Lord Nicholls of Birkenhead
In 1967 Bertil Hjert and Goran Huldtgren were art students together at Uppsala University. They saw an opening for the sale of art posters, particularly to students and other young people. They set up a company in Sweden, known later as Scandecor International AB. They owned the company equally, and they ran it together, publishing and selling posters and related goods. They used the name Scandecor as a brand name. Scandecor is an invented composite word derived from 'Scandinavian decor'.
The business prospered, until it claimed to be one of the largest poster businesses in the world. Mr Huldgtren was responsible for sales in the United Kingdom, Ireland, the Scandinavian countries and the United States. Mr Hjert was responsible for continental countries, including France and Germany. Local subsidiary companies, using the word Scandecor as part of their names, were set up to act as distributors. The United Kingdom company was Scandecor Ltd. Two trademarks were registered in this country: a word mark 'Scandecor', and a logo mark incorporating the word Scandecor within a lozenge shaped border. They were registered in Class 16, in respect of items such as posters, calendars, cards and printed art reproductions. In April 1971 the word mark was registered in the name of Scandecor Ltd. In August 1976 the logo mark was registered in the name of Scandecor International, the ultimate parent company. In September 1978 Scandecor Ltd assigned the word mark to Scandecor International, which was registered as proprietor in June 1979.
Eventually Mr Hjert and Mr Huldtgren fell out. They disengaged by stages, and in 1997 the last contractual ties were severed. Unfortunately, they had made no contractual arrangements for what should then happen about the use of the name Scandecor. These proceedings are the result. Similar proceedings are on foot in other countries. In short, Scandecor Development AB, which acquired the two registered trade marks and other assets of Scandecor International on the latter's insolvency in 1994, objected to Scandecor Ltd continuing to use the word Scandecor as part of its name in connection with the sale of its own posters and calendars. Scandecor Development relied on its rights as proprietor of the two registered trade marks, and commenced these proceedings against Scandecor Ltd for infringement of the marks. The response of Scandecor Ltd was to counterclaim for revocation of the marks, on the basis that they had ceased to be distinctive. Both parties made alternative claims in passing off.
The trial judge, Lloyd J, declined to revoke the registration of either mark. He held, however, that Scandecor Ltd was entitled to continue to carry on its business under its existing name. Both parties appealed. Differing from the Judge, the Court of Appeal, comprising Sir Stephen Brown P, and Otton and Mummery L JJ, ordered that the two trade marks should be revoked. Scandecor Development has now appealed to your Lordships' House.
The history of this matter, covering 30 years, is complicated in its detail. The detailed facts are set out carefully in the judgment of Lloyd J, reported at  FSR 500. In broad outline, the history can be broken down into four phases. The first phase was from the inception of the business in 1967 to 1979. Throughout this period the Scandecor group was an integrated group, with Scandecor International as the parent company, owned equally by Mr Hjert and Mr Huldtgren.
The second phase was from 1979 to 1984. In 1979 a partial division of the group took place. Scandecor International's sales subsidiaries were sold to its founders and co-owners Mr Hjert and Mr Huldtgren. Mr Huldtgren acquired Scandecor Marketing AB, a Swedish company, which in turn acquired the local subsidiaries for the countries for which Mr Huldtgren already had business responsibility. These included Scandecor Ltd in respect of the United Kingdom. A like acquisition was made by Mr Hjert in respect of the countries on the continent of Europe for which he already had particular responsibility. Scandecor International remained jointly owned. Scandecor International retained ownership of the registered trade marks in the different countries. Scandecor International appointed Scandecor Marketing to be its sole distributor of International's products under the name Scandecor in the countries allocated to Mr Huldtgren. Mr Hjert and Mr Huldtgren entered into a co-operation agreement.
The third phase covers the ten year period from 1984 to 1994. In 1984 the corporate relationship was finally ended, and the existing agency and co-operation agreements were superseded. Mr Huldtgren sold his shares in Scandecor International to Mr Hjert, so that thereafter Mr Hjert owned and controlled Scandecor International as well as the subsidiary companies he had acquired in 1979. Despite this corporate severance, Scandecor International remained the registered proprietor of the United Kingdom trade marks. Scandecor International appointed Scandecor Marketing as its sole distributor of a range of products, principally posters, in the countries for which Mr Huldtgren had been responsible from the outset. Scandecor Marketing was also entitled to develop and produce pictorially based products of its own, and Scandecor International licensed Scandecor Marketing and its subsidiaries to use the Scandecor mark on such goods within the allocated countries. Pursuant to this licence, from 1984 onwards Scandecor Marketing developed products of its own, chiefly calendars and cards, and sold them under the Scandecor name.
The fourth phase was from 1994 onwards. The insolvency of Scandecor International in April 1994 brought to an end the distributor and licence agreement made in 1984 between that company and Scandecor Marketing. No new overall agreement was reached between the two companies. Orders and supplies continued on interim terms. Eventually, negotiations came to an end, and supplies of posters and other products from Scandecor Development to Scandecor Marketing and Scandecor Ltd ceased. Early in 1997 Scandecor Marketing announced that in future it would sell products either published by itself or obtained from other sources. These proceedings were started in July 1997.
The Judge made findings regarding the goodwill attached to the name Scandecor. There is no goodwill in this name with the general public. The relevant section of the public with whom this goodwill exists is the United Kingdom retail trade. Retailers choose whether to stock posters or calendars from Scandecor or from one of a number of other suppliers. Naturally, retailers in this country dealt with Scandecor Ltd rather than any other Scandecor company, and they tend to associate the name Scandecor with that company. Scandecor Ltd has a goodwill with its retail customers, based on its efficient service as well as on the products supplied. But the consistent theme of the publicity material put out by Scandecor Ltd and Scandecor Marketing included a regular refrain of 'Scandecor the largest poster company in the world', referring to Scandecor International. As regards posters, Scandecor International enjoyed goodwill as the Swedish publisher and source of the product, and this goodwill was later acquired by Scandecor Development. As to calendars and cards, Scandecor Development has the same goodwill, deriving from the (erroneous) assumption in the market that there is no difference in the source of the different products.
