Use of trademarks in a corporate group: risks of non-use

 

Wow, a higher court makes a commercially sensible decision, even in the face of technical legal arguments (and overturns the lower court’s decision)!

There is the principle in trademark law of “use it or lose it”.  If a mark is simply languishing on the trademark register, an alert opportunist may apply for the same mark and seek to have the earlier mark de-registered on the grounds of non-use.  If the mark has simply not been used for 3 years, then the opportunist is likely to be successful.

That is a sensible policy position to adopt.  If a mark is not being used, let another trader have a crack.  This position holds even if historically the first trader built up over a long period of time significant goodwill in the mark if it hasn’t been used for at least 3 years.

The person who is registered as the owner of the mark must be the person who is using the mark to avoid a non-use application. Once again, a simple and uncontroversial proposition.

But what of corporate groups?  Some groups are deliberately structured so that there are separate operating entities from the entity that holds the trademarks.  Operating entities, being the entities that sell products or offer services, carry the risk of commercial failure.  If that unfortunately occurs, this may not cause the group as a whole to fail and the valuable trademarks are insulated from this risk.  That is sound risk planning.

But, within that sound planning, does use by the operating entity constitute use by the separate trademark owner?  Or can an opportunist seek to de-register the trademarks of the separate trademark owner because that entity has not used it?

This is precisely what Trident Seafoods Corporation recently tried to do.  Trident Foods Pty Ltd owned the trademark “Trident” in class 29 for seafood and had done so since the 1970s.  Its parent company Manassen Foods Australia Pty Ltd was the operating entity and undertook all sales of Trident seafood products.

A different company, Trident Seafoods, applied to register “Trident” in class 29 for seafood and to clear the path sought to de-register Trident Food’s marks on the basis that Trident Foods had not used it (although its parent company Manassen had).

Notably there was not a written licence agreement between Trident Foods and Manassen, at least not until Trident Seafoods came on the scene (at which time a written licence was put in place between Trident Foods and Manassen).  That lack of a written licence was a mistake and was partly the reason for the problems.  Trident Foods and Manassen, as is common in corporate groups, had the same directors.

Under the Trademarks Act (s7(3)), a use by a trader that is authorised by the trademark owner is taken to be use by the trademark owner.  A use is authorised by the trademark owner if the use occurs under the “control” of the trademark owner (s8(1)), which is certainly the case if there is quality control (s8(3)) or financial control (s8(4)) by the trademark owner.  This concept of authorised users recognises the widespread practice of licensing trademarks.  So, for example, in a franchise situation, the franchisor and trademark owner will typically license use of its trademarks to the franchisee and will tightly control the quality of products offered. The use by the franchisee is recognised as use by the franchisor/trademark owner.

In a corporate group, often the structure is set up and thereafter there is no active control by the trademark owner of the operating entity.  That is, a set and forget strategy.  But usually there are common directors, all of whom are rowing in the same direction.

Initially, a single judge of the Federal Court held that Manassen’s use of the Trident mark was not use by the trademark owner, Trident Foods.  The lack of a licence agreement didn’t help.  Being part of the same corporate group and having common directors wasn’t enough.  There needed to be “actual control” or “control as a matter of substance”.

Trident Foods appealed.  It really wanted to keep its marks and it wanted to block its competitor from registering the trident mark.

Fortunately, the Full Federal Court ([2019] FCAFC 100) in June 2019 took a much more commercial, pragmatic view to the control test.  The judges made much of the two entities being in the same corporate group with the same directors (at [45]):

“…it significant that at all relevant times the two companies had the same directors. It must be inferred from the evidence that the two companies operated with a unity of purpose. Trident Foods held the trade marks. Manassen sold the products under the TRIDENT brand and thereby used the trade marks …. As directors of Trident Foods, the directors had obligations to ensure the maintenance of the value in the marks. To that end Trident Foods necessarily controlled Manassen’s use of the marks by reason of the simple fact that it owned the marks and its directors, who were also Manassen’s directors, must have had one common purpose, being to maximise sales and to enhance the value of the brand…. it is commercially unrealistic in the circumstances of the present case not to infer that the owner of the marks controlled the use of the marks because the common directors necessarily wished to ensure the maintenance and enhancement of the value of the brand. The fact that this must also have been Manassen’s purpose simply confirms the unity of purpose between the corporate entities. But unity of purpose is not inconsistent with the existence of control in a case such as the present.”

