Brand and State Aid
Azhar Ghose explores some of the fascinating arguments on the alleged ‘brand’ of a public body benefitting its trading arm in a State aid complaint.
It was just last summer, a time when the legal world was at its most sedentary and the judiciary were on their customary vacations, when I was informed of an unprecedented State aid challenge.
The Complaint
A number of Fire and Rescue Authorites (FRA) cited in the complaint received copies of the complaint lodged with the European Commission against the UK Government for State aid to their FRA trading companies. To give State aid is illegal except where this is permitted in prescribed circumstances. It is an EU-derived concept which in simple terms is defined as any advantage given from state resources in whatever form conferred selectively on an undertaking that can distort competition or affect trade between state members.
The complaint understandably sent a national shudder across the FRA as their trading arm champion, seen as the panacea to central government cuts, no longer looked invincible. It was admittedly a lawyer’s dream come true! No longer could advice on this subject be dismissed as an unlikely scenario or at worst the State aid bogeyman created by the lawyers to ensure their clients' best behaviour!
The complaint alleged that the FRA via their respective Fire and Rescue Services (FRS) were permitting their purported ‘brand’, a valuable asset with an intrinsic commercial value, to be used exclusively by their trading arms free of charge, thereby giving them an unfair advantage over independent, private sector providers and distorting competition.
More particularly, it was alleged that the trading arms had the free use of the FRS name, logo, design and general getup whether through use of their badge, links on websites, equipment or uniforms. To the uninformed they would not be able to discern between the FRS and the trading subsidiaries.
They stated that this is State aid as the FRA are part of the UK Government and therefore qualified as the state. The FRS ‘brand’ is a state resource that they own and had transferred to their trading arms free of charge. In order to substantiate the novel FRS ‘brand’ argument, evidence was produced of responses to a survey where a significant proportion of customers indicated that they would purchase from a company associated with the fire and rescue service over other competitors.
The complainant produced a business case from one of the FRA that was littered with ‘admissions’ of their fire and rescue service ‘brand’ and the advantages that its brand would have over its independent competitors in the market.
The complainant also claimed that the FRA could protect their intellectual property (IP) by taking a legal action known as ‘passing off’ in the event that someone tried to improperly use or copy their ‘brand’.
The financial calculation used to assess the value of the state resources being transferred to these entities was aggregated from the largest FRA trading companies by quantifying the value of the FRA brand. An income based brand valuation method referred to as Royalty Relief was used for this purpose.
It was argued that the collective value of all the FRAs ‘brand’ far exceeded the de minimis financial threshold and thus there was no exemption from State aid.
You now have 45 minutes in which to prepare your response to the above scenario!
Just teasing…! This complaint would make an ideal exam question and so before reading any further do have a think about how you would respond to this if you had been confronted with these allegations.
The Response
Some of you may still recall as I do the amusing exchange in the TV show ‘The Apprentice’ where a young candidate declared to the world ‘I am [name] the brand !’ to which he was given short thrift.
The significance of this exchange was that it challenged my understanding of what is meant by a ‘brand’ and its applicability to a public body.
A public body like an individual is capable of registering its name and logo as ‘intellectual property’ particularly as a trademark for the purposes of legal protection to stop others from copying or using it.
As a matter of fact the Complainant did not identify any specific FRS ‘brand’ that had been protected and registered with the Intellectual Property Office (IPO) suggesting instead that the FRS had the protection of the common law action of ‘passing off’. An essential part of establishing a claim for ‘passing off’ requires a demonstration of the actual or likely financial loss to the FRS. As a non-commercial body that cannot charge for its core public functions this will be difficult to establish.
However, can a FRA lawfully deal with this property as if it were a ‘brand’ in the commercial sense such as by licensing and selling its ‘brand’ as claimed?
One very good reason to negate this possibility arises from the statutory provisions governing these same public bodies. The legislation sets out their primary role requiring delivery of their public service functions such as fire rescue at no cost to the user and in a localised geographical area.
Further, the public body is not permitted to conduct any commercial activity of its own except through a prescribed company.
One feature of a ‘brand’ is that it has a distinctive and recognisable mark or name to its target market. The Complainant, in my opinion, failed to demonstrate the existence of any brand recognition by the market. The supporting case only produced generic responses and no evidence that a specific brand could be recognised by potential customers. The survey spoke of a fire and rescue service generally rather than identifying any one of the specific FRS around the country.