On the basis of these facts Scandecor Marketing and Scandecor Ltd advance a case that the two Scandecor trade marks have become liable to mislead the public as a consequence of use made of them with the consent of the registered proprietor. Accordingly they should be revoked, pursuant to section 46(1)(d) of the Trade Marks Act 1994. Scandecor Development is now the registered proprietor of these marks. If the marks are distinctive of Scandecor Development then, at least as regards calendars and cards, the marks have become deceptive because a trade mark must be an indication of origin. But for years Scandecor Development and its predecessor Scandecor International were not the origin of these goods, nor did these companies have or exercise quality control over them. Mr Young QC submitted that if a mark belongs to X but with X's consent it is used in relation to the goods of Y, over whom X has no quality control, the mark has ceased to be distinctive. He described this as the 'golden thread' running through the law relating to registered trade marks. He drew attention to observations by Whitford J, a judge with considerable experience in this field, in McGregor Trade Mark  RPC 36, 53:
.... a bare licence under a trade mark has never been countenanced. A registered usership is accepted because .... a registered user is going to be subject to the control of the proprietor as far as the quality of the article made by the registered user is concerned. In this way, even if two persons are using a mark - the registered proprietor and the registered user - there is only one source controlling the question of quality; and if a member of the public were interested to find out who bore the ultimate responsibility for the quality of the goods, he or she would be able to do so by inspecting the relevant entries on the register.
Counsel submitted that, so far as bare licences are concerned, that is still the law. The position remains the same under the Trade Marks Act 1994. This submission raises a fundamental question about the application of the 1994 Act to the licensing of trade marks, a form of business activity which is now widely used.
TRADE MARKS AND QUALITY ASSURANCE
The quality of goods on offer is at the heart of all trading activities. As long as trading has existed, buyers have sought information and assurance about the quality of the merchandise on display. The use of trade marks is an integral part of this activity. But the manner in which business activities are carried on today is vastly different from what it was in the early 19th century when the law relating to trade marks was first developed. Labour is more mobile, business enterprises are larger and less personal, businesses and parts of businesses change hands more often. With the growth of mass markets and intensive advertising many brand names have become very valuable. In this image-conscious age trade marks are an important marketing tool. Licensing has become commonplace.
The law relating to trade marks has responded to these changing conditions. Restrictions on the sale of trade marks have gradually been eased. So have restrictions on a trade mark owner's ability to license others to use his mark. The origin of these restrictions was the realisation that if a trade mark could be sold, or its use licensed to others, the mark would in some circumstances inevitably become deceptive. Its use by an assignee or licensee could mislead the public. But whether the use of a trade mark is potentially misleading depends upon the message which a trade mark conveys to customers. This message, too, has undergone changes in course of time, in response to the changes in the way businesses are conducted. As business practices have changed, so there have been changes in the message which a trade mark is understood to convey about the business source denoted by the mark.
These changes are central to the important point of law raised by this appeal. Stated shortly, the question is whether a grant of a bare exclusive licence by a trade mark proprietor is objectionable as inherently liable to deceive potential customers. By a bare licence I mean a licence under which the proprietor of the trade mark has no power to control the quality of the goods sold under the licence. By an exclusive licence I mean a licence under which the proprietor of a trade mark grants to the licensee permission to use the mark, so long as the licence lasts, to the exclusion of everybody else including the proprietor himself. Mr Young's argument is that a bare licence is deceptive because, by definition, during the currency of the licence the proprietor of the trade mark has no control over the goods sold under his mark.
Before proceeding further I should dispose of a point which is sometimes a source of confusion. It concerns what is meant by 'licensing'. A wholesaler or retailer who buys and re-sells goods on which the manufacturer has placed his trade mark does not need a licence to use the manufacturer's mark. The wholesaler or retailer needs no such licence, for the simple reason that he is merely selling the manufacturer's goods to which the manufacturer has already attached the manufacturer's mark. Re-selling goods bearing the manufacturer's mark is not an infringement of that mark: see section 10(6) of the 1994 Act and, previously, section 4(3) of the 1938 Act. Thus a distributorship agreement, under which a person is permitted to sell another's goods, is to be distinguished sharply from a licensing agreement, under which the licensee is granted permission to use the licensor's mark on the licensee's own goods. When I refer to licences and licensing I am referring to an agreement of the latter character.
AN INDICATION OF ORIGIN
In order to understand the present state of the law and the issue now confronting the House on the interpretation of the Trade Marks Act 1994, it is necessary to go back to first principles and then consider the way the law has subsequently developed. A trade mark is a badge of origin or source. The function of a trade mark is to distinguish goods having one business source from goods having a different business source. It must be 'distinctive'. That is to say, it must be recognisable by a buyer of goods to which it has been affixed as indicating that they are of the same origin as other goods which bear the mark and whose quality has engendered goodwill: see GE Trade Mark  RPC 297, 325, per Lord Diplock.
This fundamental proposition still remains true. It is expressly recognised in the preamble to the 1988 EC Trade Marks Directive (89/104). The 1994 Act was enacted principally to give effect to this Directive. In S A CNL-Sucal v HAG GF AG  3 CMLR 571, 608, paragraphs 13, 14, the European Court of Justice described the essential function of a trade mark as giving to the consumer or ultimate user 'a guarantee of the identity of the origin of the marked product by enabling him to distinguish, without any possible confusion, that product from others of a different provenance'. For a trade mark to perform this function, it must offer a guarantee that all the goods bearing it have originated under the control of a single undertaking which is responsible for their quality.
The need to distinguish the business source of goods is as old as trading itself. A maker of goods seeks to acquire and maintain a reputation for the quality of his goods, thereby encouraging customers to prefer his goods to those of his competitors. So he places a recognisable mark on his goods to distinguish them from the goods of others. It is in the public interest that he should be able to do so, and that he should be able to prevent others from using his chosen mark. The ability to apply a mark to goods encourages makers of goods to set and maintain quality standards. It enables customers to make an informed choice between different goods available in the market.
