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|Judgments - Scandecor Developments AB v. Scandecor Marketing AV and Others and One Other Action
HOUSE OF LORDS
Lord Nicholls, Lord Steyn Lord Hobhouse of Wood- Borough Lord Millett Lord Scott of Foscote
OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT
IN THE CAUSE
SCANDECOR DEVELOPMENTS AB
SCANDECOR MARKETING AB AND OTHERS
AND ONE OTHER APPEAL
ON 4 APRIL 2001
LORD NICHOLLS OF BIRKENHEAD
1. In 1967 Bertil Hjert and Goran Huldtgren were art students together at Uppsala University. They saw an opening for the sale of art posters, particularly to students and other young people. They set up a company in Sweden, known later as Scandecor International AB. They owned the company equally, and they ran it together, publishing and selling posters and related goods. They used the name Scandecor as a brand name. Scandecor is an invented composite word derived from 'Scandinavian decor'.
2. The business prospered, until it claimed to be one of the largest poster businesses in the world. Mr Huldgtren was responsible for sales in the United Kingdom, Ireland, the Scandinavian countries and the United States. Mr Hjert was responsible for continental countries, including France and Germany. Local subsidiary companies, using the word Scandecor as part of their names, were set up to act as distributors. The United Kingdom company was Scandecor Ltd. Two trademarks were registered in this country: a word mark 'Scandecor', and a logo mark incorporating the word Scandecor within a lozenge shaped border. They were registered in Class 16, in respect of items such as posters, calendars, cards and printed art reproductions. In April 1971 the word mark was registered in the name of Scandecor Ltd. In August 1976 the logo mark was registered in the name of Scandecor International, the ultimate parent company. In September 1978 Scandecor Ltd assigned the word mark to Scandecor International, which was registered as proprietor in June 1979.
3. Eventually Mr Hjert and Mr Huldtgren fell out. They disengaged by stages, and in 1997 the last contractual ties were severed. Unfortunately, they had made no contractual arrangements for what should then happen about the use of the name Scandecor. These proceedings are the result. Similar proceedings are on foot in other countries. In short, Scandecor Development AB, which acquired the two registered trade marks and other assets of Scandecor International on the latter's insolvency in 1994, objected to Scandecor Ltd continuing to use the word Scandecor as part of its name in connection with the sale of its own posters and calendars. Scandecor Development relied on its rights as proprietor of the two registered trade marks, and commenced these proceedings against Scandecor Ltd for infringement of the marks. The response of Scandecor Ltd was to counterclaim for revocation of the marks, on the basis that they had ceased to be distinctive. Both parties made alternative claims in passing off.
4. The trial judge, Lloyd J, declined to revoke the registration of either mark. He held, however, that Scandecor Ltd was entitled to continue to carry on its business under its existing name. Both parties appealed. Differing from the Judge, the Court of Appeal, comprising Sir Stephen Brown P, and Otton and Mummery L JJ, ordered that the two trade marks should be revoked. Scandecor Development has now appealed to your Lordships' House.
5. The history of this matter, covering 30 years, is complicated in its detail. The detailed facts are set out carefully in the judgment of Lloyd J, reported at  FSR 500. In broad outline, the history can be broken down into four phases. The first phase was from the inception of the business in 1967 to 1979. Throughout this period the Scandecor group was an integrated group, with Scandecor International as the parent company, owned equally by Mr Hjert and Mr Huldtgren.
6. The second phase was from 1979 to 1984. In 1979 a partial division of the group took place. Scandecor International's sales subsidiaries were sold to its founders and co-owners Mr Hjert and Mr Huldtgren. Mr Huldtgren acquired Scandecor Marketing AB, a Swedish company, which in turn acquired the local subsidiaries for the countries for which Mr Huldtgren already had business responsibility. These included Scandecor Ltd in respect of the United Kingdom. A like acquisition was made by Mr Hjert in respect of the countries on the continent of Europe for which he already had particular responsibility. Scandecor International remained jointly owned. Scandecor International retained ownership of the registered trade marks in the different countries. Scandecor International appointed Scandecor Marketing to be its sole distributor of International's products under the name Scandecor in the countries allocated to Mr Huldtgren. Mr Hjert and Mr Huldtgren entered into a co-operation agreement.