Actual, factual control was not necessary (at [46]):

“it is not surprising given the corporate relationship, the commonality of directors and the shared processes between the owner and the user of the marks that there is no particular illustration of actual control by Trident Foods of Manassen in respect of the marks. The natural and ordinary inference given the relationship between the companies would be of unity of purpose, rendering redundant any particular illustration of the actual control Trident Foods must have had as the owner of the marks. Unity of purpose is indicative of the existence of actual control vested in Trident Foods as the entity owning the marks over Manassen as the entity using the marks.”

Given that the Full Federal Court held that there was control by the trademark owner it also held that therefore the use by Manassen was in effect use by Trident Foods and so its marks were not to be de-registered upon the application of its competitor.  Common, commercial sense prevailed!

Key takeaways:

·       If a corporate group is established with an operating entity different from the entity holding the trademarks, then ensure that there is a written licence agreement between the two which makes it clear that the TM owner authorises and controls the use of the marks by the operating entity;

·       Preferably do not have the TM entity as a subsidiary of the operating entity; it is better if they are both a subsidiary of an inactive holding company (although there remains the risk of the potential liability of holding companies for the insolvent trading of its subsidiaries Corporations Act s588); and

·       Ensure that there are common directors between the two entities; or

·       If there are not common directors (or if the TM owner sits outside the corporate group), then ensure there is practical, actual control by the TM owner of the use of the TMs by the operating entity.

An off the cliff risk of 3PL

An off the cliff risk of 3PL

Risk of trading on Credit

Any trader who supplies product on credit and has been in business for a decent length of time will know the pain of a customer going bankrupt and the consequent inability to be paid for products delivered (and typically the loss of that stock).  The bigger the customer, the bigger the pain.  A very large customer going bankrupt can even put the ongoing viability of the trader at risk.

Terms of Trade and retention of title clauses

Traditionally traders have sought to cover this risk by means of a retention of title clause in their terms of trade.  Upon bankruptcy of the customer, the trader could seek to enforce the clause and recover its goods (or so much of it as had not been on-sold during the normal course of the customer’s business) to reduce the pain incurred.

PPSA

That position was complicated in Australia during 2009 by the introduction of the Personal Property Securities Act (PPSA).  Unless the security interest created by the retention of title clause was registered under the PPSA then the retention of title clause in effect became unenforceable.  Under the PPSA, the old adage of “possession is 9/10ths of the law” became the law of the Australian land.  The trader needs to register its interest (and quickly after being created) under the PPSA so that its interest took priority relative to other creditors and so was in effect unenforceable.

Warehousing function and 3PL

Under a traditional business model, a trader would operate its own warehousing function and when its customers placed an order for products the trader’s warehouse would pick the stock and dispatch the order.  For wholesale customers, orders would be aggregated (and often with minimum quantities stipulated).  With a limited number of wholesale customers, this was an entirely manageable function.  With many traders now also operating on-line retail stores with direct to consumer sales, the size of orders has decreased (to perhaps one sku) but the volume of orders has dramatically increased.  Many traders recognise that warehousing/dispatch is not a core competency of their business and have sought to outsource this function to a 3PL provider (3rd party logistics).  Good 3PL providers have the systems and resources to operate a very efficient service, often undertaking this function far better than the trader was doing itself.  Appointing a 3PL provider leaves the trader better positioned to focus on the core aspects of their business.