The references to the FRS ‘brand’ in the business plan was explained as the inappropriate use of the word ‘brand’ for a non-commercial public body delivering public services free of charge at the point of delivery. The misuse of these concepts has become common place due to their popularising on TV programmes such as ‘The Apprentice’ and ‘Dragons Den’.
However, there were a growing number of sceptics to the proposed response to the complaint including amongst my legal colleagues. Some senior local authority officers were convinced that they had a local authority ‘brand’. It was therefore fortuitous that the cavalry arrived just in the nick of time in the shape of Counsel’s advice that reinforced my position against the complaint and quelled the dissent.
In the alternative, if there is a finding of a public body ‘brand’ then it has been suggested that the Royalty Relief method is irrelevant to the purported ‘FRS brand’ as the FRA is not legally permitted to generate income in the way required by this brand valuation method.
The Royalty Relief method is based on the principle that the brand owner can licence its brand to another entity to use for its marketing advantage. The notional price paid is based on industry rates of 3% to 6% to the brand owner by the beneficiary of that licence. Franchises that allow their brand to be used charge the user on a similar basis.
However, the Royalty Relief method fails to take into account that the trading entity may in its own right have incurred expenditure on its marketing in other words by using its own brand value.
The Costs Brand valuation has been advanced as a more appropriate valuation method for a public body as this takes into account the actual expenditure incurred on marketing the ‘brand’.
As the expenditure is nil or a nominal sum for the FRA this would therefore result in a negligible brand value. As the value of the state resource would be below the State aid de minimis financial threshold it would make such a transfer of state resources lawful.
The wider implications?
The challenge has wider implications across the public sector and more particularly in respect of local authority trading companies.
All too often one can hear council officers speaking of their ‘brand’, business development and marketing. However, they should be very precise in their use of language when it comes to preparing documents such as reports and job titles as this can be capitalised upon by those who may wish to challenge the authority.
Frequent use of commercial language serves to entrench and shape the ‘Council’s world view’ of itself as if it were a business with its own ‘brand’. The same psychological effect underlies the saying, ‘if you repeat a lie often enough it will become the truth’ and personal affirmations. The use of such language and concepts in the public sector are borrowed from the business models of the private sector to drive efficiency and performance in the public sector. A very good example of this is the growth of the notion of the pseudo ‘business unit’ in the public sector.
In addition, the customising of services with their own logo’s and designs merely adds to the blurring and confusion that ensues amongst council employees. It is perhaps not surprising therefore that Council officers unwittingly incorporate and misapply this out of context, commercial language into their reports, business cases and other documents.
Keeping an open mind, if this ‘brand’ were to exist then this should be valued, quantified, registered and protected. There is, of course, a fiduciary duty on local authorities to ensure that they properly safeguard their assets. Passing off may be difficult to prove for a local authority in court, as previously mentioned and the only safe option will be to register such ‘brands’ with the IPO.
A minority have argued for a local authority ‘brand’. Their rationale is that it would allow them to charge their trading company for the use of their brand thereby deriving additional revenue for the authority and at the same time reducing the profit of the trading company for corporation tax purposes.
However, a local authority should act rationally and therefore be consistent in its approach. By adopting this position it would therefore follow that any use of the authorities purported ‘branding’ by any other persons, partners and suppliers should also be charged or adjusted for. For example all its suppliers or ‘partners’ should be charged where they decide to use the authorities ‘brand’ as part of their marketing or promotions. There would be no real gain here as the supplier will price their supplies to take account of the additional charges.
If this was an exam, another logical question to follow from this scenario could read as follows:
Question
Please outline the practical steps and advice that you would give to a local authority setting up a company for commercial purposes in order to mitigate the risks of a State aid challenge.
This is also something that an advisor should be addressing with the local authority. Perhaps this can be dealt with in a future article, training event or if you wish to discuss this with me.
Azhar Ghose ACIS is a Chartered Secretary and Solicitor, who has worked for numerous local authorities and other public sector bodies for over 15 years particularly on their transformation and commercialisation. He is working with other organisations to improve public sector outcomes. He can be contactedThis email address is being protected from spambots. You need JavaScript enabled to view it..
The opinions and position expressed in this article are solely those of the author. As at the date of this article the State aid complaint remains to be determined by the European Commission who have not made known their official position on the complaint.
Note: Both the UK Government and the European Commission have been informed of this article.
