Extended credit?

"A brand is a promise from a trusted friend ise from a trusted friend who won't let you down".

Brands constantly evolve. Successful brand proprietors manage to anticipate market shifts and reposition and develop their brands accordingly. Increasingly, brand owners are seeking to leverage their brands through licensing and joint venture arrangements.

From a legal point of view such a strategy can be problematic. In this article, Mark Antingham examines the reasoning and considerations behind brand extension programmes, setting out some of the basic legal considerations that must be addressed.

Brand extension – what is it?
For many leading companies the management of their brand is now their most sacred corporate task, although, interestingly, not usually the "core competence" of their most senior management.

In discharging this responsibility a key decision is whether to keep a brand's identity closely attached to the product or service for which it is famous (and to use the brand building process to appropriate other values and flavours) or to seek to extend the brand through using it in connection with other products and services. Often this is an evolutionary process effected by a brand-owner funded off its own balance sheet (Sainsbury sells own-brand groceries, but also now sells petrol, financial services etc.).

However, other brand owners have been more radical, either in the ownership arrangements underlying such brand extensions (such as the establishing of jointly owned companies or other trade alliances with third parties to manage/own such new ventures) or in the extent to which they have sought to stretch the brand itself ("Virgin" being used for everything from cola and cinemas to trains and financial services).

Either way, there is rarely any neutral space: you are either on the way up or down and with the accountants and bean-counters keeping the score, few brand-owners can afford to do nothing.

Legal and Commercial Areas
Assuming that a brand owner wishes to extend its brand through seeking to exploit it in connection with a new range of products or services, possibly developed by a third party, then work needs to be done to build an ownership/rights structure within which the brand extension programme can operate. Broadly speaking such a structure requires an analysis of the following areas.

Brand Protection Issues

The use of trade-marks and clearance procedures
In a world of fierce competition, a valid trademark offers the hard pressed brand-owner a rare monopoly right: "Anyone can brew a pint of beer but there is only my Guinness…". Therefore, a tradename or mark is often worth protecting and fighting for. In addition it ought to born in mind that the Trade Marks Act 1994, implementing European Community-wide legislation within the UK, ushered in a more liberal regime for the registration of trademarks.

As a result, Coca-Cola have been able to register the distinctive shape of their celebrated bottle, Direct Line have registered their advertising jingle and a Japanese company managed to register "the smell of roses" in connection with vehicle tyres!

The new regime has also raised the prospect of multi-media trademarks or brand images. Provided that the requirement of distinctiveness and other registration hurdles can be overcome, there is no reason why a company should not be able to register as its brand icon a trademark consisting of moving graphics and sound. The multi-media version could even be registered as part of a series of marks which also included static images for use in the traditional media.

Essentially, trade mark applications should be made in not only all of the classes of goods/services in which they are currently used but also in respect of those classes of goods and services within which they may be sold. Furthermore, registrations should be made in all of the territories within which the products may be offered for sale, making use of appropriate national, European and Madrid Protocol (and even Madrid Arrangement) registration systems where necessary.

Furthermore, prior to registration, appropriate clearance searches should be made. Clearance searches should embrace the trademark registers of relevant territories, but also "common law" (directory/database) searches of unregistered marks and trawls across the Internet so as to minimise the risk that the proposed brand-name or style may be subsequently shown to have been illegally passing itself off as a competitor's product in the same field of activity. The Internet searches can cover both domain names and ordinary "hit rates" on the Web for particular names. There are several companies now specialising in Internet-orientated trademark searching, Net Searchers being the most well known.

As part of the initial search and advice stage that should precede the registration of trade marks making up the portfolio, careful thought should be given to whether the brand, in its current format, will "travel". Suffice to say that certain things can mean something completely different in a foreign language! Trademark applications and associated searches are not cheap, but this is not an area in which short cuts should be made.

Finally, it should be remembered that trademark applications can always be rejected by the relevant registry and opposed by competitors. Even if you are ultimately successful, in most jurisdictions throughout the world, in relation to trade mark rights, "unless you use it, you lose it".

Domain Names
A key facet in any brand protection strategy is increasingly the securing of rights over an appropriate domain name, a process that has already led to a number of disputes that readily illustrate the issues involved.

The first case of Internet domain name piracy to be heard at full trial in the UK – Marks & Spencer (and others) -v- One In A Million Limited – received remarkably widespread press for an intellectual property dispute. The case concerned a blatant exercise in domain name "warehousing" by the defendant company and its owner-managers, who had speculatively registered such names as burger-king.com, sainsburys.com and marksandspencer.com. The defendants were not using the names in connection with websites or in trade as such, but instead approached brand owners to propose exorbitant sale prices: Burger King were asked for £25,000 in relation to burgerking.co.uk.

The courts were predictably unsympathetic to One In A Million's pleas of legitimacy. It was held that their activities constituted actionable passing-off and registered trademark infringement. The decision was upheld in the Court of Appeal.

This decision has been criticised in some quarters for having stretched existing trademark principles too far. Nevertheless, it is clear that the courts will not entertain flagrant attempts to hold strong brand owners to ransom using pre-emptive domain registrations. It is an endorsement of the value and proprietary nature of brands and the flexible approach of the courts in enforcing brand owner's legal rights.

But not all brand owners have been so lucky before the courts. For example, a case reported in 1998 saw two brand owners fighting over the right to register "prince.com" as a domain. On the one hand there was Prince plc, who had registered this domain name and used it for about 2 years in connection with its IT services in the UK. In dispute with Prince plc was Prince Sports Group Inc., a large US sports goods company.

