TAXATION OF TRADE MARK LICENCES: A GUEST BLOG

Last month, in Trustees in the CB Simkin Trust v Inland Revenue Commissioner of New Zealand [2004] UKPC 55, The Privy Council ruled on an appeal from New Zealand on the tax status of exclusive trade mark licences. What actually happened was as follows:

The trustees of a trade mark appealed against the dismissal of their claims for depreciation allowance in respect of a number of trade marks under the Income Tax Act 1994 (New Zealand) s.EG1. The trustees, as owners of those trade marks, had granted exclusive licences over the trade marks for a period of seven years in return for an annual royalty. They later claimed depreciation allowance in respect of those trade marks on the basis that they were the owners of the right to use the trade marks during that seven-year period. The tax authorities dismissed the claim. In this appeal the Privy Council had to decide whether the trustees had remained the owners of the right to use the trade marks, notwithstanding the licensee's exclusive right to use the trade marks during the seven-year period.

Dismissing the appeal, the Privy Council held that

(i) the licensee's contractual right to the trade marks was as capable of being property as any other intangible right;

(ii) a trade mark owner, having granted a licensee the exclusive right to use a trade mark, could not be the owner of the right to use that trade mark during the licence period: any breach by the licensor would not only result in damages but would entitle the licensee to apply for an injunction to restrain the licensor;

(iii) in this case, if a third party made unauthorised use of the trade marks, the licence entitled the licensees to call on the trustees to take necessary action. That was entirely consistent with the exclusive right to use granted to the licensee, but it was inconsistent with the notion that the trustees had retained the right to use. Moreover, if the trade marks remained unregistered, then the remedy for unauthorised use by a third party was a passing-off action by the licensees and not the trustees.

(iv) the fact that the trustees were not the owners of the right to use the trade marks did not mean that, since the licensees were the owners of that right, they were entitled to claim depreciation allowance in respect of their rights under the agreement;

(v) the trustees' claim to a depreciation allowance was not improved by the circumstance that the licensees could not have made that claim. The trustees' claim to depreciation allowance failed for the reason that, for the seven-year period, the trustees did not own any depreciable intangible property. The right to use the trade marks was depreciable intangible property, but during the seven-year period the trustees did not own that right. That right belonged to the exclusive licensees.

Guest blogger Anna Carboni, a barrister in Wilberforce Chambers and a noted intellectual property expert, writes:

It seems to me that the Privy Council got the main issue right (i.e. the Simkin trusts were not entitled to claim a depreciation allowance), but that this is because of the wording of Schedule 17 and the relevant sections of the NZ Income Tax Act 1994. Once you see that "intangible property" is defined to include "the right to use a trade mark", it follows that whoever has that right at the relevant time (as opposed to the legal ownership of the mark) must be considered the owner of intangible property for the purposes of the Act. The argument on behalf of the Simkin trusts, that a licensee's right to use the mark could not be a proprietary right, was effectively an attack on the correctness of the list of intangible property in Schedule 17, which was doomed to failure. The only other way in which the Simkin trusts could have succeeded would have been to try to establish through rules of interpretation of NZ legislation that "right to use a TM" means something other than what most IP lawyers would understand it to mean: for example, because only the trade mark owner was intended to benefit. (But, if that were the case, why not just list "trade marks" as relevant intangible property, rather than the right to use them?) I doubt if there was any scope for doing this.

Privy Council: should they refrain from making general statements about the proprietary nature of IP licences?

Given the statutory definition of "intangible property" as including the right to use a trade mark, and the practical reality that an exclusive licensee (and not his licensor) has that right, it does not appear to have been necessary for the PC to make an express finding on general principles that "a contractual right is as capable of being "property" as any other intangible right" (para 17 of the judgment). Indeed, this statement conflicts with many which have gone before in IP cases and texts. See, for example:

* for patents, Lord Diplock in Allen & Hanburys Ltd v Generics [1986] RPC 203 at 246: "A licence passes no proprietary interest in anything, it only makes an action lawful that would otherwise have been unlawful.";

* for copyright, Browne-Wilkinson J in CBS Records v Charmdale [1980] FSR 289 at 295: "I would not expect a licensee to be treated as having a property interest in the copyright. Under the general law a licensee is a person who enjoys contractual rights as against the property owner. I can find nothing in the [1956 Copyright] Act which conflicts with the principle that the licensee’s rights rest in contract and are not proprietary.” and Copinger & Skone James on Copyright, at para. 5-196(a): “The rights of a licensee, whether exclusive or non-exclusive, are not proprietary: they derive only from his contract, if any, together with such extra protection as the 1988 Act gives him."

* for trade marks, Jacob J in Northern & Shell Plc v Condé Nast [1995] RPC 117 at 127: “[under the TMA] s.30(3) is the provision enabling a licensee to sue. Just as before, no proprietary right is conferred.”

In the most recent House of Lords decision, considering the character of trade mark licences in detail (Scandecor v Scandecor [2002] FSR 7), their Lordships managed to avoid discussion of the 'proprietary versus contractual' issue. However, one senses that Lord Nicholls might have veered towards the view that an exclusive licensee "owns" something concrete, given his recognition that the business source denoted by a trade mark will be perceived by the public as "the person who is for the time being entitled to use the mark, whether as proprietor or exclusive licensee" (see para. 37).

For most purposes, it really doesn't matter (and frankly, who cares) whether an IP licensee can be said to have a property right. The most important issue is usually who may and may not use the rights concerned, and who can act to prevent those who may not. The issue is most likely to be worthy of debate in a situation like the Simkin one, where tax consequences will flow from the treatment of a licence as a property right or otherwise. And in such cases, the answer will often be found in the tax legislation, which will not necessarily tally with an IP lawyer's view of the world. One example of the different worlds that we live in is the conclusion of the PC in the Simkin case that the reason why the licensee company could not itself claim a depreciation allowance in respect of its "right to use the trade mark" was that it was paying an annual royalty for the exclusive licence. Had it paid a "premium" (i.e., presumably, an up-front capital sum), the licence would have been treated as depreciable intangible property in respect of which an allowance could be claimed. This highlights the fact that definitions used in tax statutes are designed to capture or exclude particular types of payments and receipts, rather than to help the IP lawyer to characterise the underlying rights to which those payments and receipts relate. For the same reason, judges dealing with tax cases should beware of making general statements about IP rights and licences thereunder, which lawyers may cite as authority for propositions far broader than intended in the circumstances of the case.