Tullis Russell Papermakers Limited v Inveresk Limited [2010] CSOH 148. Susan writes:
"The Court of Session in Scotland has recently ruled that the purchaser of a brand was entitled to recover 40% of the purchase price from the seller due to the seller’s failure to take steps to maintain the value of the brand during an agreed service period after the sale. The parties to the dispute were two Scottish paper manufacturers, Tullis Russell (the pursuer/claimant) and Inveresk (the defender). Both companies produced high quality board for use in applications such as greetings cards, phone cards and packaging.This case provides a really fascinating insight into what is in effect an assessment of the diminution of the value of a brand. The judgment is vast (319 paragraphs), but that should not detract from its value. Of particular interest is the judge's lengthy and careful consideration of whether damage to Tullis should be assessed by taking into consideration the impact of Inveresk's breaches on either the entire portfolio of customers as a whole or by aggregating their impact of their consequences upon individual customers.
Tullis purchased Inveresk's Gemini brand and customer information in June 2005, based on the strength of and goodwill in the Gemini brand.
For a service period of five months after the acquisition, Inveresk continued to manufacture and distribute Gemini products under licence. Tullis paid Inveresk £5m for the acquisition and a further £5m for Inveresk’s services during the service period. The judge held that, on a proper construction of the contracts and the deal, the full £10 million was paid for the Gemini brand.
Inveresk agreed to waiver contractual obligations during the service period aimed at preserving the goodwill, including:
• To use all reasonable endeavours to protect the Gemini brand, maintain existing levels of customer service and promote a successful integration of the Gemini brand into Tullis; and
• Not to sell any Gemini products which failed to comply with defined quality standards and to comply with all relevant statutory and regulatory requirements;
The judge considered that the purpose of these obligations was to protect the integrity and value of the Gemini brand.
During the service period the Gemini products manufactured by Inveresk contained a much higher number of defects than usual (3 ½ times the historic average). In addition, Inveresk began dealing with customer complaints directly, without including Tullis, and adopted an antagonistic attitude towards customers who complained about Gemini products during that period.
Lord Drummond Young accepted that, in the paper industry, a certain number of quality complaints were inevitable since paper and board are largely natural products. As such, essential components of any such business were (i) a good quality control procedure; and (ii) a good complaints handling procedure.
Inveresk were held to be in breach of contract. The value of the brand and its goodwill lay in the likelihood that those who had purchased or considered purchasing the Gemini brand would do so again in future. In failing to manufacture goods of a satisfactory quality, and then dealing with customer complaints poorly, Inveresk damaged the brand and caused loss of over £4m to Tullis.
The decision demonstrates that the Scottish Court will strictly enforce measures designed to preserve goodwill and brand value. Ultimately, this may be a pyrrhic victory for Tullis, as it is reported that Inveresk has gone into receivership.
