Taxation Of Merchandise Order Licences: A Invitee Blog

Last month, inwards Trustees inwards 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 taxation condition of exclusive merchandise grade licences. What truly happened was equally follows:

The trustees of a merchandise grade appealed against the dismissal of their claims for depreciation allowance inwards honor of a number of merchandise marks nether the Income Tax Act 1994 (New Zealand) s.EG1. The trustees, equally owners of those merchandise marks, had granted exclusive licences over the merchandise marks for a menstruation of 7 years inwards provide for an annual royalty. They afterwards claimed depreciation allowance inwards honor of those merchandise marks on the footing that they were the owners of the right to work the merchandise marks during that seven-year period. The taxation government dismissed the claim. In this appeal the Privy Council had to create upwards one's require heed whether the trustees had remained the owners of the right to work the merchandise marks, nonetheless the licensee's exclusive right to work the merchandise marks during the seven-year period.

Dismissing the appeal, the Privy Council held that

(i) the licensee's contractual right to the merchandise marks was equally capable of beingness holding equally whatsoever other intangible right;

(ii) a merchandise grade owner, having granted a licensee the exclusive right to work a merchandise mark, could non hold out the possessor of the right to work that merchandise grade during the licence period: whatsoever breach past times the licensor would non only outcome inwards damages but would title the licensee to apply for an injunction to trammel the licensor;

(iii) inwards this case, if a 3rd political party made unauthorised work of the merchandise marks, the licence entitled the licensees to telephone telephone on the trustees to accept necessary action. That was solely consistent alongside the exclusive right to work granted to the licensee, but it was inconsistent alongside the notion that the trustees had retained the right to use. Moreover, if the merchandise marks remained unregistered, hence the remedy for unauthorised work past times a 3rd political party was a passing-off activity past times the licensees in addition to non the trustees.

(iv) the fact that the trustees were non the owners of the right to work the merchandise marks did non hateful that, since the licensees were the owners of that right, they were entitled to claim depreciation allowance inwards honor of their rights nether the agreement;

(v) the trustees' claim to a depreciation allowance was non improved past times the circumstance that the licensees could non conduct maintain made that claim. The trustees' claim to depreciation allowance failed for the argue that, for the seven-year period, the trustees did non ain whatsoever depreciable intangible property. The right to work the merchandise marks was depreciable intangible property, but during the seven-year menstruation the trustees did non ain that right. That right belonged to the exclusive licensees.

Guest blogger Anna Carboni, a barrister inwards Wilberforce Chambers in addition to a noted intellectual holding expert, writes:

It seems to me that the Privy Council got the master copy number right (i.e. the Simkin trusts were non entitled to claim a depreciation allowance), but that this is because of the wording of Schedule 17 in addition to the relevant sections of the NZ Income Tax Act 1994. Once you lot encounter that "intangible property" is defined to include "the right to work a merchandise mark", it follows that whoever has that right at the relevant fourth dimension (as opposed to the legal ownership of the mark) must hold out considered the possessor of intangible holding for the purposes of the Act. The declaration on behalf of the Simkin trusts, that a licensee's right to work the grade could non hold out a proprietary right, was effectively an laid upwards on on the correctness of the listing of intangible holding inwards Schedule 17, which was doomed to failure. The only other way inwards which the Simkin trusts could conduct maintain succeeded would conduct maintain been to travail to constitute through rules of interpretation of NZ legislation that "right to work a TM" agency something other than what most IP lawyers would sympathise it to mean: for example, because only the merchandise grade possessor was intended to benefit. (But, if that were the case, why non simply listing "trade marks" equally relevant intangible property, rather than the right to work them?) I dubiety if at that topographic point was whatsoever ambit for doing this.

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

Given the statutory Definition of "intangible property" equally including the right to work a merchandise mark, in addition to the practical reality that an exclusive licensee (and non his licensor) has that right, it does non seem to conduct maintain been necessary for the PC to brand an limited finding on full general principles that "a contractual right is equally capable of beingness "property" equally whatsoever other intangible right" (para 17 of the judgment). Indeed, this declaration conflicts alongside many which conduct maintain gone earlier inwards IP cases in addition to texts. See, for example:

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

* for copyright, Browne-Wilkinson J inwards CBS Records v Charmdale [1980] FSR 289 at 295: "I would non facial expression a licensee to hold out treated equally having a holding involvement inwards the copyright. Under the full general constabulary a licensee is a soul who enjoys contractual rights equally against the holding owner. I tin uncovering naught inwards the [1956 Copyright] Act which conflicts alongside the regulation that the licensee’s rights residuum inwards contract in addition to are non proprietary.” in addition to Copinger & Skone James on Copyright, at para. 5-196(a): “The rights of a licensee, whether exclusive or non-exclusive, are non proprietary: they derive only from his contract, if any, together alongside such extra protection equally the 1988 Act gives him."

* for merchandise marks, Jacob J inwards 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 equally before, no proprietary right is conferred.”

In the most recent House of Lords decision, considering the grapheme of merchandise grade licences inwards exceptional (Scandecor v Scandecor [2002] FSR 7), their Lordships managed to avoid tidings of the 'proprietary versus contractual' issue. However, i senses that Lord Nicholls mightiness conduct maintain veered towards the sentiment that an exclusive licensee "owns" something concrete, given his recognition that the describe of piece of work organisation origin denoted past times a merchandise grade volition hold out perceived past times Earth equally "the soul who is for the fourth dimension beingness entitled to work the mark, whether equally proprietor or exclusive licensee" (see para. 37).

For most purposes, it truly doesn't thing (and frankly, who cares) whether an IP licensee tin hold out said to conduct maintain a holding right. The most of import number is unremarkably who may in addition to may non work the rights concerned, in addition to who tin deed to forestall those who may not. The number is most probable to hold out worthy of fence inwards a province of affairs similar the Simkin one, where taxation consequences volition stream from the handling of a licence equally a holding right or otherwise. And inwards such cases, the response volition oft hold out found inwards the taxation legislation, which volition non necessarily tally alongside an IP lawyer's sentiment of the world. One representative of the dissimilar worlds that nosotros alive inwards is the conclusion of the PC inwards the Simkin instance that the argue why the licensee companionship could non itself claim a depreciation allowance inwards honor of its "right to work the merchandise mark" was that it was paying an annual royalty for the exclusive licence. Had it paid a "premium" (i.e., presumably, an up-front working capital missive of the alphabet sum), the licence would conduct maintain been treated equally depreciable intangible holding inwards honor of which an allowance could hold out claimed. This highlights the fact that definitions used inwards taxation statutes are designed to capture or exclude exceptional types of payments in addition to receipts, rather than to assist the IP lawyer to characterise the underlying rights to which those payments in addition to receipts relate. For the same reason, judges dealing alongside taxation cases should beware of making full general statements almost IP rights in addition to licences thereunder, which lawyers may shout equally authorization for propositions far broader than intended inwards the circumstances of the case.