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18 December 2006
Licensing is a fact of life in the modern world. There can be little doubt that most first-world consumers are well aware of it - whether it be simple licensing or its slightly more complicated sibling, franchising. Its impact on trademark law theory over the past 100 years has been considerable, as the law has had to adapt to the reality of modern commerce. Initially, where a trademark owner allowed a third party to use its trademark, in theory the trademark was vitiated (ie, it was deemed to have become non-distinctive, as it no longer identified a single source). In the United Kingdom, the 1938 act sought to address the problem by imposing the system of 'registered users'; third-party use was permissible subject to effective control by the proprietor and recordal of the arrangement on the register. Most common law jurisdictions followed suit. Despite the reality of licensing, the practice of trading in a trademark as a commodity in itself (ie, 'trafficking') was still prohibited. In the English case of Holly Hobbie,(1) the House of Lords ultimately held that applying for trademarks in classes of no interest to the applicant in the hope of licensing the mark to entities that actually carry on business in those classes amounted to trafficking and was not permitted. In South Africa, where the Trademarks Act 1963 was closely aligned to the UK 1938 act, it was accepted that the position was the same.
The emergence of the Scandecor Case(2) in the United Kingdom has had a substantial impact on thinking in South Africa, where Scandecor was considered by the Supreme Court of Appeal in the context of the GAP Case.(3) This case concerned a South African group of companies that had bought the legitimately registered South African GAP trademarks (which dated back to 1973), modified them to resemble the US trademarks THE GAP and sought to enforce them against the US company's efforts to exploit its marks in Southern Africa. The US company had sought to (i) enjoin the use of the trademarks by the South African group on the grounds that its trademarks THE GAP were well known, as contemplated by Article 6(2) of the Paris Convention, and (ii) have the South African registrations expunged from the register on a number of grounds, including non-use due to the lack of control over licensing within the South African group.
The court of first instance granted the injunction (termed 'interdict' in South African law) and ordered the expungement of the registrations due to lack of control by the registered proprietor. This finding was consistent with a number of South African and English cases, including McGregor,(4) Ritz,(5) Sportshoe(6) and The Job.(7) The group appealed and the matter came before the Supreme Court of Appeal.
It was clear from the Supreme Court of Appeal's judgment that at least some of the South African trademarks had been in use at material times. They had been used by various entities in what was referred to as the 'AM Moola Group' (not to be confused with the company of the same name); therefore, the entities using the mark were permitted to use it by an entity under the same financial and executive control as them. The court was critical of what appeared to be a chaotic state of affairs within the group, where there was little regard or even knowledge of what each individual entity was doing; the trademark was simply regarded as common property. In other words, it was clear that there was no control by the licensor over the use of the trademark. The lower court that had heard the case commented that control was necessary and found that the marks fell to be expunged on this ground.
Rather than upholding the judgment of the lower court, the Supreme Court of Appeal came to the same effective conclusion (ie, that the registrations were to be expunged), but not on the grounds of lack of control. Rather, the Supreme Court of Appeal found that the group had failed to discharge its onus of proving that the registered trademarks had been used; thus, technically, the registrations were lost through shortcomings in the evidence. In delivering the unanimous judgment of the court, Judge Advocate Harms stated (criticizing the judgment of the lower court) that "there does not appear to be any reason at present to require quality control by or on behalf of the proprietor as a requirement for permitted use".
Arguably, the statement was obiter dictum, as it was not the reason for the expungement and actually implied that expungement should not be granted. Therefore, the rationale was the failure to discharge the onus that the proprietor bore; this was a curious finding. In its judgment the Supreme Court of Appeal remarked at length on the lack of written licence agreement and commented that the mere allegation in an affidavit that the use was "with the licence" of the proprietor was insufficient, as facts also had to be alleged to support the statement. However, it did not specify which facts it was referring to. Use of the trademarks was established and such use was within the group; there was no document called a 'licence', but South African law is clear that no formal document is required. If, as Scandecor suggests and the Supreme Court of Appeal endorsed, no form of control must be exercised over permitted use (ie, licensed use) for that use to accrue to the trademark proprietor, it must follow that the word 'licence' is simply equivalent to permission. In the case at hand the owner of the trademark was a dormant company; however, in many cases the owner is a trust, a bank or a trademark-holding entity established for that purpose only, which is functionally incapable of exercising meaningful control over the use. Therefore, what should licences contain? It appears that the answer is nothing at all, since mere tolerance of use by a third party can amount to permission. However, the fact that this should cure non-use by the proprietor because it accrues to the proprietor as a form of reputation is illogical. It prompts the following question: how can there be a reputation where there is no discernible connection in the course of trade?
