Rebranding and goodwill in the technological age

Case Update

By: Tony Conaghan

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Index 1  Introduction ................................................................................................................................. 1 

2  What is a 'brand'? ....................................................................................................................... 1 

3  What is meant by Rebranding? .................................................................................................. 2 

4  What is meant by Goodwill? ....................................................................................................... 4 

5  Legislative framework to consider if rebranding ......................................................................... 9 

6  Trade Practices (Industry Codes —Franchising) Regulations 1998 (Cth) ('Code') .................... 9 

7  The Intellectual Property Statutes and Common Law .............................................................. 12 

8  Business Names Registration Act (Cth) 2011 .......................................................................... 13 

9  Common Provisions in Franchise Agreements impacting upon rebranding ............................ 14 

10  Complicating factors on a rebrand ........................................................................................... 16 

11  Re-branding, domain name registration and trade mark infringement: Solahart Industries Pty Ltd v Solar Shop Pty Ltd [2011] FCA 700. ............................................................................... 17 

12  Pharmacia & Upjohn SA ('Upjohn') v Paranova A/S ('Paranova') (C-379/97) [1999] E.C.R. 1-6927 (AGO) .............................................................................................................................. 19 

13  US case law .............................................................................................................................. 20 

14  Trade marks and rebranding .................................................................................................... 20 

15  Technological advances and impacts ...................................................................................... 21 

16  New Media ................................................................................................................................ 22 

17  Summary .................................................................................................................................. 23 

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1 Introduction

http://www.youtube.com/watch?v=JKIAOZZritk&feature=related

1.1 To address the topic of rebranding and goodwill in the technological age, I propose to focus on

the issues involved in 'rebranding', goodwill and the impact of new media.

1.2 For the purposes of this paper and brevity, I refer to franchisor – franchisee. Please read

those references to include master franchisee, sub-franchisor, area developer etc as the

context requires.

2 What is a 'brand'?

2.1 Before commenting on 'rebranding', we need to establish the context in which this is to be

considered for these purposes:

"... strong brands are built through many years of sustained investment which, if well judged, will yield a loyal consumer franchise that will result in large sales, a high market share and a continuing stream of income for the brand owner1."

"A strong brand will make a business more successful by re-enforcing the positive message the company wishes to promote about its goods and services. A brand that is working maintains loyalty and inhibits competition by making people feel happy to remain with what they know. ... People must have confidence in the brand as a badge of quality and a guarantee that whatever it offers comes up to a certain standard. Whether because of fear of the unknown or a genuine belief that what they are getting is better than the competition, these are factors that ensure companies devote vast resources to establish and maintain strong brands.2"

2.2 A traditional definition of a brand proposed by the American Marketing Association is:

"A name, term, symbol, design or combination of them intended to identify goods or services of one seller or group of sellers and to differentiate them from those competitors3."

2.3 A franchising system has, as its base, the concept of brand establishment, building brand

loyalty that, in turn serves to expand the brand equity and its value. This is then built upon

with reinforcement, dissemination (growth either by territory, geography, increased products

and services), leveraging consumer awareness leading to greater consumer recognition and

acceptance. With the franchising sector representing approximately 18% of Australia's GDP,4

brand enhancement is at the forefront of a significant proportion of Australian business

owners' commercial goals. This paper canvasses the principal legal issues arising in brand

development and rebranding, particularly drawing attention to the legal considerations

necessary, and how these must be taken into account if the rebranding is to be implemented

successfully. For example, without the complications which occurred in the Midland Bank to

HSBC scenario (addressed later).

1 Muzellec, Laurent; Doogan, Manus; Lambkin, Mary, Irish Marketing Review, 2003. Mercury Publications. 2 Iain Connor, 'Bring them home' (2000) European Intellectual Property Review 22(4), 181 – 2. 3 Laurent Muzellec, Mary Lambkin (2006), "Corporate Rebranding: Destroying, Transferring or Creating Brand Equity?", European Journal of Marketing, Vol.40 ISS:7pp.803-824 4 http://www.franchise.net.au/inspire/brand/aussie-brands-look-to-brazil-for-international-exp

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2.4 The emergent paradigm, or further complication when rebranding is contemplated, is the use

of the internet and social media, allowing for rapid 'take up' or 'take down' of brands and

reputations. I will highlight both successful and unsuccessful re-branding projects, the latter

serving as a reminder not only of the legal issues which can arise, but also of the power of the

new social media to communicate at an exponential rate locally and globally, and impact

positively or negatively upon outcomes.

3 What is meant by Rebranding?

3.1 Rebranding has been described in a number of ways.

3.2 One commentator records it as:

"Revitalising and repositioning a brand for gradual, incremental modification of the brand proposition and marketing aesthetics can be considered a natural and necessary part of the task of brand management in response to changing market conditions .. Changing a brand's name, however, suggests the loss of all the values that the old name signifies which challenges traditional marketing wisdom with regards to brand equity."5

3.3 Consequently, unless done properly and effectively, rebranding can be a costly business and

detrimentally affect reputation (which in turn affects goodwill). For example, as the British

Royal Mail learnt when it changed its brand name to Consignia at a cost of £2.5 million, met

such market resistance that it changed back to Royal Mail for another £1million.

Consequently, any consideration of rebranding of an existing successful brand must be

carefully considered, as there are so many aspects involved. These could include a perceived

need or desire to:

Modernise (revamp) the image;

Harmonise the business unit brand portfolio with the corporate brand;

Establish a distinctive identity from parent company;

Increase/create corporate brand awareness;

Clarify corporate brand structure;

Harmonise brand portfolio globally;

Help the company expand abroad;

Associate the company to its main product/service brand;

5 Laurent Muzellec, Mary Lambkin (2006), "Corporate Rebranding: Destroying, Transferring or Creating Brand Equity?", European Journal of Marketing, Vol.40 ISS:7pp.803-824

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3.4 Whilst these aspects relate mainly to the image side of the corporate brand, the rebranding

process is wider than that and usually seeks to communicate a new identity or connotation:

Reflect the change in the corporate ownership;

Reflect the change in the activity in which the corporation is involved;

Facilitate the birth of a new identity consecutively to a merger;

Differentiate itself from the parent company or former parent company.6

3.5 Whilst these findings relate generally to the corporate world, they are also apposite to the

business concept of franchising. It has been difficult to locate cases or articles dealing with

rebranding as they relate to franchising per se, either from a legal or marketing perspective.

3.6 Each impact of the 'rebrand' needs to be carefully considered because if the rebranding

strategy and implementation is not successful, the change has the potential to nullify those

many years of sustained investment and can seriously dilute, or effectively diminish, the equity

of the brand, or in other words, the value of the goodwill. This is nowhere more relevant than

in the franchising sector.

