Introduction
Relevant law
Comment
The question of dividing the ownership of a key element of a house mark or group brand goes to the fundamentals of trademark law. If it is accepted that a trademark is no more than an emblem in which absolute rights exist and which can be freely traded, it follows that it can be disposed of without restriction, like any other property.
For this to be the case, the trademark's core function of designating origin must fall away. This would require a fundamental change to trademark law. Although some argue that this is precisely what should happen, they are not in the majority.
If the function of a trademark still includes an indication of origin, then the use of an identical indication of origin by two different parties must be deceptive. Deceptive use vitiates a registered trademark.
Sections 10(12) and (13) of the Trademarks Act (194/1993) provide as follows:
"10. Unregistrable trade marks – the following marks shall not be registered as trade marks or, if registered, shall, subject to the provisions of sections 3 and 70, be liable to be removed from the register:...
(12) A mark which is inherently deceptive or the use of which would be likely to deceive or cause confusion, be contrary to law, be contra bonos mores, all be likely to give offence to any class of persons;
(13) A mark which, as a result of the manner in which it has been used, would be likely to cause deception or confusion."
Thus, the question is whether ownership and use of an identical mark by two different owners simultaneously would be "likely to deceive or cause confusion" or "cause deception or confusion" within the meaning of these provisions.
The concepts of 'distinctiveness', 'capability of distinguishing' and 'deceit' all relate to perception: the meaning that the trademark or sign might convey to the public as an indicator of origin. Classical infringement is where a competitor seeks to divert at least some of the power of a trademark from indicating the trademark owner's goods or services to its own without any lawful right to do so. The competitor 'deceives' the public. This has a technical meaning in trademark law which is best explained from case law.
In the New Zealand case of Pioneer Hi-Bred Corn Co v Hyline Chicks Pty Ltd(1) Judge Richardson stated that: "'Deceived' implies the creation of an incorrect belief or mental impression." Where deceptive trademarks are used side by side by different entities, neither trademark indicates a single source, but rather indicates two different sources, so neither is capable of distinguishing. This is why the public are protected by the trademark owner having the power to prevent deception so that its trademark remains distinctive. With international groups, it is not unknown for a trademark proprietor to allow a separate entity within the same group to register confusing marks, or to assign a confusing mark to a different entity, and thus render its own marks technically deceptive in terms of a single entity, but not in terms of the group as a whole. However, this is not allowed in the United States; the Ninth Circuit has stated that: "The law is well settled that there are no rights in a trade mark alone and that no rights can be transferred apart from the business with which the mark has been associated."(2)
In Berni v International Gourmet Restaurants of America Inc (1998) the court stated that rights in trademarks cannot be bought and sold as if they were common property. Having discussed this case, Lisa H Johnston stated in "Drifting Toward Trade Mark Rights In Gross"(3) that: "the rule prohibiting assignments in gross protects consumers from the confusion and deception resulting from a discontinuity in the nature or quality of a product that the trade mark symbolises." She also referred to Thomas Pride Mills, Inc v Monsanto Co,(4) where it was stated that:
"The primary functions of a trade mark are to indicate a single source of origin of the articles to which it refers and to offer assurance to ultimate consumers that articles so labelled will conform to quality standard established and, when licensed to others, controlled by the trade mark proprietor."
In the 1998 Charles of the Ritz decision the South African Appellate Division (as it then was) considered whether use by a registered user in South Africa of a trademark registered in the name of a UK company, but actually controlled by a US company (with which the South African company had no contract) could be relied on to preserve the registration from a non-use attack. The court accepted the reality of a group of companies and, in that case, the US company which handled quality control. The court noted a tendency in the United Kingdom and the United States not to take an excessively technical view of separate companies within the same group, but noted also that this was not universally true.
There is a European school of thought which cites the regulation's clear statement that a right may be assigned with or without the underlying business to justify a belief that the principle has somehow changed and that the detailed maintenance of a trademark or family of trademarks as identifiers of a single source is unnecessary. The criticism of that view is that it ignores the function of a trademark as clearly stated in the regulation and meaning of terms such as 'distinctive' and, in Article 4, 'capable of distinguishing'.
South African law has traditionally been closely similar to UK law, and UK authorities are much used (together with reference to US authorities) to establish the South African law. The theory that a trademark can exist divorced from its source origin briefly flourished in the wake of Abott Laboratories v UAP Cropcare (Pty) Limited,(5) a decision by a single judge of the Cape Provincial Division in which it was stated by Judge Cleaver that: "There has been a shift in our legislation to elevating the distinguishing feature of a trade mark as its main purpose."
