Ron Wheeldon Attorneys
www.brands-man.com

- by Ron Wheeldon

Alleged “Counterfeit” Goods: Sterling Auto Parts CC v. The State and BMW and Daimler Chrysler

Counterfeit goods act versus the constitution

Goodwill and the asignment of trademarks

IP Valuation

Is our South African trademark law out of step with the EC?

Limits of IP protection

Notes on trademark searches

"Passing Off" in the South African Law

Splitting of ownership of a house mark

The disadvantages of not registering trademarks

Trademark considerations in purchasing a business as a going concern (PDF)

Trademark dilution - what is it?

Why register your trademark?

ALLEGED "COUNTERFEIT" GOODS: STERLING AUTO PARTS CC v. THE STATE AND BMW AND DAIMLER CHRYSLER

There is an old, old principle of the Roman-Dutch law, of English law, of United States’ law that is considered vital to justice being done. It is central to equality before the law which is central to The Rule of Law. It is also very simple. It has names in many languages but, in simple English, it is “listen to both sides of the story before making a decision”.

I do not know of anyone who has not experienced why that is so. It is key to the plot of many movies and plays – mainly tragedies. If the story is seen only from one perspective, the door is thrown wide to misunderstanding, misconception, deceit. “He was clearly guilty, your worship, he was running from the scene”. Well, was he guilty of something, or out for an evening run? Or running to assist someone else, or because he was late? There can be all sorts of reasons why a person may be running, the simple fact of the running itself is conclusive of nothing.

In the motor parts industry there are three basic sorts of part for a vehicle, namely “OE” (original equipment – something made by or for the manufacturer of the car which bears the manufacturer’s trade mark), “after market” (something made to fit a specific vehicle that is not made by or for the original manufacturer, nor represented to be so made, which gives the consumer a choice) and “counterfeit” (something made to look like an OE part which is not and which is intended to dupe the consumer). Internationally it is accepted that after market parts are perfectly legitimate and part of normal competition. In South Africa, s. 34(2)(c) of the Trade Marks Act specifically makes it clear that the trade marks of manufacturers may be used on after market goods where the use is reasonable to indicate the purpose of the goods. It must also be fair. This is a provision also of TRIPS (the agreement on the trade related aspects of Intellectual Property) to which SA is a signatory. Capitalism is hostile to monopolies because, in the absence of competition, there is no incentive to efficiency and no ceiling on what may be charged for a product. It is axiomatic that, in a free society, consumers have a choice of what to buy and the right to be honestly informed of the pros and cons of the choices available. It is equally plain that it is not healthy to allow consumers to be deceived by unscrupulous traders into buying something which is not what it seems to be.

Counterfeiting has become a major global problem, there is no question about that and it is estimated as being a US$60 billion industry. Fake “Rolex” watches, fake “Calvin Klein”, fake “Levis”, faux “Dior”, fake almost any well – known fashion label goods abound in the streets of major cities and are even sold openly in countries where enforcement is weak, Thailand being a popular example. It goes much further than fashion, though. Cases have been reported of fake pharmaceuticals, aircraft parts (the chunk of metal that caused the Concorde crash in France was reputedly from a fake part), fake car parts. I have seen fake “Bosch” coils for car ignition systems which copy the colours, the numbers, the codes of the original, but in boxes of clearly inferior cardboard (they didn’t work very well either, unlike the original). Counterfeiting is linked to organised crime and draconian measures are necessary to combat it, because, very often, a duly summonsed street trader, who may well also be an illegal alien of no fixed abode, will not arrive in court on the specified day! He – and the fake goods – will simply vanish to reappear somewhere else. Shadowy importers of counterfeit goods prove impossible to trace, with address details and identities proving to be false. This sort of thing renders normal proceedings before a court all but impossible and the Counterfeit Goods Act was passed to provide for up front seizure of goods that appear to be counterfeit. It is a draconian piece of legislation, there can be little doubt of that. Of course, if it is used against you unfairly, you can always appeal to the High Court to direct that your goods be released, so the rights of ordinary citizens are protected. Yeah, right! The rights of fabulously WEALTHY ordinary citizens MIGHT be protected – ordinary citizens have NO RIGHTS AT ALL.

Hard words? I would like to put it much more strongly than that, but I’m a lawyer so I need to be controlled about it. Sterling is a case in point. The close corporation imported a container of goods, after market parts for cars. These goods were detained by customs, because they thought the goods might be counterfeit because they indicated which vehicles they might fit. They extracted a sample each of parts which claimed to be suitable for BMW and Mercedes-Benz, and sent these to the parties concerned. Affidavits were duly returned to customs stating that the goods are “counterfeit” because they look nothing like the originals! That’s like saying they’re counterfeit because they are not counterfeit. In fact, they are legitimate after market parts. So, how to get them released?

It is quite true, as much was made of, that lawyers acting for both BMW and Daimler Chrysler had written to me, telling me what Sterling must do before they would authorise customs to release the rest of the container (agree to destroy the goods, undertake to import no more of them). It is important to remember that neither company had sued Sterling; they were using the machinery of the State to hold the goods without having to incur the cost of suing! The State is meant to be there for everyone and I did not and (with due deference to the full bench of the TPD) still do not believe it is lawful for an organ of State to give one person an undue advantage over another. I therefore advised Sterling to sue Customs as a matter of urgency. They instructed me to bring the application, which I did, and the court found that customs had been acting illegally. They were ordered to release the goods. I did not bring the application against BMW or Daimler-Chrysler because the complaint was not against them; it was Customs that had seized the goods. The High Court in the Cape found, in the same circumstances, that the person who had instigated the action by the authorities did not have a legal interest in the outcome, so at least one other judge agreed with Judge Patel. The full bench of the TPD and the SCA, it seems, disagree and, if anyone believes their goods have been unjustly seized under the Counterfeit Goods Act, they must sue not only the organ of state that took the goods, but also each and every complainant. I would have used an exclamation mark at the end of that sentence, but it may be construed as disrespectful.

What does this all mean – in practical terms? High Court litigation is extremely expensive. Indeed, it is beyond the means of the average individual citizen. In an Intellectual Property (“IP”) case it is customary for a firm acting for a motor manufacturer to field a team of lawyers, including a Senior Counsel, a Junior Counsel (advocates), a senior attorney and his or her assistants. If the State is involved, it will likewise field the State Attorney and at least one advocate. A senior counsel might charge as much as R50 000 a day in court, his junior two thirds of that, many would charge quite a lot less, but those with deep pockets are not noted for frugality. So the stakes go up substantially for each complainant one has to cite by, say, R45 000 a day, each. Each will naturally want to have its say, so the affidavit of the person who believes himself wronged will attract an answer not only from the state, but from each complainant too. He then needs to pay his own legal team to go through all those papers (they can quickly grow to a thousand pages or more) and pages equal time, and time is money. All this time, of course, you have already been deprived of your goods on the mere say so of someone not qualified to determine whether they are counterfeit or not, without you getting a chance to say anything in your defence.

So, say you felt strongly enough about it to take a chance against stakes that would make a sensation in a casino, you had the money to get your own legal team, and you won. The court saw it your way and ordered the State to give you your goods and pay your costs.
 
Wonderful, no? No.

The State then, aided by the complainants, does not accept the judgement, and seeks leave to appeal. The court says that no other court could reasonably come to a different conclusion, and refuses leave. That’s STILL not good enough for the State; it petitions the SCA in Bloemfontein for special leave, again assisted by the complainants. The SCA grants leave, but does not hear the matter itself, it refers it back to the TPD, a full bench of three judges. The stakes just got higher still, but you cannot let go, because then you lose by default, so you must continue. Then the TPD finds against you, hands down, and you must pay the costs of the State and of each complainant, and of course your own, and you still do not have your R65 000 worth of goods. Neither the Constitutional Court nor the SCA want to assist you and you are toast. And the newspapers go on about “pirates” though you, passionately, are NOT a counterfeiter. In the Sterling case, this is essentially what happened. It does not mean – even at this stage – that the goods are counterfeit; it means simply that Customs did not act illegally even though Sterling, I and the first court of the TPD thought they did. It will take ANOTHER case to determine whether they were actually “counterfeit” – or not. Even if the TPD full bench had agreed with its single judge, the cost to Sterling would have far exceeded the value of the goods.

A statutory preservation of rights guaranteed by the Bill of Rights in the Constitution of South Africa is absolutely meaningless if there is no access to it. If you reading this did not feel an icy hand clutch at your heart, you do not understand the situation. If Customs take away the contents of your suitcase when you return from an overseas trip on the allegation that they are counterfeit, it does you no good to assert that they are not; just to be heard at all you must spend the price of a new BMW car. Makes your “right” not to be arbitrarily deprived of your property ring a little hollow, doesn’t it?

In my opinion, it is an abuse of the Counterfeit Goods Act and the legislature and/or the Constitutional Court need – urgently – to put an end to it. If you are a legitimate trader with premises, someone who can reasonably be expected to remain within the law and to come to court when summoned, there is absolutely no justification for any official to take away your goods until you have been heard, weighed, and found lacking under a balanced procedure. Only then, when it has been positively established that the goods are “counterfeit”, is it fair that you lose them and pay whatever penalty may be your due.

Ron Wheel don
14th February, 2006

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COUNTERFEIT GOODS ACT VERSUS THE CONSTITUTION

When South Africa adopted the Constitution as its supreme law it certainly seemed that we were headed for an enlightened and balanced society that would provide at least one example in the world of a changed society where George Orwell's cynical adage from "Animal Farm" – "all animals are equal, but some animals are more equal than others" – would not hold true. In the IP field, the Counterfeit Goods Act, No 37 of 1997 (“CGA”) provides as noxious an example of inequality, and as eloquent an argument for respect of the basic tenets of Anglo-Roman-Dutch law as I have been able to find.

There is a major problem, world-wide, with counterfeit goods.  Counterfeiting, as a world-wide phenomenon, has been estimated to be worth some US$60 billion per year and ranges from the apparently innocuous counterfeiting of clothing and bags right through to the plainly criminal counterfeiting of pharmaceuticals and even aircraft parts.   Counterfeiting is aligned to organised crime and is used for laundering drug money.  So serious is the problem that  TRIPS requires the members to put in place criminal procedures and penalties for wilful trade mark counterfeiting or copyright piracy on a commercial scale. Counterfeiting is difficult to define.  Most people think of a "counterfeit" as being an imitation of a known object which so closely resembles the genuine object that deception is virtually ensured.  In extreme cases, it is easy to identify – the fake pair of Levis bearing faked "Levi" labels including the "non-genuine without this label" label.  Only an expert can tell the genuine article from the fake and, quite clearly, most consumers are not experts.  The problem comes in drawing the line.  To go back to the example - is a pair of "Lives" jeans an infringement or a counterfeit?  How about "Elvis" jeans?

The CGA has 3 definitions of "counterfeiting", viz. "substantially identical copies of the protected goods", goods bearing "a colourable imitation" of "the subject matter" of an IP right "so that the other goods calculated to be confused with or to be taken as being the protected goods" or licensed goods of the IP owner; are using a prohibited mark as defined under the Merchandise Marks Acts.  Important, though, is the qualification that "the relevant act of counterfeiting must also have infringed the intellectual property right in question” (my emphasis).