Arguably, judges have lost sight of the wood in their examination of the trees. The primary and legitimate purpose of a trademark is to indicate a connection in the course of trade between goods and services and the proprietor of the mark. This is a specific part of the EU Harmonization Directive (2001/29/EC) and is central to most trademark systems, including those of the United States, Australia, India and South Africa (in the latter case, as specifically stated by Harms when delivering the judgment of the Supreme Court of Appeal in the Triomed Case).(8) Licensed use is tantamount to use by the proprietor, since the goods or services are indistinguishable from those of the proprietor;(9) this can be the case only where the proprietor is directly responsible for the nature and quality of the goods or services offered under the mark. Failing such responsibility, the link between the proprietor and the goods is inevitably severed and the trademark right becomes a right 'in gross' unjustified and unjustifiable at common law, a potentially perpetual monopoly in a particular word or other mark divorced from its indication of origin function.
This flies in the face of the jurisprudence of trademark rights as it has developed in common law countries over the past 150 years and has no theoretical justification. Therefore, South African law is at odds with that of the United States, where naked licensing results in invalidity. Where the legislature desires a radical change in a field of law (as the judges are 'interpreting' the intention of the legislature), it will use explicit language to effect that change; such change cannot be simply inferred.(10) The fact that the judges felt that it was wrong for the local owner of GAP to close out the international proprietor of THE GAP is reflected in the decision to expunge the locally owned registrations. Arguably, it is a pity that they chose to do so on the contrived and spurious grounds that use obvious to all parties had not been technically proven - which is wholly inconsistent with the court's reasoning on quality control, as it upsets a wealth of consistent precedent and gives no clear guidance for future cases.
However, this is not the only consequence, and one wonders whether the legislatures of the European Union and South Africa intended to create a means of depriving their state coffers of substantial income. Where trademarks are placed in the name of an entity other than the entity that uses them, there is usually a reason (the most common reason being tax avoidance).
Unfettered licensing of trademarks makes some remarkable structures possible, especially when little or no regard is given to common law principles of change of ownership,(11) the easy 'assignment' of rights without goodwill. An agreement is structured between a brand holder and a financial institution, whereby rights are assigned to a company controlled by a trust in which the financial institution's employees are trustees. The assignee buys the trademark for a large sum of money and becomes owner in name. However, the following developments occur simultaneously with the assignment:
The assignor continues to act as if it were the owner of the rights (ie, it maintains control over the filing, prosecution and renewal of the rights) and accepts all risks associated with the rights (eg, risk of destruction).
In other words, in form the transaction is called a 'sale/assignment', but in substance no real ownership rights are transferred. At common law, where substance is elevated over form, this sort of sham transaction may be exposed for what it really is (ie, a loan using the trademark as security); however, considering how South African law has been allowed to develop (see TDK(12) and GAP), it is likely to be upheld. The financial company gains a tax benefit by amortizing its purchase of the asset, whereas the assignor scores by claiming a deduction on the royalties that it must pay. This results in substantial savings for the parties concerned, with a concomitant substantial loss to state revenue and a nonsense for trademark rights.
Arguably, this amounts to abuse of law and a loss of consistency and coherence in trademark theory, which makes the qualification to hold trademark rights arbitrary and illogical. Ultimately, it undermines the very fabric of the scheme of trademark protection, as it renders it profoundly unpredictable and unjust (as an unpredictable law does not allow for accurate legal assessment and does not permit citizens to model their behaviour to avoid liability). It replaces the rule of law with the rule of chance. It will take legislative intervention to prevent the spread of this heresy.
(11) McAdams v Flander's Trustee & Bell, NO 1919 AD 207 at page 223: "There can be no contract of purchase and sale without animus amendi on the part of the purchaser and animus vendendi on the part of the seller. It must be a genuine animus of the one to sell and of the other to buy. It is not enough for the parties to think that they have the intention; the intention must be provided as a fact apart from what they thought. Now, here it is quite clear that neither of the parties had a genuine intention, the one to sell and the other to buy the machinery. The plaintiff did not want the machinery nor did the firm intend to part with it."
(12) Frank & Hirsch (Pty) Ltd v Roopanand Brothers (Pty) Ltd, 1993 (4) SA 279 (AD). This was the so-called TDK Case, where the assignment of copyright by the foreign copyright holder to its local licensee as a means of preventing parallel importation was upheld by the Appellant Division of the High Court (now replaced by the Supreme Court of Appeal), even though it appeared that the assignment was not a true transfer of ownership.
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