Although the use of trade marks is founded on customers' concern about the quality of goods on offer, a trade mark does not itself amount to a representation of quality. Rather it indicates that the goods are of the standard which the proprietor is content to distribute 'under his banner': see Laddie J, in Glaxo Group v Dowelhurst Ltd  FSR 529, 540-541. The concept of the owner of a mark holding himself out as responsible for the quality of the goods sold under his mark was noted by Lord Wright in Aristoc Ltd v Rysta Ltd (1945) 62 RPC 65, 82:
The word "origin" is no doubt used in a special and almost technical sense in this connection, but it denotes at least that the goods are issued as vendible goods under the aegis of the proprietor of the trade mark, who thus assumes responsibility for them, even though the responsibility is limited to selection, like that of the salesman of carrots on commission in Major v Franklin  1 KB 712. By putting them on the market under his trade mark he vouched his responsibility ....
Thus, in relying on a trade mark consumers rely, not on any legal guarantee of quality, but on the proprietor of a trade mark having an economic interest in maintaining the value of his mark. It is normally contrary to a proprietor's self-interest to allow the quality of the goods sold under his banner to decline.
THE COMMON LAW
In the early days of the 19th century no one supposed that a proprietor of a trade mark could sell the right to use his mark. A trade mark was personal. It was regarded as evidence available in a passing off action as tending to show that the defendant was passing off his goods as those of the plaintiff. But gradually trade marks increased in importance until, in the words of Fry LJ in Pinto v Badman (1891) 8 RPC 181, 194, Lord Westbury LC surprised the profession by asserting that there might be property in a trade mark. The question which then agitated the courts was whether, and in what circumstances, this new property right could be assigned. Lord Westbury gave the answer himself in The Leather Cloth Co Ltd v The American Leather Cloth Co Ltd (1863) 4 De G J&S 137. On appeal to this House Lord Cranworth, at 11 HLCas 523, 533, 534, observed that the right to a trade mark is a right closely resembling, although not exactly the same as, copyright:
The right to a trade mark may, in general, treating it as property, or an accessory to property, be sold or transferred upon a sale and transfer of the manufactory of the goods on which the mark has been used or affixed, and may lawfully be used by the purchaser.
So the law became that a trade mark may be sold, but not separately from the business in which it is used. Nor may a trade mark be assigned when it connotes a personal connection between the original owner of the mark and the goods in respect of which it is used: see Pinto v Badman (1891) 8 RPC 181, 194, 195, per Fry LJ. An instance of the latter is an artist's mark on his own artistic works.
I pause to note that the recognition that a trade mark is saleable represents a significant development in the conception of what a trade mark indicates. A trade mark is not usually to be understood as a representation regarding the identity of the source, namely, who is in control of the business in which the mark is being used. Rather, with the changes in trade, a trade mark can 'fairly be held to be' only a representation that the goods were manufactured in the course of the business using the mark, without any representation as to 'the persons by whom that business was being carried on': see Romer LJ in Thorneloe v Hill  Ch 569, 574.
This approach accords with business reality and customers' everyday expectations. Customers realise there is always the prospect that, unbeknown to them, the management of a business may change. To confine the use of a trade mark to the original owner of a business would be to give the concept of a business origin or business source an unrealistically narrow and impractical meaning. Of course, the new management, the new owners, may not adhere to the same standards as the original owner. But the risk of an unannounced change of standards is ever present, even when there has been no change in management. An owner may always decide to change his quality standards. As already noted, customers rely on it being in the owner's self-interest to maintain the value of his mark. The self-interest of the owner of a trade mark in maintaining its value applies as much to a purchaser of the mark as it does to the original owner.
THE EARLY TRADE MARKS ACTS
The early Trade Marks Acts applied a similar approach to the sale of registered trade marks. A registered trade mark was assignable only in connection with the goodwill of the business concerned in the goods for which it was registered, and it was determinable with that goodwill: see the Trade Marks Registration Act 1875, section 2. A similar provision appeared successively in the Patents, Designs and Trade Marks Act 1883, section 70, and the Trade Marks Act 1905, section 22.
Likewise with licensing. On its face section 87 of the Patents, Designs and Trade Marks Act 1883 gave the registered proprietor of a trade mark an unlimited power to grant licences in respect of his trade mark. The better view seems to have been that the part of section 87 which related to licences applied, not to trade marks, but exclusively to patents and design copyrights with which the section also dealt: see Kerly's Law of Trade Names and Merchandise Marks, 1st edition (1894) page 281. Be that as it may, in 1888 Lord Herschell's Trade Marks and Designs Inquiry Committee recommended that, in order to avoid doubt, section 87 should be amended by omitting the words relating to licensing so far as trade marks were concerned: see paragraph 36 of the committee's report. The Patents, Designs and Trade Marks Act 1888 made a limited amendment, by providing that section 87 was subject to the restrictions on assignment in section 70. In Thorneloe v Hill  Ch 569 Romer J had no difficulty in deciding that, consistently with the prohibition on the assignment of a mark separately from the business in which the mark was used, there could be no grant of a licence to use a mark separately from the licensor's business. There the owner of a mark granted a bare licence to another watchmaker giving him, for a period of seven years, the exclusive right to manufacture watches inscribed with the name 'John Forrest'. Romer J, at page 576, described this as the 'mere grant of a license' and observed that he 'need scarcely add' that a trade name or mark 'cannot be validly assigned in gross'. When the licence expired the licensors had lost any right they previously had to say that any person marketing 'John Forrest' watches thereby referred to watches manufactured by them.
The Trade Marks Act 1905 made no mention of licences. Further, the terms in which a trade mark was defined in the 1905 Act effectively negatived the possibility of licensing. Section 3 of the 1905 Act defined a trade mark as a mark used on or in connection with goods 'for the purpose of indicating that they are the goods of the proprietor of such mark by virtue of manufacture, selection, certification, dealing with, or offering for sale' (my emphasis). In order to be valid, the use made of a mark had to conform with this definition. If a mark was used in connection with the goods of someone other than the proprietor, it did not satisfy the definition.