The complaint procedure is ex parte.  A complainant makes a complaint to an inspector who may apply to a magistrate or judge for a seizure warrant.  This is then executed by the police accompanied by the inspector and a "knowledgeable person" who can tell the real from the fake.  Properly applied it is an effective remedy against people who are typically impossible to use normal civil procedure against such as itinerant street vendors, flea markets and inner city buildings of obscure ownership and tenancy where much of the counterfeit clothing is produced or finished.

Where "counterfeiting" is alleged against reputable traders who are not counterfeiting, but possibly infringing the one sidedness is harder to justify. Last year, in Sterling Auto Spares v Commissioner of Customs & Excise, Sterling brought an urgent application before the High Court in Pretoria for a shipment of goods, detained by customs, to be released.  In brief, the container had been stopped and detained by a customs officer because it contained, inter alia, the indications "MB" and "BM" with part numbers which serve to show the type of vehicle for which the parts where intended.  Samples were drawn and sent to attorneys representing BMW and Mercedes Benz who confirmed, by affidavit, that the parts were indeed “counterfeit” because some of them featured the term "C Class" (a registered trade mark of Mercedes Benz) and others featured part numbers commencing "BM" which is a registered trade mark of BMW AG.  There was no allegation that the goods were in packaging designed to mislead the public into assuming that these were genuine goods rather than aftermarket ones.  Nevertheless, Customs refused to release the goods.  Sterling sued Customs on the grounds, primarily, that the customs officer was not an inspector under section 15 of the CGA as no application to the Commissioner as contemplated by that Act had been made.  It was also claimed that, on the face of it, the goods were not counterfeit.  Mr Justice Patel in the TPD agreed and ordered the goods released.  He was particularly scathing about the affidavits from the BMW and Mercedes representatives which he dismissed as pure hearsay and which did not prove that the goods were counterfeit.  An application for leave to appeal was dismissed but a further application to the Supreme Court of Appeal,  was allowed and referred back to a full bench of the TPD to decide. It has been decided in favour of SARS and the complainants.

The arbitrary deprivation of a person of his property may not be permitted under any law, according to S.25 of the Constitution. The effect of the CGA in practise at this point is that a mere allegation of counterfeiting by a complainant is, at the whim of an inspector (who is not a judicial officer) sufficient to result in seizure of goods without warning and, most seriously, without the defendant having any right to be heard. A magistrate is typically approached to issue the warrant and he has no means of testing the accuracy of the allegations made before him. In the Checkers case in the Cape, also last year, the High Court found that the goods had been unlawfully seized and severely criticised the complainant’s attorneys for the evidence that was used to obtain the seizure. It is not everyone that can afford High Court litigation, especially against a large, wealthy foe, and more often than not, the value of the goods seized is insufficient to justify the very high stakes that must be played in order just to have the constitutional right and fundamental human right of being heard. In Sterling the released goods were immediately re-detained by SAPS, on a fresh complaint, but on the same facts. Sterling’s further urgent application to the TPD claiming res judicata, was frustrated by an application by the complainants to be joined, which, remarkably, was granted with costs by Judge Botsielo, something the CPD, in my respectful view, correctly refused in Checkers citing the complainant’s lack of an interest in determining the legality of the state’s seizure of goods. So, Sterling, a close corporation, must test its financial mettle against the resources of two industry giants, as well as the state, just to get heard on whether it was right to take away again the goods the High Court had just ordered released, when it was not heard at all when they, very cheaply, and without the inconvenience of making out a case, took them away.

Finality on these issues will come from the SCA or the Constitutional Court, but the injustice to someone wrongly accused is palpable. It cannot be right that only the very rich can be heard, for that is no access to justice at all. I have sufficient faith in our legal system to be confident that parts at least of the CGA will be struck down as unconstitutional and some measure of balance restored. The recent judgment in the Sterling matter by the full bench of the TPD, which ignored Checkers and reaffirmed Botsielo's judgment, may indicate that that faith is misplaced, and amendment of the Act is the route to follow.

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GOODWILL AND THE ASSIGNMENT OF TRADE MARKS

In terms of Section 39(1) of the Trade Marks Act of 1993;

"Subject to any rights appearing from the register, a registered trade mark is assignable and transmissable, either in connection with or without the goodwill of the business concerned in the goods or services in respect of which it has been registered".

In carrying on practice in the game of trade marks over the last 18 years, I have discovered that most people, whether they be businessmen, accountants or even attorneys, and even several attorneys practising in trade mark field, do not understand when an assignment should be expressed as "with goodwill" or "without goodwill".  The registry has also had some difficulty with this and the result is that the official records show numerous examples of assignments with goodwill that are expressed to be without it, and vice versa, and then there are those that ignore the issue altogether!  The latter school are multiplying rapidly as, unlike the form TM14 which formed part of the regulations under the 1963 Trade Marks Act and which required a statement as to whether the assignment was with or without goodwill to be entered onto the form, rather than simply appearing from the Deed of Assignment or such other evidence of title as the assignee might put before the Registrar, the present form, the form TM6, does not specifically call for this information although it could of course be supplied under "reasons for application".

In my opinion it is perfectly clear that the Registrar should require this information since he is directed – by the peremptory language of the Act – "to cause particulars of the assignments or transmission to be entered in the register."  This is precisely the same language used in the previous Act under which it was trite that this information must be entered.

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IP VALUATION

Introduction
To say that, in this 21st Century, the measurement of the value of an enterprise by its tangible assets is unlikely to be a very accurate reflector of its true worth is not to say anything new.  There must be very few people involved with business at this stage who do not appreciate that intangibles form a large part of the value in most businesses and that these are distinguishable from the great common covered by the word "goodwill".  It is after all, almost a quarter century after Nestlé bought out Wilson-Rowntree for more than five times the latter's book value, and brought to the fore the realisation that the brands of Wilson-Rowntree were worth a vast amount of money – hundreds of millions of pounds.

That – and the flurry of deals in the 1980's which saw corporate raiders targeting companies with substantial brand portfolios – forced an adjustment in thinking which, in my view, is still far from fully developed.  The figures have continued to climb – Mannesmann is reported by Brand Finance Plc to have paid £20 billion (yes, billion) for the ORANGE trade mark which was then only five years old.  Too much, surely?  Well, perhaps not – it was sold on to France Telecom for £31 billion within a year.  It must be added that ORANGE has proven to be an exceptional brand, outperforming all its rivals in terms of customer acquisition and retention, and greatly assisted by the far higher than predicted popularity of mobile telephones which have become a lifestyle in themselves.  Arguably, any reasonably distinctive brand would have done as well.  This raises the inevitable question – how much of the value is really attributable to the brand itself?  There are many who would reply "not a lot".

Stories of over-zealous brand valuations bearing little if any resemblance to reality abound and it is no coincidence that the facility for writing off a trade mark was withdrawn from the Income Tax Act.  Indeed there are many who regard IP valuation generally and brand valuation particularly as little more than an elaborate "thumb suck", clothed in scientific language.  There is more than a shred of truth in that assertion.  Any exercise that looks into the future worth of an asset producing income is going to be only as accurate as the predictions on which it is based, and the reputedly best predictor of the future, Nostradamus, certainly hedged his bets!
IP valuation, as far as I can foresee the future, is never going to be a matter of "talismatic precision" (to use the words of the U.S. Tax Court) – too many of its elements involve subjective judgements for that – but it is possible to provide reasonable and fairly reliable results if the matter is addressed thoroughly.  It is an important issue – for brands, certainly in consumer businesses, the importance is difficult to overstate – it is for example difficult to persuade a consumer to pay more than R40 of R50 for a plain white cotton T-shirt of good quality but place the name DIESEL on essentially the same T-shirt and you can get R400 for it.  The question is "why".  Intrinsically, there is no difference between the two T-shirts, the plain one may even be better, but consumers want the one with the brand on it.

The ORANGE example and listings of the top 100 global brands has worked to bring the chosen few to general attention.  Yet the bulk of intangible asset value remains off balance sheets.  This remains true even though modern accounting standards require intangibles to be dealt with.  In South Africa, Accounting Standard AC 129 (issued June 1999) deals with "Intangible Assets" and, for most types of IP (which is not an interchangeable term with intangible assets) it provides a reasonable framework for dealing with the values that exist or are brought into being.  It specifically, however, avoids recognition of internally generated brands.  (AC 129.52,3).

Brands, including trade marks
A trade mark is not necessarily a "brand" and a brand is typically more than a trade mark.  Normally a brand will be a collection of trade marks and I like to characterise the trade mark as the basis of a brand, like a light bulb.  The bulb, or a collection of them, when placed in an appropriate setting and used (i.e. when electricity is fed to it or them) illuminate a certain space.  So, with trade marks, when put in context, promoted and tied to a product identity, illuminate a part of the market.

A "mark" is any sign capable of being represented graphically.  A "trade mark" is one that acts as a badge of origin and serves to distinguish goods or services connected in the course of trade with one enterprise from those connected with another.  As a thing in itself it is a creation of statute and registration is a condition for its existence.  I like to say that a common law trade mark does not exist because there is no property right in it apart from the overall reputation or goodwill of which it is a part.

Some have said that if the basic trade mark is not registered, then there is no brand value.  That overstates the position, but non-registration will be a major negative factor in assessing worth.

Brand valuation
As noted above, the conventional approach of accountants analysing in detail the tangible elements of a business with itemised information relating to fixed assets, cash on hand, stock on hand and the like yet lumping all intangible elements of a business together as goodwill ended with AC 129.  This provides a detailed analysis of intangibles and a separation between controllable assets, likely to provide a future benefit and perceived "assets" that cannot be recognised as such, and which must still be dealt with under the general head of "goodwill".  This, still, does not take into account the real value of a developing brand.  Revaluation of a brand is not permitted under the accounting standard because there is no active market for brands which is required for measurement of value after initial recognition (AC 129.64, 65 and 66).

Some elements of goodwill are 'crisp' and very ascertainable – for instance, a registered trade mark, whereas other are by nature mutable and possibly of no lasting value such as, for instance, relationships with suppliers, or a particular management team.  To treat all of these equally must clearly be wrong.

Valuation premisses
Each element of IP is an economic asset, and therefore one of its most important functions is to produce a flow of money for its owner.

Some trade marks are more equal than other trade marks - a trade mark such as COCA-COLA has a different value to the trade mark your cousin Johan filed last week.

Not all purchasers of a trade mark will be able to derive the same benefits from it. So the value in the hands of one purchaser may be greater than the value in the hands of another.

A trade mark is capable of being an eternal asset - it has no finite life, but abuse and changing market trends can destroy its value.
The aim of the valuation process is to establish a present value for the future benefit.
There are three key elements to calculating a value and these are:
estimating the likely cash flow over a reasonable period of time;
assessing the likelihood that the estimate will be achieved; and
capitalising the cash flow.

That portion of the future benefits (typically cash flows) that spring from the trade mark itself as opposed to that portion likely to be derived from other factors such as the marketing expertise of the purchaser, can be ascribed with reasonable accuracy.

Valuation Principles - Brand
In valuing the brand, a fair market value must be ascertained. This is a value applicable in an arm’s length transaction between a willing buyer and a willing seller under orderly sale conditions (i.e. with no time constraint).
Given the nature of intellectual property, approaches to valuation such as the original cost to the vendor of acquiring the underlying trade marks are inappropriate. The historical costs of acquisition, which are essentially the costs of researching the market and devising and registering suitable trade marks, can be negligible in relation to their current value.
It is equally inappropriate to attempt to establish the cost of replacement of the trade mark. Each trade mark is unique in its nature (otherwise it would not be registrable), and the effect of say a decade of promotion of the brand makes such an approach impracticable.

