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NAVIGATING TRADEMARK RESIDUAL GOODWILL: STRIKING A BALANCE FOR FAIR COMPETITION

[Rachit Prakash Mathur is a second year student at National Law School of India University]


Introduction


While there is no clear definition of goodwill, many scholars define it as the inherent value of the trademarks - the recognition of the mark among consumers and the extra wealth it generates. For accounting purposes, goodwill is the difference between the total market value of a company and that of its hard assets like buildings and machinery. The term residual goodwill means any goodwill that remains in a trademark after it has been abandoned. Indian courts have struggled with the issue of ownership of trademarks post cessation of business and in these contexts the value of residual goodwill of a trademark becomes an important consideration in deciding ownership and its further treatment.


On one such occasion, the Karnataka High Court in the case of the Official Liquidator of M/s Ideal Jawa (India) Limited (In Liquidation) v. Registrar of Trade Marks & Others grappled with the issue of valuation and ownership of a trademark of a Company under liquidation. The question before the Court was: when is a trademark considered abandoned, such that it can be appropriated by third parties? The Court further elaborated on the concept of residual goodwill, holding that as long as the public associates the trademark with a brand or a company, it retains the goodwill of the trademark, and this cannot be appropriated by a third party. This reveals a major conundrum in context of competition law and intellectual property law. When can a mark be considered abandoned and when can it be appropriated or registered by third parties? The aim of this article is to show how the current Indian position on residual goodwill is extremely protective of trademarks and limits its alienation to other competitors in the field.

 

Residual Goodwill- Post cessation of business


The Karnataka High Court held that mere cessation of business does not amount to abandonment of trademark. In special circumstances outside the control of the Company, cessation cannot automatically mean abandonment unless it is visible that by non-use the trademark has lost its goodwill. Trademark carries with it goodwill that need not be dependent on the production and sales of the goods in question. Abandonment of trademark must mean loss of distinctiveness by non-use. In the case of Exxon Corp. v. Humble Exploration Co., Inc., the Second Circuit court had held that the first owner of trademark can rebut the prima facie case of abandonment if the public still associates the trademark with the first owner. So, it is not just about the conduct of the parties but also the public perception at large that the Courts must account for when dealing with cases of abandonment. 


For Indian Courts, public perception remains a primary consideration for valuation of goodwill. What Court often overlook is the fact that intent to abandon must be seen alongside intent not to save. A company that has stopped production and sales owing to financial distress, or if it has filed for liquidation, has no intent to use the trademark again. If the company has not taken any steps to protect its trademark from appropriation, or registered it, or made any attempts to prove the association of the mark to the company, it should be assumed by the Courts that the mark has been abandoned by the public.


In Ultraframe Ltd. V Gary Fielding, it was held that when a company goes under liquidation, it has no intention to resume production and has therefore abandoned its trademark. Many cases support this view and the simple policy rationale behind this is that trademark law in India favours usage over adoption. Registration is nevertheless not mandatory in India, but a continued usage can be used to show ownership. It makes sense that continued non-use of trademark must mean that the mark has been abandoned or is no longer used by the Company in question and would be open for other companies to register.

 

Flaws in the “Public Perception” Rule


In Fedders Lloyd v. Fedders Corporation, the Delhi High Court held that abandonment of trademark must mean loss of distinctiveness by non-use. Loss of distinctiveness is related to public perception. As long as the public associates the mark with a company, it will be considered as distinctive and eligible for protection by Courts. The major flaw in this is that public perception is not limited to just visibility in the market, but the scope has been expanded to public perception in general. In the Karnataka decision, the Courts took cognizance of fan pages and social media presence of the impugned trademark in order to ascertain distinctiveness.


This legal position gives rise to potential misuse by Companies who can no longer continue production but hold onto their trademark as long as they are in the “public eye”. For instance, a company is financial distress who may no longer be selling its products can establish goodwill and consequently ownership if they can show that its mark has been popular by making its own social media pages or any fan websites, or they may also show that there are sufficient billboards or posters in the public eye that associate the trademark with the Company. This limits scope for other companies who may want to use that trademark after a significant period of non-use by its previous owner.


Even worse, public perception remains a largely subjective test, meaning that courts can employ any means to establish public perception, justifying the same on grounds of consumer protection or giving due protection to intellectual property assets of a Company. In the Karnataka High Court decision, the Court was sensitive to the fact that the Company which previously owned the trademark was undergoing liquidation and would be required to sell off its mark to settle its debts. “Special circumstances” is a broad term used by Courts to take an overprotective view of intellectual property, a view that overvalues residual goodwill and prevents competition from using the marks. The judicial discretion employed by Courts yields inconsistent decisions, with Courts often using this discretion towards protecting intellectual property assets as opposed to facilitating their alienation.


The public perception test would also yield unclear or untrue results in markets that have been diluted by a large number of competitors or for companies that have no online presence. It is almost impossible to ascertain whether a mark is still associated with a company in the minds of the people in the absence of any clear indications such as sales, advertisements, or any other solid piece of evidence. No surveys, witnesses or documents can be used to show public perception in a conclusive fashion. In the absence of a clear burden of proof in the Indian context, this rule can be misused by large companies which may carry a presumption of continued public perception just because of its past sales record. Alternatively, a small company in a niche market cannot prove public perception as opposed to large conglomerate with a large market share. Therefore, the public perception rule affects businesses on both ends of the spectrum.

 

Concluding remarks


It is clear from the above discussion that there exist many flaws in the way residual goodwill is ascertained and valued by Courts in cases of ownership and protection cases. Because of their over-reliance on the public perception test, Courts move away from the legal principle of “usage over adoption” in trademark law. There is a need to revisit the importance of “intent” in the abandonment of trademarks. In order to facilitate competition and prevent monopoly over trademarks, there has to be a consistent approach towards residual goodwill, one which values usage over public perception. It is only after this shift can Courts protect the intellectual property assets of a business without impinging upon competition.

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