Whilst it can make good commercial sense, there is one massive risk to entering into a 3PL contract.  The 3PL provider is not just one customer who takes delivery of some stock on a promise to pay.  The 3PL provider takes custody of ALL the trader’s stock, and not with a promise to pay but with a promise to provide services.  This makes it even harder for the trader to have line of sight on any potential financial difficulties the 3PL provider may be having (unlike customers, who may over time become more and more delinquent when it pays for products).  If the 3PL provider goes bankrupt, the trader will lose all its stock unless the trader has a security interest drafted into the services contract with the 3PL provider and promptly registers that security interest under the PPSA. 

Is it worth ensuring a trader gets this right?

In the law of civil wrongs, in assessing if someone has been negligent and therefore liable to compensate another person who was harmed by that negligence, there is the negligence calculus involving 3 elements: (1) what is the probability that the harm may arise; (2) what is the gravity of the resulting injury; (3) how difficult or easy are adequate precautions?  Using this as a guide to assess whether traders should bother with this:

(1)    Risk of 3PL provider’s bankruptcy: Difficult to assess the risk of a 3PL provider going bankrupt, but perhaps let’s say small;

(2)    The gravity of the resulting injury to the trader: potentially very significant.  If a trader loses all their stock, then this will be at the least a significant set-back and a huge strain on cash-flow, but may have a domino effect, leading to the trader’s bankruptcy; and

(3)    Precautions to guard against the harm: relatively simple.  Some 3PL providers are setting up from overseas using a template warehouse service agreement that makes no reference to Australia’s (or New Zealand’s) PPSA regime.  They don’t need to; it is not their risk.  But it is relatively easy for an appropriate professional to review the 3PL contract, insert appropriate clauses and promptly register the trader’s interest in its own stock under the PPSA.

Copyright – ownership of key designs

Copyright – ownership of key designs

Many businesses will have key copyright works that are central to their operations. Perhaps the most central is a logo that identifies their brand or is otherwise a key part of their business.  Think the Nike swoosh logo or the coca-cola stylised name.

A very large amount of these business’ marketing expenditure and brand awareness are built around these key pieces of intellectual property.

It is critical that the business owns, and can demonstrate that it owns, copyright in these logos.  The key logos may also get registered as trademarks, but at the beginning, if they are an original artistic work, then copyright will subsist first.

Initially, the copyright in any artistic work will be owned by the artist/designer who created the work.

If an employee creates the copyright work in the usual course of their duties, then the employer automatically becomes the owner of the copyright (Copyright Act s35(6)).  For employees who create copyright, it is prudent to have a term in their employment contract recognising this too.  The business should track which employees created what copyright and when.  If this is a common part of their business, such as a fashion brand, then it is recommended that a register of copyright be maintained.

However, if a business engages an outsider person, a contractor, to create the artistic work, copyright is not automatically transferred to the business.  That sounds counter-intuitive, because that is what the outside person is being engaged, and paid, to do.  But to transfer copyright a written assignment is required.[1]  It is therefore critical that whenever a business engages a contractor who is involved in developing IP, for the business to enter into a written and signed agreement with the contractor which provides that all IP developed by the contractor is the contractor’s own original work and is transferred to the business.[2]

Two recent cases demonstrate the necessity to do this (but in the second case saved ay an ironic twist.

In the first, the Hells Angels motorcycle club in San Francisco engaged a tattoo artist known as “Sundown” in 1954 to create a skull image used on membership cards. The tattoo artist apparently frequented the pool hall where the San Francisco chapter met.  The tattoo artist came up with the death head design.

Pool halls and characters like the Hells Angels and Sundown are not the type of people who worry about the niceties of a legal assignment in writing.  Indeed, there was none.  So when the Hells Angels sought to sue Redbubble who allowed people to print various images onto various products (such as coffee mugs), the Hells Angels could not establish that they owned copyright in the death head logo and lost their case on this basis (but succeeded based on trademarks).

