Can a Former Employee Stop His Employer from Making Use of the Goodwill Generated by Him?

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Introduction

In a claim of passing-off, the claimant needs first to establish goodwill attached to the claimant’s business. The goodwill established by an employee of a business in general belongs to the business. It is therefore difficult for a former employee to claim passing-off against the employer for making use of the goodwill generated by the former employee during the course of his/her employment. This is notwithstanding that the employee may be individually reputable in the industry. This point is illustrated by Juthika Bhayani & others v Taylor Bracewell LLP [2016] EWHC 3360 (IPEC), an English High Court case in which a solicitor failed in her passing-off claim against the firm she previously joined as a partner.

Background

Ms. Juthika Bhayani, the first claimant, was by 2011 a solicitor practicing employment law with some reputation in Sheffield. She was at that time a partner of a firm called Watson Esam (“WE”) . In April 2011 she joined the defendant firm, Taylor Bracewell, as a salaried partner. It was agreed between the first claimant and the defendant that the latter could offer services under the trade name “Bhayani Bracewell”, focusing on legal services on employment law supplied by the first claimant in Sheffield.

In 2014, the relationship between the first claimant and the defendant came to a bitter end; the first claimant was sacked following a finding of gross misconduct. She set up another firm named “Bhayani Law Limited” (the second claimant of the case) afterward and has continued practising employment law.

For some time after the first claimant’s leaving, the defendant continued to offer services in relation to employment law under and reference to “Bhayani Bracewell”. In view of this, the first claimant took out action against the defendant for, among the others, passing off of legal services as those of her services. Arguing that the claims, including passing-off, have no any realistic prospect of success, the defendant applied for a summary judgment against the claimants.

Parties’ arguments and court rulings

As it is the defendant’s application for a summary judgment against the claimants, the defendant needed to persuade the court that the claimants had no realistic prospect of success in their claims even if the case is proceeded to trial. One major argument of the defendant is that the first claimant did not own any goodwill for the trade name of “Bhayani Bracewell” for the claim of passing-off, because the relevant goodwill of the trade name was either owned by WE or the defendant. The claimants disagreed and maintained that the goodwill in question was at all times owned by the first claimant.

Whilst the term “goodwill” is often used interchangeably with “reputation”, giving rise to some confusion, there is indeed a fine distinction between them.  Goodwill does not exist on its own and embodies the commercial connections generated between the consumers and goods or services present in a jurisdiction. On the other hand, reputation subsists even without any supporting business or where the goods or services are not in circulation. It is therefore goodwill and not reputation that is required for a passing off action to be successful. The parties have not disputed on this point. The judge reinforced this central concept of goodwill in a passing-off action by pointing out that goodwill is “indivisible from the business with which it is associated” (at paragraph 27); in contrast, reputation can exist by itself.

On the issue of the ownership of the goodwill attached to “Bhayani Bracewell”, although the judge acknowledged that there are exceptions in which employee or partner can generate goodwill of their own, in general goodwill generated by the acts of an employee or partner would be vested in the business undertaking he works for. The judge reviewed the cases which departed from the above general rule, and summarised two categories of exceptions:

  1. goodwill generated by acts of employee or partner done outside duties to the employer or partnership; and
  2. claimant being a writer or performer, where the public believed that such an artist bore sole responsibility for the quality of his writing or performing.

The judge observed that the professional acts carried out by the first claimant under and by reference to “Bhayani Bracewell” which had earned the relevant goodwill were either done in the course of the business of WE or that of the defendant. The acts were not done outside the duties to the law firms. No unusual facts had given rise to an exception, and thus the general rule followed: as a matter of law the goodwill in question vested in the defendant, instead of in the first claimant. “The goodwill generated by a solicitor’s work qua solicitor vests in the firm.” (at paragraph 43) The judge therefore held that the claimants have no realistic prospect of success in the claim of passing-off as they did not enjoy goodwill on the trade name “Bhayani Bracewell”.

Implications

It is noteworthy that the judge explicitly stated in the judgment of the case that goodwill is distinguished from reputation for being indivisible from the business with which it is associated. To establish the first element for a passing-off action, goodwill that has become associated with the mark through commercial use is relevant, whereas reputation gained by a mark through recognition of the mark does not assist at all. This legal concept differs from what the general public perceived. Specific legal advice should therefore be obtained as early as possible where there is a potential or intended claim of passing-off. If practicable, one should also register the trade name of a business, with which goodwill is usually associated, as a registered trade mark, to have statutory protection additional to the law of passing-off.

For professionals like solicitors who usually run business in partnership (or company), unless one offers services as a sole proprietor, the business with which goodwill is associated belongs to the business undertaking, not the individual professionals or salaried partners.

 

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
Published by ONC Lawyers © 2017