When a distributorship ends – who gets the naming rights?
When an exclusive distributorship between an overseas principal and an Australian distributor ends, the issue of the ownership of intellectual property generated or used during the distribution period should logically be addressed in the distribution agreement. Unfortunately, this issue is often not addressed adequately and disputes can arise between the principal and its ex-distributor with respect to the ownership and use of brands and names. The main heads of such disputes can include trade marks, reputation, domain names and contractual issues.
It is usual practice for the trade marks of imported goods to be registered in the name of the overseas principal. However, if these trade marks have not been registered in Australia by the principal, the Australian distributor may be tempted to register these marks itself. Such a practice by the distributor usually proves to be unsuccessful. The principal, by virtue of its export of the labelled goods to Australia is generally the “first user” and therefore the “true owner” of the trade marks in Australia under section 58 of the Trade Marks Act (“Act”). As a consequence, the overseas principal would be expected to succeed in an opposition or cancellation of marks which its distributor has purported to register.
Sometimes a distributor may trade under the principal’s name in Australia as a retailer or wholesaler and subsequently the distributor may seek to register the principal’s name as a trade mark for retailing and wholesaling services in class 35 of the register. This practice is also unlikely to be successful. As the “true owner” of the trade mark for the imported goods, the principal might well be seen to also be the “true owner” of that mark for distribution services on the basis that these services are “integral” to the commercial sale of the imported goods: South African Airways Pty Ltd v Virtuoso Limited (2012) 93 IPR 494
Occasionally, a principal may allow its Australian distributor to become the registered owner of its marks in Australia. The reason for this practice is that such registration can be an effective means of discouraging parallel importation of the principal’s goods to Australia. Under section 128 of the Act, a principal cannot take trade mark infringement action in Australia against “genuine goods” which are acquired overseas and subsequently imported into Australia by third parties. However, this provision is generally not applicable where the relevant trade mark is registered in Australia by a party other than the principal. If the distributor is the owner of the subject trade marks in Australia, the distributor would generally be entitled to take trade mark infringement against the parallel importer because the trade mark owner in Australia is someone other than the principal. Most principals are very reluctant to assign their Australian trade marks to their distributor but they may be prepared to do so if the distributorship agreement includes a provision that the distributor must re-assign the trade mark to the principal when the agreement terminates. The existence of such agreements have generally not been seen by Australian courts to prevent Australian distributors taking trade mark infringement action against parallel importers: Montana Tyre Rims & Tubes Pty Ltd v Transport Tyre Sales Pty Ltd (1998) 41 IPR 301
Unless there is a provision imposing a post-contractual restraint on a distributor, the ex-distributor may decide to continue to sell “genuine goods” bearing a principal’s trade mark after the distribution agreement has ended. The distributor might obtain such genuine goods from its existing stock or from overseas sources. If the principal owns the subject registered trade marks in Australia, the ex-distributor would be entitled to sell such “genuine goods” in Australia. However, although the ex-distributor may offer such goods for sale, it should be careful to trade under its own name rather than that of the principal. The right to sell branded products does not provide the distributor with the right to sell under that name. Such activities could constitute misleading and deceptive conduct under section 18 of the Australian Consumer Law (“Law”). These activities could also constitute false representation as to sponsorship, approval or affiliation under section 29(1)(h) of the Law. Such misappropriation of the principal’s reputation can easily occur where the ex-distributor is attempting to retain its original customer base in competition with the principal or its new distributor.
Some ex-distributors may decide to include the name of their ex-principal in a domain name and even electronically link this domain name to the distributor’s own website. Such behaviour is likely to constitute trade mark infringement and misleading conduct. In addition, it may be difficult for a distributor to continue to maintain registration of a domain name which is not based on a registered trade mark. It is important to note that the registration of a company name, business name or domain name does not provide legal proprietorship in a name. Such legal proprietorship can only be acquired by trade mark registration. As a consequence, the principal may succeed in an action under UDRP provisions to have the ex-distributor’s domain name cancelled or assigned to the principal.
Nearly all of the above issues can be addressed in a suitably drafted distribution agreement under which the intellectual property of the principal can be defined and the distributor makes undertakings that it holds no rights in the intellectual property of the principal. However, the distributor may justifiably claim that it has its own intellectual property in its function as a distributor. The rights of the distributor in its own name need to be defined and protected in the agreement, particularly where the distributor is entitled to sell complementary third party or house-branded goods. The distribution agreement should be drafted so that the principal retains all rights in its branded names and reputation in relation to its goods while the distributor retains respective rights in its distribution activities under its own name. The ownership of any future intellectual property generated by the parties during the course of the distribution agreement might also be split along such functional lines.
Principals and distributors should attempt to avoid potential IP disputes at the outset by addressing the relevant issues discussed above. Distributors who attempt to circumvent the IP rights of principals by clandestine trade mark registration may also fall foul of section 62A of the Act which prohibits trade mark applications being filed in “bad faith”. The test of “bad faith” has been defined as “conduct falling short of acceptable commercial standards”. This test is quite broad and is being more frequently employed to prevent parties such as distributors from engaging in conduct which might deprive principals of their legitimate trade mark rights.