In the second case, Racing Victoria wanted commemorative medals based on famous jockeys or trainers struck for annual awards.  Racing Victoria provided historical photographs of the jockeys and trainers and a Melbourne jeweller provided sketches of proposed medals.  Mr Douglas was engaged to make the medals and was paid accordingly.  Mr Douglas then engaged a die maker Mr Forwood to create the actual medals based on Mr Douglas’ sketch, but gave to the die maker the original photographs.  Over time, Racing Victoria moved away from Mr Douglas in providing the medals and appointed a new supplier.  Mr Douglas claimed that he was the owner of the copyright in the medals, that his copyright had not been assigned to Racing Victoria and that Racing Victoria was breaching his copyright by continuing to strike the commemorative medals.  Although Douglas had been paid for his work, arguably he was being opportunistic and was just seeking another pay day.  It was true that there was no assignment from Douglas to Racing Victoria.  But in an ironic twist, the person who ultimately created the medals, Mr Forwood, had not assigned his copyright to Mr Douglas.  So, the court held Mr Douglas did not own the copyright which he alleged Racing Victoria had breached!

The bottom line is that, particularly if a business engages a graphic designer to create their key logo, ensure that the contract with the graphic designer includes an express assignment of copyright in the work created.  But the same principle applies to a business engaging:

  • photographers, whether for an advertising shoot or a model/action/athlete shoot;
  • filmmakers;
  • designers for products;
  • graphic design studios who design point of sale catalogues, etc.; and
  • IT software writers.

 In all situations, written contracts with appropriate IP assignment and indemnity clauses should always be used.



[1] Robin Ray v Classic FM (1998) 41 IPR 235; Douglas v Racing Victoria [2019] FCCA 49 at [116].

[2] Copyright Act s196(3).

Her Fashion Box – an ethical, legal and commercial disaster

Her Fashion Box – an ethical, legal and commercial disaster

The tale of Her Fashion Box Pty Ltd (HFB) is a 101 about how not to operate a fashion start-up, and, how not to treat employees.

Her Fashion Box Pty Ltd sold fashion and beauty accessories to consumers via an on-line subscription model.  Early in its life it received an investment of $200,000 via the TV program Shark Tank.

HFB had three employees, all of which it underpaid by a total of $40,543.  That underpayment no doubt helped its cash-flow and bottom line, at the expense of those employees.  One of the employees was a graphic design graduate.

Young university graduates often face a job market where supply of graduates far outstrip available opportunities.  These graduates are very motivated to get their foot in a door and gain some experience.  That first step into their chosen industry and profession can often be the hardest to secure, but once obtained their career is off and running.  Some may accept a sub-optimal role in order to do this. 

Some employers, well aware of market dynamic, will blatantly take advantage of young graduates.  This is true across many sectors, including the fashion industry.  It was certainly true of HFB and its founder and sole director, Kath Purkis.

HFB offered the graduate an internship and she worked 2 days a week.  She was not paid anything (but ultimately a $1,000 “Christmas bonus” was paid to her).  The graduate did meaningful work for HFB.

The purpose of an internship is to provide an inexperienced, unemployed person an opportunity to learn, observe and develop skills, gain some experience and get a foot in the door to their industry.  The hope is the internship will lead to a job, either with that or another brand.  Internships are unpaid.  An unpaid internship is only legitimate if either (1) when undertaken as part of a vocational placement related to the individual’s course of study or (2) in circumstances where an employment relationship does not exist.  (This is elaborated on in my book Fashion Law: The Complete Guide at chapter 10).  Here, the graphic designer had already graduated from her course of study.  Also, she wasn’t just receiving training and exposure to real life work but doing what graphic designers do in their day to day jobs.

The Federal Circuit Court held that the graphic designer was an employee and had therefore been underpaid (as had the other two employees).  The court ordered that all underpayments be paid to all three employees.  The court also penalised HFB $274,278 pursuant to the Fair Work Act, finding its flagrant disregard of award rates particularly egregious.  So, the fine was ultimately six times the original underpayment and was set because of the flagrant nature of the breaches and to act as a deterrent for others.

