• UK COURT DIARY

    When Goodwill Vendors Have Second Thoughts

    Prospective purchasers beware, when the name of the business they intend to buy is also the name of the vendor. Where the contract terms permit the vendor to trade again under his own name, even an assignment of goodwill may not be enough to protect the buyer from the confusion that may arise.

    The question of when a business vendor may compete under his own name with a purchaser of the business and goodwill in that name was examined recently by the Court of Appeal in I. N. Newman Limited v Richard T. Adlem ([2005] EWCA Civ 741). The business buyer ultimately succeeded in preventing the vendor from competing as a funeral director in the same village under his own name, which was also the name of the transferred business. However, the differing views of the High Court, the appellate majority and the dissenting appellate judge show that the judicial see-saw could have come down either way.

    What lessons can prospective business buyers learn from this experience?

     

    The Facts

    The defendant respondent, Richard Adlem, had built up a successful business as a funeral director, agricultural contractor and memorial headstone provider in a Dorset village called Sixpenny Handley since 1965. He traded under the name “Richard T. Adlem Funeral Director.”

    In 1993, Mr Adlem sold his funeral business and the goodwill in that business to a Mr Beckwith. Mr Adlem continued to trade as a provider of memorial headstones, and he also actively assisted Mr Beckwith, for pay, in the directing of funerals. Mr Beckwith traded under the name “Richard T. Adlem Funeral Director,” sometimes adding “and Stephen Beckwith.”

    In 1999, Mr Beckwith sold the funeral business, including goodwill, to the respondent, I.N. Newman Ltd., the claimant appellant in the case. Newman continued the business under the name “Richard T. Adlem Funeral Director,” and Mr Adlem assisted Newman with 40 or so funerals between May 2000 and February 2001.

    Apparently yearning for his old vocation, in March 2001 Mr Adlem started to trade again in Sixpenny Handley as a funeral director. He advertised under his own name and began to complain to parish magazines and trading standards about Newman’s use of his name, resulting in a local reluctance to accept advertisements from Newman. At the same time, Mr Adlem registered RICHARD T. ADLEM FUNERAL DIRECTOR as a trade mark for monumental masonry services and funeral services in Classes 37 and 45.

     

    Claim by Newman

    Newman sued for passing off. It claimed that it was the successor in title to the goodwill in Mr Adlem’s previous business carried out under his name, and that his assertion of a right to trade again as a funeral director under that name was inconsistent with that grant. Newman also sought a declaration that Mr Adlem’s trade mark registration was invalid owing to Newman’s ownership of goodwill.

     

    High Court Decision

    The High Court found that although Newman was the successor in title to the goodwill, nonetheless as a matter of fact the name “Richard T. Adlem Funeral Director” did not denote Newman exclusively. It held that the parties had a concurrent right to use of the name, and thus dismissed the passing off action and the invalidity claim based on ownership of goodwill. It upheld the defence to trade mark infringement based on ownership of a prior right in a locality, however.

     

    The Court of Appeal Considers

    A Court of Appeal majority affirmed the High Court’s finding that the 1993 agreement had involved a transfer of goodwill.

    The 1993 agreement had contained a 5-year restrictive covenant blocking Mr Adlem from trading as a funeral director within a 10-mile radius of Sixpenny Handley. The Court of Appeal majority, however, rejected the suggestion that this clause was permissive, allowing Mr Adlem to set up a competing business under his own name within the area, after 5 years had passed.

    In the Court’s view, even though some members of the public associated the name “Richard T. Adlem Funeral Director” with Mr Adlem personally, the mere fact that they went to Newman’s business associating it with Mr Adlem personally was not the kind of deception that the law would remedy. Such customers may not have realized that the business had been assigned. However, they would have gone to the business that they intended to visit.

    The fact that some members of the public might associate the name with Mr Adlem meant that he was under a particular duty to make it clear that any new business he began was just that—a new business, and not the original business now conducted by Newman.

