The recent Court of Appeal decision of Cyclone Hardware Pty Ltd & Anor v Patience & Nicholson (NZ) Ltd provides a timely reminder to Group companies of the need to ensure appropriate structures are in place to govern use of trade marks by companies within the Group. There are potential implications if these are not in place, especially in the event of the Group splitting in some way.

Implications for Group companies

- Sale and Purchase - Goodwill that arises from the use of a trade mark generally belongs to the business that uses the trade mark. The sale of business must take account of not only the trade mark but also the goodwill that arises through the use of the trade mark. Careful drafting to ensure only the intended assets (including any goodwill) are transferred will help avoid the significant complications that may arise when a trade mark is transferred but the goodwill is inadvertently left behind.

- Risks - Group companies should ensure the internal licensing of their intellectual property is in order and the goodwill a business will derive from use of a trade mark flows where it is intended. The risk for Group companies is that a subsidiary company which enjoys the reputation and goodwill from the use of a trade mark may ultimately have the overriding rights to use of that trade mark if there is no licence arrangement stating that goodwill enures to the parent company.

- Licensing - If trade marks (whether registered or not) and other intellectual property are owned by a company in a Group other than the company that uses the trade mark, they should be licensed to the user. The parent in a Group will often be the proprietor of all formal intellectual property rights even though these are intended to be used by another company within the Group. A licence arrangement will establish rules around use of the trade marks (including any unregistered trade marks) and other intellectual property, and ensure that goodwill generated is to the benefit of the owner. Upon any split of the Group, the reputation and goodwill will remain with the parent company unless specifically transferred to the purchaser. This will also ensure that the parent is able to control the use of the intellectual property by its subsidiaries.

Facts of the Case

The Court considered the right to use the initials "P&N" in the New Zealand cutting tools industry. The respondent, Patience & Nicholson (NZ) Ltd ("P&N New Zealand"), is a cutting tool manufacturer whose name is sometimes abbreviated to the initials P&N. Until the late 1980s, it was one of a group of companies which included an Australian company of the same name. Both companies marketed their products under the trade mark P&N and there were accompanying trade mark registrations in Australia, New Zealand, and elsewhere.

In 1987 the Australian operation was sold and the Australian and New Zealand Patience & Nicholson businesses subsequently began to operate independently under different ownership. However, there was some uncertainty as to who owned the P&N trade mark at the time the New Zealand business separated from the Australian operation. The New Zealand business was not included in the sale of the Australian business as the purchaser was only interested in the Australian business. The New Zealand P&N trade mark was not included in the assets transferred to Cyclone but there was an issue as to whether the goodwill associated with use of the New Zealand P&N trade mark was transferred.

The Australian business eventually came under the ownership of the first appellant, Cyclone Hardware Pty Ltd ("Cyclone"), who initially continued to market its products under the P&N trade mark in Australia but not into New Zealand. P&N New Zealand made little use of the P&N trade mark, instead choosing to rebrand its products using a different trade mark. However, the company name or its abbreviation was still used in promotion.

In 1995 Cyclone began to concentrate all its marketing under the P&N name only. From 1998 onwards it began actively marketing its products in New Zealand under the P&N name through its distributor and second appellant, Fox & Gunn Ltd. The ultimate result was that two companies were operating in New Zealand, both using the P&N trade mark.

High Court

In the High Court, P&N New Zealand claimed it was entitled to the benefit of the goodwill and reputation in New Zealand associated with the use of the trade mark P&N and that Cyclone passed off their goods as those of P&N New Zealand. P&N New Zealand also sought relief under the Fair Trading Act 1986 for misleading and deceptive conduct. Cyclone counterclaimed on similar grounds arguing it had the right to use the P&N trade mark in New Zealand. The High Court ruled in favour of P&N New Zealand.

Court of Appeal

The Court of Appeal upheld this decision. On the basis of survey evidence from the trade and the expert opinion of key participants within the trade, the abbreviation P&N and the full name, Patience & Nicholson, were clearly shown to be associated with and descriptive of the business of P&N New Zealand.

Important Facts:

- Group companies need appropriate structures to deal with the use of trade marks by members of the Group

- Certainty at time of transfer and internal licensing of trade marks will help avoid complications at a later date

This is a general summary only and should not be taken as a substitute for specific advice.

x-tech group Simpson Grierson Web site: x-tech group Simpson Grierson

Contacts
Earl Gray, Partner, earl.gray@simpsongrierson.com
Michael Sage, Partner, michael.sage@simpsongrierson.com
Jan Kelly, Partner, jan.kelly@simpsongrierson.com
Patrick Casey, Solicitor, patrick.casey@simpsongrierson.com


September 2001