Discovery Holdings Ltd v Sanlam Ltd and Others

• Jurisdiction: South Africa
• Judge: Goliath J
• Judgment Date: 03 July 2014
• Citation: 2015 (1) SA 365 (WCC)
• Docket Number: 8995/2012
• Hearing Date: 03 July 2014
• Counsel: P Ginsburg SC (with F Southwood) for the applicant. AR Sholto-Douglas SC (with BJ Vaughan) for the respondents.
• Court: Western Cape Division, Cape Town

Goliath J:

Introduction I

[1] What's in a name? Commenting on the tough task of finding a name for a fund, a portfolio manager pointed out in an article in the Wall Street Journal:

'All the Greek gods were taken. . . . So were many animals, mountain ranges, rivers, roads — even solar systems. . . . It was harder than naming my children.' J

Goliath J

A (Ianthe Jeanne Dugan 'Why Hedge Funds Hunt for Animals, Search the Stars — As Firms Proliferate, Finding the Right Name is Tough' Wall Street Journal, 25 July 2005 at A1.)

[2] In a globally competitive business world a trademark can be the single most valuable asset for a company. A carefully selected and B nurtured fund name continues throughout the fund's life and, as with any successful enterprise, a fund may evolve into a reputable and recognisable brand. As in many other industries, financial service providers use branding as a strategically important way to distinguish their products. A trademark with a good image and reputation enhances C the goodwill of a company and provides it with a competent edge:

'Trademark law aims to aid consumers in identifying the source of goods by allowing producers the exclusive right to particular identifying words . . . which they may attach to their products as a designator of source.'

(Thomas & Betts Corp v Panduit Corp 65 F 3d 654 (7th Cir 1995).) This D is a trademark infringement case over the use of the terms 'escalator funds' and 'escalating fund'.

Factual background

[3] The applicant is the holding company of the Discovery group of companies which operates in health and insurance (Discovery Health), E life insurance (Discovery Life), financial services (Discovery Invest and Discovery Card) and wellness (Discovery Vitality). The applicant is also the proprietor of all intellectual property, including trademarks, licensed to the Discovery group of companies.

F [4] The first respondent is Sanlam Ltd, which is responsible for the centralised functions of the Sanlam group of companies, such as strategy, financial and risk management, marketing and communication, human resources and corporate social investment. The second respondent is Sanlam Life Insurance and part of the Sanlam group of companies and offers life insurance, and financial services in relation to insurance, G investment and financial products. Reference to the respondents is a reference to the first and second respondents.

[5] The Sanlam and Discovery groups of companies are direct competitors in the financial services market. The material facts of this case are undisputed. The applicant (Discovery) is the proprietor of the registered H mark 2007/23913 ESCALATOR FUNDS which is registered without disclaimer in class 36 in respect of —

'insurance, insurance underwriting, including health insurance underwriting; financial affairs, including but not restricted to, medical-aid schemes, medical retirement annuities, health care financing; monetary affairs; real estate I affairs, services ancillary to the aforegoing'.

[6] During May 2011 the applicant conducted a search of the register of trademarks and discovered an application for the registration of the mark 2011/01572 SANLAM ESCALATING FUND in class 36, in the name of Sanlam Immaterial Property (Pty) Ltd. The application was filed for registration on 27 January 2011 in respect of 'insurance; financial affairs; monetary J affairs; real estate affairs'.

Goliath J

[7] The applicant also discovered through internet searches that the A respondents had commenced the use of the name ESCALATING FUND/SANLAM ESCALATING FUND. It is alleged that from at least 22 July 2011 the respondents have been using the trademarks ESCALATING FUND and SANLAM ESCALATING FUND in relation to financial products called constant proportion portfolio insurance (CPPI). The applicant immediately B requested the respondents to voluntarily withdraw the trademark application and to cease their use of the impugned offending marks. The respondents rejected the applicant's demands and confirmed that they would neither cease their use of the impugned marks nor voluntarily withdraw their trademark application. C

