In current society, it is now more important than ever to protect the interests of your business and to ensure that they are not prejudiced by the acts of a competitor. This can be done by raising an action of “passing off”.
What is “Passing off”?
Passing off is a common law action and is used to prevent one party from using the goodwill associated with another party for their own benefit. This does not provide a monopoly right over the mark; instead it protects the owner of the goodwill against what can be referred to as “unfair competition”. The law of passing off is extensive and covers the goodwill associated with a trademark, signs, visual images, domain names and other descriptive material.
Passing off can be referred to as the law of unregistered trade marks, although it may also relate to a registered trademark and as such, an infringement of a registered trademark may also be actionable as a passing off.
To establish a claim for passing off, three requirements must be met:
- Goodwill – reputation of a business
- Misrepresentation – any misrepresentation must be made by a trader in the course of trade and must have led to confusion or likelihood of confusion in the mind of a purchaser
- Damage– establishing actual or likely financial loss
Goodwill
Goodwill is a relatively simple term but much confusion exists surrounding what it means. It was defined by Lord MacNaghten in the case of IRC v Muller & Co’s Margarine Ltd (1901) as:
“…a thing very easy to describe, very difficult to define. It is the benefit and advantage of the good name, reputation and connection of a business. It is the attractive force which brings in custom. It is the one thing which distinguishes an old-established business from a new business at its first start. The goodwill of a business must emanate from a particular centre or source. However widely extended or diffused its influence may be, goodwill is worth nothing unless it has power of attraction sufficient to bring customers home to the source from which it emanates.”
When a business is sold, the purchasers acquire the business and also the goodwill that has built up along with it. Despite being an incorporeal asset of a business, goodwill has considerable value attached to it; it is what brings in custom. Goodwill is established through the use of a trademark, advertising campaign, sign or other factor, which is distinctive of the business in question. The law of passing off provides that these signs, marks etc. are not protected as such, instead it is the goodwill of the business that uses them that is protected.
Confusion
Confusion can arise in relation to the use of reputation and goodwill in the process of passing off. Individuals may assume that a business is likely to have a reputation based on the fact that the business has established goodwill and as a result they can use the terms interchangeably. However despite the terms being closely related, a distinction between the two can be made apparent. The existence of a reputation in a mark does not necessarily guarantee the presence of goodwill. The case of Harrods v Harrodian School (1996) supports this fact, as it states that: “damage to reputation without damage to goodwill is not sufficient to support an action for passing off”.
It must be established that goodwill exists in the place of infringement. The period of time which goodwill has existed within the area concerned is not a determining factor here, as only its presence is required to be proven. There is no particular time period within which goodwill must be established. As long as the infringed party is able to show that they have the requisite goodwill, it is irrelevant how long the business has been trading for.
The goodwill can often be restricted within the geographical area of the business of the infringed party, but each case is dependent on the business involved. If it is a very large company involved, who will have a vast amount of goodwill and reputation attached to the business, it is thought that goodwill can extend to places even where they do not have a place of business. For example, a large company such as Starbucks would be considered to have goodwill extending throughout the whole of the UK if not the world, despite not having a place of business in each town/city. Unfortunately, the goodwill associated with a smaller business is often restricted to the area of trade, which makes it difficult to establish passing off in respect of businesses that are benefiting from a party’s goodwill, but perhaps trade in another city.
Misrepresentation
For there to be a successful claim under passing off, there must be a misrepresentation as to the goods or services offered by the other party, which leads to an element of confusion arising in the minds of the public. The fact of whether the misrepresentation is intentional or not is irrelevant; the misrepresentation must be a material one, creating a real, tangible risk of damage to the infringed party. The Court in making a judgment will look at whether there is a likelihood that the public or in particular the persons to whom the action is addressed, have been misled into thinking that the goods or services in question belong to the infringed party, when in fact they do not.
Misrepresentation can arise in a number of circumstances. Common forms may include:
- where the infringer represents that his goods or services are those of the infringed party by having a mark or sign that is the same or very similar; and
- where the infringer represents that the two businesses are the same or in some way linked to one another.
Misrepresentation must be at the point of sale. If the similarity only became evident after a product was purchased, the necessary misrepresentation to establish an action for passing off would not be established.
The likelihood of confusion increases when the products involved are very similar, however the products do not need to be always in the same field of activity.
It should be noted that in some cases it is possible for one party to use another party’s mark, sign etc. if the company does so in a way that is not attempting to deceive or misrepresent the public. Such a case would not amount to passing off by way of misrepresentation. An example of this would be where the defender makes use of the infringed party’s name but makes it unambiguously clear that the goods or services supplied are not connected in any way to the infringed party. Likewise, if the goodwill of a business is only affected due to competition in the market, this is not passing off as there is no misrepresentation.
Damage
Lastly, in order for an infringed party to succeed in an action for passing off, the infringed party must prove that they have incurred actual or reasonably foreseeable damage to the business due to the alleged misrepresentation. This is generally difficult to prove and on a practical basis involves inspecting the books of account of both parties. Proving the likelihood of damage is sufficient.
Legal Action
Following successful completion of the trinity test, there are a number of legal remedies available to the infringed party. Legal action can be taken by the infringed party to obtain an interdict, damages or an account of lost profit, to protect your business against passing off. It should be noted that the infringed party will not obtain all three remedies against the infringer and that they do not get the privilege of choosing which remedy they would like. This of course, is left to the Court’s discretion.
Interdict
An interdict (or injunction in England) is a Court Order preventing the infringer from continuing to use the goodwill of the infringed party for their own benefit.
The Court will take into consideration the convenience to grant an interdict. It should be noted that the infringed party should challenge the infringer as soon as the infringed party become aware of the passing off issues, as failing to do so may be seen as acquiescence by the Courts and may prevent a party from obtaining an interdict.
The remedy of interdict may also be available as an interim measure and can be used by the infringed party to restrain further dealings by the infringer pending a full trial.
Damages
In an award of damages, the infringer is ordered to pay financial compensation to the infringed party in respect of the passing off. Damages must be proportionate to the actual damage caused. An infringed party would normally allege damage under two categories – firstly, loss of sales and secondly, damage to goodwill and reputation.
The issue of damages is very complex. However, the general purpose of this remedy is to put the pursuer back in the position they would have been had the wrongful act not occurred.
Accounting of Lost Profits
An account of lost profits is another monetary remedy and involves the infringer paying to the infringed party any financial profit gained whilst passing off or any lost profits incurred by the infringed party due to the passing off.
It should be noted that this remedy and damages are mutually exclusive and both cannot be awarded together, as this would be a double remedy. However, an account of lost profits will not be awarded where there is no right to damages.
In practice, this remedy is rarely sought, as it is very difficult to value the actual loss.
In both damages and an account of lost profits the Court has the discretion to award interest on sums awarded between the date of infringement and the date of judgment. Notably, the Court always awards interest on these remedies between the date of judgment and the date of payment. The interest rate is a standard rate used by the Court and is often less than the commercial rate of interest.
This information is intended to provide general guidance only. For more specific legal advice please get in touch: [email protected].