Another fine judgment: court considers ownership of goodwill in franchised businesses

In Okotoks Ltd v Fine & Country Ltd ([2013] EWCA Civ 672), the Court of Appeal has considered the issues of ownership of goodwill in franchised businesses and of "tolerable confusion", and again confirmed the limited role of the appellate court in multi-factorial assessments of evidence.

This was an appeal against the July 2012 first instance decision of the trial judge, Mr Justice Hildyard, in Fine & Country Ltd v Okotoks Ltd ([2012] EWHC 2230 (Ch) and [2012] EWHC 2585 (Ch)), a passing-off and trademark infringement action in the field of high-value property estate agency services. The claimant (respondent) conducts business under the FINE & COUNTRY mark and logo. The appellants had rebranded the higher-end part of their business FINE. 

The main first instance judgment runs to 122 pages with a shorter supplemental judgment.  The judgments contain a lengthy and detailed discussion of a number of areas of passing-off and trademark law, as well as of the evidence. The trial lasted 10 days and a number of witnesses were called for cross-examination.

The case had proceeded at first instance primarily as a passing-off case, and secondarily as a trademark infringement case with an invalidity counterclaim. The infringement claims included both likelihood of confusion claims and claims based on Article 9(1)(c) of the Community Trademark Regulation (207/2009) and Section 10(3) of the Trademarks Act 1994.  The defendants lost on all three limbs and appealed on a wide range of points.

With regard to passing off, the court reviewed in some detail the approach taken by Hildyard J to the assessment of the evidence in the passing-off claim and found no error of principle that would allow the appeal court to interfere with the judge's findings of fact or application of the law. The court's judgment notes that the respondent's counsel was not called on to make submissions on this part of the appeal. The court reaffirmed that it is not its function to retry cases. It noted that many of the grounds of appeal were that the trial judge had applied the right test incorrectly. In a case where many of the points the judge has been called on to decide are multi-factorial assessments, the appeal court must be especially careful about interfering.

The appellants had made wide-ranging attacks on the evidence relied on and the weight given to it by the trial judge. The court noted that Hildyard J had taken various limitations in the evidence into account in his assessment of the evidence. The court found nothing wrong with the judge's approach to the evidence, noting that he gave most weight to the evidence of live witnesses and his own independent assessment.

The respondents acted in a quasi-franchisor capacity, granting licences and receiving licence fees from estate agency firms. The court agreed with a passage in Wadlow on Passing Off (Fourth edition, at 7-110 -111) in which the author argues that the franchisor owns the relevant goodwill in the franchised name and format of a franchised business unless there is contrary agreement, abandonment of control or surrender to the franchisees. The judgment also confirms that a franchisor's ability to attract licence fees is itself goodwill, which is capable of protection in passing off and can be damaged. If this case goes to an inquiry, there may be an outstanding issue from the first instance decision over whether the respondents to the appeal need to join their franchisees as parties in order to maximise damages recovery.

The court then turned to the appeal on trademark validity. The registered marks included FINE & COUNTRY in lightly stylised form plus graphic elements. The evidence unsurprisingly showed widespread use of ‘fine’ and ‘country/& country’ (separately) in the estate agency field. 

The court found that Hildyard J had failed properly to separate considerations of inherent and acquired distinctiveness in his assessment, and also to consider separately the distinctiveness of the UK and Community trademark (CTM) registrations, which had been filed at different times.  Had the case turned on inherent distinctiveness, the appeal on validity might well have succeeded. However, since the court found that the evidence showed that, as at the date of registration of the CTM (at least), the mark had acquired distinctiveness, it found no error that would impact the outcome. It is not clear from the judgment whether the court considered the proper assessment of acquired distinctiveness of the CTM in member states other than the United Kingdom where English is understood (see Cases T-405/05 (upheld in C-553/08), T-435/07 and T-307/09). The evidence as described in the judgments confirms that the claimant does have licensees overseas, but the factual evidence appears to have been directed primarily to the UK market.

With regard to the appeal on infringement, the Court of Appeal took a similar approach to likelihood of confusion as for passing off, namely finding no error of principle that would allow it to say Hildyard J's assessment was plainly wrong. In light of its finding on this point it did not go on to consider the Article 9(1)(c) and Section 10(3) infringement case.

The appellants had also raised a defence under Article 12(b) of the Community Trademark Regulation and Section 11(2)(b) of the Trademarks Act, which Hildyard J had rejected. The court held that Hildyard J had made an error of law insofar as he found that the mere use of FINE as a brand precluded the application of the defence. However, this did not affect the outcome. The court found that Hildyard J had made no error of principle in finding on the facts that the use was not in accordance with honest practices in industrial and commercial matters. This was because the use went beyond the "tolerable confusion" that can lawfully arise where parties use descriptive marks, not least given the appellant's knowledge of the claimant's brand at the point when it adopted its own FINE branding. The court further observed that, once a defendant who relies on this defence is aware that its sign is deceptive, it must stop using it, even if the defendant had previously believed it was on the right side of the line.

Vanessa Marsland, Anna Blest and Will Shiel, Clifford Chance LLP, London