Trade Marks Act 1938
The Trade Marks Act 1938 made two changes in this field, one relating to assignments, the other to licensing. The prohibition on assignment of a registered mark separately from the relevant business gave rise to unsatisfactory consequences in practice. The unsatisfactory results were exemplified in cases such as Lacteosote Ltd v Alberman (1927) 44 RPC 211 and In the Matter of Trade Mark No. 437,870 of John Sinclair Ltd (1932) 49 RPC 123. This prohibition was relaxed by the 1938 Act. Under this Act a registered trade mark was assignable either in connection with the goodwill of a business or not. An assignment of a mark which was not accompanied by an assignment of the business in which the mark was used had to be publicly advertised. But the relaxation was not total. As a safeguard, the proprietor's ability to assign his mark was made subject to the proviso that assignment was not permissible if it would result in more than one person having the right, whether under the common law or by registration, to use the same or similar marks in relation to the same description of goods and that would be likely to deceive or cause confusion: see section 22(4).
That was the first change. In RJ Reuter Co Ltd v Mulhens (1953) 70 RPC 235, 250 , Sir Raymond Evershed MR described this as a 'far-reaching and significant change' in trade mark law, in which it had been previously regarded as 'fundamental' that trade marks could not be separated from the business of origin and from the goodwill of that business. This change was a further step in the evolution of the trade mark message. No longer was the mark taken as a representation that the current business was a continuation of the business in which the mark had originally or successively been used. Now a person might buy a registered mark without the goodwill of the existing business and then use the mark in his own new business. Under the 1938 Act a trade mark was taken to denote only that the goods came from the source comprising the person who was currently the owner of the mark, whoever he might be, and however long or short lasting his period of ownership might be. Customers rely upon the self-interest of the current owner to maintain the value of the mark currently belonging to him.
The second change brought about by the Trade Marks Act 1938 related to licensing. Contemporary commercial developments had made some legal recognition of the practice of licensing trade marks desirable. The 1938 Act cautiously opened the door to licensing, although it stopped short of any clear recognition of unrestricted licensing. Section 28 of the 1938 Act established a somewhat complex system whereby, at the discretion of the registrar, a person might be registered as a 'registered user' of a mark. When exercising his discretion the registrar had regard, among other matters, to the degree of control which the proprietor would have over the proposed use of the mark. Eventually, this registration system was held to be a permissive and not a mandatory provision: see 'Bostitch' Trade Mark  RPC 183.
However, an overriding limitation on the proprietor's freedom to grant licences still remained in place: the statutory definition of a trade mark. As with the position under the 1905 Act, use of a mark outside the definition of a trade mark in the 1938 Act endangered the validity of the registration. The 1938 Act adopted a new definition, wider than the definition in the 1905 Act. Section 68(1) of the 1938 Act defined a trade mark as a mark used in relation to goods for the purpose of indicating 'a connection in the course of trade between the goods and some person having the right either as proprietor or as registered user to use the mark'.
Two points are to be noted here. First, under this definition the source denoted by a mark need not always be the proprietor of the mark. The source might be a person using the mark with the consent of the proprietor: a registered user. This was a further, and important, development in the concept of a trade mark and what it denotes.
Second, as to other licences, much legal learning grew up around the scope of the phrase 'a connection in the course of trade'. The courts grappled with the conundrum of identifying what were the essential ingredients of a connection 'in the course of trade' between the proprietor of a mark and a licensee's goods. The position was not satisfactory. It is summarised succinctly in Kerly's Law of Trade Marks and Trade Names, 13th ed (2001) page 336:
The cases were never entirely consistent, and it was hard to discern hard and fast rules as to the connection in the course of trade which was required between the proprietor of a mark and the goods of his licensee in order to avoid the mark becoming deceptive.
However, the generally accepted view was that a bare licence, under which the licensor has no control over the quality of the goods sold by the licensee, would not suffice. The passage from the judgment of Whitford J in McGREGOR Trade Mark  RPC 36, 53, which I have quoted above, reflects this view. Further, section 28(6) of the 1938 Act outlawed 'trafficking' in a trade mark. In the 'Holly Hobbie' case this prohibition was held to catch character merchandising: see In re American Greetings Corporation's Application  1 WLR 189. Lord Bridge of Harwich, at page 192, described this result as a 'complete anachronism'. Character merchandising deceives nobody.
Trade Marks Act 1994
The Trade Marks Act 1994 has brought about substantial changes in the registered trade mark law of the United Kingdom. The primary purpose of the Act, as set out in its long title, is 'to make new provision for registered trade marks', implementing the Trade Marks Directive. Among other changes the Act has swept away the remaining restrictions on assignment and licensing.
Section 1(1) defines a trade mark in the following terms:
a "trade mark" means any sign capable of being represented graphically which is capable of distinguishing goods or services of one undertaking from those of other undertakings.
Inherent in this definition is the notion that distinctiveness as to business source (the 'goods of one undertaking') is the essential function of a trade mark today.
Under section 24 of the 1994 Act a registered trade mark may be assigned in the same way as other personal property and either with the goodwill of a business or independently. The obligation under the 1938 Act to advertise an assignment of a trade mark when the assignment was unaccompanied by the goodwill of the assignor's business has been abolished. This requirement was thought to be of little practical effect as a safeguard to the public. Now it is up to the assignee of the mark, if he does not also acquire the assignor's business, to make with the assignor whatever arrangements may be necessary to ensure that the mark will continue to be indicative exclusively of one source, viz, after the assignment, the assignee. That is now the responsibility of the assignee, because the abolition of the statutory prohibition on assignment has not altered the fundamental principle of trade mark law that a trade mark which ceases to be distinctive is no longer fulfilling the essential functions of a trade mark and therefore, if registered, should not remain on the register.
As to licences, sections 28 to 31 make provision for the grant of licences, either exclusive or non-exclusive, general or limited. Licences are registrable transactions. This wide power to grant licences is drawn directly from article 8(1) of the Trade Marks Directive. The Directive provides simply that a trade mark 'may be licensed for some or all of the goods or services for which it is registered'.
