Great (IP) Brands (Products) Never Die

During the last election cycle, US Presidential candidate Mitt Romney attacked the beloved US children’s television show, Sesame Street, in a debate with Barack Obama.  In a bizarre exchange, Romney basically said he was going to shut down the Public Broadcasting Service show—Big Bird, the Grouch, the Count, Bert, Ernie and Elmo were in trouble.  My children, who watched the debate, were horrified.  At the time of the debate, my children were ages 8, 5 and 3 (we had to work to get them to focus).  After the debate, they would say things like, “We hate Romney,” and “Romney hates kids.”  I tried to explain to my kids that Romney is not against Sesame Street; Romney just doesn’t like the fact that the government is partially paying for the production of Sesame Street while our country has so much debt.  I also pointed out that Sesame Street is a very popular show and that a firm in the private sector would be sure to “pick it up”—they probably wouldn’t miss a show.  (trying to be objective here)  But, my kids were not having it.  They still, to this day, dislike Mitt Romney.  And, if you ask my now four year old what her religion is she says, “Democrat.”  (So much for Sunday school.  And, I do confess that there are other reasons my kids support the Democrats and they also think President Barack Obama is “very cool.”)

Here is another teaching moment.  The beloved American snack food and brand, the Twinkie, is reborn.  Last year, the Hostess company announced its bankruptcy.  Some of its brands were American icons such as Wonder Bread and Twinkies.  CNN reports that a joint venture of private equity firms is purchasing the Hostess snack food business, including Twinkies, for $410 million.  CNN has also reported that the “Wonder Bread” brand and Hostess bakeries has been purchased by Flower Foods for $360 million.  Looking forward to seeing Twinkies on the shelves again—although I confess I prefer Sno Balls. (I wonder if my kids are now going to love a joint venture of private equity firms.)

Royalties owed to bankrupt musician not "wages"

"Royalties from music publisher belonged to lender of bankrupt", published in the World Media Law Report about six weeks ago, is a note on the Ontario, Canada, decision in Re Friedman (2008), 49 C.B.R. (5th) 131 (Ont. S.C.J. in bankruptcy).

In brief, Friedman assigned his rights to royalties payable by Canadian copyright collecting society SOCAN to his music publisher, as security for loans advanced to him from the publisher. He subsequently became bankrupt, owing the publisher some $3.2 million. When the publisher sought payment to it of the royalties payable to Friedman from SOCAN, Freidman applied under the Bankruptcy and Insolvency Act, s.68(1) for a ruling that those royalties were effectively post-bankruptcy wages which, as such, could not be the subject of an attachment.

Holding for the publisher, the Court considered that the royalties in question had been earned from activities which Friedman had completed before the starting date of his bankruptcy. Accordingly s.68(1) did not apply.

Source: note by Miller Thomson LLP

Question on Rejection of IP Licenses in Bankruptcy or Insolvency

I am departing from my usual form of commentary to pose a short request for information from readers. I have just completed a short piece for a publication on the issue of the treatment of IP licenses in a bankruptcy proceeding. While there is apparently a major divide on the issue between the U.S. position and the position elsewhere on whether a licensee can seek to force the licensor in bankruptcy to continue with the license, all systems seem to allow the trustee, in some fashion, to reject the license.

My question is whether any reader is aware of a decision under a national bankruptcy law in which a trustee has rejected the license and the issue was later brought to court. If so, I would be most grateful for receiving particulars about such decision. Please post the particulars as a Comment below or, if that is not possible, email me here

Branding and the Demise of Mervyn's

One of the more difficult tasks in teaching IP strategy to MBA students is explaining why trademarks are lumped together with patents, copyright and trade secrets. The way I try to accomplish this is by emphasizing the relational and symbolic nature of trademarks. Trademarks are not really about protecting words per se (not even the most renowned famous mark can enjoy blanket protection for every commercial use). Instead, they seek to protect the relationship created between and among the mark, the product, and the source and the goodwill generated by this relationship.

Now I am not kidding myself. I can't push this foray into the outer reaches of IP metaphysics for too far or too long, lest I become the object of glazed-over, or disconnected, stares. But 5-15 minutes of this exposition, Coca Cola container in hand to serve as a ready example, seem to do the job. What becomes even more difficult is when the discussion moves from trademarks to brands (there are invevitably several upwardly marketing types in each class). I am aware that yesterday's trademark manager has become today's "head of corporate branding" in many companies.