Although there is a growing number of transactions in brands as property objects independent of other assets, there is not yet a lively market in any particular type of trade mark, except perhaps in very limited sectors such as the pharmaceutical industry and the food and beverage industry in major economic blocs such as North America and the European Community. Even in these restricted areas the uniqueness of every item of intellectual property makes the market-based approach to valuation approximate only, and the market history is really only useful in indicating precedents rather than actual values.

It is internationally accepted that the appropriate factor on which to base the valuation of existing and well established trade marks and other forms of intellectual property is the income-earning capability of the relevant items of intellectual property. Although there are some divergences in the most sophisticated valuation procedures, the best method in circumstances most commonly encountered is to assume that the purchaser, as an investor in the trade mark, will proceed to licence it to a suitable licensee in order to generate royalty income. The most suitable licensee may be a wholly owned subsidiary, which can be readily controlled, but there is no fixed rule in this regard. A notional licensing transaction is therefore assumed, analogous to a leaseback of fixed property.
In the notional licensing transaction that is then constructed, the parties must be at arms length and an exclusive license would be granted to the user of the mark. It would be expected to guarantee a minimum performance in the form of payment sufficient to support any necessary funding of the acquisition of the trade mark, and would provide a long-term stream of royalty income.
For this notional transaction, a suitable royalty rate must be ascertained and applied to projections of sales of the relevant products. This flow of royalty income must be reduced to its net present value (NPV). The techniques for this type of calculation involve the application of a discount factor for inflation and for the risk that, for various considered reasons, the projected income will not be achieved.

In the abstract, it is difficult to determine the period over which a forecast of sales may reasonably be made and, for the purposes of this example, we shall assume 10 years. This may be considered a short period in view of the successful use of many trade marks continuously for decades, but it takes account of the fact that the business environment in South Africa is presently subject to extreme stresses and these are likely to continue as major political, social and economic restructuring of the country occurs.

Specific Trade Mark Analysis
Registration status
A registered trade mark is far more valuable than an unregistered trade mark because the rights it represents are much easier, and therefore much less expensive, to protect in a court of law and a registered trade mark can be freely transferred with or without the business with which it is connected, whereas an unregistered “trade mark” cannot be transferred without the business it represents.

International availability
A brand that has global potential must be more valuable than one which does not. Certain trade marks that are ideal for the South African market, may be anticipated in other markets or the word elements may have unfortunate meanings in other languages.  POCARI SWEAT, a cool drink brand in the Far East, is not likely to appeal to English speakers.
A strong brand in South Africa which has the potential to become global, must be worth more than one which will be limited to this market.

Market stability
The question of the business in which the trade mark is used is crucial to determining a reasonable basis for assessing its future value. Certain markets are very stable and, by this, I mean that they change slowly and infrequently. For instance, the market for heavy machinery such as CATERPILLAR is a long term one - the product is very expensive and long lasting and earth moving is not subject to the vagaries of fashionable trends. The fashion clothing market, on the other hand, can be both very volatile and very stable, depending on the brand itself and its market segment.

Trends
Certain brands are closely linked to trends in the market and some of these, by their very nature, are extremely short lived. The TEENAGE MUTANT NINJA TURTLES are a prime example - for nearly two years, this brand boasted phenomenal consumer appeal and phenomenal sales - if one had valued the brand early in its career and decided that it had a ten year life at that sort of level of sales, it would have been over-valued considerably.

Customer loyalty
Certain brands have fanatical followings. It is important to establish whether the brand being valued falls into this category. If it does, its value must be enhanced.

Inherent registrability/distinctiveness
This is related to the question of whether the trade mark is registered. There is a spectrum of distinctiveness which goes from the most distinctive trade mark, generally consisting of invented words such as KODAK and EXXON, which have no meaning other than trade mark or brand meaning. These travel down through arbitrary marks, such as MUSTANG for cars to suggestive marks, such as BODY ON TAP for shampoos, to obliquely descriptive marks such as CHICKEN LICKEN, to surnames and then to very descriptive trade marks such as BITTER LEMON. Generally, the less distinctive the trade mark, the lower its value since the protection granted by registration may prove illusory when one comes to enforce one’s imagined rights and finds that the court determines that the trade mark should never have been registered in the first place!

Acquired distinctiveness/secondary meaning
It would have been noted above that surnames came low on the list of distinctive trade marks. This is because traditionally surnames have not been protectable trade marks on the principle that a common surname cannot be monopolised since other people, having that surname, may well need to use it in trade. There does come a stage in the use of such a trade mark, however, where it acquires what the Americans call a secondary meaning. The surname McDONALDS is a celebrated example.

Effects of competition
Having considered the relative strength of the brand, one must consider its future likely strength in the face of foreseeable changes in the market and foreseeable competition. Here much turns on the nature of the business that the purchaser is in and the nature of the business from which the brand is drawn.

Certain industries are likely to have constant and concentrated competition which, in association with many of the other factors listed in the relative strength analysis above, will lead to the conclusion that the brand is unlikely to have a long life. Here the relative strength, capitalisation and ability to control the market held by the purchaser may have a significant effect on value. For instance, if the purchaser controlled a large chain of retail outlets dominant in the market, its commitment to promote the purchased brand at the expense of would be competitors within in its own retail outlets, would enhance the value over the same brand being sold to a smaller player in a poorer position to control the market.

Valuation calculation
The most straightforward means of calculating the valuation would be to take the expected annual royalty cashflow over the appropriate period (for the present purpose, we should say 10 years) and reflect the royalty value as an after-tax amount. The non-discounted value would then be the total of the royalty flow over the next 10 years. This is then discounted by the amount of inflation which is expected over the next 10 year period and further discounted according to the dangers in the particular market, and according to all the other factors which have been mentioned above. The net present value is the result of taking all of these considerations into account.

Conclusion
Brand valuation is more of an art than a science - although it has been done, it is not something which can properly be undertaken on a fixed mathematical formula and it has to be questioned how effectively an accountant, acting alone, can value something of this nature, since most accountants will not be able to analyse the strength of the underlying trade mark. On the other hand, trade mark attorneys, acting alone, may well be weak on the accounting elements of the valuation. It follows that a good valuation will combine both sets of skills.

As with any art, the results will not be precise, although the figure presented at the end of the exercise may lend the illusion of precision. The reason is that many of the factors affecting the valuation have a high subjective content, however objectively one may work at ascertaining them.

The approach outlined here, though, has a way of producing similar results when applied by different people and represents a reasonable means of assessing value that has found generalised acceptance from revenue agencies, sellers and buyers alike.

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IS OUR TRADE MARK LAW NOW OUT OF STEP WITH THE EC?

My article suggesting that the Trade Marks Act of 1993 permitted brand comparative advertising was published in the September 1996 issue of De Rebus.  It caused some controversy among trade mark practitioners and the bulk of them took the opposite view, although I was never quite able to understand their reasons for this.  At all events, the Cape case of Abbott Laboratories and others v. UAP Crop Care (Pty) Limited and others, 1999(3)SA624 referred to my article, and those (in other publications) by two of the authors of the Act, Chris Job and Owen Dean, and concluded that comparative advertising does indeed infringe under this Act.  Regrettably, there was no appeal. In my opinion, Cleaver J, who decided the case, misconstrued the meaning of the word "use" in the context of Section 34 in particular and of the Act as a whole. The recent judgment by Van Dijkhorst, J in Abdulhay M Mayet Group (Pty) Limited v. Rennassa Insurance Co Limited and another 1999(4)SA 1039(T) (Case No. 21447/98) repeated this misconstruction because his Lordship said:

"Although Section 2(2) of the Act deals with the use of a mark it does not give a definition of the word "use".  The word "use" therefore bears its ordinary meaning namely "the Act of using a thing for any (esp. a profitable) purpose;  …. Utilisation or employment for or with some aim or purpose".

It is my belief that the word has a technical meaning within the context of the Trade Marks Act, as dealt with in my earlier article, and it is a technical meaning well recognised by our own courts in the past as well as those around the world.  But I digress.
Returning to Cleaver, J's judgment in the Abbott Laboratories case, the startling thing from my point of view is to be found on page 635 of the reported judgment at C where he states: "As I have already pointed out, there has been a shift in our legislation to elevating the distinguishing feature of a trade mark as its main purpose.  The point of departure for interpreting the South African Act is accordingly not the same as that for interpreting the United Kingdom Act".

He then goes on to state at page 836:
"Finally, when comparing the United Kingdom legislation with our own, it must be remembered that the United Kingdom Act of 1994 implemented an EC Directive which makes simple comparisons of the Act with our Act somewhat hazardous.  [My emphasis].  For the above reasons, and having regard to the changes brought to our law in the 1993 Act and the reasons for these changes, I am not prepared to accept this portion of Jacob J's judgment as a basis for finding that comparative advertising is permitted in terms of our law".

I describe this as "startling" for a number of reasons.  First, our law in this field has always closely followed that of the United Kingdom and UK authority has been much used over the last 100 years in the interpretation of our various Trade Mark Acts up to the 1963 Act, which were closely modelled on the UK legislation.  So was our 1993 Act.  Cleaver J's judgment strongly implies a belief on his part that our law was changed in 1993 in some way other than in compliance with the European Directive.  The memorandum on the objects of the Trade Marks Bill 174 of 1993 published in the Government Gazette at the time indicates the exact opposite.  An extract is reproduced below:

South Africa's most important trade partners, the members of the European Community, are rapidly moving towards the modernization and harmonization of their trade mark legislation.  The first European Directive of the European Community to bring the legislation concerning trade marks of the member countries into agreement (89/104/EEC) dated 21 December 1988 – "The European Directive") is of particular importance in this regard.  The European Directive requires members of the European Community to amend their domestic legislation relating to trade marks to ensure that such laws are in accordance with the provisions of the Directive.  The British White Paper on the Reformation of the Trade Marks Law, dated September 1990, is also of importance.  It sets out the manner in which the United Kingdom proposes to amend its Trade Marks Act of 1938 so as to bring it into line with the European Directive.

The Bill takes several of the above-mentioned developments and requirements into account and proposes amendments to the South African law on trade marks that will bring it into accordance with the European Directive in cases where such principles and proposals are reconcilable with South African requirements ….
"A new test for registrability of a trade mark, that is, of being "capable of distinguishing", is introduced in clause 9.  This definition accords with the European Directive".  A single test for registrability is therefore being proposed and there will no longer be any distinction made between trade marks for purposes of registration in Part A and Part B of the register.  This is in accordance with the British White Paper.  Part A and Part B of the register will therefore fall away, save for the existing trade mark registration .  [My emphasis]

The perceived 'evil' that led to the EC Directive was that different theories of law applied in different countries to trade marks and, with the global market, and more pertinently, the common market, it was felt necessary to harmonise these laws.  Trading partners were also encouraged to harmonise and this brought about changes in both South Africa and Australia.
As Cleaver J pointed out in his judgment (and as I pointed out in my 1996 article):
"(a)      The provisions of S34(1)(a), (b) and (c) are more or less identical to S10(1), (2) and (3) of the United Kingdom Trade Marks Act, 1994;  and

1. The provisions of S34(2) are more or less identical to the provisions of S11(2) of the United Kingdom Act."

He goes on to say:
"However, as Jacob J pointed out at 298 (line 5) in his judgment, the language of S11(2) is virtually the same as that of article 6 of the EC directive and that directive notes that the function of a trade mark is:
"in particular to guarantee the trade mark as an indication of origin".

