In the valuation of businesses the portion attributed to goodwill is often greater than other items of property such as stock, equipment or work in progress. Pain is felt immediately when a competitor or pirate pass off its business or product as yours.
They are taking your goodwill, a business property right. Protection against this is at the heart of the tort of passing off law.
The use of passing off law is neatly illustrated in an English case involving Rihanna and sale of a designer T-shirt bearing her image.
The case was triggered after Topshop, a major English garment retailer, produced and sold the T-shirt online and in its stores.
Rihanna has an army of minders. They were not happy.
The case was launched as Robyn Rihanna Fenty and Others vs Topshop and Another. The decision was handed down in mid-2013 by Justice Birss in the High Court of Justice, Chancery Division.
Topshop was prepared. Rihanna's legal hurdles included:
Topshop had licensed the photo for use from the copyright holder of the photo.
Topshop was not using the name Rihanna on the T-shirt or marketing messages, though it had done so for a few days on the online ad for the T-shirt. RIHANNA is a registered trade mark for clothing held in England.
Topshop was not stating expressly that the T-shirt was endorsed, official or authorised.
There was no breach of any privacy right.
There are no publicity rights recognised in English law, as in certain states of the United States.
Three elements of a passing off case
The minders turned to reliance on the common law remedy of passing off. For this they had to establish the three elements of a passing off claim.
Goodwill – Rihanna is obviously a global music icon. Rihanna’s goodwill was evidenced by the existence of endorsement agreements with Nike, Gillette, Clinique and LG Mobile as well as promotional arrangements with H&M’s Fashion Against Aids, Gucci, Armani and River Island (for which Rihanna is also involved as a designer). Quoting Justice Birss at 38: “Through her companies she runs a very large merchandising and endorsement operation.” Importantly, evidence indicated Rihanna had an association between herself and the high-end fashion world. Indeed, Rihanna was also on the evidence a “style icon” for women 13 to 30. In synch with this Topshop's item was a designer T-shirt not, as the judge pointed out, a bog standard music artist T-shirt that would be readily regarded as unendorsed or unauthorised.
Misrepresentation – For this element Rihanna's case was that use of her image was a strong indication to her fans that the Topshop T-shirt was authorised by Rihanna. Here it was noted that the photo was taken during the shoot for her hit single “We Found Love” [it currently has over 326 million views on YouTube]. Justice Birss noted with some emphasis that “Topshop makes a considerable effort to emphasise connections in the public mind between the store and famous stylish people.” He cited this @Topshop (350,000 followers) tweet: “Ridiculously excited! @Rihanna in our Oxford Circus store as we tweet. Ah, wonder what she'll buy…". Here the Rihanna evidence was showing that the T-shirt was in a Topshop retail context where, as the judge noted, certain artist-connected representations by Topshop were commonplace.
Damage – Thirdly, it was said that Rihanna’s goodwill, as well as her merchandising business, had suffered as a result of the misrepresentation. Specifically there had been a loss of control over her reputation in the fashion sphere. (In Australia the remedies for passing off are injunctions, compensatory damages, exemplary damages and/or an account of profits.)
On the above basis Rihanna and her minders succeeded with the passing off claim.
The decision still sets a high hurdle. Selling a T-shirt with an image of a famous person on it would not be enough to constitute passing off in another case. More evidence or context is needed. Justice Birss decision states this at paragraph 35:
“A critical problem is to distinguish between two different reasons why a person might be moved to buy the product in question. If when they buy the t-shirt, they simply wish to buy an image of the pop star, then no misrepresentation has taken place. Merely recognising that the image is an image of the celebrity can never be sufficient to make the claimant's case. For passing off to succeed there must be a misrepresentation about trade origin.” [Emphasis added]
Rihanna’s court success relied on the strength of the evidence of Rihanna’s goodwill, misrepresentation and damage. Her goodwill included evidence of her trade involvement in fashion, the designer T-shirt connected with that sector, all making it easier for her fans to believe that such a designer T-shirt originated from her or her minders, thus substantiating misrepresentation by Topshop.
The three elements of passing off begin with the need to prove goodwill. Justice Gummow in the Australian High Court decision of JT International SA v Commonwealth of Australia  HCA 43 at 106 provides clear guidance on the legal nature of goodwill. Note his final sentence referring to “visual images”.
"From the viewpoint of the proprietors of a business and subsequent purchasers, goodwill is an asset of the business because it is the valuable right or privilege to use the other assets of the business as a business to produce income. It is the right or privilege to make use of all that constitutes “the attractive force which brings in custom”. Goodwill is correctly identified as property, therefore, because it is the legal right or privilege to conduct a business in substantially the same manner and by substantially the same means that have attracted custom to it. It is a right or privilege that is inseparable from the conduct of the business.
And, as Windeyer J emphasised in Colbeam Palmer, protection of property is the foundation in equity of the passing-off action. Further, it is well established that such an action may protect the goodwill derived from slogans and visual images which build up an association with the business of the plaintiff.”
Design your IP, don't do random IP work and registrations
The Rihanna case yet again illustrates that IP protection is greater if the claim about there being goodwill extends well beyond merely a random registration. Rarely is it enough to just register a trading name, business name, company name, trade mark or domain name. In Rihanna's case there were various endorsement and merchandising agreements which were put into evidence. The list of convincing witnesses providing evidence in the case for Rihanna included:
her New York talent manager,
her creative director of six years providng a “full service marketing and branding company that builds brands for artists, athletes and business”,
a brand director at a major UK fashion retailer,
a brand licensing agency, and
an executive from Live National Merchandise Ltd, who ultimately could not appear.
Required evidence and witnesses varies with each case. Measuring goodwill varies with each business. In another case the metrics for goodwill might be the quantity of passing foot or car traffic, the duration of consistent and prominent use of a mark, the regularity of repeat business, reputation held in a trading name, domain name or trade mark or in many other elements of that complex five letter concept - brand.
We’ve written extensively on this Lightbulb blog about how to build a strong brand. We've also repeatedly explained, including in the video below, that it is vastly better to build IP into your product, than to paste IP onto it.
In winning Rihanna had more than just goodwill and metrics, eg evidence of having a name immediately recognised by tens or hundreds of millions. Rather, she had evidence of having forged a reputation in the fashion or garment and merchandising industries. This helped found the misrepresentation and damages arguments to deliver the result.
Goodwill is property associated with a business. Oftentimes the goodwill can’t be separated from the rest of the business, for example a registered trade mark when assigned must be assigned with its associated goodwill. Taking goodwill takes the associated business. As the Rihanna case illustrates, passing off law can protect that property when other laws don’t apply.
UPDATE 22 January 2015: On this day the England and Wales Court of Appeal (Civil Division) released its decision. It too ruled, unanimously, that there was passing off in this case - http://www.bailii.org/ew/cases/EWCA/Civ/2015/3.html