AJPark

Manufacturing businesses that set up and sell off related retail outlets need to consider the implications of allowing another unrelated business to use their name. And the retail business needs to consider what alternative is best for the ongoing business.  The retail shop may need to change its name or the parties may need to negotiate a licence outlining the terms and conditions under which the name can be used.

It is not uncommon for manufacturing businesses to have a retail outlet.   A retail outlet allows a manufacturer to dispose of stock fairly easily.  Often the retail outlet is no more than a factory shop.  Or it may be a “seconds shop”.  Sometimes it is a fully stocked retail outlet separate but still part of the manufacturing business. 

When the manufacturing businesses’ name is used as the retail outlet name, common ownership will mean there is no issue. Using the same name on effectively two different businesses is not a problem when both are owned by one business.

But what happens if the manufacturing business decides to sell its retail operation to another independent business?  Should the manufacturer allow the retail business to continue using its name or should a name change be a condition of purchase?  Should the manufacturer give the retail business a licence to use the manufacturer’s name for ‘retail services’ subject to certain terms and conditions? 

The interests of the retail owner should also be considered.  Would the retailer be better off buying the outlets and starting business afresh with a new name? Or should the retailer try to negotiate a deal whereby it can continue to trade under the existing name? These are complex issues.  There is no right and wrong answer.

But it is important that these issues be considered and resolved to avoid any downstream misunderstandings.  If the parties decide that the retail business will continue trading under the manufacturing name, then it is critical that this be formally documented.  And that the retail business understands fully what this arrangement means for its business and its possible future effects.
  
We canvas some of the issues that arise below.

It is common for a manufacturing business to have a related retail arm.  It is also common during the life of the manufacturing business for it to consider selling its retail operation.

Any business, whether it is a manufacturer or retailer, should consider registering its brand as a trade mark. This is so even if there is no plan to sell part or the whole business.  A businesses’ brand is one of its most valuable assets. 

Applications to register a trade mark must specify the goods and services for which the trade mark will be used. Once registered, trade mark protection will extend to the goods and services that have been specified and similar goods and services.

Let’s take a hypothetical clothing manufacturer Starlight as an example.  The brand 'Starlight' could be registered as a trade mark for ‘clothing manufacturing’ services and ‘clothing’ products.  If Starlight also offers ‘clothing design services’ for other clothing manufacturers then those services should also be protected.  If Starlight also runs a retail outlet then ‘retail’ or ‘wholesale’ or both ‘retail and wholesale’ services should be covered too.

Over the years Starlight grows its manufacturing base through mergers and takeovers.  After ten years of business, Starlight has five factories.  At each factory, they run a factory shop.  The business also has eight other retail outlets throughout New Zealand.  But with no in-house retail expertise and facing increased competition, Starlight decides that ‘retail’ is too hard.  They decide to sell the eight retail stores.  Starlight wishes to keep its five factory shops because they provide access to customers and their views about product lines. Starlight can also sell surplus stock, old stock and seconds through its factory stores.

The manufacturing business puts its eight retail outlets on the market.  After several bites, they finally find an interested buyer.  But the buyer also wants to continue trading under the name Starlight.  They see huge value in continuing to trade under the already successful retail chain name.  There is equity in the Starlight brand.  The retail chain has a strong customer base and the business has credibility by being associated with the well respected manufacturer Starlight.

The manufacturing business is not so sure.  What happens if the retail business flounders – will that damage the manufacturing business?  What if the retail chain sells clothes of an inferior quality to theirs?  Would the retail chain want to use the brand Starlight on clothing made by other manufacturers?

The manufacturing business had intended selling its retail outlets without its name.  But now the question has been asked, Starlight must decide whether the retail business buyer can use the Starlight name.

If the manufacturer agrees to the retail chain continuing to trade under the name Starlight, then this arrangement needs to be documented in a trade mark licence that clearly spells out the terms and conditions of such use.

Such a document would outline such matters as:

1. Would the manufacturer be prepared to supply its Starlight-branded clothes to the retailer?
2. Can the retailer stock other manufacturers’ clothing if the answer to the first question is yes?
3. Can the retailer use the name Starlight for online sales or mail order sales?
4. Can the retail business owner register a domain name including the word Starlight for its online retail business?
5. How long can the retail outlets be called Starlight?
6. What are the rights of renewal?
7. How is Starlight to be presented?
8. Can use of Starlight be sub-licenced?
9. And much more…

Another consideration for the retail owner if it decides to enter into a licence is the future ‘saleability’ of its business.  While Starlight may be prepared to allow the initial retail business to use its name, it may not be so keen to allow others.  It is not unusual for the rights to use of a trade mark to extinguish on the sale of a business. 

Whether the retail buyer can continue to use the name could impact on the price paid for the business.  Without the ability to use Starlight, the retail buyer may see the retail chain as having reduced value.

But if the manufacturer refuses to licence use of its name, the retailer has an opportunity to select its own unique brand which it can then register as a trade mark.

Although the retail business would have to create a business afresh with no existing reputation to rely on, it can build a business with a name that it owns and controls.  It would not have to worry about having the ‘right to use’ its name revoked in the future.  This is an important consideration.

The retail business would over time build up equity in its own name.  This could significantly influence the value of the retail business should its owner decide at some stage to sell it.  Ownership would also provide the retail owner with greater flexibility should it decide to franchise its business or sell it at a later time.

There are advantages and disadvantages in starting out with a fresh name and in licensing the use of an existing name. Either way, any arrangement for using another businesses’ name should be formally documented so the rights and duties of both parties are clearly spelt out from the outset.

An edited version of this article was published in NZ Retail, February 2009.

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  Corinne Blumsky

  Partner