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Published : June 21, 2010 | Author : sujay_ilnu
Category : Company Law | Total Views : 9110 | Rating :

Sujay Dixit, BA.LL.B(Hons in Corporate Law) Institute of Law,Nirma University

Passing off and the concept of goodwill in the law of contract

Passing off
Passing off is a part of the law of contract which can be used to enforce unregistered trademark rights. The tort of passing off protects the goodwill of a trader from a misrepresentation that causes damage to goodwill.

The law of passing off prevents one person from misrepresenting his or her goods or services as being the goods and services of the claimant, and also prevents one person from holding out his or her goods or services as having some association or connection with the plaintiff when this is not true.

Passing off and trademark law
A cause of action for passing off is a form of intellectual property enforcement against the unauthorised use of a mark which is considered to be similar to another party's registered or unregistered trademarks, particularly where an action for trademark infringement based on a registered trade mark is unlikely to be successful (due to the differences between the registered trademark and the unregistered mark).

Passing off and the law of registered trademarks deal with overlapping factual situations, but deal with them in different ways. Passing off does not confer monopoly rights to any names, marks, get-up or other indicia. It does not recognize them as property in its own right.

Instead, the law of passing off is designed to prevent misrepresentation in the course of trade to the public, for example, that there is some sort of association between the business of defendant and that of the claimant. Another example of passing off is where the defendant does something so that the public is misled into thinking the activity is associated with the claimant, and as a result the claimant suffers some damage, under the law of passing off it may be possible for the claimant to initiate action against the defendant.

Elements of Passing Off
There are three elements, often referred to as the Classic Trinity, in the tort which must be fulfilled.
These are:
1) Goodwill owned by a trader
2) Misrepresentation
3) Damage to goodwill
Plaintiffs have the burden of proving goodwill in its goods/services, get-up of goods, brand, mark and/or itself per se.

The Plaintiff also has the burden of proof to show false representation (intentional or otherwise) to the public to have them believe that goods/services of Defendant are that of the Plaintiff; thus, there must be some connection between Plaintiff’s and Defendant’s goods/services/trade. They must show likelihood and/or actual deception/confusion in the public. Deception/confusion, however, does not consider a ‘moron in a hurry’. (See Morning Star Cooperative Society v Express Newspapers Limited [1979] and Newsweek Inc. v. British In relation to the element of damage to goodwill, there may be loss/diversion of trade or dilution of goodwill. The Plaintiff need not prove actual or special damage; real and tangible probability of damage is sufficient. This damage should however be reasonably foreseeable. It is insufficient to simply show likelihood/actual deception and/or confusion. Ultimately, the Court must use common sense in determining the case, based on evidence and judicial discretion, and not witnesses.

Extended passing off
One of the instances where passing off is actionable is the extended form of passing off, where a defendant's misrepresentation as to the particular quality of a product or services causes harm to the plaintiff's goodwill. An example of this is Erven Warnink v J Townsend & Sons (Hull) Ltd [1979] AC 731, in which the makers of advocaat sued a manufacturer of a drink similar but not identical to advocaat, but which was successfully marketed as being advocaat.

The extended form of passing off is used by celebrities as a means of enforcing their personality rights in common law jurisdictions. Common law jurisdictions (with the exception of Jamaica) do not recognise personality rights as rights of property. Accordingly, celebrities whose images or names have been used can successfully sue if there is a representation that a product or service is being endorsed or sponsored by the celebrity or that the use of the likeness of the celebrity was authorised when this is not true.

Reverse passing off

Another variety, somewhat rarer is so-called 'reverse passing off'. This occurs where the defendant markets the plaintiff's product as being the defendant's product (see John Roberts Powers School v Tessensohn [1995] FSR 947. It will be recalled that orthodox passing off entails the defendant representing that his product is the plaintiff's product. In many cases, reverse passing off can be explained under the ordinary rules: for example where a defendant may represent that he or she made goods which were in fact made by the plaintiff so as to pass off his own business as a branch of the plaintiff's.

