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What is the Value of a Descriptive Trade Mark?

Michael McDonald | October 8th, 2015

A recent Federal Court case demonstrates the fundamental importance of choosing brands and marketing strategies that differentiate your business from your competitors. In this case, Chemist Warehouse issued trade mark enforcement proceedings against its competitor, Direct Chemist Outlet, and not only lost the case, but will also lose its trade mark registration because it lacked the requisite distinctiveness under the Trade Marks Act (Cth). This confirms that descriptive brands are not the way to go.

This also highlights the difficulty of quantifying and attributing value to trade marks on balance sheets. If a trade mark is highly descriptive, the mark could be of very little value because it will be difficult to enforce against a third party, or worse, it could be of no value at all if the Court finds that the registration should be cancelled.

Moreover, if a business has highly descriptive trade marks, this is likely to have a detrimental effect on the sale price of the business. The strength of trade marks and other forms of intellectual property (IP) is a key factor that must be taken into account when conducting due diligence for a potential acquisition of a business or specific IP assets.

The claims

In the case of Verrocchi v Direct Chemist Warehouse, the applicants, trading as ‘Chemist Warehouse’ issued proceedings against Direct Chemist Outlet (DCO) for the following:

  • Misleading or deceptive conduct under the Australian Consumer Law and passing off in relation to the ‘get-up’ used by DCO. Chemist Warehouse alleged that DCO had copied the visual appearance of its stores which depict yellow as a prominent feature along with other primary colours red and blue; and
  • Infringement of its registered trade mark ‘Is this Australia’s Cheapest Chemist?

This article focuses on the trade mark infringement issue.

The Federal Court’s findings

Chemist Warehouse alleged that DCO’s use of the slogan ‘Who is Australia’s Cheapest Chemist?’ infringed Chemist Warehouse’s registered trade mark ‘Is this Australia’s Cheapest Chemist?’ (the Trade Mark).

However, interestingly, Justice Middleton held that the Trade Mark was not valid because it did not meet the distinctiveness requirements under s.41 of the Trade Marks Act (the Act). This was because a trade mark must be perceived as ‘a reliable badge of origin on its own’ and in his Honour’s view the slogan was merely descriptive. Even if the Trade Mark had been found to be valid, Justice Middleton did not consider that DCO had used the slogan ‘as a trade mark’ and accordingly there would have been no infringement in any event.

So why would you want to use a brand that is descriptive of your goods or services?

As lawyers, we are commonly told by clients that they want to establish a business with a brand that is very descriptive of their business offering. This is usually because they want customers to immediately understand what their business provides.

However, from a legal perspective, adopting a descriptive brand is in fact very risky, for the following reasons:

  1. In order to register a trade mark, your mark:a) must not be substantially identical or deceptively similar to any earlier filed trade marks; and;
    b) must be ‘distinctive’ of the goods or services that you provide (rather than descriptive).If a trade mark is descriptive of the goods or services, the Trade Marks Examiner is unlikely to allow the trade mark to proceed to registration because it would be unfair to allow one person to have a monopoly right over a word or phrase that other traders may wish to genuinely use in the ordinary course of trade. Whether a trade mark is ‘descriptive’ would also depend on the nature of the goods or services in question. For instance, ‘apple’ would be descriptive of apples or apple trees, whereas ‘apple’ is not descriptive of computer products.In some circumstances it may be possible to register a descriptive mark if you can submit sufficient evidence to the Trade Mark Examiner to demonstrate that the mark has ‘acquired distinctiveness’ through extensive use over time.
  2. It is a defence to trade mark infringement if a person uses a mark in good faith to indicate the kind, quality, quantity, intended purpose, value, geographical origin, or some other characteristic, of goods or services under s.122(b)(i) of the Act.This means that even if you are able to eventually register a trade mark by demonstrating that the brand has acquired distinctiveness through extensive use, you will not be able to enforce your trade mark registration against a third party if they are using their mark in a descriptive way and can rely on the defence in s.122(b)(i).An example of this is the case of Pepsico Australia Pty Ltd & Anor v The Kettle Chip Company Pty Ltd where it was held that the term ‘kettle cooked chips’ was used descriptively and did not infringe the Kettle Chip trade mark. This is because the use of the word ‘kettle’ referred to the way in which the chips were cooked.
  3. As demonstrated in the Chemist Warehouse case, you can lose your trade mark registration if the Court finds that your trade mark is not sufficiently distinctive as required under the Act.

So what is the moral of the story?

Your clients should be very careful about the brands that they adopt. They should select a name that is sufficiently distinctive so that they do not have to encounter the difficulties described above.

Clients should also ensure that they select a name that is different from other brands to ensure that they do not expose themselves to an action by another trader for:

  1. infringement of their registered marks; or
  2. misleading or deceptive conduct or passing off.

Why would your clients want their brand to be similar to those of their competitors? If they have a good business, they should set themselves apart by adopting a unique brand position.

And what about accountants?

The Chemist Warehouse case shows the importance of properly considering the integrity of a trade mark, and thus, what value should be properly reflected on the balance sheet.

The Chemist Warehouse case shows the importance of properly considering the integrity of a trade mark, and thus, what value should be properly reflected on the balance sheet.

In valuing trade marks, accountants should not just consider whether a trade mark is registered, but rather, whether the trade mark is robust enough that it can withstand a challenge as to validity. The strength of the trade mark (and indeed other forms of IP) will have a significant impact upon the sale price of the business or the IP assets of the business.

About Sarah Verstak

Sarah has 13 years’ experience in intellectual property (IP), litigation and commercial law. She has significant experience in protecting, structuring and enforcing clients’ IP rights and assisting clients to expand their brand protection internationally.

Sarah is also a member of the Institute of Public Accountant’s Disciplinary Tribunal.

Michael McDonald

Michael McDonald

Director, BA LL.B at mdp
Michael is a highly respected and pre-eminent lawyer, commercial advisor and businessman with a career spanning more than 35 years across corporate, commercial and intellectual property law. He has specialist expertise in, and passion for, commercialising and growing Australian businesses both in Australia and internationally.
Michael McDonald

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