Jacob, J accordingly had regard to this purpose when construing S11(2) and that is no doubt why he said that honest comparative use "would in no way affect his mark as an indication of trade mark origin".  Cleaver J was referring to and quoting from the judgment of Jacob J in the English case of British Sugar PLC v. James Robertson & Sons Limited [1996] RPC 281 and the following part of the judgment by Jacob J: "Second, I think one must distinguish between a use of the mark by way of an honest comparison and other uses.  I see no reason why the provision does not permit a fair comparison between a trade mark owner's goods and those of the defendant.  The comparison would have to be honest, but provided it was and was part of a genuine indication of, for instance, quality or price, I think it would be within the provision.  Such honest comparative use might well upset the mark's proprietor (proprietors particularly do not like price comparisons, even if they are true) but would in no way affect his mark as an indication of trade origin.  Indeed the defendant would be using the proprietor's mark precisely for its proper purpose, namely to refer to his goods.  I can see nothing stated in the purpose of the directive indicating that trade mark monopoly should extend to the point of enabling a proprietor to suppress competition by use of his trade mark in this way".

This follows the approach of the courts in the United States, Australia, Canada and, I believe, in Europe.  The laws are "harmonised" and trade mark jurisprudence throughout the developed world is almost universally of this view.  A trade mark must be capable of distinguishing, if it is to be registered, but it also and critically functions as a badge of origin.  The definition of a trade mark in the South African Act of 1993 reads as follows:

"'Trade mark', other than a certification trade mark or a collective trade mark, means a mark used or proposed to be used by a person in relation to goods or services for the purpose of distinguishing the goods or services in relation to which the mark is used or proposed to be used from the same kind of goods or services connected in the course of trade with any other person".
This is very similar to the definition in the United States Trade Marks Act, the Lanham Act, which defines the term as follows:
"The term "trade mark" includes any word, name, symbol or device or any combination thereof –

1. used by a person,  or
   

1. which a person has a bona fide intention to use in commerce and applies to register on the principle register established by this Act, to identify and distinguish his or her goods, including a unique product, from those manufactured or sold by others and to indicate the source of the goods, even if that source is unknown".

The Community Trade Mark requires that a mark needs to be a "sign" capable of graphic representation and goes on to state:
"…. the relevant sign is capable of performing the basic function of a trade mark.  That function in economic and legal terms, is to indicate the origin of goods or services and to distinguish them from those of other undertakings".

Finally, the UK definition reads as follows:
““Trade Mark“ means any sign capable of being represented graphically which is capable of distinguishing the goods or services of one undertaking from those of other undertakings”.

It will be seen that there is no difference in concept between all of these definitions.  Indeed, if anything it is the English definition – which makes no reference (unlike the South African definition) to a connection in the course of trade – which may have justified Cleaver J's  rather startling conclusion.  A trade mark remains a badge of origin that can function only if it is capable of distinguishing.
This comes into closer focus if we consider the type of right granted under the various trade marks Acts and the nature of trade mark infringement.  The most lucid explanation of this that I have been able to find is from a US appeal case in the seventh circuit of the United States Court of Appeal, James Burrough Limited v. Sign of the Beefeater Inc., where, at page 274, the court said:
"The statement of findings below twice includes a finding of no trade mark infringement, followed by separate finding of no likelihood of confusion.  But the concepts are inseparable.

A "trade mark" is not that which is infringed.  What is infringed is the right of the public to be free of confusion and the synonymous right of a trade mark owner to control his product's reputation".

In an earlier part of the judgment it is stated:
"In the consideration of evidence relating to trade mark infringement, therefore, a court must expand the more frequent, one-on-one, contest-between-two sides, approach.  A third party, the consuming public, is present and its interests are paramount.  Hence infringement is found when the evidence indicates a likelihood of confusion, deception or mistake on the part of the consuming public.  Infringement does not exist, though the marks be identical and the goods very similar, when the evidence indicates no such likelihood".  [My emphasis]

In the Abbott Laboratories case, it was common cause that there was no confusion.  Cleaver J said at page 628:
"I should make it clear that in the brochure the second respondent in no way attempts to pass its product off as that of the first applicant, nor does it hold out that PERLAN is identical to PROMALIN, as was the case with the first respondent in 1997.  The second respondent makes it quite clear that the mark PROMALIN is the property of the first applicant for at the foot of the first page of the brochure the following appears: "PROMALIN and PROVIDE are registered trade marks of Abbott Laboratories, Chicago, USA.""
So it is clear that there was no deception or confusion among the consuming public, the third party who the US courts say is paramount.  As is clear from the judgment referred to above, the UK courts would have taken the same view.  I have it on good authority that those in Australia and Canada would also have taken the same view.  There is no use as a trade mark, there is no deception and there is no confusion.  Following the reasoning in the case of Protective Mining and Industrial Equipment Systems (Pty) Limited v. Audio Lens (Cape) (Pty) Limited referred to in the judgment, our courts should, in my view, also have agreed under the previous Trade Marks Act that there is no infringement.

Cleaver J, however, says:
The "badge of origin" element of the trade mark is no longer at the forefront and has been replaced by the distinguishing capability of the mark.  It would seem that, in seeking to persuade me that the respondents have not infringed the applicant's marks, Mr. Louw has in effect highlighted the "origin" element of the mark, which is clearly acknowledged in the brochures, but has overlooked the distinguishing element of the marks".

The judge has, in my opinion, made a distinction which is devoid of difference.  The trade mark provides a ready means of telling the goods of one party from those of another.  It is no longer considered important that the persons whose goods are thus distinguished should necessarily be known to the public.  It is important, though, that the goods are distinguished.
A person "uses" a trade mark, whether it be his or that of another, when he applies it, or has it applied, to goods or services so that the public can distinguish those goods from those of his competitors.  He does not "use" the trade mark when he refers to his competitor's goods by the "handle" that distinguishes them – the competitor's trade mark.  He certainly does not confuse the public as to whose goods are whose.

It has long been my view that the 1993 South African Trade Marks Act was a piece of ill considered legislation that made changes to our law not necessary to the implementation of the EC Directive, which South Africa voluntarily sought to implement.  The Act is host to conflicting doctrines of trade mark law and infested with vague terms that render interpretation enigmatic.  Many laymen laugh and say that this is the case so that lawyers can make more money as more matters will inevitably be referred to litigation.  Frankly, it is good for no one.  Our courts are overloaded already, and a more insidious problem is that, when lawyers cannot accurately predict the outcome of cases, the esteem in which the public holds them inevitably declines and legal uncertainty makes the law, right or wrong, a luxury for the extremely wealthy.  That hardly promotes the small and medium enterprise to which South Africa is supposed to be committed.  This judgment, in stating that the UK law can no longer be used as a compass to the interpretation of ours, serves only to multiply those uncertainties and, in direct conflict with the Constitution of South Africa, muzzles the right of freedom of commercial speech.  It must be incorrect.  With South Africa emerging from its isolation and rejoining the world as a whole it is difficult to believe that the legislature – while stating its intention to harmonise South African trade mark law in accordance with the EC Directive – actually sets about taking South Africa, for the first time in her post 1820 history, out of step with her most important trading partners!

The original draft of the Bill made it clear that brand comparative advertising was lawful.  In view of the grave do ubts created by this judgment and its inevitably far reaching consequences, it is time for the legislature to make its will known by amending this Act intelligently to ensure that it can only be interpreted as being in harmony with the EC Directive.

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LIMITS OF IP PROTECTION
BMW v/s Verimark

One of the debates raging in the world of intellectual property today concerns the rational limits of IP “protection” – where the line must be drawn between granting monopolies and allowing free competition. In some circles IP protection has become something of a label for blatant anti-competitive behaviour and the recent ruling of the US Supreme Court on patent protection in KSR v. Teleflex is seen as a welcome limitation of runaway patent monopolies. In the trade mark field the reining in of dilution theory by the Victoria’s Secret decision of the Supreme Court had its echo in South Africa with the Laugh it Off case, both basically supporting the widely held view that dilution (at least by alleged blurring) is a fiction. With the rapid broadening of the trade mark estate in recent years  with the proliferation of dilution statutes, recognition of rights where there is no local registration and criminalization of “counterfeiting” – often so loosely defined that innocent infringement can be characterized as counterfeiting – the risks inherent in ordinary, honest competition have risen to the extent that development of SMMEs is seriously hampered.

To those in the South African spare parts for vehicles industry, the fact that BMW sued  telemarketer Verimark for trade mark infringement through featuring a BMW motor vehicle, complete with BMW badge, in its infomercial for a car polish would come as no surprise. That the Transvaal Provincial Division of South Africa’s High Court (“TPD”) thought that this claim was a bit far fetched and refused an injunction may surprise a few.  BMW clearly considered that judgment to be incorrect and appealed to the Supreme Court of Appeal (“SCA”). The SCA judgment in Verimark (Pty) Ltd v BMW AG [2007] SCA 53(RSA) was handed down on 17th May 2007 and confirmed, in no uncertain terms, the correctness of the TPD finding.

I have written many times, since 1998 in fact, that the popular interpretation of the infringement provisions of the Trade Marks Act of 1993 – that any use of a registered  mark, whether as a trade mark or not, infringes – is wrong. In my opinion, the only legitimate concern of trade mark law is where a mark is used to confuse or deceive consumers as to the source of the goods offered. So sale of aftermarket spare parts which are branded with the manufacturer’s trade mark, but also carry the name of the vehicle they are intended to fit, is clearly allowed and does not amount to counterfeiting (as has often been alleged) or even infringement. So, too, an honest comparison where the competitor’s goods are identified by the competitor’s mark is not infringement.

It seemed, for a while, that South Africa might be taking its own unique course on trade mark law and that the designation of origin function of a trade mark had fallen away. This was the conclusion of the Cape Provincial Division in  Abbott Laboratories v.UAP Crop Care (Pty) Ltd in 1999 which used that reasoning to conclude that brand comparative advertising - where the competing party’s brand is used to identify its product - amounted to trade mark infringement. I criticized this judgment at the time as meaning – if correct – that South Africa was out of step with the EU law. This was the opposite of what the Trade Marks Act, 1993 had been designed to achieve according to the explanatory memorandum which accompanied its publication as a Bill.

Soon, however, there were indications by the SCA that it did not agree and it stated that the primary function of a trade mark was still a designator of origin without, however, actually overruling Abbott. The result was that certain elements still believed that Abbott was good law. The breakthrough now is that this case specifically distances the law from Abbott. The SCA has taken the opportunity to make it plain that a “trade mark serves as a badge of origin”, a fact the court describes as “trite”. The court has brought us even closer to the EU law by specifically adopting the European Court of Justice’s test for infringement,  namely that the use must create “the impression that there is a material link in trade between the third party’s goods and the undertaking from which those goods originate.”