7. The third phase covers the ten year period from 1984 to 1994. In 1984 the corporate relationship was finally ended, and the existing agency and co-operation agreements were superseded. Mr Huldtgren sold his shares in Scandecor International to Mr Hjert, so that thereafter Mr Hjert owned and controlled Scandecor International as well as the subsidiary companies he had acquired in 1979. Despite this corporate severance, Scandecor International remained the registered proprietor of the United Kingdom trade marks. Scandecor International appointed Scandecor Marketing as its sole distributor of a range of products, principally posters, in the countries for which Mr Huldtgren had been responsible from the outset. Scandecor Marketing was also entitled to develop and produce pictorially based products of its own, and Scandecor International licensed Scandecor Marketing and its subsidiaries to use the Scandecor mark on such goods within the allocated countries. Pursuant to this licence, from 1984 onwards Scandecor Marketing developed products of its own, chiefly calendars and cards, and sold them under the Scandecor name.
8. The fourth phase was from 1994 onwards. The insolvency of Scandecor International in April 1994 brought to an end the distributor and licence agreement made in 1984 between that company and Scandecor Marketing. No new overall agreement was reached between the two companies. Orders and supplies continued on interim terms. Eventually, negotiations came to an end, and supplies of posters and other products from Scandecor Development to Scandecor Marketing and Scandecor Ltd ceased. Early in 1997 Scandecor Marketing announced that in future it would sell products either published by itself or obtained from other sources. These proceedings were started in July 1997.
9. The Judge made findings regarding the goodwill attached to the name Scandecor. There is no goodwill in this name with the general public. The relevant section of the public with whom this goodwill exists is the United Kingdom retail trade. Retailers choose whether to stock posters or calendars from Scandecor or from one of a number of other suppliers. Naturally, retailers in this country dealt with Scandecor Ltd rather than any other Scandecor company, and they tend to associate the name Scandecor with that company. Scandecor Ltd has a goodwill with its retail customers, based on its efficient service as well as on the products supplied. But the consistent theme of the publicity material put out by Scandecor Ltd and Scandecor Marketing included a regular refrain of 'Scandecor the largest poster company in the world', referring to Scandecor International. As regards posters, Scandecor International enjoyed goodwill as the Swedish publisher and source of the product, and this goodwill was later acquired by Scandecor Development. As to calendars and cards, Scandecor Development has the same goodwill, deriving from the (erroneous) assumption in the market that there is no difference in the source of the different products.
10. On the basis of these facts Scandecor Marketing and Scandecor Ltd advance a case that the two Scandecor trade marks have become liable to mislead the public as a consequence of use made of them with the consent of the registered proprietor. Accordingly they should be revoked, pursuant to section 46(1)(d) of the Trade Marks Act 1994. Scandecor Development is now the registered proprietor of these marks. If the marks are distinctive of Scandecor Development then, at least as regards calendars and cards, the marks have become deceptive because a trade mark must be an indication of origin. But for years Scandecor Development and its predecessor Scandecor International were not the origin of these goods, nor did these companies have or exercise quality control over them. Mr Young QC submitted that if a mark belongs to X but with X's consent it is used in relation to the goods of Y, over whom X has no quality control, the mark has ceased to be distinctive. He described this as the 'golden thread' running through the law relating to registered trade marks. He drew attention to observations by Whitford J, a judge with considerable experience in this field, in McGREGOR Trade Mark  RPC 36, 53:
11. Counsel submitted that, so far as bare licences are concerned, that is still the law. The position remains the same under the Trade Marks Act 1994. This submission raises a fundamental question about the application of the 1994 Act to the licensing of trade marks, a form of business activity which is now widely used.
Trade marks and quality assurance
12. The quality of goods on offer is at the heart of all trading activities. As long as trading has existed, buyers have sought information and assurance about the quality of the merchandise on display. The use of trade marks is an integral part of this activity. But the manner in which business activities are carried on today is vastly different from what it was in the early 19th century when the law relating to trade marks was first developed. Labour is more mobile, business enterprises are larger and less personal, businesses and parts of businesses change hands more often. With the growth of mass markets and intensive advertising many brand names have become very valuable. In this image-conscious age trade marks are an important marketing tool. Licensing has become commonplace.
