Assignment of Goodwill in Businesses and Their Trading Names - a Cautionary Tale Where the Trading Name Coincides With that of the Business Owner
A recent Court of Appeal case I N Newman Limited v Richard T Adlem (2005) EWCA Civ 741 highlights the significance of a trader selling the business which he had hitherto been operating under his own name; once that goodwill has passed to a third party, the trader is not at liberty to restart his former business under his own name without running a significant risk of a passing off action from the new business owner.The case involved a Richard T Adlem, who had, since 1965, run a successful business as a funeral director in the village of Sixpenny Handley in Dorset. In 1993 Mr Adlem entered into a contract to sell the business to a Mr Beckwith. The contract contained a restrictive covenant preventing Mr Adlem from establishing a competing business within a five-year period after the sale. Mr Beckwith frequently used Mr Adlem's services following the sale, in particular to direct funerals, and although Mr Adlem was not an employee of Mr Beckwith, he was paid for his services. During this time, Mr Adlem was aware that Mr Beckwith was using the name "Richard T Adlem, Funeral Director" for the undertaking business. In 1999, Mr Beckwith sold on the business to IN Newman Limited (the "Newmans") together with the right to use the business name "Richard T Adlem Funeral Directors". As before with Mr Beckwith, Mr Adlem assisted the Newmans with the conduct of many funeral services, in the full knowledge that they too were operating the business under his name.In 2001, Mr Adlem restarted his funeral business under the name "Richard T Adlem" and objected to several local parish magazines in which the Newmans had been advertising, that they were not entitled to use his name. These magazines were understandably put off from accepting the Newmans' advertisements. In 2002, Mr Adlem was successful in registering "Richard T Adlem, Funeral Director" as a trade mark in respect of funeral and related services.The Newmans brought a claim against Mr Adlem in passing off, contending they were the rightful owners of the goodwill in the name "Richard T Adlem" in relation to the funeral business which they had purchased from Mr Beckwith in 1993. The Newmans also claimed that Mr Adlem's trade mark registration was invalid under Section 47(2)(b) of the Trade Marks Act 1994 (the "Act") as a result of their ownership of the goodwill in the name in respect of the services for which it had been registered. It was also claimed that the registration could not be claimed against the Newmans under Section 11(3) of the Act in any event given their prior use of the mark within the Dorset area.Although Mr Adlem did not formally counterclaim for trade mark infringement, he did contest the declaration of non-infringement made by the Newmans and so by implication the question of trade mark infringement arose.High Court JudgmentAt first instance it was held that although the 1993 agreement did transfer title in the goodwill in the funeral business to Mr Beckwith, including the goodwill attaching to the name "Richard T Adlem" for funeral services, the name still denoted the individual, Mr Adlem, to a substantial number of people and did not exclusively denote either Mr Adlem's or the Newmans' business. Both parties were held to share concurrent rights in the name so that Mr Adlem's use of his name in connection with his new business was not deceptive and the Newmans' claim in passing off and trade mark invalidity failed. However, the trade mark registration was held to be unenforceable against the Newmans by virtue of Section 11(3) of the Act.Appeal Court JudgmentOn appeal, Jacob LJ stated that it was simply not open to Mr Adlem to start a fresh funeral business under exactly the same name as he had previously traded under without making it absolutely clear that his business was distinct from that operated by the Newmans and that he had not made this distinction. "Having sold the goodwill, Mr Adlem was under a duty not to undermine it". As to the decision of first instance judge that both parties shared concurrent rights in the name, Jacob LJ suggested that this finding had been made, if only in part, on the basis that Mr Adlem had officiated at a large number of the funerals conducted by Mr Beckwith and then the Newmans. It had been concluded that this role lent the public the impression that the business was either owned by Mr Adlem or was one in which his services could be secured. Jacob LJ refuted this claim; the work which Mr Adlem had carried out was for the benefit of the business which he had sold and in association with the goodwill which was no longer his. "He was not trading on his own account within this period". Jacob LJ went on to draw from the judgment handed down in Trego v Hunt (1896) AC 7 by Lord Macnaghten "It is not right to profess and to purport to sell that which you do not mean the purchaser to have; it is not an honest thing to pocket the price and then to recapture the subject of the sale." Although the five-year restrictive covenant which Mr Adlem had agreed on his 1993 sale of the business to Mr Beckwith did not prevent him from going back into business as a funeral director in 2001, it did not allow him to start up any such business under his own name. The covenant was concerned only with non-competition under any name and whether working on his own account or with others and did not serve to qualify the complete assignment of the goodwill attaching to the name to Mr Beckwith. Jacob LJ took issue with the first instance judge's finding that Mr Adlem's use of his name in connection with his new business was not deceptive, for two reasons. Firstly, the audience to which he would be advertising his new business extended far beyond those of his personal acquaintance in Sixpenny Handley, to a public who would be unaware of the two competing businesses. Secondly, such customers would be unlikely to recollect who was operating the two "Adlem" businesses, so that bereaved relatives might go to Mr Adlem when they in fact meant to put their custom with the Newmans, as the owners of Mr Adlem's former business of which they were already aware.It was not an option for Mr Adlem to use the "own name" defence to the passing off claim since, irrespective of personal names, everyone is free to choose the name under which they trade. By using his own name as the trading title for his new business, Mr Adlem was in effect stating that the Newmans were usurping this right, which served to wholly misrepresent the true position and greatly diminished the goodwill which he had sold.As to the validity of Mr Adlem's trade mark registration for "Richard T Adlem, Funeral Director", given that a finding of passing of had been made out, the registration was as a consequence invalid and