    The majority was puzzled by the High Court’s finding of concurrent goodwill. Although Mr Adlem had assisted both Beckwith and Newman with the conduct of funerals, his name in association with such services did not and could not generate goodwill because he was not trading on his own account, but rather was working for the benefit of the business he had sold.

    Whilst the Court accepted that no instances of deception arising from Mr Adlem’s activities had been proved, nonetheless it found that deception was likely. Advertisements placed by Mr Adlem stating “Est. 35 years,” or “The original and only RICHARD T. ADLEM…Established 1965 and still a small, independent and private family business” were likely to give rise to the impression that he was continuing the original business and that Newman was a usurper, and thus result in sales which should have gone to Newman.

    A disclaimer at the end of one ad (“No connection with Richart T Adlem operating from 01725 552306 or I. N. Newman Ltd.”) was insufficiently full, clear and “up-front” to be properly effective.

     

    Court of Appeal’s Ruling

    The Court of Appeal found that Mr Adlem had passed off his business as and for that of Newman, and that his trade mark registration was invalid on the basis of Newman’s ownership of prior goodwill.

    A dissenting judgment, however, shows how the facts of this case were open to different interpretations.

    In the view of Arden LJ, the 1993 agreement had not assigned an exclusive right to use of the name “Richard T. Adlem Funeral Director.” Mr Adlem had not been required to cease use of that name in respect of his memorial headstone and agricultural contracting business. The only restriction to Mr Adlem’s activities, therefore, was the restrictive covenant, which had ceased to apply after 5 years.

    Arden LJ agreed with the High Court’s finding of concurrent goodwill. As an independent contractor, Mr Adlem had performed nearly all funerals for Beckwith and Newman and, as such, continued to acquire goodwill in his name. The public perception was that Mr Adlem was providing funeral services, and that his services could be obtained through the business of Beckwith and later Newman. Consequently, Arden LJ considered that there had been no relevant misrepresentation.

     

    Comment

    This case is a hard lesson to prospective business buyers, and sellers, alike.

    Often most of the value in a business transfer is in the goodwill, “the attractive force that brings in custom.” It almost goes without saying, therefore, that the transfer should exclude the vendor from trading under the same name later, and thus depriving the buyer of some of the value of his purchase. And yet, where the contract can be read as permitting continued trade under that name, there may be a risk of concurrent goodwill arising which prevents either party from holding exclusive rights. The risk of such a situation actually arising is highest where goodwill is in a personal name.

    In this case, the business buyer was saved by the appellate majority’s reading of the contract as having transferred exclusive ownership of goodwill to Mr Beckwith and later to Newman, and of Mr Adlem’s continued activities as having been for the benefit of the sold business, creating no new and independent goodwill for himself. However, it seems clear that this was a case on which reasonable people could differ, and the claimant appellant may have succeeded as much through luck as merit.

    Business sellers, too, may find this judgment harsh. A business vendor who has sold the goodwill in his personal name may be astonished to learn that he may no longer trade later on under it, without making it clear that those seeking the original business should not come to him.

    How can business buyers and sellers reduce the likelihood of conflict when dealing with a business transfer agreement involving a personal name? Clearly each case will differ, but as a general rule, the following points may be relevant:

    • Draft any transfer of goodwill with a view to avoiding any ambiguity as to whether the entire goodwill of the business has been transferred.
    • State clearly for whose benefit the vendor carries out any independent consultancy on behalf of the transferred business, to avoid uncertainty as to whether such activities give rise to independent goodwill for the vendor.
    • Make it express whether or not the vendor is permitted to trade under any variant of his personal name once any restrictive covenants have ended. Seek to agree any such variants, and how the vendor will communicate that his new business is not the same as the old. This is particularly important in fields, such as law or accounting, where it is normal for traders to offer their services under their own personal names.Each case will be different, however, and there is no substitute for good professional advice on the specific aspects of an individual transfer. Where personal names are concerned, the advice will pay for itself if the parties can steer around the problems that beset the players in Newman.