We must be careful not to overstate the effect of this judgment, because each judgment is true to its own facts and here it was very clear that it would be absurd to grant BMW relief. When dealing with spare parts and alleged counterfeits the issues are not quite as black and white. It seems clear, though, that the time is over when it can be alleged that a headlight in, say, a HELLA box, and bearing the HELLA trade mark, but also with a white block on the side printed with , say, 3 SERIES 1986-1993, is rendered an infringement and thus a counterfeit. A similar light in a box emblazoned BMW is, if not put in that box by or with the authority of BMW AG, very much an infringement and plainly counterfeit, and that is how things should be.

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NOTES ON TRADEMARK SEARCHES

Searching is an art, not an exact science and absolute accuracy in assessing the availability of a mark is not guaranteed. We bring 25 years’ experience to the task and our assessments are generally correct, but we accept no liability if other parties, or a court, disagree with them.

• The trade mark search has been conducted at the Trade Marks Office and is naturally subject to the accuracy of the official records.  A delay of several  weeks – sometimes months - occurs between the physical filing of an application and the capture of the data onto the official records. The official records have definite shortcomings, including missing data and inaccuracies do occur. We cannot accept any liability for them.
• South Africa is a member of the Paris Convention. This permits an applicant in a convention country to lodge an application up to six months after the filing date in his own country and the application will be treated as if filed in that other country on the home filing date (called “the priority date”). Such a right, not yet claimed by filing in South Africa, will obviously not be disclosed by a local search.
• Marks which lapsed or were refused registration prior to computerisation were not captured onto the database and, along with those for which no application was filed, will not be disclosed by our search. Such marks may nevertheless be in use and protected at common law.  Consequently it is wise, before actually launching a new product, to conduct a thorough investigation of the marketplace to see whether any conflicting marks are in use. 
• A mark which is registered but which has not been the subject of bona fide use for five years or longer is vulnerable to removal from the register on grounds of such non use. There can also be other grounds of removal and, where any such grounds exist, it is often possible to negotiate the cancellation or transfer of an existing registration.  Thus, what appears to be an impediment or complete bar to the use and registration of a proposed trade mark may be less of a problem than it first appears to be.
• Business and corporate names are not the concern of the Registrar of Trade Marks and our trade mark search will not disclose business, company or CC names incorporating your proposed trade mark or similar words. It is wise to conduct a company name search in the companies register and we will undertake such an investigation on request, at a nominal additional cost.
• "Well-known" marks may be protected in South Africa even though such marks are not registered or used in this country.  Our investigation will obviously not disclose these. Moreover, a registered mark in a class not related to the search may enjoy “dilution” protection and give rise to unexpected difficulty. We are happy to provide detailed advice on dilution issues on request.
• Trade mark searches do not extend to domain names.  We recommend that such searches are conducted and will undertake such searching at nominal additional cost
  

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"PASSING OFF" IN THE SOUTH AFRICAN LAW

The South African trade mark law is derived from and closely related to the English law but, when applying doctrines of common law, many South Africans overlook the fact that the English tort of "passing off" is not identical to the wrong of "passing off" in the South African law which is a genus of the delict of unlawful competition (in English law, a separate tort).  This is because, while the English common law recognises a number of separate well-defined torts as specific wrongs, the South African common law is Roman Dutch and does not recognise these torts.  The South African common law of civil wrongs is known as delict.  Most actions in delict are based on the developments of the Roman lex aquilia.  The basis of this is threefold:

1. an unlawful act;
2. committed deliberately or negligently (culpa or dolus);
3. which causes or is likely to cause patrimonial loss.

In the case of Dunn & Bradstreet (Pty) Limited v SA Merchants Combined Credit Bureau (Cape) (Pty) Limited 1968 (1) SA 209, Corbett J (as he then was) stated:

"… the  broad and ample basis of the lex aquilia is available in this field for the recognition of rights of action even where there is no direct precedent in our law."

The South African law and the English law are agreed that rival traders may not mislead the public by "passing-off", or in other words making misrepresentations that the goods of the one are the goods of the other, but the analysis used to reach the conclusion differs.

As explained in the Schultz v Butt case (1986 (3) SA 667 Act 678) by Nicholas AJA:

            "In order to succeed in an action based on unfair competition, the plaintiff must establish all the requisites of aquillian liability, including proof that the defendant has committed a wrongful act.  In such a case, the unlawfulness which is a requisite of aquillian liability may fall into a category of clearly recognised illegality, … namely trading in contravention of an express statutory prohibition; the making of fraudulent misrepresentations by the rival trader as to his own business; the passing-off by a rival trader of his goods or business as being that of his competitor; the publication by the rival trader of injurious falsehoods concerning his competitor's business; and the employment of physical assaults and intimidation designed to prevent a competitor from pursuing his trade.  But it is not limited to unlawfulness of that kind."

The statement makes it clear that the South African law is not as restricted as the English law which, latterly, has been seeking to extend definitions of the tort of passing-off beyond all recognition, and beyond logical bounds, in order to offer a remedy for actions which are felt to be wrongful, but which do not fall within the classic formulation of the tort.  In the South African law, confusion alone is not sufficient.  In Hoescht Pharmaceuticals (Pty) Ltd v The Beauty Box (Pty) Ltd (in liquidation) 1987 (2) SA 600 Nicholas AJA stated:

            "Confusion per se does not give rise to an action for passing-off.  It does so only where it is the result of a misrepresentation by the defendant that the goods which he offers are those of the plaintiff or are connected with the plaintiff.  That has not been shown.  The cause of any confusion is probably to be found elsewhere."

The authors of Webster & Page (4TH Ed) explain this by stating:

            "Confusion may arise from the mere fact that the parties are conducting the same trade and using descriptive titles of which neither can claim any legitimate monopoly."

The authors go on to quote Van Reenen J in Kellogg Co v Bokomo Co-operative Limited in pointing out that even where the trade marks used  by the competitors are acknowledged to be confusingly similar, at common law there would be no delict of passing-off in the absence of proof of deception.  This is in conflict with the position in Capital Estate and General Agencies (Pty) Limited v Holiday Inns, Inc, where, as the authors point out, "likelihood of confusion" is sufficient to give rise to passing-off proceedings.  It is clear, I think, that Van Reenen J overstated the situation but the fact is that a certain amount of copying is legitimate and lawful.

Thus, while at the English common law it is conceivable that a passing-off action will lie where there is an innocent misrepresentation that nevertheless results in confusion, it will not lie in the Roman Dutch common law because an innocent misrepresentation – unless demonstrably negligent – can never be unlawful.

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SPLITTING OF OWNERSHIP OF A HOUSE MARK

Introduction
The question you ask goes to the fundamentals of trade mark law.  If it is accepted that a trade mark in the modern law is no more than an emblem in which absolute rights exist and which can be freely traded, then it would follow that it could be disposed of without restriction, like any other property.

This assumes that the function of the trade mark as designating origin has fallen away and that its sole function, now, is to distinguish between goods.

If the function of a trade mark still includes an indication of origin, then the use of the identical indication of origin by two differing entities must inevitably be deceptive.  Deceptive use vitiates a registered trade mark. 

The Law
The South African Trade Marks Act, No. 194 of 1993 provides at section 10, subsections 12 and 13 as follows:

1. 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:
   1. 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;
   2. A mark which, as a result of the manner in which it has been used, would be likely to cause deception or confusion;"

The question then, is whether ownership of the identical mark, albeit for differentiated goods or services would be "likely to deceive".
In the New Zealand case of Pioneer Hi-Bred Corn Co. v Hyline Chicks Pty Ltd [1979] RPC410 423 as quoted in Shanahan Second Edition the New Zealand judge Richardson J explained: ""Deceived" implies the creation of an incorrect belief or mental impression … Where the deception or confusion alleged is as to the source of the goods, deceived is equivalent to being mislead into thinking that the goods bearing the applicant's mark comes from some other source and confused to being caused to wonder whether that might not be the case".

In the situation proposed, the trade mark would no longer indicate a single source but would indicate two unconnected sources.  No doubt, the goodwill attaching to the trade mark would also be divided since a certain goodwill will attach to the one set of goods and services and a certain goodwill will attach to the other set.  This is tantamount to an assignment which is expressed to the "without goodwill" but which leaves both the assignor and the assignee deceptively utilising the same attractive force.  That this is not permitted in the US law is quite clear.  The 9th circuit court of appeal has stated: "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."  Mister Donut of America, Inc v Mr. Donut, Inc 418 F2d 838, 842, 164 USPQ 67, 69(CA) 9 1969. 

 In the 1998 case of Berni v International Gourmet Restaurants of America Inc it was stated that rights in trade marks cannot be bought and sold as if they were common property, independent of any interest in an ongoing business because "a mark is not property that may be assigned" in gross."  "If a trade mark is assigned in gross, then the assignee obtains the symbol divorced from its goodwill.  The assignee may subsequently employ the mark in connection with a different business, a different product or service, in a different goodwill.  As Dr Lisa H Johnston stated in her article "Drifting Toward Trade Mark Rights In Gross", in volume 85 of the Trade Mark Reporter [published by INTA], having discussed the above cases "Thus, 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 in her article to the case of Thomas Pride Mills, Inc v Monsanto Co., 155 USPQ 205, 208(ND Ga 1967) where it was stated "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."

I am mindful that you have opinion that the proposed split would be acceptable both in the UK and in the US under current law.  My reading of the position under US law differs from that view as may have been illustrated above.  The South African law has traditionally been closely similar to the UK law and UK authority is much used (together with reference to US authority) to establish what the South African law is.  Before the passing of the South African 1993 Trade Marks Act, it would have been a fair assumption to say that the position in South Africa was much the same as the position in the UK under the 1938 Trade Marks Act, and before.  The leading case was apparently the Sinclair case (1932) 49 R.P.C.123 which, although relating to the position before the 1938 Act, held that an assignment under the 1905 Act required the assignment together with the goodwill of the entire business in which the mark was used.  Where the entire business was not assigned, it was held that the assignment was bad.  This position was modified by the 1938 Act, as you no doubt know and it would seem under that Act a part of the goodwill could be assigned, but Kerly (12th edition) page 244 states:

"If, however, the result of a particular transfer should be that the mark assigned becomes deceptive, the registration could (it would seem) be expunged as invalid, notwithstanding that the assignment as such was not open to challenge."

There is no direct South African authority on the point.  However, if it is borne in mind that the EC directive that brought about the harmonisation of the trade mark laws in Europe, and also brought about our 1993 Act noted that the function of a trade mark is: "In particular to guarantee the trade mark as an indication of origin" – then it would follow that origin is still an important function.
There has been one judgment in this country which indicates a change of attitude to marks (the case of Abott Laboratories and others v UAP Cropcare (Pty) Limited and others, 1999(3)SA624(CPD)), a decision by a single judge of the Cape Provincial Division in which it was stated by Cleaver, J:
"…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 EC 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 trade mark.  Under our 1963 Trade Marks Act, a trade mark was defined as follows:
"Other than a certification mark, means a mark used or proposed to be used in relation to goods or services for the purposes of –

1. indicating a connection in the course of trade between the goods or services and some person having the right, either as proprietor or as a registered user, to use the mark, whether with or without any indication of the identity of that person; and
2. distinguishing the goods or services in relation to which the mark is used or proposed to be used, from the same kind of goods or services connected in the course of trade with any other person."

In the 1993 Act, the definition reads:
"Other than the certification trade mark or a collective trade mark, means a mark used or proposed to be used by a person in relation to goods or services for the purpose of distinguishing the goods or services in relation to which the mark is used or proposed to be used from the same kind of goods or services connected in the course of trade with any other person."