Perry v Truefitt
Perry v Truefitt (1842) 6 Beav. 66 is a famous English case where the tort of passing off was first articulated. Leathart made a hair treatment product. He had shown the mixing process to Perry, a perfumer and hair-dresser, who decided to call the mixture "Medicated Mexican Balm". Perry marketed the mixture under the title "Perry's Medicated Mexican Balm". Truefitt, one of Perry's competitors, made a product that was very similar to Perry's mixture, which he marketed it under the name "Truefitt's Medicated Mexican Balm", and used bottles and labels that looked like Perry's product. Perry filed a bill against Truefitt, arguing that the name "Medicated Mexican Balm" was valuable to his business and that he should have exclusive right to prevent others from using it. The Court denied Perry the right to the name. However, Lord Longdale held that misrepresentation can be grounds for an injunction, stating that "a man is not to sell his own goods under the pretence that they are the goods of another man".

What It Means
'The goodwill which has been the subject of sale is nothing more than the probability that the old customer will resort to the old place.' The definition cited above is of course the very simplistic and rather lay men meaning of what goodwill results in.
It has been more elaborately defined in Trego v. Hunt by Lord Macnaughten as:
' often it happens that goodwill is the very sap and life of the business , without which the business would yield little or no profits . It is the whole advantage whatever it may be , of the reputation and connection of the firm , which may have been built up by years of honest work or gained by lavish expenditure of money.'

Goodwill is essentially an intangible asset of a firm accruing to it by the good conduct and business performance. Therefore it can effectively be defined as the benefits arising from connection and reputation of the business and is primarily an asset. It is intangible and rather difficult to identify per se. Its is also difficult to specify when the goodwill takes existence and no business which commences possesses goodwill from the start. It is generated as the business is carried on and may be augmented with the passage of time.

It has been held in the case of CIT v. B.C. Srinivasa Setty that the goodwill is affected by everything relating to the business , the personality of the owners, the nature and character of the business , its name and reputation , its location , its impact on the contemporary market and on the prevailing socio-economic ecology.

Lord Eldon's observation in the case of Churton v. Douglas is a very important aspect of the meaning of goodwill, 'goodwill must mean every advantage -every positive advantage , If I may so express it as contrasted with negative advantage of the later partner not carrying on the business himself - that has been acquired by the old firm in carrying on its business , whether connected with the premises in which the business was previously carried on, or with the late firm , or with any other matter carrying with it the benefit of business.'

It is the public approbation which has been won by the business , and that is considered as a marketable thing ; it is the probability of the customers or clientele of the firm resorting to the person or persons who succeed to the business as a going concern. 'Approbation ' was one of the original meaning of goodwill before it was used as commercial slang.

Now, at the time of dissolution, the goodwill may be sold separately or along with the other assets. If there is dissolution of a partnership with a condition that the assets fall to a particular partner and no mention of goodwill is made, it is assumed that the goodwill also falls to the partner getting the other assets. It is therefore quite clear that goodwill is an integral part of the assets. At this time goodwill might infact be the most important and valuable asset. Also if there is no express or implied agreement to the effect then the goodwill may be sold as an asset on insistence of a partner. It must be noted that earlier neither the Contract Act nor the Partnership Act had any specific provision on goodwill and it has been only a recent development to include the section on goodwill as part of partnership act. The question whether the firm has goodwill or not is a question of fact.

The name of a firm which is included in the goodwill may be excluded from the sale where use of that name is likely , to expose continuing partners , who carry on business , to liability. Goodwill of the business sold -- seller of goodwill may set up rival business but if he tries to attract customs of old firms he can be restrained by an injunction from doing so, where a person is taken on the condition that the goodwill shall bring to other partner on termination of the partnership above principles applies. Also if there exists a deed of modification to separate business , it cannot be considered a deed of dissolution and thus will not attract Section 55 of the Indian Partnership Act.

In Laxmidas v. Nanabhai , the question was regarding maintainability of a suit and counter claims.
The essential reading regarding Section 55 was laid down as ' Goodwill is a part of the assets of a firm. The prima facie rule is that the goodwill of the firm being a part of that assets has to be sold just like other assets before the account between the partners can be settled and partnership wound up.' But no particular reference to goodwill which is only one of the several assets of a firm in a plaint for taking accounts of a dissolved partnership is required. Similarly the existence of goodwill is an asset of the firm , which has to be sold and the proceeds divided between the partners in the account taking is no bar to the conversion of a counter claim into a plaint in a cross suit is not easy to comprehend.

Authors contact info - articles The  author can be reached at: sujay_ilnu@legalserviceindia.com

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