Imagine pouring your heart and tremendous efforts into building a beloved brand over the years, only to have your distributor claim ownership of your hard-earned goodwill after termination of the distribution agreement. This is a nightmare scenario that far too many brand owners and manufacturers have faced.
What is goodwill?
Goodwill, as an intangible intellectual property right, refers to the brand value attached to a trade mark or brand name, which is separate and different from a trade mark registration. A trade mark or brand name may have goodwill regardless of whether such mark or name is registered as a trade mark or not. Goodwill is generated from a brand owner or a trader’s business activities and is a proprietary right protected under the common law of passing off in Hong Kong. Although goodwill normally belongs to the owner/licensor of a brand, if the owner is not careful, depending on the circumstances, it is possible that goodwill in a brand name can end up belonging to the distributor.
Oriental Food Industries Sdn Bhd v Sze Hing Loong Development Ltd
Source of origin
The starting point in determining ownership of goodwill is the terms of the distribution agreement. If the agreement is silent on the issue, a distributor may be able to claim ownership of the goodwill. In a dispute, a Hong Kong Court will consider the “public perception test” and the “control test” to decide whether the brand owner/licensor or the distributor holds the rights. In essence, if the average consumer views the distributor as the source of origin of the products, and when the distributor controls the selection and quality of the products in the local market, they may be able to claim ownership of the goodwill of the brand name.
The Hong Kong case of Oriental Food Industries Sdn Bhd v Sze Hing Loong Development Ltd highlights the dangers of losing the goodwill to your distributor. Oriental Food, a Malaysian snack maker, appointed Sze Hing Loong as the Hong Kong distributor for its “Super Ring” cheese-flavoured snacks. Sze Hing Loong later started sourcing and selling a competing “Super Oooh” snack with similar packaging and get-up from another manufacturer in Hong Kong. The original Malaysian owner then sought a summary judgment application against Sze Hing Loong for trade mark infringement and passing off. It also sought an injunction to stop Sze Hing Loong from selling the competing “Super Oooh” products claiming that it was the owner of the goodwill in the “Super Ring” mark and the get-up of “Super Ring” product.
Question of fact
Dismissing Oriental Food’s application, the Court held that since Sze Hing Loong was responsible for selecting and assigning the product choice for the local market, and for controlling the seasoning and flavour of the products to tailor to the preferences of Hong Kong consumers, and it had also affixed Sze Hing Loong’s own trade mark as the distributor on the product, it was possible for Sze Hing Loong to claim that it owned the goodwill in the “Super Ring” mark and the product get-up. Although no final judgment was published in this case, it established that ownership of goodwill is a question of fact and it is possible for a distributor to own the goodwill in a brand/get-up of a product that it distributes on behalf of the original owner of the brand.
Distributors can be crucial to building a brand but it is important for a brand owner to take proactive steps to protect its trade marks and goodwill. The lack of a final judgment indicates that the parties may have reached a settlement after the summary judgment application. However, this case serves as a warning that distributors can potentially hijack a brand’s hard-earned goodwill if the original owner does not proactively protect it.
What should you do?
The only secure way to avoid this nightmare scenario is to clearly and expressly spell out ownership of goodwill in the distribution agreement from the outset. In addition, other steps such as registering your brand locally, are also extremely important. Suing a distributor for breach of contract and intellectual property infringement can be costly and time-consuming, and even worse, distracting the brand owner from its business development and marketing initiatives. It is important not to let a trusted distributor become your worst nightmare.
For further information, please contact:
Eliza Siew, Partner, Deacons
eliza.siew@deacons.com