It will be seen that the language of the second part of the 1963 Act definition is used to the virtual exclusion of the language of the first part of the previous definition.  To say that this does away entirely with the origin function of the mark is, to some, a seductive argument.  The judgment, however, referred to a change of emphasis and the retention of language relating to a mark becoming deceptive is inconsistent with the removal of the origin function.  This is because a mark is deceptive when it constitutes a misrepresentation as to source.

In researching this point, I was reminded that the US Lanham Act makes provision for cancellation of a trade mark for a registrant misrepresentation of source in terms of section 14(3).  An article by Theodore H Davis, Junior in the same volume 85 of the Trade Marks Report to which I referred above goes into detail on this issue.  It is interesting that section 14(3) authorises cancellation "if the registered mark is being used by, or with the permission of, the registrant so as to misrepresent the source of the goods or services on or in connection with which the mark is used."  From the article it appears that most of the uses of this section have related to the misuse of a registered trade mark in such a way as to impinge upon the goodwill of another.  Perhaps the most instructive of the cases to which he refers is at page 75 of the article where the defendants had been terminated as distributors of the plaintiff's LIQUID GLASS car polish.  The defendants then purchased from a third party the rights to the federally registered trade mark LIQUI-GLASS for the same goods but then 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 their duty as a former distributor to distinguish their goods.

The next question to consider is whether the trade mark would remain "capable of distinguishing" or, in other words, distinctive.
In South Africa, as in the UK, the decision in the Bowden Wire case was generally accepted as laying down the principle that the licensing of a trade mark vitiated the trade mark on the grounds that public deception would result in that the trade mark would cease to be distinctive.  In the UK, as you no doubt know, the "GE" case modified that position but, in South Africa, use of a registered trade mark by a wholly owned subsidiary of the registered proprietor, where the subsidiary was not a registered user, was held, in a full bench decision of the Transvaal Provincial Division, to be insufficient save the trade mark from expungement on grounds of non-use by the registered proprietor.  That was in 1983.  The decision has since been criticised locally, but is generally accepted to have been correct under the previous law. 

Since, with the proposed splitting of ownership, what I presume to be a presently distinctive trade mark will no longer be distinctive of either party, it is my view that it will become vulnerable to expungement in terms of section 10(2)(a) in that it will have become incapable of distinguishing within the meaning of section 9 which requires that a trade mark should be capable of distinguishing the goods or services of one person from those of another.  Here, where two people own the same trade mark, the trade mark clearly could not distinguish between their goods, or services, as the case may be.

This comes into sharper focus if we consider the rights granted by section 34(1)(c) which is the South African provision which makes a trade mark dilution actionable.  The relevant portions of the provision read as follows:
"A trade mark shall be infringed by the unauthorised use in the course of trade in relation to any goods or services of a mark which is identical or similar to a trade mark registered, if such trade mark is well known in the Republic and the use of the said mark would be likely to take unfair advantage of, or be detrimental to, the distinctive character or the repute of the registered trade mark, notwithstanding the absence of confusion or deception."

The proposed splitting of ownership and then use with the split goodwill will clearly be, as demonstrated above, detrimental to the distinctive character or repute of the registered trade mark.  This is the case even if the use of the second feature proposed by the one party to be used in conjunction with the shared mark is sufficient to prevent deception.  It is in fact the entire basis for the theory of trade mark dilution and the inescapable fact is that the two companies will be diluting their shared asset.
In practical terms this may mean very 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?  I suggest that such action would be impossible and the third party alleged "dilutor" would be able to carry on regardless.

The problem is even further illustrated by considering the situation where there are unforeseen changes of management and direction from the one half of the enterprise which causes problems for the other.  The one half may embark on a disastrous advertising campaign such as that of BENETTON and destroy the repute of the shared mark.  The other half would inevitably be affected by factors beyond its control and, as the architect of its own misfortune, could hardly seek to enjoin the activities of the other half.

Conclusion
As a practical matter, from the point of view of persuading the South African Registrar to permit the split of registrations in this country, I would expect little difficulty provided written consents were furnished by both sides.  Any objections are theoretical, but they go to the heart of the nature and function of a trade mark.  If the question of validity was brought before our courts, there is a very strong prospect of our courts finding that the shared mark has been vitiated. 

Accordingly, my advice would be to establish a third party holding company to administer the trade mark and to hold the rights in it without division.  Both new companies should pay royalties to this company and this company should employ a person for the express purpose of exercising control over the use of the mark.  Naturally, both new companies would be represented on the board of the new third party entity so that control over this entity would be shared.  This would prevent any future surprises and ensure the consistent development of the trade mark as an asset.

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THE DISADVANTAGES OF NOT REGISTERING TRADE MARKS

The registered trade mark is a statutory  right which is only obtained through registration of that trade mark in terms of the Trade Marks Act,1993.  This is distinct from rights of goodwill at common law, often erroneously called "unregistered trade marks" which do not have the protection of statute, and are only protectable if in all the circumstances of the case, it appears that the action complained of amounts to unlawful competition to the extent that the one party is " passing off" his goods or services as those of the other.   Such an action is inevitably costly and the results are, at best, uncertain. 

Therefore, in order to assert a right analogous to a right of property in a particular trade mark, as distinct from the overall goodwill of a business, it is essential that the trade mark be registered or at least that an application for its registration should be made. 

While there is debate as to whether a registered trade mark right is in fact a right of property, there is no doubt that the Trade Mark statute recognizes this quasi-property right in registered trade marks.   Specifically, a registered trade mark may be used to secure a debt and may be attached to found or confirm jurisdiction.

Turning to the position where one has successfully prevented a passing off and wishes to recover damages, this is extremely difficult as it is necessary to show the degree to which the plaintiff business has actually been damaged by the passing off under the common law.  Again in stark contrast to this, where a registered trade mark has been infringed, the Trade Marks Act provides for actual damages to be paid where these can be shown, or, alternatively, for a "reasonable royalty" to be paid.  Quite clearly, establishing what would be a reasonable royalty in a particular industry for the use of a trade mark is a far easier undertaking than trying to show the actual impact of unlawful competition on a given business.

A registered trade mark is freely assignable from one party to another, separately from the business in which it may have been used and should appear on the balance sheet.  None of this is true of a so-called "unregistered trade mark".  In a modern business environment, therefore, it is tantamount to negligence for a company not to seek registration of its trade marks.

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TRADE MARK DILUTION - WHAT IS IT?

Introduction
The South African Trade Marks Act (number 194 of 1993) imports into South African law the concept of trade mark “dilution” by incorporating, for the first time in a South African statute, anti-dilution provisions. This is part of a world wide trend and very far reaching anti-dilution provisions are also incorporated in the European Regulation which establishes the European Community Trade Mark (CTM). It is a serious and radical departure from all previous theories of trade mark protection applicable to South Africa and, again in keeping with world wide trends, it is part of the growing recognition of a trade mark as an asset in itself and separate from the business in which it is used. Aspects of the theory are difficult to understand but it is critical that legal practitioners seek to understand as much as they can of the theory since it will inevitably have far reaching consequences on the ways in which their clients do business.

Why is there trade mark protection?
A free market economy depends on freedom of competition and is hostile to monopolies. Monopolies stifle competition and the need to compete in terms of service, quality and efficiency is to the benefit of the consumer, and the economy as a whole, since a company which provides a sub-standard product, poor service, or which levies too high a price will not survive. It is recognised that free copying of products, ideas, inventions and the like is permissible unless a form of competition is legally “unfair” measured as being contra bonos mores, or unless such copying infringes the limited statutory monopolies established by, inter alia, the Patents Act, the Copyright Act, the Designs Act or the Trade Marks Act.

These various statutes, and the few others like them, recognise the right of an individual to reap the benefits of that individual’s enterprise and, for the most part, grant a limited monopoly before others are allowed to compete. Thus an inventor can acquire a 20 year monopoly under the Patents Act but, at the end of that time, anybody may make use of the invention and sell a product in competition with its creator. Design rights and copyright protection are similarly limited, although copyright subsists for a much longer period. These three types of right respect the right of the individual to the product of his intellect and are collectively called “Intellectual Property”. The term is also used to describe trade mark rights although it is questionable whether the right to a trade mark is intellectual property at all. The right protected by a trade mark is, in essence, very different to the right protected by patent, copyright, or design. In anything but the most elementary of senses, a trade mark does not involve a creative process of the intellect. Certainly, one may “invent” a word or create a new artistic work which will serve as a trade mark but which will simultaneously be the subject of copyright protection for very different reasons to the protection it may or may not enjoy as a trade mark. In essence, a trade mark is merely an identification and it is protected in the public interest rather than to the benefit of an individual. The trade mark owner also benefits since, if a consumer likes the product, the consumer can readily again identify the product from similar products made by other traders and the trade mark right can grow into a general identification of source which benefits both trader and consumer in that the trader has a “flag” to attract the attention of the consumer and the consumer has something of a guarantee of quality. It will be obvious, too, that the flag, brand, name, symbol or whatever it is that is being used as the trade mark must be distinctive, which is to say merely that it should actually function to distinguish the product of the trader from the similar products of his competitors. Both trader and consumer have an interest in this. The trader wants the consumer to purchase more of his goods in the future and the consumer wishes also to buy the same goods again without being duped into mistakenly purchasing the goods of some other party. This distinguishing function is, in the words of Parker J in the last century “the original and legitimate function of a trade mark”. In the United States, it has been said that the purpose of the trade mark registration system is “not to ‘protect’ trade marks, but ... to protect the consuming public from confusion, concomitantly protecting the trade mark owner’s right to a non confused public.”  The authority for that is James Burrough Limited v. Sign of Beefeater, Inc 540 F2 d266,276 and this is further amplified in the case of The International order of Job’s daughters v. Lindeburg and Co,633 F2 d91 2.919 where it was said “a trade mark owner has a property right only in so far as is necessary to prevent consumer confusion as to who produced the goods and to facilitate differentiation of the trade mark owner’s goods”.

This is why it is semantically incorrect to refer to a “common law trade mark”. At common law, a trade mark has no existence apart from the goodwill or reputation of the business. At common law one does not normally acquire a right to a name as identifying that goodwill or reputation, but to the totality of the identifying features, including the locality of the trading, the trade dress of the product, the appearance of the outlet and the like, in short the sum of all the features which actually serve to identify the business or product. This was well illustrated in the JOHANNISBURGER cases heard in the Cape and Natal, where, notwithstanding the fact that the BELLINGHAM JOHANNISBURGER table wine in its distinctively shaped green bottle had been sold country wide for over 30 years, and was very well known and asked for as simply JOHANNISBURGER, the proprietors were unsuccessful in attempting to restrain a competitor from launching a JOHANNISBURGER in a different bottle. There were difficulties with distinctiveness in that Johannisburger apparently refers to a specific blend of wine and this was why it had not been registered as a trade mark.
In summary, it will be clear that the basis of trade mark protection on both sides of the Atlantic is the protection of the public from confusion and deception. That confusion or deception must occur before a remedy will lie, is thus basic to traditional trade mark theory.

