The proportion of modern enterprises’ intangible assets is getting increasingly higher. Among S&P 500 companies 40 years ago, enterprises held mainly tangible assets such as land and equipment, accounting for about 90% of their asset value. Nowadays, this has inverted, with 90% of assets being intangible assets.
Intangible assets mainly include technical patents, know-how, trademarks, brands and data. The rights to these are, like the exclusive right to trademarks, the legal carriers of brand assets. Trademarks and brands are particularly important.
Brand (or brand asset) is an economic definition or asset definition. From the perspective of legal ownership, in addition to trademarks, there are also such rights and interests as:
- Enterprises’ right to name under the Civil Code;
- Rights and interests in trade dress under the Anti-Unfair Competition Law; and
- Names unique to well-known goods, which are the legal carriers of brand assets.
Thus, trade names should not be overlooked. As reflected in some court cases, dispute over the rights and interests of a trade name is typical of disputes resulting from a failure to plan for the use of a trade name prior to the investment, and a failure to specify that the use of the trade name is to be disabled at the time of withdrawal of investment.
In a retrial case by the Supreme People’s Court, the plaintiff was a national conglomerate with its name starting with the character for “Zhong”, and its subsidiaries were also named starting with the same character. The plaintiff’s secondary subsidiary made equity investment in the defendant and, after the investment, changed the defendant’s enterprise name to a combination of “Zhong” + the defendant’s original trade name.
After several years of operation, the subsidiary withdrew its investment from the defendant but it continued to use the “Zhong” name, resulting in a conflict between the two and a negative impact on the plaintiff’s brand asset management.
In this case and similar other cases where the author represented plaintiffs, the courts all upheld the plaintiff’s claims for discontinuing use of the trade names. The disputes about using names frequently arose after the withdrawal of investment, reflecting a general failure to plan and arrange management of the brands carried by the trade names during the investment and M&A process.
For the investee, if there is a breakthrough contribution to the trade name, disabled use of the trade name due to equity changes will also cause serious business obstacles.
In investment and M&A, if a target is a brand-driven enterprise – especially a branded enterprise with notable history – an investigation should be conducted on its brand assets in a reasonable manner to make a professional legal evaluation.
Based on the author’s practical experience in M&A and disputes in enterprises with brand advantage, the following aspects should be considered to improve brand asset evaluation and investment decisions.
Consistency between business models and trademarks. The registration and protection of trademarks based on classification of goods and services. The Nice Agreement Concerning the International Classification of Goods and Services for the Purposes of the Registration of Marks divides goods and services into 45 categories.
However, with the innovation of business models and the transformation and upgrading of many traditional industries, their service carriers and models have been altered. This may lead to further changes in the main legal categories for brand asset protection.
The internet, Metaverse, and Web 3.0 all have potential to reshape business models. Therefore, judgment on consistency between business models and trademarks is essential in the investment in, or M&A of, brand-driven enterprises.
Stability of exclusive right to trademark. According to the Trademark Law, if a registered trademark infringes upon any person’s prior rights and interests, that person may file a declaration of invalidation within five years.
However, if the registration was made in bad faith, or the person is the owner of a well-known trademark, the five-year limit will not apply. Such declaration of invalidation not subject to the five-year limit tends to have a long-term impact on the stability of trademarks.
A registered trademark should not conflict with others’ prior rights and interests, including the name rights of celebrities, movie stars, athletes and famous fairy tale characters, and the prior copyright of others.
Therefore, when investing in a brand-driven enterprise, decision-making should also consider whether it is going through litigation, or may go through litigation in the future, thus bringing challenges to trademark stability.
Concentration of trademark registration symbols. During trademark transfer, the law requires that similar trademarks registered on the same goods, or identical or similar trademarks registered on similar goods, be transferred together. This is to prevent market confusion caused by the dispersion of trademark symbols. Enterprises should investigate the concentration of trademark symbols held within the investee and the related protection layout for the defensive and associated trademark to judge whether there is an appropriate degree of trademark protection.
In addition, an investor should also consider the licensing of the investee’s trademark, whether its trademark conflicts with trade names of market participants in other regions, and whether there are other co-existing trademarks in the market due to historical reasons. In addition, attention should be paid to the more important trade-dress rights in brand assets.
Promotion of financing
As intellectual property financing receives more market incentives, brand asset pledge financing has been recognised as a financing means that can be sought in addition to investment and M&A. For investors, making better use of brand assets for financing can also reduce the consumption of cash flow.
To improve financing prospects, investors may also adopt the strategy of brand competition; that is, comprehensively and effectively combining the external awareness, internal category, technology and competition of the brand to highlight the differentiated advantage in the sub-categories.
This will better promote the competitiveness of enterprises and facilitate the introduction of both strategic and financial investors, thus realising the purpose of brand management for financing and development.
Peng Yingwu is a senior partner and the deputy director of the national professional committee on IP at DOCVIT Law Firm