should be removed from the Register.Arden LJ dissented with this judgment and agreed with the first instance judge that goodwill in the name "Richard T Adlem, Funeral Director" was shared between Mr Adlem and the Newmans, on the basis that the public considered the name to be distinctive of both parties. The services which Mr Adlem provided to both Mr Beckwith and the Newmans after the sale of his business were in the nature of an independent contractor so that any goodwill arising out of the provision of these services would enure to the benefit of Mr Adlem, so as to maintain his share of the goodwill in the name. On this basis, no claim in passing off could be made out and Mr Adlem's trade mark registration was valid.The third appeal judge, Tuckey LJ, agreed with Jacob LJ's conclusions saying "I have no doubt that by the 1993 agreement Mr Adlem transferred the entirety of the goodwill of the undertaker's business to Mr Beckwith and this includes the goodwill of that business attached to the name "Richard T Adlem Funeral Director" ". The goodwill attached to the name in this business was not shared. The decision was therefore carried by a majority of 2:1.Elizabeth Emanuel UK Trade Mark Registry DecisionThe decision in the Adlem case mirrors that which was reached by the Trade Mark Registry in UK Trade Mark Registry case No BL0/017/04 involving the fashion designer, Elizabeth Emanuel, who rose to fame after her involvement in the design of Princess Diana's wedding in 1981. Ms Emanuel later ran into financial difficulties and agreed to sell her business and its goodwill, including a registered trade mark for an Elizabeth Emanuel Logo covering clothes and related to a predecessor company of Continental Shelf. Ms Emanuel also became an employee of this company, but this employment proved short-lived and Ms Emanuel left the company after about one month. A UK trade mark application was subsequently filed in the name of Continental Shelf for the name "Elizabeth Emanuel" covering various goods including clothing. This application was opposed by Ms Emanuel, who also applied to revoke the UK trade mark registration which she had assigned to Continental Shelf. The opposition and revocation actions were both brought on the grounds of deceptiveness, in that the marks were misleading as to the origin of the goods and services for which they had been filed. The Trade Mark Registry dismissed both actions. Although the marks had caused deception and confusion, such deception and confusion was found to be lawful and the inevitable consequence of the sale of a business and goodwill which had been conducted under the proprietor's own name. Ms Emanuel appealed both decisions to the Appointed Person who made two significant observations:If a trade mark is deceptive such that there is a real risk that the purchasing behaviour of the average consumer will be affected, then there is a public interest in prohibiting the registration of that mark. Conversely, there is also a clear public interest in allowing the sale and assignment of businesses and goodwill, together with associated trade marks; In the case of small businesses involved in the selling of goods, there will be cases where the public may well believe, for at least a time after the transfer, that a particular individual is still involved with the design or production of those goods. It was regarded as questionable whether this confusion, limited as it is likely to be in time, is incompatible with the essential function of a trade mark as an indication of origin of the goods in a particular business. In the case of the registered mark it may also be questioned whether or not any liability to deceive may fairly be said to be in consequence of the use made of it by the proprietor or with his consent. In view of difficulties posed by the facts of this case, the Appointed Person put the following issue to the ECJ for a ruling: "Whether a trade mark is to be regarded as liable to mislead the public within the meaning of Article 3(1)(g) or Article 12(2)(b) if, for a period following its assignment together with the business of making the goods to which it relates, the use of the mark in relation to those goods is liable to deceive the public into believing, contrary to the fact, that a particular person has been involved in designing and making those goods." The ECJ's ruling on this reference is awaited.CommentBoth of these cases highlight the issues raised by the assignment of personal names which have also been used as trading names. It has long been accepted in the United Kingdom that an element of confusion on the part of the public is an inevitable consequence of the sale of goodwill attached to the trading name of a business. The law allows this kind of "deception", without which trading entities would be effectively unsaleable.It would seem unlikely that the ECJ would rule in the Elizabeth Emanuel case that such deception is prima facie unlawful since the Trade Marks Directive expressly allows the assignment of goodwill and marks in a business which carries with it the likelihood of the public being deceived for a period after the sale. More likely is a clarification of the type of deception which would be permitted and hopefully, guidance as to it could be minimised, for example by way of the new owner advertising the lack of connection with the famous name. However, the value of either of the trading names "Richard T Adlem" or "Elizabeth Emanuel" lies in maintaining, of only for an interim period, the fiction that there is still some connection between the purchaser of the business and its famous founder and by implication, that the quality of the goods or services provided under the names is as it was previously. If the ECJ decides that this fiction is to be minimised, there will no doubt be a significant knock-on effect on the value of such personal names. In the event that the ECJ rules only that deception in relation to business sales should be minimised, but that such sales can nonetheless continue, it would appear unlikely that Elizabeth Emanuel could successfully re-establish any fashion business under the Elizabeth Emanuel name and the more recent Adlem decision would appear to confirm this view. In the Adlem case, Jacob LJ laid down the principle that a trader could not recommence business in his own or any other name where he had sold the goodwill related to a business trading under that name to a third party, unless he made clear the distinction between the two business so as to avoid any risk of deception on the part of the public. It is difficult to conceive how any trader in either Mr Adlem's or Ms Emanuel's situation could distinguish their new business from that of their competitors given the identity of the services offered and their trading names and both parties would be best advised to"reinvent" themsevles under new names.