[8] Proceeding in terms of s 34(1)(a) or 34(1)(b) of the Trade Marks Act 194 of 1993 (the Act), the applicant now seeks to restrain the respondents' use of the term ESCALATING FUND or any mark confusingly or deceptively similar to the applicant's registered trademark. Ancillary to this relief the applicant also seeks an enquiry into damages for the D alleged trademark infringement. The applicant further advanced a claim seeking to interdict and restrain the respondents from passing off their services and offerings as those of the applicant through their use of the name ESCALATING FUND or any other name confusingly similar to the name ESCALATOR FUNDS. E

[9] The respondents oppose the application and in turn have brought a counter-application in terms of the provisions of s 24(1) read with ss 9, 10(2)(a) and 10(2)(b) of the Act seeking the removal of the applicant's trademark from the register as an entry wrongly made, alternatively an entry wrongly remaining therein. In the alternative the respondents seek F an order that the applicant's trademark be endorsed with disclaimers to the effect that the applicant is not granted the exclusive rights to the descriptive words 'escalate' and 'funds' separately from each other and from the mark ESCALATOR FUNDS as a whole.

[10] The respondents raised the following defences in response to the G applicant's claims based on trademark infringement and passing off:

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The respondents' use of the allegedly offending phrase 'escalating fund' is not trademark use, but the descriptive use of a particular service offering or product of the second respondent.

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On a proper comparison of the two trademarks used by the parties, H the applicant failed to establish any likelihood of confusion or deception in the relevant class of the purchasing public for the services in question as required by s 34(1)(a) or (b) of the Act.

•

The applicant's mark is incapable of distinguishing its goods from those of other traders, or consists exclusively of a sign or an indication I that may serve in trade to describe the goods as contemplated in s 10(2)(b) of the Act, and accordingly forms the basis of the respondents' counter-application for the cancellation of the mark; alternatively a disclaimer should be entered against the applicant's registration of ESCALATOR FUNDS to the effect that it will not grant the applicant exclusive rights in the words 'escalate' or 'fund'. J

Goliath J

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A As regards the applicant's case based on passing off, the respondents deny that the applicant has demonstrated the requisite reputation in the mark ESCALATOR FUNDS (separately from its DISCOVERY trademark) or that it has established a likelihood of deception or confusion arising between the respondents' product and that of the applicant.

The common product: CPPI B

[11] Constant proportion portfolio insurance is a form of investment risk management. It is common cause that the parties on either side are currently using their disputed trademarks in relation to CPPI products. It C is a portfolio insurance trading strategy that dynamically manages capital between a risky and risk-free asset with the goal of providing a maximum guarantee at maturity. It allows an investor to maintain an exposure to the upside potential of a risky asset while providing a capital guarantee against downside risk. The strategy actively allocates between two asset classes, a riskless asset (normally money-market fund) and a risky asset D which could be equity, hedge funds or commodity indices. In rising markets the strategy allocates more towards the risky asset, while in falling markets the strategy allocates more towards the riskless asset. The investor determines a floor which is defined as the lowest acceptable portfolio value. As the total value moves down and closer to the floor, the E allocation to the riskless asset increases. The risk of violating the floor protection is the gap risk, namely the risk that the portfolio value will not meet the guarantee at maturity. To be able to guarantee the prescribed floor a crash put may be bought to hedge against rapid downward market movements.

F [12] Rebalancing is done on a daily basis. This means that a portfolio manager periodically changes the portfolio components or the component's proportion with the portfolio. Rebalancing of the portfolio occurs in reaction to movements in the risky asset with exposure being increased after a rise and decreased after a drop. If there is a sudden drop in the G market such that the investor is not able to rebalance his portfolio adequately, the floor can be breached. The strategy usually outperforms the prescribed floor unless there is a sudden drop in market prices such that the investor is not able to rebalance his portfolio adequately. The goal of the strategy is to leverage the returns of a risky asset through dynamic trading, while guaranteeing a fixed amount of capital at H maturity.

[13] CPPI based products offer security to the client through a predetermined guaranteed minimum payoff at maturity, while also giving the possibility of higher returns through limited exposure to a risky asset. I Ideally these products have more assets invested in the risky asset when it increases in value, and less when it decreases. Most of the CPPI products provide some sort of guarantee if they produce less than the required minimum targeted return (the gap risk).

[14] CPPI is not a new concept in the investment industry and has been employed as an investment strategy or risk model since the 1980s. The J CPPI was introduced on fixed income assets by AF Perold...