3.7 The word 'rebrand' is a neologism, made up of the two elements – re and brand7. Re is often

used as a prefix to denote 'again' or 'anew'. So that a characterisation of rebranding has been

described in these words:

"The creation of a new name, term, symbol, design or a combination of them for an established brand with the intention of developing a differentiated (new) position in the mind of stakeholders and competitors."8

3.8 The lawyer's mind immediately turns to the intellectual property implications of these changes

or the new 'creations', and how to protect them in terms of new assets (or sources of goodwill

as we shall see later). More about that later.

3.9 Those stakeholders covers a range of constituents and parties, including the owners of the

franchise business (be they shareholders, partners, unit holders or individuals), the directors

(executive and non-executive), the executive, management and employees of the franchisor,

the franchisees, their employees, the suppliers, service providers, contractors, and, finally, of

course, the consumers. Each will have different perspectives and priorities, as well as needs

to address, in the consideration of any rebranding strategy or enterprise and its

consequences.

3.10 The commercial driver is that brands have a value. This is widely recognised.

6 Laurent Muzellec, Mary Lambkin (2006), "Corporate Rebranding: Destroying, Transferring or Creating Brand Equity?", European Journal of Marketing, Vol.40 ISS:7pp.803-824 7 Laurent Muzellec, Mary Lambkin (2006), "Corporate Rebranding: Destroying, Transferring or Creating Brand Equity?", European Journal of Marketing, Vol.40 ISS:7pp.803-824 8 Laurent Muzellec, Mary Lambkin (2006), "Corporate Rebranding: Destroying, Transferring or Creating Brand Equity?", European Journal of Marketing, Vol.40 ISS:7pp.803-824

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"Brands, it seems, alongside ownership of copyright and trademarks, computer software and specialist know-how, are now part of the intangible value investors place on companies." 9

3.11 I note that this definition squarely raises the legal bases supporting any valuation of a

company, and the goodwill component of that valuation.

3.12 There are several reasons why rebranding occurs, and several levels at which it can be

actioned. For the purposes of this paper, it is sufficient to record that rebranding can extend

from a lower incremental element such as a minor promotional repositioning of a product, to a

variation or updating of imagery, through to a renaming of the corporate brand at the highest

level (such as Midland Bank to HSBC in the UK – more about that later).

3.13 As to the catalyst inducing or necessitating a rebrand strategy, at any of these levels, 4 main

factors are identified:

change in ownership;

in corporate strategy;

in competitive conditions;

in the external environment.10

3.14 Again, these were assessed in the context of the general corporate community and not

franchising, where there seems to be little specific research and reporting on rebranding.

However, the concepts can be juxtaposed to franchising.

4 What is meant by Goodwill?

4.1 This is a term commonly used. However, for lawyers, the use of the term 'goodwill' causes

concern because of the necessity to understand in what context it is being used. Depending

on that context, goodwill may have a different meaning and outcome; for instance, goodwill

has a legal meaning derived from its consideration in case law (often related to stamp duty or

revenue cases), for the purposes of various Parts and Divisions of the Income Tax

Assessment Act 1936 (Cth) ITAA, A New Tax System (Goods & Services Tax) Act 1999 (Cth)

(GSTA), the State Duties Acts, in accounting under the Australian Accounting Standards

Board directives, various Taxation Rules (TR's) and for valuation purposes.

4.2 Such eminent jurists as Lord MacNaghten and Lord Halsbury confirm that goodwill is

incapable of precise definition, a view with which the High Court agreed in FCT v Murry11.

9 Sinclair, Roger, the Encyclopaedia of Brands and Branding in South Africa, 1999, p13 10 Laurent Muzellec, Mary Lambkin (2006), "Corporate Rebranding: Destroying, Transferring or Creating Brand Equity?", European Journal of Marketing, Vol.40 ISS:7pp.803-824 11 FCT v Murry (1998) 193 CLR 605.

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4.3 Lord MacNaghten's definition is often cited. It is interesting to note that the issue in The

Commissoners of Inland Revenue v Muller & Co's Margarine, Ltd12 was whether stamp duty

was accessible in the UK on the sale of a business which included goodwill.

4.4 Lord MacNaghten said:

"It is very difficult, as it seems to me, to say that goodwill is not property. Goodwill is brought and sold every day. It may be acquired, I think, in any of the different ways in which property is usually acquired. When a man has got it he may keep it as his own. He may vindicate his exclusive right to it if necessary by process of law. He may dispose of it if he will – of course under the conditions attaching to property of that nature. ...

It is not easy to form a conception of property having no local situation. What is goodwill? It is 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. .... Goodwill is composed of a variety of a variety of elements. It differs in its composition in different trades and in different businesses in the same trade. ... The goodwill has no independent existence ... it must be attached to a business."

4.5 The other members of the House of Lords are less frequently quoted. Lord Lindley added:

"I understand the word [goodwill] to include whatever adds value to a business by reason of situation, name and reputation, connection, introduction to old customers, and agreed absence from competition, or any of these things, and there may be others which do not occur to me....

In this wide sense, goodwill is inseparable from the business to which it adds value, and, in my opinion, exists where the business is carried on. Such business may be carried on in one place or country or in several, and if in several there may be several businesses, each having the goodwill of its own."

4.6 On the other hand, less frequently quoted is the Earl of Halsbury who gave the dissenting

judgment.

4.7 Earl of Halsbury said:

"The 'goodwill thereof' is a thing which can be assumed to exist separately. Like every other thing which suggests one simple idea, it is difficult, if not impossible, to define it. The right to trade and the name of a firm which has acquired a reputation is not confined to a particular locality or to any particular premises."

4.8 His view was that:

"I am wholly unable to see the goodwill itself as acceptable of having any local situation."

4.9 But that was in 1900. Where have we progressed?

4.10 A leading Australian authority was decided by the High Court of Australia in FCT v Murry13:

"[Goodwill] is really a quality or attribute derived from other assets of the business ... Its existence depends upon proof that the business generates and is likely to continue

12 The Commissioners of Inland Revenue v Muller & Co's Margarine, Limited. House of Lords [1901] AC 217. 13 FCT v Murry (1998) 193 CLR 605.

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to generate earning from the use of identifiable assets [such as] locations, people, efficiencies, systems, processes and techniques.14"

4.11 The meaning of the term is complicated because of the difference between the legal, business

and accounting definitions; "...accounting and business notions of goodwill have proved

influential in the valuation of goodwill for legal purposes..."15.

4.12 For instance, in the Duties Act 2001 (Qld), goodwill is not defined, but is used as follows:

"S.14(3) The unencumbered value of property that is the goodwill of a business includes the value of any restraint of trade arrangement entered into by the transferor or a related person of the transferor to protect the value of the goodwill acquired by the transferee.

S.35 What is a business asset:

(1) Each of the following is a business asset:

(a) goodwill;

(b) a statutory business licence used for carrying on a business;

(c) a right to use a statutory business licence used for carrying on a business;

(d) the business name used for carrying on a business."