The development of the right to a trade mark as an asset
Originally, since a trade mark served to identify the goods of a specific trader, trade mark theory did not allow for that trader to allow some other trader to use his trade mark to identify that trader’s goods, even if made to the exact same specifications as those of the original trader. As the 20th century progressed, the power of a trade mark to attract custom became evident as did the value of licensing. As business became more and more globalised, so consumers in one area were apt to purchase goods identified by the trade mark of a trader from a different area and local traders were prepared to pay for the right to use that identity. By the late 1930’s the need for trade mark law to recognise and provide for licensing was evident and registered user provisions were incorporated into the 1938 UK Act with a “knock on” effect throughout the English speaking world. The second half of the century has seen the growth of true globalisation of business together with modern merchandising which has seen the attractive force of a trade mark employed more and more as a business tool and the emergence of brands as assets of tremendous value in themselves. Today, trade marks feature on balance sheets as assets in their own right and character merchandising has seen trade mark proprietors licensing others to use trade marks in fields in which the proprietor itself has absolutely no expertise. The law took time to catch up with this phenomenon as is illustrated by the formalistic approach to licensing exemplified by the British HOLLY HOBBlE case, where trade mark registration was refused to the owner of the rights in a character called HOLLY HOBBlE in numerous classes, because it was evident that the trade mark proprietor had no intention whatsoever of trading in goods in those classes but was merely registering in order to be able to license a third party to use in those classes. This, the House of Lords held, amounted to “trafficking in trade marks”, something prohibited by the 1938 UK Trade Marks Act. The South African Act of 1963 had a similar provision and it was evident that, once again, commercial reality had overtaken formal trade mark law. To the average consumer, the trade mark appearing on a product no longer means necessarily that it was manufactured, or selected by a particular trader, but that someone owning the rights to that trade mark has authorised a trader to use it. Thus, a consumer does not buy a t-shirt featuring the name and characters from the SIMPSONS TV programme because of the intrinsic fashion quality or ability of the producers in that television programme to manufacture high quality clothing. The consumer purchases the product because they, or their children, wish to be associated with the programme and they expect that the use has been authorised by the producers. They probably do not know who the producers, either of the programme or of the clothing product, are, nor do they care. They wish to identify with “the Simpsons”. The result is that the trade mark THE SIMPSONS is a business tool which allows anybody authorised to use it to sell virtually any product. It may belong to 20th Century Fox, it may belong to Universal City Studios, it may belong to the creator of the SIMPSONS cartoons, it may belong to Investment Facility Company four million and twenty-five, it may belong to the man in the moon. The consumer’s purchasing decision is not affected by ownership. It is affected only by the trade mark itself and the qualities which the consumer attaches to that trade mark.

This does not mean that the source theory is dead. Many trade marks still do identify a source and the perceived source of the product is a major ingredient to the purchasing decision. The real change is the recognition that the name, device, slogan, logo, letter combination, colour combination, shape of the product or container for the product or any combination of these has a life of its own. It is a commercial property and, being a commercial property, it should have the sort of protection that other commercial properties have against malicious injury, against theft and against the theft of its fruits.

Identifying the property
If one looks at other commercial assets, such as land, buildings, vehicles and plant, the property is easily identified; and trespass is generally immediately clear both to the person who trespasses and the one who is trespassed against. If I erect a shop on your land, burn down your building or steal your lorry, neither you nor I will have any doubt as to what has occurred. In my opinion, the logical purpose of a modern trade mark statute is to permit all parties the same facility in respect of the asset that is a trade mark. You would be distressed if the law of immovable property changed so as to enable a person to own property and extract a harsh penalty from you if you trespass, and yet not mark the boundaries! A sort of “minefield” approach to property ownership.

The benefits of registration
During the last century, with the increasing industrialisation of the world, it was recognised that relying on the common law to protect consumers from confusion was insufficient. Each time a trader felt that his rights of reputation or goodwill were being impinged upon by a rival, he had to approach the court with evidence of his reputation, both in terms of the strength of his reputation and the geographical extent of it, he had to prove a likelihood of confusion, or actual confusion and that the activities or his rival were unlawful. In English law these were the essentials of the tort known as passing off, in South African law the same term was used but it was a development of the aquilian action for delict. This was expensive, time consuming and ponderous and, most telling of all, uncertain in all but the most blatant of cases. The result was very substantial pressure in the UK for there to be a system of registration of trade marks which resulted in the establishment of a select committee on the Trade Marks Bill which published its report in 1862. This gave rise to the first UK Statute that provided for registration, the Trade Marks Registration Act of 1875. Under this Act, registration of a trade mark was prima facie evidence of the proprietor’s exclusive right to the trade mark, becoming conclusive evidence of such right after five years. This meant that a trader could obtain registration without having yet used his trade mark and this in turn meant that he could commence use at a future date with little fear of finding himself in conflict with someone else’s prior rights.

Too detailed an analysis of the history of statutory development of trade mark protection is beyond the scope of this paper but use of the registration process was encouraged so that a trader could acquire a nationwide right and any would-be competitor would have notice of that right through conducting a search of the trade mark register. In English law practice, the registration right did not abrogate common law rights, as in some other countries such as Portugal and France where rights are acquired solely by registration.

The scope of the monopoly has traditionally been further limited by allowing a trader registration in respect of goods upon which he uses the trade mark, or upon which he intends to use the trade mark. Goods, and latterly services, were classified for administrative ease and also because, in keeping with the idea of a limited monopoly, the monopoly acquired by the trade mark owner was restricted to those goods in relation to which he traded. The British classification listed 50 classes of goods and there would be no objection, in principle, to different traders owning the same mark for different classes of goods. Indeed, with the often restricted geographical areas in which common law rights had developed, it was, and still is, not uncommon for different parties to own the same trade mark for goods in the same class where there has been honest concurrent user. Thus, to take a hypothetical example, the proprietor of the KINGS HEAD brewery in London could register the name as his trade mark for his beer but could not prevent the proprietor of the KINGS HEAD brewery in Newcastle from obtaining a similar registration for his beer, where the two had traded quite independently and in ignorance of one another. Different classifications of goods were used by numerous different countries but the Nice agreement of 1957 created an international classification which is now adhered to by most countries in the world including South Africa. Traditionally, under the English approach, a trade mark right was protected only for the class in which it was registered and only for the goods covered by the registration. Thus, if you had registered the trade mark COBRA in, say, class 9 in respect of vacuum cleaners, there would be no infringement, if I used the trade mark COBRA on binoculars falling in the same class. There would certainly be no infringement if I used on floor polish (a class 3 product) or water taps (a class 11 product). If a trade mark was registered for goods upon which the proprietor did not use it or upon which demonstrably the proprietor had no intention of using it, the registration of the trade mark would be cancelled for those goods.

So, it will be seen that, in summary, the business asset was identified by being registered, in a specific class and in respect of specific goods or services. With the body of precedent built up over the years, the boundaries of the property comprising the asset were as obvious as the fence marking the boundary of a piece of land. Accidental trespass, for the reasonably astute, had become all but impossible. The changes to the South African Law introduced by the 1993 Trade Marks Act are revolutionary and the entire approach towards identifying the commercial property of others, and avoiding trespass, requires a different mind set than has hitherto been the case.

The development of dilution
The origins of the theory of dilution expressed as such are to be found in an article which was published in the United States by the scholar Frank Schechter in 1927. Ever since the latter part of the last century, there has been recognition of the fact that limiting trade mark protection to the exact goods upon which the trade mark owner uses his trade mark can leave room for third parties to trade on the attractive force of the trade mark by applying it to different goods and, therefore, weakening (so the argument goes) the original trade mark. As Mr Schechter put it:

          “The real injury in all such cases can only be gauged in the light of what has been said concerning the function of a trade mark. It is the gradual whittling away or dispersion of the identity and hold upon the public mind of the mark or name by its use upon non-competing goods. The more distinctive the mark, the deeper is its impress upon the public consciousness, and the greater the need for its protection against vitiation or dissociation from the particular product in connection with which it has been used.”

The earliest case in which the concept, although not identified as such, was recognised, an English case, was The Eastman Photographic Materials Company Limited and Another V The John Griffiths Cycle Corporation Limited and the Kodak Cycle Company Limited 15 RPC (1898) 105. A company had started manufacturing and selling bicycles called KODAK CYCLES and had registered the trade mark KODAK for bicycles. The Eastman Photographic Materials Company Limited sued for passing off and cancellation of the registration. The court found that the intention had been to identify the cycles with the plaintiff company’s cameras and also its cameras adapted for use on bicycles which, the court accepted were very well-known in the UK, and the plaintiffs were successful. The reasoning followed by the court was somewhat stretched and it seems clear that Mr Justice Romer was determined to assist the Eastman company and the fairly tenuous association the company had had with bicycles was used to find that cameras and bicycles were competing products! It would certainly be a startling allegation today to say that bicycles and cameras are generally sold through the same shops!

Two approaches to the problem evolved on either side of the Atlantic. In the UK, the 1938 Trade Marks Act introduced defensive trade marks which permitted a trade mark proprietor to register his trade mark, (provided it consisted of an invented word and enjoyed a substantial reputation) for goods upon which there was no intention to use the trade mark on the part of the proprietor but, if some third party was to use the trade mark, some confusion as to origin would result. The defensive trade mark was taken up by the Australian legislature which somewhat broadened the approach from the British and then in our 1963 Trade Marks Act which again broadened the approach. Meanwhile, across the Atlantic, a general action for “dilution” grew up in individual state law, the first statute prohibiting dilution of the distinctive quality of a registered trade mark being passed by the State of Massachusetts in 1947. In the intervening period, 25 states have adopted statutes intended to prevent trade mark dilution. The concept is a fashionable one and has been introduced not only into South African law, but also into numerous European statutes and into the Community Trade Mark (CTM) and is now part of Federal U.S. law with the recent coming into force of the Federal Trademark Dilution Act of 1995 which amended the basic U.S. Trademark Statute, the Lanahm Act. The position in the individual states in the US has been described thus:

          “The practical problems that have beset the dilution statutes are notorious and well documented. As courts have struggled to apply the dilution statutes, they have erected various rules that are arbitrary both in conception and application. In conception, the rules have no apparent relation to the purpose or language of the dilution statutes, but seem designed only to rein in the dilution principle ‘lest it swallow up all competition in the name of protection against trade name infringement’. In application, the rules are invoked inconsistently from jurisdiction to jurisdiction - and even within the same jurisdiction.”
          (Jonathan E Moskin, Vol. 83 Trade Mark Reporter, pages 127-8)

One of the effects of the 1993 Trade Marks Act has been to abolish defensive trade mark registration in South African law and replace it with the concept of dilution. The dilution provisions are S.10(1 7) and S.34(1)(c) which read:
          “S.l 0 - 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:
          (17) a mark which is identical or similar to a trade mark which is already registered and which is well-known in the Republic, if the use of the mark sought to be registered would be likely to take unfair advantage of, or be detrimental to, the distinctive character or the repute of the registered trade mark, notwithstanding the absence of deception or confusion.”
          “S.34(1) - The rights acquired by registration of a trade mark shall be infringed by -
          (c)     the unauthorised use in the course of trade in relation to any goods or services of a mark which is identical or similar to a trade mark registered, if such trade mark is well known in the Republic and the use of the said mark would be likely to take unfair advantage of, or be detrimental to, the distinctive character or the repute of the registered trade mark, notwithstanding the absence of confusion or deception: Provided that the provisions of this paragraph shall not apply to a trade mark referred to in section 70(2).”
Obviously, since attempts to apply the concept in the United States have led to so many conflicting judgments from state to state, and even within the same jurisdiction (eg New York) the application of this theory in South African law is difficult to predict. Clearly, through its inherent uncertainty it is a potential source of large volumes of future litigation which can only be bad news for business.
For example, it is not clear within the US whether dilution applies only to strong trade marks, that is to say inherently distinctive trade marks which are truly famous (such as KODAK), or whether it extends to marks with significant acquired distinctiveness, (such as ROLLS ROYCE, IBM or BEECH NUT) or whether they extend also to weak marks (such as DON’T LEAVE HOME WITHOUT IT, a slogan trade mark of American Express). There is no express rule contained either in the US statutes, or ours, on this point and no consistent line of authority in the US. Equally unclear in the US is whether it is a remedy available for only non-competing situations, or an additional remedy for situations where the parties compete. S.34(1)(c) specifies “any goods” so in SA at least it appears to be an additional remedy.

