Intellectual Property- South Africa

Introduction

Faced with pressure to use intellectual property in more creative ways from a tax perspective, some companies have considered or even embarked on the division of ownership of their house brands, sometimes geographically (as with DHL), and sometimes within the same market, but for differentiated goods or services. The issue of dividing ownership of a brand raises fundamental principles of trademark law. If it were accepted that trademarks in modern law are no more than emblems in which absolute rights exist and which can be traded freely, it would follow that trademarks could be disposed of without restriction, like any other property.

This is based on the assumption that a trademark's function of designating the origin of goods has disappeared and that its sole function is now to distinguish between goods. If the function of a trademark still includes an indication of origin, the use of identical indications of origin by two entities must inevitably be deceptive. Deceptive use vitiates a registered trademark.

The Law

Section 10(12) and (13) of the Trademarks Act (194/1993) provide as follows:

"1. Unregistrable trademarks - the following marks shall not be registered as trademarks or, if registered, shall, subject to the provisions of Sections 3 and 70, be liable to be removed from the register:

12. 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 or be likely to give offence to any class of persons;

13. 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 is thus whether ownership of identical marks, albeit for differentiated goods or services, would be likely to deceive.

South African law has traditionally been similar to UK law and UK authority is much used to establish South African law. Before the passing of the South African Trademarks Act 1993, the position in South Africa was similar to that in the United Kingdom under the Trademarks Act 1938. The leading case was Sinclair,(1) which, although relating to the position before the 1938 act, held that an assignment under the 1905 act required the assignment and the goodwill of the entire business in which the mark was used. Where the entire business was not assigned, the assignment was invalid. This position was modified by the 1938 act; it seemed that part of the goodwill could be assigned under that act, but Kerly's Law of Trademarks and Trade Names stated as follows:(2)

"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, as the EU directive that brought about the harmonization of the trademark laws in Europe, and also brought about the South African 1993 act, states that the function of a trademark is "in particular to guarantee the trademark as an indication of origin", it follows that origin is still an important function.

One Cape Provincial Division judgment, Abbott Laboratories v UAP Cropcare (Pty) Limited,(3) indicates a change of attitude towards marks. Justice Cleaver stated that "there has been a shift in our legislation to elevate the distinguishing feature of a trademark as its main purpose". His reasoning was based on a mistaken impression that the South African act did not follow the EU directive (the explanatory memorandum makes it clear that the act was intended to follow the directive) and a change in the language used to define a trademark. Under the Trademarks Act 1963, a 'trademark' is 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 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 as follows:

"Other than the certification trademark or a collective trademark, 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."

The language of the second part of the 1963 act's 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. Arguably, the retention of language relating to a mark becoming deceptive is inconsistent with the removal of the origin function - a very radical idea - and the Supreme Court of Appeal effectively overruled Cleaver (albeit indirectly, as it did not refer specifically to his judgment) in Beecham Group plc v Triomed (Pty) Ltd.(4) In that case the Supreme Court of Appeal reaffirmed that South Africa had followed the EU directive and that the function of a trademark is to indicate origin. This also reaffirms that a mark becomes deceptive where it constitutes a misrepresentation as to source.

The next issue to consider is whether trademarks remain capable of distinguishing or, in other words, distinctive. In South Africa, as in the United Kingdom, the decision in the Bowden Wire Case was generally accepted as laying down the principle that the licensing of a trademark vitiated the trademark on the grounds that public deception would result in the trademark ceasing to be distinctive. In the United Kingdom, the GE Case modified this position; however, in South Africa the use of a registered trademark 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 to save the trademark from expungement on grounds of non-use by the registered proprietor. This decision was handed down in 1983. It has since been criticized, but is generally accepted to have been correct under the previous law.

The effect of the splitting of ownership is that the mark will indicate either one of two discrete sources. Therefore, it will no longer indicate - without some qualification or explanation - either party and will no longer be distinctive of either party. Arguably, it will thus become vulnerable to expungement in terms of Section 10(2)(a), as it will be incapable of distinguishing within the meaning of Section 9, which requires that a trademark should be capable of distinguishing the goods or services of one person from those of another. Where two people own the same trademark, the trademark clearly cannot distinguish between their goods or services.

This comes into sharper focus in light of the rights granted by Section 34(1)(c), which makes a trademark dilution actionable. The relevant portions of the provision read as follows:

"A trademark shall be infringed by the unauthorized use in the course of trade in relation to any goods or services of a mark which is identical or similar to a registered trademark, if such trademark 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 trademark, notwithstanding the absence of confusion or deception."

The splitting of ownership and use with the split goodwill is clearly detrimental to the distinctive character or repute of the registered trademark. This represents the entire basis for the theory of trademark 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'. However, how would either company take action against the third party in terms of this section? Arguably, such action would be impossible and the third party - the alleged 'dilutor' - would be able to carry on regardless.

The problem is further illustrated when considering a situation where there are unforeseen changes of management and direction in the part of the enterprise which causes problems for the other. One half of the enterprise may embark on a disastrous advertising campaign 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.

Comment

Persuading the South African registrar to permit the split of registrations will cause little difficulty, provided that written consent is furnished by both sides. Any objections are theoretical, but they go to the heart of the nature and function of a trademark. If the issue of validity were brought before the courts, there is a strong prospect that they would find that the shared mark has been vitiated.