4.13 Approved Accounting Standard ASRB 1013 states at 5.1.3:

"5.1.3. Goodwill is recognised as an asset only when it satisfies the following asset recognition criteria:

(a) it is probable that the future benefits embodied in the identifiable assets will eventuate; and

(b) it possesses a cost or other value that can be measured reliably.

5.7 Goodwill which is purchased by the entity must be measured as the excess of the cost of acquisition incurred by the entity over the fair value of the identifiable net assets acquired."

4.14 Critically, it seems tolerably clear after FCT v Murry that goodwill is one indivisible item of

personal property in a business, is separate from other property of that business, including

property that may be its sources ... goodwill is inseparable from the business.16

4.15 However, it is not within the ambit of this paper to canvass the legal relationship in Australia

between goodwill and business names and trade marks specifically. For instance, s106(3) of

the Trade Marks Act 1995 (Cth) in dealing with assignments of trade marks states; "The

assignment or transmission may be with or without the goodwill of the business concerned in

the relevant goods and/or services".

4.16 The NSWCA in one of the 'restaurant' cases found "that there is no rule that the goodwill for a

business necessarily includes its trade name".17 The 260 Oxford St, Taste of India18 and

14 FCT v Murry (1998) 198 CLR 605 at 611. 15 FCT v Murry (1998) 198 CLR 605 at 612. 16 The Meaning & Nature of Goodwill in the tax context. Ian Tregoning (2010) 39 ATRev 123.

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Squires Loft19 'restaurant' cases basically involved the sale of business and whether goodwill

included the rights to use the name.

4.17 As to the sources of which goodwill may be comprised, several have been identified in various

ways and may be summarised as follows:

Site or local goodwill eg premises;

Personal goodwill ie form personal characteristics;

Name goodwill eg brand, trade mark, name;

Monopoly goodwill eg deriving from patents, exclusive licences, statutory rights etc.20

4.18 Suffice it to say, that when considering rebranding, the lawyer's attention will need to focus on

the sources of the goodwill of the franchise business. Changes to particular elements of the

sources such as to trade marks, brands, logos, copyright, confidential information, and the

identifiable assets as defined by the High Court in FCT v Murry will impact upon the goodwill.

4.19 Depending on the circumstances, and the proposed legal consequences of the rebranding,

regard may be directed towards the various provisions of the ITAA and GSTA where the

impact of the rebranding on goodwill and its value may be relevant.

4.20 Goodwill is not defined under the ITAA 1997 (Cth). However, goodwill figures in several

provisions including S.100.25 What are CGT assets? Some CGT assets are reasonably well

known, and amongst those set out is goodwill.

4.21 The salient features of the legal meaning of goodwill for the purposes of comparison with the

accounting meaning of the term are that:

A business may have goodwill from its start ie if it can take legal action to protect it

from competition eg infringement of its trade marks, even though there is no record of

profitability. This is distinct from accounting where goodwill is identified by the

quantifiable capacity of the business to earn profits.

Whilst goodwill may have multiple sources, it is one indivisible whole, inseparable

from the business.

Goodwill can exist even where the value of the business does not exceed the

identifiable assets. This varies from the accounting approach.

Goodwill can exist even where it is not recognised in the books of account.21

17 260 Oxford St v Premetis [2006] NSWCA 96 18 Chowdhury v Taste of India Restaurants Pty Ltd [1999] IPR 413 19 JLCS Pty Ltd v Squires Loft City Steakhouse Pty Ltd [2008] FCA 867 20 The Meaning & Nature of Goodwill in the tax context. Ian Tregoning (2010) 39 ATRev 123 at 126. 21 Goodwill & Taxation Issues. Dr Michael Walpole. 2010 UNSW, Faculty of Law Research series at p34.

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4.22 Most franchise agreements contain provisions dealing with the allocation of goodwill. The

term is sometimes defined in the franchise agreement, though in my experience more often

not. The majority of franchise agreements provide that the goodwill is owned by the

franchisor. That goodwill having its various sources from those components of the franchise

business.

4.23 This is commonly done through the medium of the intellectual property clauses. These

invariably acknowledge the ownership or exclusive rights in the franchisor. Those clauses

often align the use of the trade marks and goodwill. Some examples (of which I am not the

draftsman but am unable to provide attribution):

"The Franchisee agrees that his usage of the Trade Marks and any goodwill established thereby shall enure to the exclusive benefit of the franchisor."

"The Franchisee acknowledges and agrees – any use of the Marks and the goodwill established thereby shall enure to the exclusive benefit of the franchisor."

"The Franchisee agrees that its use of the Intellectual Property and any goodwill resulting from such use will enure to the exclusive benefit of [the franchisor] or the intellectual property owner."

4.24 Provisions in other franchise agreements are more specific.

"Rights to goodwill

The Franchisee agrees that all the goodwill and other rights and interests arising from the Franchisee's use of the Business Name (or any other derivative of the Business Name), the Trade Marks, the Image and the System belong to [the franchisor] or a Related Entity of the franchisor."

4.25 Other franchise agreements deal with it in the negative sense:

"No Payment for Goodwill

The franchisee will not be entitled to any payment for goodwill [by the franchisor] when this Agreement ends."

4.26 From another perspective, in the eyes of consumers, the goodwill of the franchise system

demonstrates corporate homogeneity and the consumer loyalty is attached to the franchise

system, and not the individual franchise owner. The advantage of developed franchise

systems lies in the fact that, by entering the system, the franchisee benefits from the

franchisor's systems, intellectual property, brand and the attaching goodwill from day one.

Should a rebranding change or add to those sources of goodwill, then that goodwill will be

affected – either advantageously or negatively.

4.27 I might also point out that in some studies in this area an analogy has been drawn to the

situation in some European jurisdictions where compensation is payable upon termination of

an agency or distribution agreement. Whilst it is not the topic of this paper to point out the

salient differences between an agency and a distribution agreement and a franchise

agreement, there needs to be a clear distinction drawn when making comparisons between

different jurisdictions that those comparisons are valid and seek to compare similar legal

arrangements as opposed to loose analogy.

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4.28 I also commend to you the 2 papers on goodwill I have footnoted, that is those by Dr Michael

Walpole and Mr Ian Tregoing for further elucidation on 'goodwill'.

5 Legislative framework to consider if rebranding

5.1 There are a myriad of strategic, stakeholder, marketing and consumer aspects to consider in

deciding whether, and if so, how to change an existing brand (and all that term embraces).

5.2 Those aspects are not the purview of this paper.

5.3 Rather, if the decision is taken by the owners, the board or executives, as the case may be, to

change an aspect of the brand, be it a relatively minor incremental change to a logo, style,

copyright, promotional material, or a major change such as a new name, what are the legal

aspects, if the business is a franchise, that require consideration?

5.4 My starting point will be the Franchising Code of Conduct.

6 Trade Practices (Industry Codes —Franchising)

Regulations 1998 (Cth) ('Code')

6.1 Part 2 Division 2.1 provides for the Disclosure document. I will not repeat all the provisions

because you will be either familiar with them or the Code is readily accessible

(http://www.comlaw.gov.au/Details/F2010C00451).