Further, there is no certainty as to whether the allegedly diluting mark must be exactly the same, substantially the same or only somewhat similar to the mark it is alleged to dilute. Further still, none of the state statutes specify whether it is necessary to show that the allegedly diluting mark is deliberately diluting or, to use the American term, whether there is “predatory intent”. In some judgments in the US, it is stated that predatory intent is required, whereas others believe it is only “a factor to be considered”.
Perhaps it would be useful here to divide the concept up into the three distinct types of dilution which are generally recognised. The three are as follows:
(a)     dilution through genericisation.
(b)     dilution through tarnishment; and
(c)     dilution through blurring;
All three are clearly contemplated by section 34(1)(c) as quoted above. The first two are easily explained:

Genericisation
Certain trade marks have become generic. In everyday language, we use invented words which were once the property of particular companies or individuals: ASPIRIN, CELLOPHANE, ESCALATOR, TELEFAX, WINDSURFER – There are many more. Some have had particularly close calls: XEROX, BIRO and HOOVER, all spring to mind. The trade mark XEROX was rescued by Xerox Corporation by investing a large amount of money worldwide in advertising that XEROX is not an alternative handy word for “photocopy”, but refers rather to a photocopy made on a XEROX photocopy machine. Similarly, particularly in England, the word BIRO has been used to replace “Ballpoint Pen” and there are common references to “Did you hoover the carpet?”, whether or not the vacuum cleaner was made by HOOVER or some third party. Most often, genericisation has occurred through sloppy use of the trade mark by the originator, its licensees or simply the public at large which the originator has failed to control. The result is that the trade mark becomes the name of the object and ceases to be a trade mark. The wrong of genericisation under dilution law is where a competitor, or even an non-competitive trader, sets about using a trade mark in such a way as to bring about the situation where it will tend to become simply generic, such as where a furniture manufacturer might state that a cabinet is “suitable for storing xeroxes” and mean “photocopies”.

Tarnishment
Again, a fairly simple concept to explain. A trade mark is typically part of a brand identity and the proprietor will be endeavouring to associate his trade mark with positive aspirations or ideas which will tend to increase the appeal of his product to the market. This is particularly evident in the COCA COLA advertising where positive associations have been particularly strong and assisted by slogans such as IT’S THE REAL THING and ALWAYS COCA COLA, while showing young, attractive, physically fit people having a good time. The Coca Cola company successfully took action against a poster company for the “Enjoy Cocaine” poster which utilised the red and white colours of Coca Cola and the script form associated with COCA-COLA. Similarly famous was the case where a pornographic film entitled “Debbie does Dallas” involved an actress attired in the distinctive uniform of the Dallas Cowboys Cheerleaders which was held in a California court to dilute the reputation of the Dallas Cowboys Cheerleaders. Again, no difficulty.

Blurring
It is under this head that most of the difficulties arise. Perhaps the leading case on this type of dilution is Mead Data Central, Inc v Toyota Motor Sales Inc, and the most detailed analysis in the concurring judgement of Judge Sweet in that case. The facts briefly were that Toyota had launched its new luxury automobile under the name LEXUS and Mead Data Central objected because it felt, not that there would be any confusion between the car and its LEXIS database, but rather that the sheer weight of the Toyota advertising campaign was likely to overwhelm the database trade mark. The court of first instance found for Mead Data Central Inc, but the second circuit reversed the judgment on two main grounds:
(a)     that LEXIS was not a sufficiently strong trade mark to merit protection against dilution; and
(b)     that the pronunciation of the two trade marks was sufficiently different to prevent dilution.
Judge Sweet concurred in the ruling of the court but explained his views very thoroughly and made it clear that he had come to the conclusion through a somewhat different route. He felt that LEXIS was sufficiently strong in its own market to warrant protection and he thought also that the pronunciation of the two trade marks would be very similar among consumers. Nevertheless, on the basis of a six part test which he intended to provide a more substantive analysis of dilution than had been available up to that time, he ultimately agreed that LEXUS would not dilute LEXIS. The six factors he postulated are:
(a)     similarity of the marks;
(b)     similarity of the products;
(c)     sophistication of consumers;
(d)     predatory intent;
(e)     renown of the senior mark; and
(f)      renown of the junior mark.

Analysis of these factors, regrettably, does not really clarify the position. Jonathan E Moskin in the article referred to above states that:
          “Because the basic phenomenon of dilution is so elusive, there can be no assurance that the factors indeed are the right ones, nor is it entirely clear how certain of the factors should be weighted or applied.”
He goes on to identify two additional factors which merit consideration:
(a)     likelihood of proliferation of unauthorised uses of similar marks; and
(b)     evidence of actual dilution.

The first of these additional factors provides one of the strongest supports for the concept of dilution and comes from the New York Court of Appeals definition of dilution from the case Allied Maintenance Corp v Allied Mechanical Trades Incas follows:
          “A cancer-like growth of dissimilar products or services which feed upon the business reputation of an established distinctive trade mark or name.”

The second of the additional factors would be very difficult to prove but obviously weighty if proof could be found. Of Judge Sweet’s six points, similarity of the marks is obviously necessary but similarity of the products is difficult to apply to dilution. Central to the concept of dilution is the use of a trade mark on a product so dissimilar from the product of the prior user that there is no likelihood of confusion. Consumer sophistication is once more a difficult factor to apply as, while unsophisticated consumers may be confused, spurious use of famous trade marks on a plethora of non-competing products may reduce the cachetassociated with the mark. Predatory intent is not a statutory requirement and a South African court is unlikely to read the word “intentionally” into the language of the dilution provisions in the Trade Marks Act of 1993. The fifth factor, the renown of the senior mark, is obviously relevant but goes no further towards answering the question as to whether only truly famous marks or also those of lesser stature should be protected. A truly famous mark may be more inherently valuable but a trade mark well-known in only a particular market may be more vulnerable to blurring. Finally, the renown of the junior mark, in casuTOYOTA LEXUS, is relevant. With overwhelming advertising expenditure a junior mark could conceivably overwhelm a senior mark. To quote once more from Mr Moskin:
          “In sum, Judge Sweet’s opinion is an uncertain compass in the largely directionless field of anti-dilution law; unless and until the factual and theoretical bases of the theory are demarcated, it is unreasonable to expect that any set of reliable guidelines can be established.”

The fact is that in the USA, courts have been reluctant to find dilution where competition between the parties is absent. If competition exists, courts generally rely on whether a likelihood of confusion has been proved. They also require some sort of malicious intent on the part of the defendant. In short, courts in the USA mainly shrink back from applying the dilution theory in its “pure” form.

The confusion is well illustrated in the following extract from an article by Professor Kenneth L Port:
          “When a right is vague and impossible to articulate, courts will always be inconsistent in their application of that right    the inconsistencies between the federal circuits and the district courts in their application of dilution is only further evidence that the necessity of the remedy should be re-considered.

          For example, New York courts require evidence of confusion even though the New York statute clearly dictates that dilution may be found regardless of confusion. Oddly enough, the Illinois courts will refuse to find dilution if there is confusion. Therefore, New York courts require confusion while Illinois courts preclude dilution remedies when there is confusion. To make matters worse, the New York dilution statute and the Illinois dilution statute are identical
What is the problem then, why do the courts in the US have such a difficulty with the theory?

Runaway Monopoly
Writing in the United States in 1952 George E Middleton in his article “Some Reflections on Dilution” (42TMR1 75 (1952)) expressed the view that granting dilution rights to a trade mark “proprietor” is the same as giving the trade mark proprietor a monopoly on the market in any context. As he explained:

          “An original, ingenious trade mark, protected because of those qualities, is a hybrid creature, part trade mark, part copyright. It is more than a trade mark because a trade mark need be neither original nor ingenious; it is less than a copyright because its lifespan is not fixed by statute, but is determined by the exigencies of trade. It may endure for more than [the life of a copyright] but, on the other hand, it will surely cease upon the midnight with no pain on the demise of the trade it had symbolised. For not even the most hardened Schechterian would contend, I suppose, that a trade mark, however ingeniously contrived, survives the extinction of the trade that bore it and does this not point up the underlying fallacy of the whole dilution rationale - the irrationality of the “rationale”?”
This explanation requires careful consideration, particularly in a South African context. Capitalist business theory is hostile to monopoly. This is why the United States has anti-trust laws to prevent monopolies and why South Africa has the Maintenance and Promotion of Competition Act, as flawed as it may be. It is generally recognised that a prosperous and effective economy needs competition and South Africa’s economy needs the creation of jobs as a matter of desperate urgency.

To consider briefly the law of copyright, copyright comes into being on publication of a work in some tangible form. One therefore cannot copyright an idea, but merely the expression of the idea. The idea itself is never protected, only the work embodying is protected. Generally, copyright cannot subsist in a single word.

Dilution theory now grants to the “well-known” trade mark a write akin to a copyright in an idea since it is not only the trade mark itself but the marketing message of the trade mark that is protected so that if my trade mark puts others in mind of yours, notwithstanding the lack of competition between us, you will have an action against me if your mark is “well-known”. What does “well-known” mean in the context of the Trade Marks Act of 1993? In the McDONALDS case in the TPD, Mr Justice Southwood felt that this must mean generally known throughout South Africa and in all population groups. The Appellate Division felt that it must mean known to a substantial number of people in the particular trade. That was in the context of a different section relating to the protection of foreign trade marks that are neither used nor registered in South Africa. In the context of Section 34 (1)(c) the fact is that it is anyone’s guess.
Yet, in South Africa, there were no such qualms among those who pass our laws. All opposition was simply brushed aside. We already had a famous trade mark protection scheme which worked exceedingly well in practise, defensive trade mark registration. We destroyed this scheme in favour of something that, demonstrably, does not work.

Limited monopoly
Modern jurisprudence is hostile to monopolies, except where strictly necessary in which case they must be clearly defined and strictly limited. Modern law making is aimed at allowing people to ascertain their rights quickly and easily, it is meant to be accessible and certain. In the last century it was decided to provide for trade mark registration so that the rights of parties would be readily ascertainable and easily enforced. Since then, there has been great evolutionary development of our law, culminating in the 1963 Act, which had its shortcomings and could have benefited from further evolutionary development at this stage.
Instead, we have revolutionary development and it is now a fait accompli with which we must all become familiar. I hope that this explanation of the concept will have assisted you, the reader, in identifying the nature of the beast, if not specifically how to tame it.

NOTES