Against this background I turn to the question whether the use of a mark by a licensee under a bare licence is objectionable as inherently likely to deceive. I shall confine my observations to exclusive licences. What is the message which a trade mark conveys today? What does a trade mark denote? It denotes that goods bearing the mark come from one business source: the goods of one undertaking, in the words of section 1(1) of the 1994 Act. That much is clear. But what does the mark denote about that source? Must the source be the proprietor of the trade mark? On this the Act is silent. But so to read the Act would accord ill with the statutory power to grant licences. And this interpretation would turn the clock the back to 1905. Even under the 1938 Act the source was not so confined. Under the 1938 Act the source could be a registered user.
Or is the business source the person who is for the time being entitled to use the mark, whether as proprietor or exclusive licensee? I prefer this view. The commercial background has changed greatly since 1938, and even more so since 1905. The present position was well summarised in a paper, Reform of Trade Marks Law, issued by the Department of Trade and Industry in September 1990 (Cm 1203).
Paragraph 4.36 reads:
Whatever may have been the position in 1938, the public is now accustomed to goods or services being supplied under licence from the trade mark owner. For example there has been the growth of franchise operations. The potential for deception is therefore less. Moreover the strongest guarantee that a proprietor will maintain control over the way in which his trade mark is used is that it is in his own interest to do so. A trade mark is a valuable piece of property, in terms both of its power to attract customers and of the royalties which can be demanded from licensees. Its value is however ultimately dependent on its reputation with the public. If the proprietor tolerates uncontrolled use of his trade mark the value of this property will be diminished. In an extreme case the registration of the mark may become liable to be revoked if it has become deceptive or generic through such use. It is however the responsibility of the proprietor, not the Registrar, to prevent the devaluation of his own property.
Thus, the wider interpretation, according to which the source may be either the proprietor or an exclusive licensee, would not be at variance with customers' perceptions. Customers are well used to the practice of licensing of trade marks. When they see goods to which a mark has been affixed, they understand that the goods have been produced either by the owner of the mark or by someone else acting with his consent.
Nor does the wider interpretation undermine the protection which a trade mark is intended to afford customers. For their quality assurance customers rely on the self-interest of the owner. They assume that if a licence has been granted the owner can be expected to have chosen a suitable licensee and imposed suitable terms. They also assume that during the currency of any licence the licensee, as well as the owner, is likely to have an interest in maintaining the value of the brand name. Customers are not to be taken to rely on the protection supposedly afforded by a legal requirement that the proprietor must always retain and exercise an inherently imprecise degree of control over the licensee's activities.
Some of those who have spent their professional lives under the regime of the 1938 Act, may consider that this view of the matter is distressingly heretical. They would be mistaken. It is no more than the consequence flowing from the 1994 Act having freed the law of registered trade marks from the straitjacket imposed by the statutory definitions of a trade mark in the 1905 Act and then the 1938 Act. Freed from that constraint, the law can now catch up with business practice.
Accordingly, I cannot accept Mr Young's 'golden thread' submission. From 1984 Scandecor Marketing and Scandecor Ltd were selling their own goods under the Scandecor marks. They were doing so, until 1994 when it was terminated, under a bare licence. This does not of itself mean that from 1984 onwards these marks had become liable to mislead.
Before proceeding further I must mention some of the practical implications of the view expressed above, starting with the position which exists while an exclusive licence is in operation. The mere fact that, during this period, some customers may associate the trade mark with the exclusive licensee does not mean that it has become deceptive or that it lacks distinctiveness. During the licence period the goods come from only one source, namely the licensee, and the mark is distinctive of that source.
The position after the licence has ended is different. Then the right to use the mark reverts to the proprietor of the mark. He can then apply the mark to his goods. The position is, indeed, comparable to the position which arises when a trade mark is assigned without any assignment of the assignor's business. Whether this change in the person entitled to use the mark gives rise to deception will depend primarily on what then happens to the erstwhile licensee's business. If the former licensee ceases to carry on the business in which he used the mark, no question of deception due to lack of distinctiveness will normally arise. Henceforward the mark will be distinctive of one source, namely the proprietor of the mark. This will be a different source from the source during the licence period, but this change in the source is not itself inherently deceptive. Such a change occurs whenever a trade mark changes hands.
What happens if, after the licence has ended, the former licensee continues to carry on the same business as he did during the licence period? Suppose he continues to manufacture the same goods and deal with the same customers, but without using the licensed mark. In such a case there may be scope for confusion and deception. Any customers who were aware of the identity of the source during the licence period may continue to associate goods bearing the mark with the former licensee and his continuing business. When that is the position, the mark may no longer be distinctive of one business source. Whether that is so will depend on the facts of the case.
A complicating feature of the present case is that for the most part the use of the Scandecor marks by the licensees, Scandecor Marketing and Scandecor Ltd, occurred while the Trade Marks Act 1938 was still in force. The 1994 Act came into force on 31 October 1994. Paragraphs 8 and 9 in Schedule 3 to the 1994 Act provide that sections 24 and 28 of the 1994 Act, concerning assignments and licences, apply only to transactions occurring and licences granted after the commencement of the 1994 Act. The old law continues to apply in relation to transactions occurring and licences granted before the commencement of the 1994 Act.
This means, for instance, that the validity of the assignment of the Scandecor word mark by Scandecor Ltd to Scandecor International in 1978 is to be decided by reference to the provisions of the 1938 Act. Nothing turns on this point, however, so far as this particular assignment is concerned, because Scandecor Ltd does not seek to challenge the validity of this assignment.
Less clear cut is the position regarding the licence granted in 1984 by Scandecor International to Scandecor Marketing to use the Scandecor mark on its own products, such as calendars. Under the 1938 Act, the question which arose was whether this licence was sufficient to constitute a connection in the course of trade between Scandecor International and the goods of Scandecor Marketing and Scandecor Ltd, within the meaning of section 68 of that Act. Scandecor International neither exercised nor did it have any right to exercise any control over these products. Lloyd J decided that, despite this, the connection was sufficient to satisfy the statutory requirement. I agree. The parties continued to regard themselves as part of a loosely knit group, even though the corporate relationship between the companies had ended. There was continuing consultation and collaboration both ways about posters and calendars and other items. English law has long recognised that when applying the phrase 'a connection in the course of trade' the court looks at the business realities and does not confine itself to a narrow legalistic view: see the authorities referred to by Dillon J in Revlon Inc v Cripps & Lee Ltd  FSR 88, 95-97.