6.2 Rather, I draw your attention to specific provisions, that depending on the circumstances, may

be relevant. Of an overarching nature is the purpose of the Disclosure document in clause 6A.

The underlying purpose is "to give a franchisee current information from the franchisor that is

material to the running of the franchised business".

6.3 If, at the time of the discussions with a prospective franchisee, a franchisor plans to rebrand in

a way which is material to the running of a franchised business then this information should be

included in the Disclosure document to the prospective franchisee.

6.4 The provisions of clause 17C 'Arrangements to apply at the end of the franchise agreement'

may be relevant.

6.5 In particular, clause 17C(f) provides:

"Whether the franchisor will consider any significant capital expenditure undertaken by the franchisee during the franchise agreement, in determining the arrangements to apply at the end of the franchise agreement."

6.6 A rebranding exercise involves expense. Most franchise agreements provide that the

franchisee bears those costs to be associated with a rebranding exercise in terms of the new

signage, promotional material, store livery and lay out, uniforms and whatever else may be

involved in the exercise.

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6.7 As these costs are usually not insignificant, the franchisor will need to consider the extent to

which a rebranding may occur, and if so, its extent, the likely costs involved, and if a material

part is to be paid by the franchisee, making disclosure under 17C(f).

6.8 The term 'material' is not defined in the Code. Clause 18(2) lists matters which if not included

in a Disclosure document must be told to a franchisee within 14 days. So, those matters

provide an indication. The list is not conclusive in that there is room for debate on, for

example, what constitutes a 'material' 'change in intellectual property' (18(2)(h)).

6.9 I could not locate a case where the meaning of 'material' as used in the Code is considered. I

looked for an analogy in the continuing disclosure obligations under the Corporations Act.

6.10 The concept of materiality is not defined in the ASX Listing Rules. However, expressions

which are not specifically defined in the Listing Rules but have a particular meaning under the

Corporations Act, have the same meaning in the ASX Listing Rules.

6.11 The annotated Listing Rules give an effective 'rule of thumb' by which to assess materiality (in

a continuous disclosure context) – if the CEO or Board of a Company needs to be alerted to

the information, consideration should also be given as to whether it should be disclosed to the

market.

6.12 The concept of materiality is found in the following sections of the Corporations Act:

(a) (s677 - continuous disclosure):

'a reasonable person is taken to expect information to have a material effect on the price of value of securities if it would, or would be likely to, influence persons who commonly invest in securities in deciding whether or not to subscribe for, buy or sell the securities'.

(b) (s412(1)(a)(i) - information as to compromise with creditors) In Re HIH

Casualty and General Insurance Ltd (2006) 57 ACSR 791, Barrett J summarised the

materiality requirement as:

'In other words, anything which, if known and appreciated, has the capacity to influence a creditor’s decision and judgment whether to vote one way rather than the other (and, indeed, whether to participate at all) must be made known as part of the explanation called for by s 412.' (This is very similar to the test expressed in a takeover context).

6.13 To extrapolate this to the franchise context, a plan by the franchisor to rebrand the name or

change the registered trade mark (or common law mark for that matter) would expectedly be

sufficiently material to warrant disclosure (see 18(2)(h)).

6.14 But, what if there were to be some additional products with variations to an existing theme,

possibly minor in nature?

6.15 In this regard, it is important to bear in mind that the Code defines in clause 3:

"Trade mark has the meaning given by the Trade Marks Acts 1995.

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Note a trade mark is a sign, including any letter, word, name, signature, numeral, device, brand, heading, label, ticket, aspect of packaging, shape, colour, sound or scent (or any combination of these) used or intended to be used, to distinguish goods or services dealt with or provided in the course of trade by a person from goods or services so dealt with or provided by any other person (see Trade Marks Act 1995, s17)."

6.16 As we have noted over recent years, the breadth of registrations of trade marks to include

logos, devices, aspects of packaging, shape and colours, to name a few of the topical

examples, has increased significantly.

6.17 Consequently, even if the proposed element of rebranding is incremental, say to the form of

the promotional presentation of a product, this may require a search beforehand to verify the

availability of the variation, if a trade mark is involved, and also necessitating an application(s)

in one or more trade mark classes to ensure protection.

6.18 In addition, as that would present as a variation of the 'intellectual property' as it is so often

defined under most of the franchise agreements, this may require disclosure, either to a

prospective franchisee or in accordance with the obligations of the franchisor under clause 18.

6.19 For convenience, clause 18 refers to Disclosure of materially relevant facts, in particular

clause 18(1) states:

"If a disclosure document does not mention a matter mentioned in subclause (2), the franchisor must tell a franchisee or prospective franchisee about the matter, in writing, within a reasonable time (but not more than 14 days) after the franchisor becomes aware of it."

6.20 For our purposes, a relevant matter may be that referred to in clause 18(2)(h):

"A change in the intellectual property, or ownership or control of the intellectual property, that is material to the franchise system."

6.21 Also, potentially relevant is clause 17 'Marketing and other cooperative funds'. Depending

upon the extent of the rebranding and the potentially contentious issue of who pays, franchisor

or franchisee? or in what proportion? the contributions to the marketing fund and their amount

may become an issue. Usually the franchise agreement will provide for a break up of who

pays the respective costs in terms of aspects of rebranding, such as for a common

requirement where retail outlets are involved of upgrading a store's presentation with modern

point of sale and marketing material. I deal with usual provisions in franchise agreements later

in this paper.

6.22 For completeness, I mention the provisions of clause 19 of the Code whereby a franchisor

must give to a franchisee a current disclosure document within 14 days after a written request

by the franchisee. However, that request can only be once in 12 months.

6.23 Clause 23A confirms that any obligation to act in good faith at common law remains. A

franchisor needs to consider this when rebranding. Other papers deal with the meaning of

'good faith'.

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6.24 Annexure 1 to the Code is the Disclosure document for the franchisee or prospective

franchisee. The relevant disclosure aspects there for consideration in respect of a rebranding,

depending on the circumstances, would include, clause 7 Intellectual Property, clause 8

Franchise Site or Territory, clause 9 Supply or Goods or Services to a Franchisee, clause 12 A

Contribution to the Marketing or Cooperative Funds and clause 13 On Payments Including

Isolated Payments.

6.25 Of particular significance in terms of rebranding is clause 13.A dealing with 'unforeseen

significant capital expenditure'. It is convenient to recite the clause:

"13.A.1 Whether the franchisor will require the franchisee, through the franchise agreement, the operations manual (or equivalent) or any other means, to undertake unforeseen significant capital expenditure that was not disclosed by the franchisor before the franchisee entered into the franchise agreement."

6.26 This clearly raises the spectre of a rebranding and, depending upon its extent and the

arrangements as to who bears the respective costs, that material aspects be disclosed.

