Iliffe - the tax stuff

To follow up on Jeremy's post, the tax stuff on the Iliffe case has some useful points buried in it (but don't forget it's all obiter as the decision was actually that the assignments were void as they were assignments of unregistered trademarks in gross so the whole thing fell apart from the start):

Capital or revenue?
The decision confirms that the treatment of receipts from IP assets is not significantly different to that of receipts from other assets; where there is a significant reduction in value of an asset as a result of a transaction, that transaction is likely to be viewed as a capital transaction and any receipt will be a capital receipt.  In this case, the grant of a 5 year licence over the IP asset was held to constitute a significant reduction in value of that IP asset.

The capital/revenue distinction is less important for companies without capital losses as the tax rate is the same – it matters more to individuals, who pay different rates of tax on capital and revenue receipts.

One useful point that arises from the judgement is the confirmation that, simply because a payment arrangement is not typical for that type of transaction, it does not necessarily affect the tax treatment – HMRC had argued that trademark licensing arrangements are usually based on periodic payments, not a lump sum, and that the lump sum here simply relieved the subsidiaries of having to pay periodic payments. As such, they argued that the lump sum should be regarded as revenue. The judgment noted that this was not how the transaction was structured – the lump sum was not based on royalties, or any use of the IP assets, and the fact that this was atypical was not "of much significance".

Creating IP - licences and other implications
The tax rules for company IP assets depend on whether the asset was created or acquired before or on/after 1 April 2002 – the rules for post-1 April 2002 assets are more generous and so there are rules to stop related parties getting benefits by transferring IP assets between themselves. Basically, you can't turn a pre-1 April 2002 asset into a post-1 April 2002 asset by transferring it from one related party to another.

Unfortunately, the related parties rules don't really take licences into accounts – in this case, the parties tried to create post-1 April 2002 assets by creating licences from the trademarks. Licences are qualifying IP assets within the tax rules.

The judgement accepts that the licences of the trademarks were created after 1 April 2002 but finds that, in this case, there was no expenditure on the creation of the licences after 1 April 2002. The only expenditure in respect of the licences was on their acquisition. If there's no expenditure on creation of an IP asset after 1-April 2002 then it's not a post-1 April 2002 asset, under the tax rules. Even if it's actually created after that date.

As a result, the judgement finds that the licences can't fall within the corporate intangible tax rules because they are acquired from a related party – for the acquirer to get beneficial tax treatment, the IP asset must have been a post-1 April 2002 asset for the related party.

There was no discussion as to creation expenditure in respect of the licences and particularly the legal fees and the management time that are usually involved in the creation of the licenses. It seems unlikely that the licences sprang fully formed from the licensees and the licensor's only involvement was signature – particularly as it's clear from the background facts in the judgement that the licensor's directors were involved in discussions on the matter.

If time and legal fees incurred in creating licences don't count as post-1 April 2002 creation expenditure then there could be an argument that time spent by an author in creating a copyright work equally doesn't count as expenditure on creating an IP asset as copyright can be created without more identifiable expenditure. It's unlikely that HMRC would take the point, but it's arguably a logical conclusion from the judgement.

The decision was fairly clearly signalled by the point (in para 250-251) that there must be some limitation on licences counting as IP assets, otherwise all that would be needed to get around the related party rules would be to licence a pre-1 April 2002 asset, rather than transfer it. It's a pity that the judgement has to be a bit contorted in trying to get to this point – it's a point that should be properly dealt with in legislation.

It should be noted that the decision doesn't affect licences acquired from third parties – all that's required in such cases is that expenditure on acquiring the licence is incurred on/after 1 April 2002: the pre/post-1 April 2002 status of the licence with respect to the licensor doesn't matter.

IP mini-GAAR
There's a section in the IP tax rules for companies that effectively denies beneficial treatment if one of the main purposes of a transaction is to get a tax benefit (a mini-general anti abuse rule). The judgement findings here aren't specifically related to IP tax – they have wider implications for other mini-GAARs and the main GAAR that's anticipated in 2013. In particular, the judgement found that:

• it could take the tax adviser's intentions into account in deciding whether a tax advantage was a main purpose, as the taxpayer company directors didn't fully understand the structure
• it could compare the transaction to a hypothetical transaction that achieved the commercial objectives more effectively

Both these points are a bit of a departure from previous interpretation of mini-GAARs and have implications well outside the realms of IP tax law.