13. The law relating to trade marks has responded to these changing conditions. Restrictions on the sale of trade marks have gradually been eased. So have restrictions on a trade mark owner's ability to license others to use his mark. The origin of these restrictions was the realisation that if a trade mark could be sold, or its use licensed to others, the mark would in some circumstances inevitably become deceptive. Its use by an assignee or licensee could mislead the public. But whether the use of a trade mark is potentially misleading depends upon the message which a trade mark conveys to customers. This message, too, has undergone changes in course of time, in response to the changes in the way businesses are conducted. As business practices have changed, so there have been changes in the message which a trade mark is understood to convey about the business source denoted by the mark.
14. These changes are central to the important point of law raised by this appeal. Stated shortly, the question is whether a grant of a bare exclusive licence by a trade mark proprietor is objectionable as inherently liable to deceive potential customers. By a bare licence I mean a licence under which the proprietor of the trade mark has no power to control the quality of the goods sold under the licence. By an exclusive licence I mean a licence under which the proprietor of a trade mark grants to the licensee permission to use the mark, so long as the licence lasts, to the exclusion of everybody else including the proprietor himself. Mr Young's argument is that a bare licence is deceptive because, by definition, during the currency of the licence the proprietor of the trade mark has no control over the goods sold under his mark.
15. Before proceeding further I should dispose of a point which is sometimes a source of confusion. It concerns what is meant by 'licensing'. A wholesaler or retailer who buys and re-sells goods on which the manufacturer has placed his trade mark does not need a licence to use the manufacturer's mark. The wholesaler or retailer needs no such licence, for the simple reason that he is merely selling the manufacturer's goods to which the manufacturer has already attached the manufacturer's mark. Re-selling goods bearing the manufacturer's mark is not an infringement of that mark: see section 10(6) of the 1994 Act and, previously, section 4(3) of the 1938 Act. Thus a distributorship agreement, under which a person is permitted to sell another's goods, is to be distinguished sharply from a licensing agreement, under which the licensee is granted permission to use the licensor's mark on the licensee's own goods. When I refer to licences and licensing I am referring to an agreement of the latter character.
An indication of origin
16. In order to understand the present state of the law and the issue now confronting the House on the interpretation of the Trade Marks Act 1994, it is necessary to go back to first principles and then consider the way the law has subsequently developed. A trade mark is a badge of origin or source. The function of a trade mark is to distinguish goods having one business source from goods having a different business source. It must be 'distinctive'. That is to say, it must be recognisable by a buyer of goods to which it has been affixed as indicating that they are of the same origin as other goods which bear the mark and whose quality has engendered goodwill: see GE Trade Mark  RPC 297, 325, per Lord Diplock.
17. This fundamental proposition still remains true. It is expressly recognised in the preamble to the 1988 E C Trade Marks Directive (89/104). The 1994 Act was enacted principally to give effect to this Directive. In S A CNL-Sucal v HAG GF AG  3 CMLR 571, 608, paragraphs 13, 14, the European Court of Justice described the essential function of a trade mark as giving to the consumer or ultimate user 'a guarantee of the identity of the origin of the marked product by enabling him to distinguish, without any possible confusion, that product from others of a different provenance'. For a trade mark to perform this function, it must offer a guarantee that all the goods bearing it have originated under the control of a single undertaking which is responsible for their quality.
18. The need to distinguish the business source of goods is as old as trading itself. A maker of goods seeks to acquire and maintain a reputation for the quality of his goods, thereby encouraging customers to prefer his goods to those of his competitors. So he places a recognisable mark on his goods to distinguish them from the goods of others. It is in the public interest that he should be able to do so, and that he should be able to prevent others from using his chosen mark. The ability to apply a mark to goods encourages makers of goods to set and maintain quality standards. It enables customers to make an informed choice between different goods available in the market.