But for me, the uncertainties about setting the metes and bounds of brands and branding make the class discussion among the most challenging of the entire course. Is branding about various lines of an international cosmetics company, or is about the overall value and draw of the name of multi-faceted retail chain?

On the metaphysics of branding

I was reminded of the uncertainties regarding discussions on brands in an article that appeared in the December 8th issue of Business Week, "How Private Equity Strangled Mervyn's". The focus of the article was the bankruptcy of the U.S. chain retailer, Mervyn's. At its height, Mervyn's had 257 stores and 30,000 employees, and it was a well-known retail fixure in the U.S. West Coast. The article took the slant that the ultimate demise of the company was due to the interests of its most recent owner, a consortium of private equity investors, whose financial interests were not necessarily in the best interest of the long-term prosperity of the company and its brand.

According to the article, the new owners of the chain were more interested in reaping short-term benefit from sellling off real estate and engaging in certain sleights of hand with store leases than in attending to the nuts and bolts of trying to resucitate a declining retail brand. Indeed, the account of the actions of the chain's private equity owners is notable by the fact that the things that presumably went into building the brand--merchandise, pricing, ambience, service, and customer goodwill--are virtually unmentioned. For these owners, at least, there was more (or at least different, if only for the short term) value in the physcial assets acquired and later disposed of, than in what we would typically understand as part of the chain's brand.

In fact, the decline of the Mervyn brand began much earlier, in 1978, when the family-owned business was sold to the retail conglomerate Dayton Hudson. According to the article, Dayton Hudson preferred to use the money that was being spun off by Mervyn to strengthen its flagship franchise, the well-known U.S. retainer Target. The result was that, here as well, the kinds of things that are necessary to maintain a brand in the rough and tumble of retailing were being neglected by virtue of the diversion of cash flow from the company's parent to another (and preferred) member of the corporate retailing stable.

The demise of a brand

In recounting this story, it is clear that we have drifted far afield from a conventional understanding of branding. Will the regrettable end of Mervyn's find its way into my next MBA course? Probably not, after all, it is not really about IP strategy. That said, it too is about branding, or more precisely, what happens when branding ceases to become a primary focus of the company's operations.

After bankruptcy: what happens to the Italian business format franchise?

Although, once a business format is successfully trialled, a franchise contract runs a heavily reduced risk of encountering an episode of bankruptcy on either side, this event can still occur. The Italian Bankruptcy Law (267/1942) divides business contracts into three categories:

* contracts that terminate on an adjudication of bankruptcy;

* contracts to which the bankruptcy trustee automatically succeeds the bankrupt because continued performance is to the creditors' advantage;

* contracts that are suspended until the bankruptcy trustee decides whether to terminate or continue them.

Franchise agreements, despite their ubiquity, are not however mentioned -- an oversight that was not addressed when the Franchising Law was revised in 2004. This means that their regulation on bankruptcy must be handled by analogising them to one of the three categories mentioned above.

In intellectual property terms, franchise agreements can span a number of elements of the contractual relationship:

* the use of trade marks and other signs belonging to the franchisor;

* the transfer of the franchisor's know-how to the franchisee;

* the sale by the franchisee of products and services and

* the payment by the franchisee of agreed royalties or fees.

The diverse nature of these provisions makes franchise agreements comparable to several types of contract, such as licence, agency, distribution, supply and commission agreements.

Some commentators consider the franchise relationship to be one of personal trust, which automatically terminates in the event of either party's bankruptcy, in the same manner as agency and commission agreements. Case law from the Court of Turin in January 1995 however construed the franchise as a supply agreement in which the franchisor supplied services, rather than goods. On this basis it was regulated by the provisions of the Bankruptcy Law that provide for the suspension of performance of mutual obligations until the bankruptcy trustee decides whether to terminate or continue the contract. This ruling has however been questioned on practical grounds.

Ultimately each case will be decided on its own facts and its own merits. Parties are advised to stipulate the consequences of bankruptcy in advance, to avoid undertainties and undesired consequences [source: Marco De Leo and Beatrice Masi, of Rinaldi e Associati, writing in International Law Office].