6.27 It is appropriate to point out also the provisions of clause 16 whereby the franchisee's

obligations are to be set out in the disclosure document including 16.1(f) complying with

standards or operation manuals and (j) maintenance and appearance of site, premises,

vehicles and equipment.

6.28 These are the areas where often a rebranding of a mark, logo or otherwise is going to have an

impact, and a franchisor requires a franchisee to comply. We will deal further with this when

we look at usual provisions in Franchise Agreements.

6.29 Compliance with a rebranding protocol as provided for in the franchise agreement would also

be a condition upon which renewal may occur. Consequently consideration is also to be given

to clause 17.1(d) "conditions the franchisee must meet to renew, extend or extend the scope

of the franchise agreement".

7 The Intellectual Property Statutes and Common

Law

7.1 Each of these statutes, such as the Trade Marks Act 1995 (Cth), the Copyright Act 1968 (Cth),

the Designs Act 2003 (Cth), the Patents Act 1990 (Cth) and the Competition and Consumer

Act 2010 (Cth) may have application or have an impact upon the franchisor's rights and

require consideration in the rebranding context.

7.2 In addition, the common law be it relating to unregistered trade marks, confidential information

or passing off, may also require attention (as the Midland Bank UK case shows).

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8 Business Names Registration Act (Cth) 2011

8.1 The requirements of the legislation in respect of business names may also require attention.

S.35 Notifying changes—entity that gives information to ASIC

(1) If:

(a) an entity gives information to ASIC; and

(b) the information is recorded in relation to a business name in the Business Names

Register; and

(c) circumstances change so that the information is no longer correct;

the entity must lodge with ASIC notice of the change within 28 days after becoming aware of

it.

(2) The notice:

(a) must be in the prescribed form; and

(b) must be lodged in the prescribed manner.

S.48 Cancellation—failure to provide information

(1) ASIC may cancel the registration of a business name to an entity if:

(a) either:

(i) the entity is obliged under section 35 to notify ASIC of a change to information and

the entity fails to do so within the period required under that section; or

(ii) ASIC requests the entity to give ASIC information under section 37 and the entity fails

to do so within the period specified in the request; and

(b) ASIC is satisfied that the failure to provide the information affects the integrity of the

Business Names Register; and

(c) ASIC is not satisfied that there are exceptional circumstances justifying the failure to

give the information.

(2) ASIC must, at least 28 days before cancelling the registration, give notice in writing to

the entity informing the entity that ASIC will cancel the registration unless:

(a) the information is given to ASIC within that 28 day period; or

(b) the entity satisfies ASIC that there are exceptional circumstances justifying the failure

to give the information.

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9 Common Provisions in Franchise Agreements

impacting upon rebranding

9.1 We have dealt with the Code and possible legislative considerations.

9.2 We turn to the contractual terms between the franchisor and the franchisee. Common

provisions in franchising agreements potentially relevant to a rebranding include:

The Definitions' Section

9.3 These invariably have definitions seeking to cover the 'field' of all that a franchise grants (or

may grant in the future).

9.4 By that, I refer to the wide definitions starting with, for example, "Approved Products" – defined

to mean 'the types of products and brands, ingredients, packaging, and other products either

supplied pursuant to this Agreement or as specified from time to time in the manual...'. There

may be also references to or inclusions of other items such as Defined Products, Key

Products, Core Products, Merchandise etc.

9.5 The definition of 'Business' or 'Franchise Business', 'System' etc encompassing all the rights

granted by the franchisor to the franchisee pursuant to the agreement.

9.6 The definitions of Confidential Information are all encompassing; usually including the

Franchise Business or System, the manuals, or the operation manuals, working manuals,

support manuals etc, Protocols, Policies, Rules, Data, Transactions, transaction records,

research, customers, customer information, financials and so on. This is often the 'catch all'

provision to protect the franchisor and also seeks to cover all processes, procedures, know-

how, marketing strategies, market research, systems, computer programs, models,

databases, any modifications and any other information and so on.

9.7 A reference to or definition of image, style, livery, get-up etc is covered either as part of the

intellectual property definition or separately. If there is a definition along those lines, it usually

includes names, trade marks, copyrights, signs, layouts uniforms, badges, colour schemes,

fixtures and fittings and as modified from time to time. All aspects potentially affected by a

rebranding.

9.8 The 'Intellectual Property' is all embracing. It would include not only the statutory rights under

the traditional legislation, but also the 'advertising and marketing material', and specifically the

software, source and object codes, firmware, hardware, data, documents, specifications,

plans, programs, listings, calculations, drawings etc, and the Confidential Information (just in

case anything got missed under the Confidential Information definition!).

9.9 Depending upon the nature of the franchise, other agreements will also have provisions about

menus or secret recipes, merchandise or networks. In the retail context, there would

provisions about premises.

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9.10 Trade marks are often specifically defined to include not only the registered trade marks but

also other indicia such as logos, business names, unregistered trade marks. This is to ensure

the common law net is cast to capture those as well to protect the franchisor.

9.11 It is important to understand the breadth of coverage in the definitions of those items which are

likely to be altered, varied, ceased or added on a rebranding. This is particularly so as these

items are all potentially the sources of the goodwill attaching to the franchise business and

owned by the franchisor. Next, is how obligations are created in respect of those items, and

how the terms are used in the franchise agreement itself.

9.12 You will be familiar with the General Obligations provisions which set out what the franchisee

has to do. In essence, these require the franchisee to comply.

9.13 For our present purposes, I will refer to those provisions of franchise agreements which

specifically deal with rebranding (though usually not using that word).

9.14 These provisions relating to the obligations in conducting the Business or System, such as

ensuring premises conform to the site presentation guidelines including, the point of sale

material, the layout, the use of image, the uniforms etc.

9.15 There are also usual provisions dealing with the updating, modifying or new developments

with which the franchisee must comply (usually at its cost).

9.16 To perhaps provide an indication of how most franchisors would address this issue of

rebranding, many of the franchise agreements I have seen provide that if there is to be a

rebranding in any of the items such as within the Intellectual Property, Confidential Information

and other definitions, the franchisee will pay the costs. A provision may be along these lines

(taken from a franchise agreement at random):

"Modification of names and trade marks

1. If the franchisor notifies the franchisee that it wishes to:

(i) modify or discontinue the use of any of the trade marks, the business name or use one or more additional or substitute trade marks: or

(ii) modify the corporate colours, trade dress, decor, uniform specifications, any part of the image or any other design, appearance and operation attributes of the franchisor's businesses;

the franchisee must immediately comply with that notice at its own cost and:

(iii) use the modified, additional or substitute trade marks, corporate colours, trade dress, decor, uniforms, designs, appearances or attributes in accordance with terms of this agreement;

(iv) cease to use any trade marks, corporate colours, trade dress, decor, uniforms, designs, appearances or attributes declared by the franchisor to be obsolete; and

(v) undertake all reasonable refurbishments, fitouts, reprints and modifications to the premises, equipment, letterhead, business cards, stationery and uniforms as are reasonably required by the franchisor.