In the end, however, I do not think this matters. Revocation of the two marks is sought under section 46(1)(d) of the 1994 Act. Section 46(1) provides:
The registration of a trade mark may be revoked on any of the following grounds ... (d) that, in consequence of the use made of it by the proprietor or with his consent in relation to the goods or services for which it is registered, it is liable to mislead the public, particularly as the nature, quality or geographical origin of those goods or services.
The claim in these proceedings is that, in consequence of the use made of the marks by Scandecor Marketing and Scandecor Ltd with the consent of Scandecor International, the marks are 'liable to mislead the public'. That is essentially a question of fact. That question of fact must be answered having regard to matters as they now are, not as they were at some time in the past. In deciding this issue of fact the court must have due regard, as I have been at pains to emphasise, to the message which a trade mark conveys. But since the question is whether the marks are currently liable to mislead, the message which is relevant is the message which use of the marks conveys today, not the message it would have conveyed to the public in the past.
QUESTIONS FOR THE EUROPEAN COURT OF JUSTICE
However, before applying the views expressed above to the facts of this case an authoritative ruling will have to be sought from the European Court of Justice. The views I have expressed represent a significant change in English law on a point of considerable practical importance, and on which there is no Community jurisprudence. Needless to say, it is essential that the same view is taken on this point throughout the European Union. As already noted, the relevant provisions of the 1994 Act are drawn directly from the Trade Marks Directive. Accordingly, the House should refer to the European Court of Justice the question whether a trade mark is to be regarded as liable to mislead the public within the meaning of article 12(2)(b) if the origin of the goods denoted by the mark is a bare exclusive licensee.
The Court of Justice should also be asked to give a ruling on three further questions. The first concerns the meaning of 'undertaking' in article 2 of the Directive. I should explain how this point arises. After 1984 Scandecor Marketing and Scandecor Ltd acted in two capacities. They continued to distribute Scandecor International's posters and other goods. They were also licensed to apply the Scandecor marks to their own calendars and cards and other items. Thus Scandecor Marketing and Scandecor Ltd were selling, under the same brand name and at the same time, products which had been produced by them (calendars and cards) and closely allied products which had been produced by Scandecor International (pictorial posters). This gives rise to no difficulty if throughout this period all these companies formed part of one 'undertaking'. If they did not, the position may be very different.
What is the criterion to be applied in deciding whether, for trade mark purposes, Mr Huldtgren's companies and Mr Hjert's companies were still part of a single undertaking? Undoubtedly these companies were one undertaking at the outset in the 1970s. But was that still the position after 1984? Neither the 1994 Act nor the Directive elaborate on what is meant by undertaking. Section 1(1) of the Act simply reproduces the language of article 2 of the Trade Marks Directive. For competition law purposes undertaking is taken to mean an economic unit. The unit may consist of several persons, natural or legal. Typically this is so where several persons have no real freedom to act independently in the relevant respects: see, for instance Viho Europe BV v Commission of the European Communities  ECR I-5457, 5489, paragraph 50, and Centrafarm BV v Winthrop BV  ECR 1183, 1198, paragraph 32. Whether this concept can be transferred and applied directly to trade mark law may be a matter open to discussion. Certainly, in the context of article 2 and consistently with the purpose of trade marks, the essential feature distinguishing one undertaking from another would seem to be that normally each undertaking can be expected to set its own standards of quality for its goods. Thus, if two or more individuals or companies are trading separately and producing their own goods but there are long-term contractual links between them, an important consideration in deciding whether they form one undertaking for the purposes of article 2 is the extent to which they collaborate, or act in concert, in matters affecting the quality of their goods.
In the present case the parties worked to similar if unwritten standards. As the Judge commented, this is not surprising. They were using the same mark, so that each would be concerned about the quality of the other's products. There was continuing consultation and collaboration both ways about posters and calendars and other items. They bought each other's products. They maintained a policy of 'one face to the outside world'. This could hardly have been done if different companies were adopting different standards. They were not in competition with each other. But, against this, the Judge found that Scandecor International did not exercise any control over Scandecor Ltd's own products. It is not appropriate at this stage to pursue the question whether the distinction between control and acting in concert is material for present purposes. The next step must be to obtain guidance from the Court of Justice on what are the criteria to be applied in determining whether a trading relationship comprises a single undertaking for the purposes of the Trade Marks Directive.
A further question which must also be referred to the Court of Justice concerns the 'own name' defence. This is one of the defences on which Scandecor Marketing and Scandecor Ltd rely in answer to the trade mark infringement claim. The Judge upheld this defence. Section 11(2)(a) of the 1994 Act provides that a registered trade mark is not infringed by the use by a person of his own name. This is subject to the proviso that the use must be in accordance with honest practices in industrial or commercial matters. Section 11(2)(a) reproduces article 6(1)(a) of the Directive. The invocation of this provision by Scandecor Marketing and Scandecor Ltd raises a much-discussed question: is a company a person for the purpose of section 11(2)(a) of the Act? I think the better view is that a company can claim the protection of this provision. I recognise that the name of an individual is part of his overall personality. His name has an importance for him that is not present in the case of a company. But I do not consider this is a sufficient reason for cutting down the scope of this provision, the more especially as the added proviso is adequate to ensure that companies cannot misuse this limitation on the rights of the owners of trade marks. But this cannot be regarded as acte clair.
My noble and learned friend Lord Scott of Foscote has raised another question. Section 46(1) provides that the registration of a trade mark 'may' be revoked on certain grounds. This implements the provision in article 12 of the Directive that a trade mark shall be 'liable' to revocation in specified circumstances. The question which arises is whether, when those circumstances exist, the court must revoke the trade mark, that is, that the court retains no discretion.