People typically trade via a company structure so that the risk of trading (and risk of breach of law) is the company’s, not the individuals behind it.  However, the Court in HFB also issued a penalty order of $54,855against Kath Purkis personally.

Under the Fair Work Act (FW Act), a person who:

  • has actual knowledge of, and was an intentional participant in;
  • aids, abets, counsels or procures; or
  • was, directly or indirectly, knowingly concerned in or a party to,

the breach of the FW Act by the employer, is a person involved in the employer’s contraventions of the FW Act and, therefore, is taken to have themselves engaged in the conduct that constituted the employer’s contravention of the FW Act.

So, Kath Purkis was personally liable for this fine. Carful structuring by trading as a company will not protect individuals who cause their company to deliberately breach such laws.

In keeping with this general approach of neither acting ethically or legally, HFB also failed to deliver subscriptions on time or at all and failed to respond to customers’ requests (including to cancel their subscription).  HFB was ultimately the subject of a public warning to consumers not to deal with HFB by the NSW Office of Fair Trading.

With such an unethical and illegal approach to business, it is not surprising that HFB has gone out of business.  It is also in the process of being struck off the register of companies by ASIC.

Fabric Designs and Copyright

Copyright in fabrics

A recent Federal Court case examined the breach of copyright in fabric designs (in the case, the design being applied to quilt covers and pillow cases).  The Dempsey Group Pty Ltd (“Dempsey”), originally designed three unique fabric patterns, and hence owned copyright in those patterns.  Dempsey sold these products under its Morgan & Finch brand.  Spotlight used the same supplier in China as Dempsey and was shown samples of the designs owned by Dempsey.  Spotlight then used the Dempsey fabrics to create similarly designed and competitive products.  The three original Dempsey designs and the three copies by Spotlight are set out in Annexure D (towards the end) of the court judgement (http://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2018/2018fca2016).

Once viewed, the original products and the Spotlight versions are certainly not identical, and there are significant differences.

The Court nonetheless found that Spotlight’s products breached Dempsey’s copyright in its fabric designs as Spotlight copied a substantial part of it.  About one of the products, the Court reasoned:

“There are differences of detail, colouring and design between the products but, in my opinion, the KOO Jarvis product reproduces a substantial part of the Rimona artistic work. As Dodds-Streeton J observed in Seafolly at [345], it is unnecessary that the two works bear an overall resemblance to each other nor is it appropriate to dissect the copyright work piecemeal and focus on the differences. If similarities are identified, the question is the qualitative significance of such similarities. Reproduction does not strictly require a complete and accurate correspondence to a “substantial part” of the work. The artistic quality of the Rimona work consists of the colour, layout and shaping of the designs in the centre and the colour, layout, structure and integers of the border, the cumulative effect of which created the desired “look and feel” sought by Ms Norris in designing the product. Whilst the bird motifs and floral background are absent from the central design of the KOO Jarvis product and the overall effect is not as “busy”, the use of teal as the dominant colour in the KOO Jarvis product and the similarity of the shaping of the designs in the centre and border design, structure and integers have sufficient objective similarity and qualitatively reproduced, in a material form, the look and feel of the Rimona product”.

Key take-aways from this case:

·       Once again, courts have blown away the myth of the 10% rule (change 10% of someone’s copyright and you are ok).  If a designer is using another artistic work as inspiration, that designer needs to apply their own creative effort to come up with something new and not recreate the look and feel of the original work;

·       It is important as soon as you are aware of someone else infringing your rights, put them on notice by way of a letter of demand (after which they will be allowed a short time to take advice and make a decision (in the end Spotlight undertook a recall)).  However, in this case damages didn’t start to run until Dempsey had not just put Spotlight on notice but also provided some proof that they created the original artwork.  So ensure your internal records can quickly be marshalled to provide this; and

·       Emphasise with your factories that you own copyright in your works and insist that they not showcase those designs to other customers or potential customers.