Overall
It's unlikely that there will be an appeal given that the defeat was on a basic point of IP law, so the IP tax points will stand as obiter dicta for the time being – the main points to note are:

• get the IP law right!
• make sure the taxpayer understands the structure
• trying to get around the rules will probably not be favourably looked upon by the Tribunal

The Vegemite/iSnack Trade Mark Saga Down Under: Fiasco or Triumph?

I have always wondered to what extent there is really no such thing as a good trade mark; at the most, there are bad trade marks that you simply wish to avoid. By this I mean that, as long as a trade mark passes muster legally, such that no one can challenge it as being too descriptive, and no third party can assert rights against the mark: it does not really matter at the end of the day what the precise mark actually is.

I thought about this question in reading an article that appeared on 3 November on nyt.com. Entitled "Vegemite Contest Draws Protests", under the byline of Meraiah Foley, the article describes a chain of events that began in July 2009 in connection with finding a name for a new variety of Australia's most distinctive food product--Vegemite. This product is described by the article as "salty, gooey yeast beloved millions of Australians", akin to that icon of the English breakfast table--Marmite. Akin perhaps, but in the eyes (palate?) of millions of Australians, Marmite is clearly inferior to their beloved Vegemite.

I have to admit--I have never understood the culinary attraction of Marmite, which means that I would probably also find Vegemite difficult to swallow. Perhaps the secret of Vegemite is a mix of culture and timing. As observed in the article, well-known Sydney chef Bill Granger observed that "Australian food was really bad until the 1970s: boiled meat and vegetables without any butter or salt. Vegemite was one of the things that actually had any flavor, and that's why it became so incredibly popular It is one of the only foods that is unique to Australia, and people see it as being quintessentially Australian." Whatever the reason, it seems that Vegemite has itself become an icon of Australian food products.

So what does any of this have to do with trade marks? It seems that the producer of Vegemite, Kraft Foods Australia, sought to launch a new variety of the Marmite product (mixed with cream cheese) by means of a contest to find a name for the gooey delight. To this end, Kraft caused jars and jars of the new product to appear on Australian supermarket shelves, with the words "Name Me" on the label. Weeks passed, and more than 3 million jars were sold (1 jar for nearly each 7th denizen of Australia), the product still remaining nameless. On 26 September, Kraft announced the winner via an expensive ad slot that appeared on the televised finals of the Australian football league--"Vegemite iSnack 2.0".

Now I would have thought that with the naming of the new product, the Vegemite business would return to normal. Au contraire. Anger poured in from all directions, inlcuding Facebook, Twitter, and a dedicated website (called "Names that are better than iSnack 2.0"). One online commentator called for the 27-year old designer who had come with the winning name to be "run naked through the streets of Sydney 'as retribution for his cultural crime' ". Another commentator simply said that the name was "un-Australian".

Kraft's reaction (or retribution) was soon to arrive. Four days later it announced that it was putting the name up for a re-vote. The ultimate winner, selected from an online and telephone poll, was --"Cheesybite." Product with the new name will appear on the shelf in a few months, after all of the jars with the "iSnack 2.0" name are sold.

Where Did You Hide the Cheesybite?

A public relations and marketing disaster for Kraft, no? Well, it it is not clear. As for the impact on Kraft's bottom line, the results were in fact spectacularly good. Sales for the "iSnack 2.0"-branded product rose 47% during the first two weeks of sales, while the sales of the original Vegemite product remained unaffected. In other words, Kraft actually increased sales for the Vegemite line. As well, the fact that the product had reached approximately 15% of all Australian households was a marketing achievement that brand managers usually only dream about.

There are those, especially with a conspiratorial bent, who seem convinced that Kraft planned the entire operation as a way of getting the consumers' attention amidst a cluttered and competitive supermarket environment. I rather doubt that, although Kraft's rapid response to the public outcry and subsequent revetting of the name must be applauded as an especially market-savvy move.Getting back to the question I raised at the beginning of this blog post--is there such a thing as a bad trade mark? I guess the answer, based on the Vegemite 'iSnack 2.0" experience, is both "yes" and "no."

On the one hand, the original mark per se seems to have been a bad marketing ploy, taking Australian culture and sensibilities into account. On the other hand, the trade mark issue was quickly resolved, the issue quickly disappeared, and Kraft does not seem to have suffered any harm to its business. So does, or does the mark, not matter? For the last word, I bring the words of Professor of Marketing, Paul Harrison, from Deakin University in Melbourne: "If people like the taste of it, they'll keep buying it--if they don't, they won't. Ultimately, you don't want people thinking too much about your brand, you want people to become habitual about it."