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2. The franchisor is not liable to the franchisee or any other person for any loss, cost or damages arising from any change under this clause."

9.17 Clauses like this make it clear who bears those costs. This is not to say that a franchisor will

pass on all the costs. It will have its own costs to bear in developing the rebranding strategy.

It is not within the ambit of this paper to deal with the political, strategic, financial, reputational,

and practical elements involved in a decision to rebrand and its consequences.

9.18 Also, relevant are those provisions now commonly found in franchise agreements dealing with

use of the world wide web, or the internet, domain names and the new or social media (the

'technological age' part of this paper).

9.19 Most franchisors have now identified the need to have provisions in their agreements directing

the use of all forms of media be they traditional print, broadcast, by radio or television, domain

name registrations, internet and intranet or the new forms of social media such as Facebook,

YouTube, Twitter, Foursquare, Pinterest, Blogs and so on.

9.20 In terms of a rebranding strategy, it is necessary to give consideration to how the project plan

and implementation will occur given that there will be immediate dissemination, and feedback,

once the announcement or marketing becomes public. More on this later.

10 Complicating factors on a rebrand

10.1 Unexpected issues which may arise after a corporate rename and rebrand. For a case which

illustrates this see HFC Bank Plc v HSBC Bank Plc (formerly) Midland Bank Plc22. In brief,

HSBC acquired Midland which was one of the 4 major clearing banks in the UK, with some

1700 branches. Midland was to undergo a rebranding to HSBC.

10.2 HFC Bank had a not insignificant presence in the UK market with some 2.5 million customers,

430,000 open bank accounts, receivables of £2.96 billion and 168 High Street banks.

Seemingly, a sufficient reputation to protect.

10.3 As you are anticipating, HFC given the aural similarity to HSBC, and with evidence it relied on

of confusion by a couple of hundred customers etc, sought an injunction based on passing off

against Midland adopting HSBC.

10.4 Survey evidence established the unprompted awareness of HFC was 1% and prompted

awareness 30%. However, the core business of HFC was lending. HFC was the fifth biggest

issuer of Visa and Mastercard credit cards in the UK.

10.5 Despite the evidence of confusion, Justice Lloyd found against HFC. He found "no

misrepresentation [by HSBC] has been proved. Further, these are cases of non-actionable

confusion. They need to be dealt with, no doubt, but this is a management task in which the

courts have no part to play."

22 HFC Bank Plc v HSBC Bank Plc (formerly Midland Bank Plc) [2000] F.S.R. 176 (Ch D)

17

10.6 Such is the uncertainty of litigation, and an obstacle to the rebrand which arose for HSBC.

Interestingly, the Judge said if he had been satisfied that HFC had proved its case (relevant

reputation) and as Midland's current exercise was a rebranding and the development of a new

brand and corporate identity, he would not have found for the defence because HSBC did not

have a sufficient reputation in the UK.

11 Re-branding, domain name registration and trade mark infringement: Solahart Industries Pty Ltd v Solar Shop Pty Ltd [2011] FCA 700.

11.1 Solar Shop Pty Ltd ('Solar Shop') supplied photovoltaic and hot water systems. Solahart

Industries Pty Ltd ('Solahart') manufactured solar hot water systems.

11.2 In September 2009, Solar Shop moved to selling photovoltaic systems exclusively. Solar

Shop owned Solar Hut Pty Ltd ('Solar Hut'), which commenced a budget, web-based business

of selling the photovoltaic systems in May 2009.

11.3 Solar Hut's website, at www.solarhut.com.au, came to Solahart's attention. Due to Solahart's

concerns particularly regarding the aural similarity of the words 'Solahart' and 'Solarhut', Solar

Hut changed its website to www.sunsavers.com.au in October 2009. Solar Hut retained its

logo, substituting the word 'Sunsavers' for 'Solarhut' in the URL descriptor below it. It also

retained its corporate name.

11.4 Solar Hut conducted its business from www.sunsavers.com.au. Until 7 October 2010, it

maintained www.solarhut.com.au which, when accessed, redirected internet users to the

'Sunsavers' website.

11.5 Solahart's claims for infringement were brought under s 120(2)(a) of the Trade Marks Act 1995

(Cth), namely that Solar Hut's use of the word 'Solarhut' in its domain name

www.solarhut.com.au constituted deceptively similar use of Solahart's mark in relation to its

goods.23

11.6 Infringement of Solahart's marks was found24 by their use in the domain name

www.solarhut.com.au over two discrete periods: 25

11.7 1 May 2009 to 6 October 2009, when Solar Hut conducted its business under the name

'Solarhut' from the domain www.solarhut.com.au; ('first period') and

11.8 October 2009 to 7 October 2010, when www.solarhut.com.au continued to direct customers to

www.sunsavers.com.au ('second period').

11.9 The basis for this second period claim was that inputting 'Solar Hut' to a search engine would

guide consumers to www.sunsavers.com.au.26

23 Solahart Industries Pty Ltd v Solar Shop Pty Ltd [2011] FCA 700, [63]. 24 Solahart Industries Pty Ltd v Solar Shop Pty Ltd [2011] FCA 700, [63]. 25 Solahart Industries Pty Ltd v Solar Shop Pty Ltd [2011] FCA 700, [48].

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11.10 Perram J held that the use of the Solarhut domain name in the second period did not exploit

the 'Solahart' mark, but exploited the goodwill it developed in the first period in order to

increase traffic to the Sunsavers website. His Honour held that the 'Sunsaver' and 'Solar Hut'

domain names were 'merely two different doors on to the same webpage.'

11.11 The judgment found that the 'Solarhut' domain name was used as a trade mark, stating that

Solar Hut's advertisements and goods for purchase were associated with the 'Solarhut' mark

and its corresponding website. The domain name was held to be used analogously to a shop

front.

11.12 The decision highlights the caution with which brand owners should proceed when undergoing

a rebranding process, and indeed when first establishing a brand name. This is particularly

important given the developing state of the law. A critical contextual analysis of the trade

mark's use is to be found in cases such as Mantra Group Pty Ltd and Others v Tailly Pty Ltd

and Another (No 2)27 and Sports Warehouse, Inc v Fry Consulting Pty Ltd 28.

11.13 Perram J in the Solahart case cited the US authority of Nissan Motor Co. v. Nissan Computer

Corp29 as authority for the principle that, where a domain name is used to attract consumers to

a website promising a connection with goods relating to the registered mark, infringement may

be found where the domain name owner only benefits from a traffic flow over the website, and

does not sell the goods.30 The basis for this US judgment's finding, however, is an action in

trade mark dilution, which does not share parallels with an infringement action. No findings of

confusion or competition are required, rather just commercial use of the mark considered to

reduce its distinguishing capability.31 However, the Nissan case is based upon use in

commerce, and seemingly reducing the association with the product itself.32 This departs from

the tenets of trade mark law which protect the efforts invested in establishing a brand name.33

Domain names comprise only words. These words are capable of indicating the origin of

goods, while the system through which they are registered ie ICANN, the domain name

protocols are different to the system of registering intellectual property rights in trade marks (IP

Australia). Franchisors being brand owners or developers are cautioned to proceed with

diligence in both establishing brands and undergoing a rebranding.