For completeness I mention a contention of Mr Rosen QC based on article 10(3) of the Directive. Article 10 makes provision regarding the non-use of trade marks. Article 10(3) provides that 'Use of the trade mark with the consent of the proprietor .... shall be deemed to constitute use by the proprietor'. Mr Rosen submitted that the proper interpretation of this article is that use with consent constitutes deemed use by the proprietor for all purposes. Accordingly, the use of the marks by Scandecor Marketing and Scandecor Ltd on their goods was not likely to 'mislead the public'. Their use is deemed to be use by the proprietor of the marks, Scandecor International. The 1994 Act should be construed accordingly.
I cannot accept this. I agree with Lloyd J that the context of article 10(3) makes clear that article 10(3) is directed at the non-use provisions of articles 10 and 11. It is not applicable to the revocation provisions in article 12(2)(b). Those are the provisions carried into section 46(1)(d) of the Act. The Act incorporates the effect of article 10(3) into section 46(1)(a). A mark may be revoked if, for a period of five years, it has not been put to genuine use 'by the proprietor or with his consent'. I consider this is acte clair. The Court of Justice should not be burdened with this further point. That court is burdened enough without being asked questions to which the answer is obvious.
Accordingly, the further conduct of this appeal should be adjourned while the Court of Justice is asked to give rulings on the questions I have outlined.
I have had the privilege of reading in draft the speech of my noble and learned friend Lord Nicholls of Birkenhead. For the reasons he gives I would also make the order which he proposes.
Lord Hobhouse of Woodborough
For the reasons given by my noble and learned friend Lord Nicholls, I agree with the order which he has proposed.
I have had the advantage of reading in draft the speech of my noble and learned friend, Lord Nicholls of Birkenhead. I agree with him that the questions which he identifies are not acte clair and should be referred to the Court of Justice.
By doing so I should not be taken as necessarily accepting that the answers to these questions will be determinative of the appeal or necessary to its disposal. The appeal raises difficult questions of national as well as Community law, and even more difficult questions in the application of the law to an unusual set of facts.
With this reservation I agree with the order which my Lord proposes.
Lord Scott of Foscote
The trademark issues before your Lordships on this appeal arise out of the terms of a divorce settlement entered into not between the parties to a marriage but between business partners who, having fallen into disagreement, decided to split between them the business empire they had together created. They entered into what, objectively viewed, were eminently sensible arrangements for the split. But they did not foresee, and so did not provide for, a particular eventuality that has led to this litigation and to the appeal to your Lordships House. The eventuality, the unforeseen event, was the bankruptcy in 1994 of Scandecor International AB. I have had the advantage of reading in draft the opinion of my noble and learned friend, Lord Nicholls of Birkenhead, and gratefully adopt both his summary of the facts and his illuminating survey of the history and development of the relevant trade mark law. The law is, today, to be found in the provisions of the Trade Marks Act 1994, enacted in order to implement Council Directive No. 89/104 / EEC of 21 December 1988. The purpose of the Directive was to approximate the laws of the Member states relating to trade marks. The old law is not, however, entirely spent. The 3rd Schedule to the Act contains transitional provisions and paragraphs 8 and 9 are of relevance to some of the issues arising in this case.
As to the issues, the position seems to me to be as follows:
The appellant, Scandecor Development AB (Development), is, or was prior to the order made by the Court of Appeal on 23 July 1988, the registered proprietor of the word mark, 'Scandecor', registered on 23 April 1971, and the logo mark incorporating the word 'Scandecor' registered on 27 August 1976.
Development, the successor in title of International as registered proprietor of these trade marks, "has exclusive rights in the trade mark[s] which are infringed by use of the trade mark[s] in the United Kingdom without [its] consent" (s.9(1) of the 1994 Act, and see Art. 5.1 of the Directive).
Over the period 1979 to 1997 one or other, or both, of the respondents, Scandecor Marketing AB (Marketing) and Scandecor Limited (Limited), was the distributor in the United Kingdom of International's products. These products were, of course, marketed and sold as Scandecor products. In addition Marketing and/or Limited was the licensee of the two Scandecor marks for the purpose of marketing and selling in the United Kingdom products produced by and acquired from sources other than International.
In using the marks for the purpose of carrying on its business over the period mentioned, Limited attracted to itself business goodwill, in the sense that its retailer customers associated the name Scandecor with Limited and were satisfied with the quality of Scandecor goods and services they were receiving from Limited.
After the revocation in 1997 of Limited's licence to use the two marks (i) Limited continued to carry on business as Scandecor and (ii) the appellant Panther + Scandecor Ltd. (Panther), as the new licensee of the two marks, commenced to carry on a competing business and used the marks for that purpose.
The use by Limited of the style 'Scandecor' for its business purposes is a use which infringes the word mark 'Scandecor' (s.9(1) of the 1994 Act), and, perhaps, the logo mark as well, unless Limited can bring itself within section 11(2) of the 1994 Act. Section 11(2) provides, so far as relevant, as follows:
A registered trade mark is not infringed by -
the use by a person of his own name or address
provided the use is in accordance with honest practices in industrial or commercial matters
and see Article 6.1 of the Directive.
Whether Limited is entitled under section 11(2) to carry on business as "Scandecor" depends
on whether paragraph (a) of section 11(2) applies not only to individuals but also to companies; and
on whether Limited, in continuing to trade as Scandecor after the revocation of its trade mark licence, is complying with the "honest practices" proviso to section 11(2).
The issue under (i) above depends upon the correct construction of the statutory language. I am in agreement with Lord Nicholls' opinion that section 11(2)(a) does apply to companies. He has, however, expressed the opinion that the point is not acte clair, and I do not dissent from that.
The issue under (ii) above is one of fact.
If Limited is entitled to carry on business under the style 'Scandecor' notwithstanding the termination of its trade mark licence, it must follow that the use of the marks by Development or Panther, or by any other licensee of Development, has become "liable to mislead the public". The public, for this purpose, consists of retailers. Retailers associate posters and other products sold under the Scandecor mark with Limited. If Limited can continue to trade as Scandecor, the mark will have ceased to be capable of distinguishing the goods of one undertaking (Development and its licensees) from those of another undertaking (Marketing and Limited): see section 1(1) of the Act and Article 2 of the Directive.