Prince Sports wrote a letter of complaint to Prince plc alleging that Prince plc's use of the domain name infringed Prince Sport's trademark rights and demanded that the domain registration be transferred to them. Prince plc successfully defended itself by claiming that Prince Sports was making an unjustified allegation of trademark infringement. In the ensuing court action, although Prince plc did not own any registered trademarks, it was able to show that it had acquired substantial goodwill and reputation through its trading activities in the UK, and so had proprietary rights of its own in the name PRINCE within its commercial field and was therefore entitled to use the domain name.

Other intellectual property rights
Although trademarks and domain names are of key significance in developing the necessary legal frameworks to support a brand-extension campaign, careful attention should be paid to protecting other intellectual property rights in the product to which the brands are applied by way of patent, design registration and, of course, copyright.

Brand management and infringement
Merely protecting the brands in their new fields of activity by way of trademark registration is only half of the story. It is essential that a brand management programme be put in place to manage and control the brand extension process. Brands depend upon uniformity. It is therefore vital that where a third party licensee is to be permitted to use the brand, it must by obliged to adhere rigidly to the instructions of the licensor/brand-owner. This is essentially on ongoing obligation on the part of the proprietor. In the case of a small organisation, this can be an onerous obligation.

Registrations also have to be maintained and renewed. The new versions of the brand consequent upon redesign/updating should be registered while old, superseded representations of it should be discontinued and the superseded product removed from the market in an effective and legal way.

It is imperative that trade mark infringement and counterfeiting is dealt with. The difficulty is that whilst some brands/goods are not particularly susceptible to it, others are, by their very nature, frequently the object of the counterfeiters' attentions. Premium brand owners are particularly at risk. A careful watch has to be kept to ensure that infringement is not occurring and that a policy is developed and implemented for dealing with it. This may involve establishing watching services and establishing action plans for dealing with counterfeiting in individual markets.

However, although major counterfeiting conspiracies often get the headlines, the rights of a trademark or brand-owner may be jeopardised in many other ways, as the Scandecor case shows.

In this case, Scandecor International was a company set up by two parties (A and B) to produce and sell posters. A and B took responsibility for separate sales markets, and after a dispute another company (Scandecor Marketing) was set up to formalise the separation of markets. Scandecor International retained ownership of the UK trademark registration for SCANDECOR, and continued to supply Scandecor Marketing with posters for distribution within the UK. When SI was bought out by a third party, it then brought proceedings against SM to stop the use of the SCANDECOR name.

The court held that both companies had separate goodwill in the name, so the action failed. The fact was that SI had continuing goodwill under the name SCANDECOR in relation to the manufacture of the posters, whilst SM had acquired goodwill in relation to its distribution business under the same name. The lesson of this case is that any mingling or "sharing" of a trademark should be considered very carefully, bearing in mind the possibility of corporate restructuring and selling-off in the future.

Corporate structure, taxation and competition law issues
In addition, particular ownership and tax issues can arise where a brand extension programme involves the assignment or licensing of intellectual property rights to a third party or a special purpose vehicle established to help develop the brand. Certainly, the brand-owner should consider the various "What if…?" scenarios that may affect a third party licensee including:

insolvency;
material breach (including a failure to hit quality, sales or marketing budget commitments); and
a change of control.
A brand owner should take appropriate advice on the tax implications of the licensing programme, including the implications of transfer pricing and the various tax treaties that knit nations together from a tax point of view. Finally, exclusivity clauses and territorial limits need to be carefully considered to make sure that they do not breach competition law or other "blue sky" legislation.
Structuring the licence and distribution agreements
Brand extension is often fundamentally about trade mark licensing. Therefore the usual considerations apply for licence arrangements. Of particular importance within the licensing agreement are those clauses that deal with methods of manufacture and sale and provisions aimed at maintaining the quality of licensed products. It is important that the licensor maintains a significant involvement in the product that is actually being produced for sale by the frequent inspection of samples of product and packaging. In view of the importance of the brand, it follows that the licence agreement will deal with notification to the licensor of actual, threatened or suspected infringements of any of the licensed rights as well as covering how these will be dealt with in practice.

Equally, distribution arrangements for the product range will need to be carefully considered. Lack of experience in the field, timing and cost are obvious reasons for the proprietor not establishing a separate manufacturing and sales operations for dealing with the "extended" product. It is considerably easier to approach an existing "name" in the field and to enter into a licensing arrangement with them for the manufacture and sale of the product. Equally, the distribution arrangements will need to be carefully considered. Where will the goods be sold and by whom? Whilst it is important that for premium branded goods, they are sold into premium brand outlets, competition law impacts upon this. Again, specific legal advice needs to be taken as to exactly what, if any, restrictions can be imposed in respective markets.

Ongoing responsibility
On an ongoing basis, the licensor must manage his relationships with licensees, invest in the brand portfolio, assess and develop new markets and threats to existing ones and successfully attack and eradicate the most serious instances of infringement/counterfeiting that may manifest themselves. Perhaps one of the most difficult aspects of this will be dealing with infringers/counterfeiters in the future.

Conclusion
Approached correctly, brand extension is an effective way of maximising the income from the brand concerned, as well as giving it a much wider profile than it has hitherto enjoyed. However, commercially, an ill-judged extension of the use of the brand can result in significant damage to the core brand and its perceived values, while the legal pitfalls are many and complex. It is a decision that requires excellent brand strategy advice, supported by appropriate and timely legal and accounting input.