11.14 Similar issues have come to light in European jurisprudence, with the following case again

highlighting the issues that arise in trying to delineate commercial necessity of a rebrand and

intellectual proprietary rights.

26 Solahart Industries Pty Ltd v Solar Shop Pty Ltd [2011] FCA 700, [7]. 27 (2010) 183 FCR 450. 28 (2010) 186 FCR 519. 29 [2004] USCA9 511; 378 F.3d 1002 (2004) (9th Cir.2004). 30 Solahart Industries Pty Ltd v Solar Shop Pty Ltd [2011] FCA 700, [50], citing Nissan Motor Co v Nissan Computer Corp [2004]

USCA9 511; 378 F.3d 1002 (2004) (9th Cr. 2004). 31 Nissan Motor Co. v. Nissan Computer Corp [2004] USCA9 511; 378 F.3d 1002 (2004) (9th Cir.2004) [*1011] [**16]. 32 Giorgio Nicolo Vergani, 'Electronic commerce and trade marks in the United States: domain names, trade marks and the "use in commerce requirement" on the Internet' (1999) 21 (9)) European Intellectual Property Review 450, 459. 33 Elizabeth M Flanagan, 'No Free Parking: Obtaining Relief from Trademark-Infringing Domain Name Parking' (2007) 92(2)

Minnesota Law Review 498, 502.

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12 Pharmacia & Upjohn SA ('Upjohn') v Paranova A/S ('Paranova') (C-379/97) [1999] E.C.R. 1-6927 (AGO)34

12.1 Upjohn manufactured an antibiotic in France and Greece under the respective marks of

Dalacine and Dalacin C. Paranova purchased and sold the antibiotics in Denmark after

having replaced the marks with the Dalacin mark.

12.2 In determining whether Paranova had infringed Upjohn's trade marks by applying the Dalacin

mark to the goods, the central issue for the European Court of Justice was whether it was

'necessary' to rebrand.35 The essence of this inquiry was whether preventing an importer from

rebranding represents an obstacle to their market access, or whether the rebranding crosses

this threshold and damages the mark's reputation.

12.3 It has been suggested that the Advocate General in this case demonstrated a confluence of

the 'guarantee of origin' principle, which attends circumstances where a mark is used to

indicate unequivocally the origin of a product when it is first marketed (such principle being

contravened where another party re-affixes the mark when it is not authorised to do so), and

the circumstances in which a different mark is affixed to the product, 36 as in Paranova. It is

doubtful whether Upjohn could rely on the corollary principle to this, (the doctrine of

exhaustion) to prevent the application of a different mark to its product, as this erodes the

rights of a trade mark owner to apply a mark to goods for the first time, such rights being

enshrined in Article 7 of the Trade Mark Harmonisation Directive37:

The proprietor is not entitled to prohibit use of the trade mark in relation to goods

which have been put on the market in the Community under that trade mark by the

proprietor or with his consent.

12.4 Market distortions, particularly in the context of pharmaceuticals, are the result of factors

unrelated to trade mark rights.38 This refocuses attention on the preservation of intellectual

property rights and an owner's capacity to enter a market in the quest for a clear

conceptualisation of what qualifies rebranding as 'necessary'.

12.5 The nexus between rebranding purely for commerciality and ease of entrance into a market,

for example in the case of parallel importation, and the legal implications of retaining a mark

which renders the nature of products ambiguous39 is yet to be made clear by the European

Court of Justice (ECJ). The proposition in this case seemed to be that the principles of

exhaustion and guarantee of origin extended to the circumstances of parallel importation in

34 as cited in Marleen Van Kerckhove and David Rosenberg, 'Upjohn v Paranova: utterly exhausted by a trip too far' (1999) European Intellectual Property Review 21 (5), 223. 35 Marleen Van Kerckhove and David Rosenberg, 'Upjohn v Paranova: utterly exhausted by a trip too far' (1999) European Intellectual Property Review 21 (5), 223. 36 Marleen Van Kerckhove and David Rosenberg, 'Upjohn v Paranova: utterly exhausted by a trip too far' (1999) European Intellectual Property Review 21 (5), 223 at 225. 37 Marleen Van Kerckhove and David Rosenberg, 'Upjohn v Paranova: utterly exhausted by a trip too far' (1999) European Intellectual Property Review 21 (5), 223 at 224. 38 Marleen Van Kerckhove and David Rosenberg, 'Upjohn v Paranova: utterly exhausted by a trip too far' (1999) European Intellectual Property Review 21 (5), 223 at 224. 39 Marleen Van Kerckhove and David Rosenberg, 'Upjohn v Paranova: utterly exhausted by a trip too far' (1999) European Intellectual Property Review 21 (5), 223 at 226.

20

order to justify rebranding and curtail consumers' potential confusion as to the nature of the

goods being marketed.

12.6 It has been suggested40 that clearer guidance is required in relation to whether these

circumstances constitute an exception under Article 17 of TRIPs to the Article 16(1) rights of a

registered trade mark owner to prevent third parties from using the identical mark in respect of

goods in respect of which the mark is registered, such exception being conditional upon the

taking into consideration of the legitimate interests of the trade mark owner.

13 US case law

Tortious interference: Partner & Partner, Inc. v Exxonmobil Oil Corporation; and Michigan Fuels, Inc.41

13.1 In this case, Partner & Partner, Inc. (P&P) and Exxonmobil Oil Corporation (Exxon) entered

into a lease/franchise agreement for a gas station, which provided that P&P had no exclusive

area of operation and that Exxon could continue trading at its discretion. Exxon moved to a

‘distributor served’ market in which direct dealerships were terminated, the direct dealers

being offered purchase of the gas stations with one of 3 approved distributors. P&P

purchased a station under the new agreement, and competed with another station that

subsequently re-branded to Exxon. P&P claimed this was a breach of an alleged 'one-mile'

policy which outlined that newly branded stations could not be located within one mile of an

existing station.

13.2 The case referred to an action under this head as 'tortious interference with an advantageous

business expectancy', viz. the intention to interfere with a party's contractual rights or business

relationships42 where there lies a valid, advantageous business expectancy. This was not

established, however, because the alleged assurances were not incorporated into the written

lease/franchise agreements.