19. Although the use of trade marks is founded on customers' concern about the quality of goods on offer, a trade mark does not itself amount to a representation of quality. Rather it indicates that the goods are of the standard which the proprietor is content to distribute 'under his banner': see Laddie J, in Glaxo Group v Dowelhurst Ltd  FSR 529, 540-541. The concept of the owner of a mark holding himself out as responsible for the quality of the goods sold under his mark was noted by Lord Wright in Aristoc Ltd v Rysta Ltd (1945) 62 RPC 65, 82:
Thus, in relying on a trade mark consumers rely, not on any legal guarantee of quality, but on the proprietor of a trade mark having an economic interest in maintaining the value of his mark. It is normally contrary to a proprietor's self-interest to allow the quality of the goods sold under his banner to decline.
The common law
20. In the early days of the 19th century no one supposed that a proprietor of a trade mark could sell the right to use his mark. A trade mark was personal. It was regarded as evidence available in a passing off action as tending to show that the defendant was passing off his goods as those of the plaintiff. But gradually trade marks increased in importance until, in the words of Fry LJ in Pinto v Badman (1891) 8 RPC 181, 194, Lord Westbury LC surprised the profession by asserting that there might be property in a trade mark. The question which then agitated the courts was whether, and in what circumstances, this new property right could be assigned. Lord Westbury gave the answer himself in The Leather Cloth Co Ltd v The American Leather Cloth Co Ltd (1863) 4 De G J & S 137. On appeal to this House Lord Cranworth, at 11 HLCas 523, 533, 534, observed that the right to a trade mark is a right closely resembling, although not exactly the same as, copyright:
So the law became that a trade mark may be sold, but not separately from the business in which it is used. Nor may a trade mark be assigned when it connotes a personal connection between the original owner of the mark and the goods in respect of which it is used: see Pinto v Badman (1891) 8 RPC 181, 194, 195 , per Fry LJ. An instance of the latter is an artist's mark on his own artistic works.
21. I pause to note that the recognition that a trade mark is saleable represents a significant development in the conception of what a trade mark indicates. A trade mark is not usually to be understood as a representation regarding the identity of the source, namely, who is in control of the business in which the mark is being used. Rather, with the changes in trade, a trade mark can 'fairly be held to be' only a representation that the goods were manufactured in the course of the business using the mark, without any representation as to 'the persons by whom that business was being carried on': see Romer LJ in Thorneloe v Hill  Ch 569, 574.
22. This approach accords with business reality and customers' everyday expectations. Customers realise there is always the prospect that, unbeknown to them, the management of a business may change. To confine the use of a trade mark to the original owner of a business would be to give the concept of a business origin or business source an unrealistically narrow and impractical meaning. Of course, the new management, the new owners, may not adhere to the same standards as the original owner. But the risk of an unannounced change of standards is ever present, even when there has been no change in management. An owner may always decide to change his quality standards. As already noted, customers rely on it being in the owner's self-interest to maintain the value of his mark. The self-interest of the owner of a trade mark in maintaining its value applies as much to a purchaser of the mark as it does to the original owner.
The early Trade Marks Acts
23. The early Trade Marks Acts applied a similar approach to the sale of registered trade marks. A registered trade mark was assignable only in connection with the goodwill of the business concerned in the goods for which it was registered, and it was determinable with that goodwill: see the Trade Marks Registration Act 1875, section 2. A similar provision appeared successively in the Patents, Designs and Trade Marks Act 1883, section 70, and the Trade Marks Act 1905, section 22.
24. Likewise with licensing. On its face section 87 of the Patents, Designs and Trade Marks Act 1883 gave the registered proprietor of a trade mark an unlimited power to grant licences in respect of his trade mark. The better view seems to have been that the part of section 87 which related to licences applied, not to trade marks, but exclusively to patents and design copyrights with which the section also dealt: see Kerly's Law of Trade Names and Merchandise Marks, 1st edition (1894) page 281. Be that as it may, in 1888 Lord Herschell's Trade Marks and Designs Inquiry Committee recommended that, in order to avoid doubt, section 87 should be amended by omitting the words relating to licensing so far as trade marks were concerned: see paragraph 36 of the committee's report. The Patents, Designs and Trade Marks Act 1888 made a limited amendment, by providing that section 87 was subject to the restrictions on assignment in section 70. In Thorneloe v Hill  Ch 569 Romer J had no difficulty in deciding that, consistently with the prohibition on the assignment of a mark separately from the business in which the mark was used, there could be no grant of a licence to use a mark separately from the licensor's business. There the owner of a mark granted a bare licence to another watchmaker giving him, for a period of seven years, the exclusive right to manufacture watches inscribed with the name 'John Forrest'. Romer J, at page 576, described this as the 'mere grant of a license' and observed that he 'need scarcely add' that a trade name or mark 'cannot be validly assigned in gross'. When the licence expired the licensors had lost any right they previously had to say that any person marketing 'John Forrest' watches thereby referred to watches manufactured by them.
