Lotus – A Divided Operation

Published 19 June 2011 By: Jon Walters

By Ben Rees. The Lotus story is a complicated one. Colin Chapman began the Lotus brand and raced in the 1950s under the Team Lotus name. In the late 1950s and early 1960s different corporate entities were established; Lotus Cars Ltd, to run the road car operation, and Team Lotus Limited, to run the racing operation. In effect, the claims and counterclaims heard in this dispute, which predominantly relate to passing off and trade mark infringement, can be dated back to the formation of the two companies.

 

Over the decades the companies had shared resources and know-how on an ad-hoc basis and, in the successful period for Team Lotus in Formula 1 in the 1970s, Group Lotus were keen to establish a link in the public’s consciousness between the Lotus road car and the Formula 1 operation. This is perhaps most clearly illustrated in Group Lotus’ sale of road cars in the famous ‘John Player’ black and gold livery, which was for years closely associated with the successful F1 Team Lotus. However, save for a very short period, Team Lotus and Group Lotus have operated as entirely distinct legal entities. 

Lotus founder Colin Chapman died in 1982 and, by 1985, Group Lotus’ profits were waning. In an effort to make Group Lotus a more desirable prospect to potential purchasers, it was decided that it was necessary for the two Lotus entities to crystallise their distinct respective operations in writing. The agreement that followed sought to demarcate the companies, drawing the dividing lines between the intellectual property each company could call their own, and to set out their particular areas of operation going forward. 

In the period since, Team Lotus, following a ‘pass the parcel’ of sales and acquisitions, found its way into the hands of David Hunt in 1995; it was this company that entered into an agreement with Tony Fernandes in 2010, following 1MRT’s failed 2009 Licence collaboration with Group Lotus (itself now in the hands of Proton). It is not entirely clear, but it appears that Fernandes acquired what was left of Team Lotus, including its name and goodwill. 

Dispute 

The dispute centred around two central issues: whether Group Lotus were entitled to terminate the 2009 Licence entered into with 1MRT, and (perhaps of greater importance) whether David Hunt’s agreement with Tony Fernandes entitled 1MRT to use the Lotus brand and other ‘Team Lotus’ intellectual property. 

Mindful of the then impending start to the Formula 1 season, and in the hope of ensuring that only their cars raced with the Lotus badge, Group Lotus sought to have the licence issue decided by way of summary judgment before the first chequered flag of the 2011 season fell. The judge took little time in deciding that the matter was best decided with a full ’speedy’ trial which was listed to be heard from 22 March. 

The drama continued right up to the doors of the Royal Courts of Justice; days before the trial, David Hunt withdrew his support for Fernandes, 1MRT and Team Lotus, citing both a disagreement over a deal struck between them in January and “potentially some serious holes” in Team Lotus’ case. Ominously in this already rather ill-fought and very public spat, Hunt said that, failing an about-turn by Fernandes, “this trial won’t be the last battle he’s facing, even if he wins.” 

Having heard the evidence over 7 days in March and April, Mr Justice Peter Smith has now handed down his written judgment. In it, he considers claims and counterclaims relating to passing-off, trademark infringement and breaches of the licence agreement entered into by the two parties. 

Arguments and findings – both teams remain on the grid 

Put simply, Group Lotus argued at trial that it was the entity to which the origins of the Lotus brand could be traced and, as such, it claimed the intellectual property rights subsisting in both Lotus Cars and Team Lotus. They said that the Defendants had, over the years, infringed its intellectual property relating to the Lotus brand under the Trade Marks Act 1994 (TMA). Group Lotus also argued that the goodwill that had been established in the company was ‘indivisible’ and that the whole Team Lotus operation was merely an arm of this collective goodwill. 

The judge dismissed Group Lotus’ claims (and the Defendants’ tactical counterclaims) on these points. The ‘Team Lotus’ moniker, it was held, had never been directly associated with Group Lotus. The link between the two companies was summarised by the judge: “all [Group Lotus] wanted was the kudos of being associated with the successful racing team but certainly not any of the exposure” (at paragraph 116). 

Group Lotus’ goodwill argument was also dismissed; there was a clear understanding, evidenced by the 1985 agreement, that there was separate goodwill owned by each of the entities. Formula 1 fans too would understand the separation – they were not an easily confused bunch, having long since got to grips with the notion of similarly named teams on the F1 grid. 

Group Lotus had arguments in reserve, but these too failed - there was held to be no abandonment of the goodwill by the Defendants, despite the 14 year racing sabbatical; the Lotus brand was still very much a respected name in racing, and one that was worth fighting over. 

The judge also held that a restrictive covenant in the 2009 Licence entered into between Group Lotus and 1MRT, which sought to restrain 1MRT from using the word ‘LOTUS’ upon termination of the licence was deemed void (for being both too vague and too wide in scope) and in restraint of trade. There was, therefore, nothing to prevent the deal concluded between Hunt and Fernandes. 

As a result of the findings, 1MRT is free to continue competing in the Formula 1 calendar under the ‘Team Lotus’ brand. 

Was it all bad news for Group Lotus? 

Whilst not affecting 1MRTs ability to race as Team Lotus, Group Lotus did successfully argue, under section 46 of the TMA, that two of the Team Lotus marks were to be revoked owing to a period of 5 years non-use (between 2003-2008). 

They were also successful in their claims relating to a breach of the 2009 Licence; the judge concluded that 1MRT had breached provisions of the licence relating to merchandising, for which Group Lotus is entitled to damages (although it is anticipated that such damages are likely to be relatively modest). 

Final standings 

Whilst Group Lotus can point to pyrrhic victories with regards their trade mark revocation and breach of the 2009 Licence arguments, it is them, rather than Team Lotus, who are more likely to be licking their wounds in the paddock. Once the dust settles, this hard fought and tempestuous legal battle can be seen to have simply continued the pre-trial status quo; however the fact that Fernandes and 1MRT can continue to race as ‘Team Lotus’ is likely to be seen by the Defendants as a moral victory, if nothing else. 

It has been clear throughout the saga however that the legal battle was doing nothing for the teams’ success on the track – or the Lotus brand itself. Jarno Trulli has said that he viewed the spat as “embarrassing and surreal” whilst Tony Fernandes has himself acknowledged that the legal case may well have deterred potential sponsors from backing his team. 

With Group Lotus looking set to appeal the decision, the off-track distraction for the drivers, sponsors and supporters of the respective teams may not yet be over. 

See 'Lotus v Lotus: The Forumla for Success?' for indepth look at the background of the case.

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Author

Jon Walters

Jon Walters

Partner, Northridge

Jon provides commercial and corporate advice to clients. He is recognised by the directories as a “real go-to adviser” and a “commercial and regulatory expert”, with particular expertise on governance, corporate advice and commercial rights.

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