Under section 46(1)(d) of the 1994 Act, the registration of a trade mark may be revoked if it has become liable to mislead the public "in consequence of the use made of it by the proprietor or with his consent". The Scandecor reputation acquired by Limited through use of the marks over the period 1979 to 1997 under the licences granted by the proprietor of the marks is the reason why, if Limited can continue to trade as Scandecor, the marks have become "liable to mislead". Accordingly, registration may be revoked under section 46(1)(d).
There is a dispute between the parties as to whether revocation under section 46(1) is mandatory or discretionary. If, on the premise that Limited can continue to trade as Scandecor, the revocation power under section 46(1)(d) is exercisable, it ought, in my opinion, to be exercised. It could not be right to have the retailer customers or the general public in a position of being unable to tell from which of the two rival undertakings the Scandecor goods which they had purchased, or were proposing to purchase, originated.
On the other hand, if Limited is not able to take advantage of section 11(2), then unless Marketing / Limited can succeed in obtaining the revocation under section 46(1)(d) of the registration of the marks, Development's case must, in my opinion, succeed. Limited's use of the style "Scandecor" would be a plain and continuing trade mark infringement. The only defence would be that registration should be revoked (see s. 46(6) of the 1994 Act).
As I have said, if Limited is entitled under section 11(2) to continue to trade as Scandecor the case for revocation seems to me to be very clear. But if Limited is not so entitled, the revocation case is not, to my mind, nearly so clear. Marketing/Limited's case for revocation is that Limited's use of the marks over the period 1979 to 1997, in part as distributor of International's products and in part as licensee, has brought about an accrual to Limited of a reputation in the marks that renders the use of them by the proprietor liable to mislead. But if, after termination of the distributorship and the licence, there is no continuing right for the ex-distributor / licensee, Limited, to trade under the Scandecor name, the existence of its accrued reputation may not be enough to satisfy the section 46(1)(i) criterion. If it is enough, then every grant of an exclusive licence would potentially put the mark at risk. This, to my mind, is easily the most difficult point in the case. It is also, perhaps, the most important, because a decision on the point may have legal and commercial implications for a wide variety of licensing arrangements.
A decision on this point will need to take account of the moment at which Marketing / Limited became, for the purposes of section 1(1) of the Act, a separate "undertaking" from the undertaking of which International, the proprietor and licensor of the marks was a member. Was it 1979, or 1984, or was it not until the insolvency of International in 1994? If they all remained members of the same "undertaking" until 1994, it is difficult to see how, in the short period between then and 1997, the marks could have lost their capability of distinguishing the proprietor's undertaking from other undertakings.
In addition, the question whether the use of a mark by a bare exclusive licensee can, in principle, lead to the mark becoming "liable to mislead" for section 46(1) purposes by reason of the association in the public mind of the licensee with the mark is critical to Marketing / Limited's case for revocation.
If Marketing / Limited can succeed in establishing that the criteria of section 46(1)(d) are met, the question whether the revocation power is mandatory or discretionary will then arise. On the premise that Marketing/Limited are not entitled, so long as the marks remain registered, to trade under the name Scandecor, the answer to the question whether, if the power is discretionary, it should be exercised, is not, to my mind, obvious. If it is only Development and its new licensees who are entitled to trade as Scandecor, the Scandecor mark will remain capable of distinguishing between the undertaking which they represent and other undertakings. There would not necessarily be any greater or more lasting confusion than would be consequent upon any assignment of a mark unaccompanied by business goodwill (see section 24(1) of the 1994 Act), or upon any revocation of an exclusive licence with the grant of a new licence to another.
For these reasons I agree with Lord Nicholls' opinion that authoritative rulings should be sought from the European Court on the three questions he identifies in paragraphs 49, 50 and 53 of his opinion.
I think that, at the same time, the European Court should be asked to give a ruling as to whether the power of revocation conferred by section 46(1), implementing Article 12(2) of the Directive, should be construed as a mandatory power, required to be exercised if the requisite criteria are met, or as a discretionary power, available to be exercised if the criteria are met.
McGregor Trade Mark  RPC 36; GE Trade Mark  RPC 297; S A CNL-Sucal v HAG GF AG  3 CMLR 571; Glaxo Group v Dowelhurst Ltd  FSR 529; Aristoc Ltd v Rysta Ltd (1945) 62 RPC 65; Pinto v Badman (1891) 8 RPC 181; The Leather Cloth Co Ltd v The American Leather Cloth Co Ltd (1863) 4 De G J&S 137; Thorneloe v Hill  Ch 569; Lacteosote Ltd v Alberman (1927) 44 RPC 211; In the Matter of Trade Mark No. 437,870 of John Sinclair Ltd (1932) 49 RPC 123; RJ Reuter Co Ltd v Mulhens (1953) 70 RPC 235; 'Bostitch' Trade Mark  RPC 183; re American Greetings Corporation's Application  1 WLR 189; Revlon Inc v Cripps & Lee Ltd  FSR 88; Viho Europe BV v Commission of the European Communities  ECR I-5457; Centrafarm BV v Winthrop BV  ECR 1183
Trade Marks Act 1994, s.1, s.9, s.10, s.11, s.24, s.28, s.31, s.46
Trade Marks Act 1938, s.4, s.28, s.68
Trade Marks Act 1905, s.3, s.22
Patents, Designs and Trade Marks Act 1883, s.70, s.87
Trade Marks Registration Act 1875, s.2
E C Trade Marks Directive (89/104), preamble, Art.2, Art.5, Art.8, Art.10, Art.12
Authors and other references
Kerly's Law of Trade Names and Merchandise Marks, 1st edition (1894)
Lord Herschell's Trade Marks and Designs Inquiry Committee Report 1888
Reform of Trade Marks Law, issued by the Department of Trade and Industry in September 1990 (Cm 1203)
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