14 Trade marks and rebranding

14.1 Trade marks are essential in strategising a global brand.43 Their role in providing both brand

protection and brand expansion, however, must be sufficiently proscribed in contracts, for

example in restraint clauses, as illustrated by the recent decision of the Full Court of the

Federal Court of Australia in Idameneo (No 789) (Idameneo) v Symbion Pharmacy Services

Pty Ltd (Symbion).44

14.2 As part of the exit strategy to its demerger with Idameneo, Symbion granted Idameneo a two-

year licence to use Symbion's mark. The terms of the agreement proscribed Idameneo's use 40 Marleen Van Kerckhove and David Rosenberg, 'Upjohn v Paranova: utterly exhausted by a trip too far' (1999) European Intellectual Property Review 21 (5), 223 at 227. 41 326 Fed. Appx. 892; 2009 U.S. App. LEXIS 9708; 2009 FED App. 0317N (6th Cir.); 2009-1 Trade Cas. (CCH) P76,600

42 326 Fed. Appx. 892; 2009 U.S. App. LEXIS 9708; 2009 FED App. 0317N (6th Cir.); 2009-1 Trade Cas. (CCH) P76,600, page 4, paragraph [**12]. 43 Iain Connor, 'Bring them home' (2000) European Intellectual Property Review 22(4), 184. 44 [2011] FCAFC 164 (15 December 2011).

21

of marks 'similar to or capable of being confused with' Symbion's mark. The wording, different

to that of s 120 of the Trade Marks Act 1995 (Cth), attempted to impose more rigorous

restrictions on potential infringers.

14.3 The Full Federal Court held that the contractual term was to be construed not in its composite

form, but as two discrete phrases, prohibiting the use of marks that were similar to Symbion's,

or marks that were capable of being confused with it.

14.4 'Similar to' was a phrase held to 'capture a wider range of commonality' between two objects

than the statutory phrase 'substantially identical with'.45

14.5 The Court read into the agreement the parties' intention that the restraint protected Symbion’s

legitimate commercial interests in the marks and their associated goodwill and reputation.46 It

found a lack of any evidence of any possibility of confusion within the areas of the parties'

operations, which were held to be 'distinct and different specialised markets'.47

15 Technological advances and impacts

15.1 UK: Digital Economy Act 2010 (UK)

(a) This legislation requires that, once an ISP has more than 400,000 customers, it

assumes responsibility in directing infringement notices to them and keeping

infringement records.48

(b) These provisions are some of those under consideration as the Australian

Government considers its response to the decision in iiNet49. Franchisors are

reminded of the necessity of closely examining the terms of their legal relationship

with their ISP and seeking to ensure that they have as much control over the use of

the site as possible. This may become essential for their brand protection.

15.2 EU: L'Oréal S.A. & Ors v E Bay International A.G. & Ors50

(a) In this case, L'Oréal claimed that eBay was liable for the infringing conduct of

counterfeit sales of L'Oréal products on its site. The Court of Justice of the European

Union held that more than the provision of an auctioneering service was necessary to

establish facilitation of trade mark infringement, for example, an active role in

promoting offers.

(b) For franchisors, the consideration may involve the ability to control the marketing and

resale of their products by franchisees or consumers.

45 Idameneo (No 789) v Symbion Pharmacy Services Pty Ltd [2011] FCAFC 164 at [52]. 46 Idameneo (No 789) v Symbion Pharmacy Services Pty Ltd [2011] FCAFC 164 at [63]. 47 Idameneo (No 789) v Symbion Pharmacy Services Pty Ltd [2011] FCAFC 164 at [62]. 48 ss 3 and 4 of the Act 49 Roadshow Films Pty Ltd v iiNet Ltd [2012] HCA 16 50 [2009] EWHC 1094 (Ch) (22 May 2009)

22

16 New Media

16.1 The instantaneous nature of modern day communications brings immediate feedback on

brand acceptance or rejection.

16.2 Consequently, franchisors are increasingly taking recourse to social media to give their brands

further exposure.

16.3 A franchisor's failure to monitor public reception to a brand change via these media can

contribute significantly to its ability to effect and, where necessary redirect, rebranding

strategies. How can issues arise? Let's consider Facebook.

16.4 Facebook does not own the copyright in its users' content;51 Facebook is, however, granted a

'non-exclusive, transferable, sub-licensable, royalty-free, worldwide license'52 to use any IP in

user content posted on Facebook or in connection with it, such licence ending when a user

account is deleted. This is with the exception of material that has been shared with other

users. This exception cultivates a medium through which content with IP rights attached may

be utilised to harm the reputation of its owner. To ensure the franchisor's brand is protected,

close scrutiny of Facebook pages is a necessary corollary to Facebook use as a tool for brand

extension or rebranding.

16.5 However, the enforcement of IP rights in social media may be fraught with unintended

consequences. For example, Facebook's 2010 action against Lamebook, a takeoff website

intended for users to post examples of content they found to be amusingly 'lame'.53 Not only

was the case dismissed, but it also resulted in increased publicity and profiling for Lamebook.

16.6 Franchisor's should therefore think tactically in approaching infringements of their IP and avoid

adverse publicity. Coca-Cola provided an example of market-savvy brand development, when

instead of taking action against the founders of an unofficial Coca-Cola fan page, they invited

them to collaborate with Coca-Cola. The result was Facebook's largest fan page, boasting

over 33 million followers.

16.7 Underscoring the importance of a franchisor's commitment to invigorating its brand via social

media is the fact that legally, franchisors are charged with a heavy onus to monitor the content

of their Facebook business pages.

16.8 Recent decisions by the Advertising Standards Board make it clear that the Australian

Association of National Advertisers Code of Ethics is equally applicable to a brand owner's

Facebook page contents authored by the owner and by its users; a position reinforced by the

Federal Court decision in ACCC v Allergy Pathway (No.2) [2011] FCA 74, where the company,

Allergy Pathway and its director were held to have been in contempt of court for undertaking

51 Facebook Inc v Power Ventures, Inc ("Facebook Data Scraping Case") US District Court, Northern District of California, C 08-5780 JF (RS), 11 May 2009. 52 <http://www.facebook.com/legal/terms> at 28 August 2012. 53 Facebook Inc v Lamebook LLC (U.S. District Court, Northern District of California, 10-05048)

23

not to publish misleading consumer testimonials made on its Twitter and Facebook pages, and

then failing to remove them.

16.9 These cases reinforce the careful consideration franchisors should undertake when deciding

whether to establish a business page on social media sites, and the ongoing vigilance

required (and its commercial cost) in order to engineer the page in a manner that improves,

rather than deteriorates, the brand and its concomitant goodwill.

17 Summary

17.1 This paper seeks to address legal issues confronting a franchisor undertaking or

contemplating a rebrand.

17.2 There are a myriad of potential legal aspects to consider; the Code, the legislation of IP and

related statutes, the terms of the franchise agreements, common law and equity.

17.3 If there is not due compliance, the risks to reputation, damages and loss of the value of

goodwill are readily apparent.

17.4 These risks are accentuated in the new operating environment of wider global instantaneous

communication, and the opportunity for stakeholders, in particular, consumers, to voice their

opinions about a brand and any rebranding that should occur, thereby affecting its goodwill.

L

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