His reason for stating this was based on a mistaken impression that the South African act did not follow the EU directive (the explanatory memorandum makes it very clear that it was intended to follow the directive) and a change in the language used to define a trademark.
The South African Supreme Court of Appeal declined to follow Cleaver's reasoning and, in 2007, Abbott was specifically overruled. The function of a trademark as an indicator of origin was reaffirmed and it is clear that – as always – a mark is deceptive when it constitutes a misrepresentation as to source. This remains the case internationally.
The US Lanham Act provides for cancellation of a trademark for a misrepresentation of source. Theodore H Davis, Jr(6) goes into detail on this issue. From the article it appears that most of the uses of Section 14(3) of the act have related to the misuse of a registered trademark in such a way as to impinge on the goodwill of another. In one case to which he refers , the defendant had been terminated as a distributor of the plaintiff's Liquid Glass car polish. The defendant then purchased from a third party the rights to the federally registered trademark LIQUI-GLASS for the same goods and adopted a trade dress closely similar to that of the plaintiff. The court found this conduct adequate to warrant cancellation of the defendant's registration in view of the defendant's failure to fulfil its duty as a former distributor to distinguish its goods.
The next question to consider is whether a trademark would become deceptive through use if used by different entities, or if it were permitted to be used by competitors as a trademark.
In UK trademark law, the decision in Bowden Wire was generally accepted as laying down the principle that the licensing of a trademark vitiated the trademark on the grounds that public deception would result. In effect, the trademark would no longer be a badge of origin for a single source and would cease to be distinctive. GE modified that position by allowing that use under the control of the trademark owner would not be deceptive, reflecting the reality of modern commerce where licensing has become essential to business.
In South Africa, the position was as technical as Bowden Wire. In Stopayne use of a registered trademark exclusively by a wholly owned subsidiary of the registered proprietor was held to be insufficient to save the trademark from expungement on grounds of non-use because the subsidiary had not been recorded as a registered user. Although there had been use in the course of trade under the control of the proprietor, the court ruled that it could not be taken into account for the technical failure to comply with the record.
That case is an extreme example and the law has changed significantly since that decision as the recordal of registered users is no longer compulsory and is effectively in disuse. However, the principle remains the same: where the ownership of a distinctive element or the distinguishing feature of a distinctive trademark is no longer exclusive, that element will no longer be distinctive of either party, and therefore the mark would become deceptive through the nature of the use as contemplated by Section 10(13).
Any division of ownership will clearly be detrimental to the distinctive character or repute of the registered trademark. This is the case even if the use of a second feature proposed by one party to be used in conjunction with the shared mark is sufficient to prevent actual public deception. In fact, it is the entire basis for the theory of trademark dilution and the inescapable fact is that the two companies will be diluting – weakening and devaluing – their shared asset.
In practical terms this may mean little until a third party allegedly dilutes. How, in that event, would either company take action against that third party in terms of this section? Such action would likely be impossible and the third-party alleged dilutor would be able to carry on regardless.
The problem is further illustrated by considering the situation where there are unforeseen changes of management and direction from one part of the enterprise which causes problems for the others.
As a practical matter, from the point of view of obtaining conflicting registrations in South Africa, there is little difficulty and the whole concept of the existing law is to shift more responsibility onto brand owners to police their own rights and ensure that they are not eroded. Any objections are theoretical, but they go to the heart of the nature and function of a trademark. If the question of validity was brought before the courts, there is a definite prospect of the courts finding that a shared mark has been vitiated.
Accordingly, it is wise to establish a third-party holding company to administer the trademark and to hold the rights in it without division. All user companies should be licensed and should pay royalties to the brand-owning company, and this company should employ a person for the express purpose of exercising control over the use of the mark. Naturally, the group exercises effective control of the brand-owning entity so that control over this entity would be shared. This would prevent any future surprises and ensure the consistent development of the trademark as an asset.
For further information on this topic please contact Ron Wheeldon at Ron Wheeldon Attorneys by telephone (+27 11 646 6666), fax (+27 11 646 8895) or email ([email protected]).
Endnotes
(2) Mister Donut of America, Inc v Mr Donut, Inc 418 F2d 838, 842, 164 USPQ 67, 69(CA) 9 1969.
(3) Volume 85 of the Trade Mark Reporter, published by the International Trademark Association.
(4) 155 USPQ 205, 208 (ND Ga 1967).
(6) Volume 85 of the Trade Mark Reporter, published by the International Trademark Association.