25. The Trade Marks Act 1905 made no mention of licences. Further, the terms in which a trade mark was defined in the 1905 Act effectively negatived the possibility of licensing. Section 3 of the 1905 Act defined a trade mark as a mark used on or in connection with goods 'for the purpose of indicating that they are the goods of the proprietor of such mark by virtue of manufacture, selection, certification, dealing with, or offering for sale' (my emphasis). In order to be valid, the use made of a mark had to conform with this definition. If a mark was used in connection with the goods of someone other than the proprietor, it did not satisfy the definition.
Trade Marks Act 1938
26. The Trade Marks Act 1938 made two changes in this field, one relating to assignments, the other to licensing. The prohibition on assignment of a registered mark separately from the relevant business gave rise to unsatisfactory consequences in practice. The unsatisfactory results were exemplified in cases such as Lacteosote Ltd v Alberman (1927) 44 RPC 211 and In the Matter of Trade Mark No. 437,870 of John Sinclair Ltd (1932) 49 RPC 123. This prohibition was relaxed by the 1938 Act. Under this Act a registered trade mark was assignable either in connection with the goodwill of a business or not. An assignment of a mark which was not accompanied by an assignment of the business in which the mark was used had to be publicly advertised. But the relaxation was not total. As a safeguard, the proprietor's ability to assign his mark was made subject to the proviso that assignment was not permissible if it would result in more than one person having the right, whether under the common law or by registration, to use the same or similar marks in relation to the same description of goods and that would be likely to deceive or cause confusion: see section 22(4).
27. That was the first change. In R J Reuter Co Ltd v Mulhens (1953) 70 RPC 235, 250 , Sir Raymond Evershed MR described this as a 'far-reaching and significant change' in trade mark law, in which it had been previously regarded as 'fundamental' that trade marks could not be separated from the business of origin and from the goodwill of that business. This change was a further step in the evolution of the trade mark message. No longer was the mark taken as a representation that the current business was a continuation of the business in which the mark had originally or successively been used. Now a person might buy a registered mark without the goodwill of the existing business and then use the mark in his own new business. Under the 1938 Act a trade mark was taken to denote only that the goods came from the source comprising the person who was currently the owner of the mark, whoever he might be, and however long or short lasting his period of ownership might be. Customers rely upon the self-interest of the current owner to maintain the value of the mark currently belonging to him.
28. The second change brought about by the Trade Marks Act 1938 related to licensing. Contemporary commercial developments had made some legal recognition of the practice of licensing trade marks desirable. The 1938 Act cautiously opened the door to licensing, although it stopped short of any clear recognition of unrestricted licensing. Section 28 of the 1938 Act established a somewhat complex system whereby, at the discretion of the registrar, a person might be registered as a 'registered user' of a mark. When exercising his discretion the registrar had regard, among other matters, to the degree of control which the proprietor would have over the proposed use of the mark. Eventually, this registration system was held to be a permissive and not a mandatory provision: see 'Bostitch' Trade Mark  RPC 183.
29. However, an overriding limitation on the proprietor's freedom to grant licences still remained in place: the statutory definition of a trade mark. As with the position under the 1905 Act, use of a mark outside the definition of a trade mark in the 1938 Act endangered the validity of the registration. The 1938 Act adopted a new definition, wider than the definition in the 1905 Act. Section 68(1) of the 1938 Act defined a trade mark as a mark used in relation to goods for the purpose of indicating 'a connection in the course of trade between the goods and some person having the right either as proprietor or as registered user to use the mark'.