Australian Brand Equity Enterprises Pty Ltd and Australian Trade Commission - [2005] AATA 176

Administrative

Appeals

Tribunal

DECISION AND REASONS FOR DECISION [2005] AATA 176

ADMINISTRATIVE APPEALS TRIBUNAL Nº V2004/744

GENERAL ADMINISTRATIVE DIVISION

Re: AUSTRALIAN BRAND EQUITY
ENTERPRISES PTY LTD

Applicant

And: AUSTRALIAN TRADE COMMISSION

Respondent

DECISION

Tribunal: Mr B.H. Pascoe, Senior Member

Date: 2 March 2005

Place: Melbourne

Decision:The Tribunal affirms the decision under review

(sgd) B.H. Pascoe
Senior Member

EXPORT MARKET DEVELOPMENT GRANTS – grants entry requirement – planned export activities – planned export earnings – no sales or planned sales of products – eligible intellectual property – eligible know‑how – no dispute

Export Market Development Grants Act 1997

REASONS FOR DECISION

2 March 2005 Mr B.H. Pascoe, Senior Member

This is an application to review a decision of the respondent (Austrade) to affirm a determination that the applicant did not meet the grants entry requirement under the Export Market Development Grants Act 1997 (the EMDG Act) and was not eligible for a grant under that Act.
At the hearing, the applicant, Australian Brand Equity Enterprises Pty Ltd (ABEE), was represented by its Chief Executive Officer, Mr N. Gerrard, and the respondent was represented by Ms S. Marks of counsel. Evidence was given by Mr Gerrard.
By application dated 23 July 2001, ABEE applied for a grant under the EMDG Act. At the date of application, the company's name was Supernatural Nutritionals Pty Ltd but changed its name to Australian Brand Equity Enterprises Pty Ltd on 4 October 2001. In the application, the products or services were shown as "distributor and exporter of industrial and consumer products, including hose reels, display units and health supplements". Expenses in respect of which a grant was sought for the two years ended 30 June 2001 were shown as:
Overseas Representation  106,110
Marketing Visits  11,677
Free Samples  3,206
Trade Fairs, Literature, Advertising             26,025
Short‑Term Consultants  500
_____
147,518

This total was allocated between three countries as:

Japan  105,480
India  40,549
Singapore  1,489
_______
147,518

Section 7(1) of the EMDG Act sets out the general rules for eligibility and requires a number of conditions to be satisfied. In particular, paragraph (h) requires that:
…
(h)if Division 5 applies to the person—Austrade has decided under section 20 that the person met the grants entry requirements.

Under s 18(1), Division 5 applies unless the person is a grantee in respect of any previous grant year or an application for a grant in respect of the immediately preceding grant year is pending. Neither of these apply to ABEE. Section 21 then provides that Austrade may determine in writing the requirements that a person must satisfy to pass the grants entry requirements.

The applicable grants entry requirements are set out in a determination made by Austrade on 8 July 1997 as follows:
A first‑time applicant at the time of taking the grants entry test:
(i)must have export activities which are planned – "planned export activities" – (including, as an example only, export activities where the claimant has conducted research into the existence of a potential market)
(ii)must have planned export activities which are not on their face unachievable
(iii)must have and be likely to continue to have a management involved in and with the ability to achieve the planned export activities
(iv)must have and be likely to continue to have financial resources capable of supporting the planned export activities
(v)must have and be likely to continue to have staff of the number and with the skills capable of supporting the planned export activities
(vi)must have and be likely to continue to have a production and supply capacity to support the planned export activities
(vii)must have export activities which are not on their face unlawful or impracticable (including as examples only (a) the planned export of alcohol to a country where the sale of alcohol is prohibited; (b) the planned export from Australia of goods for which consent is necessary for their export and where the consent is unlikely to be given; (c) where raw material of a product is unavailable), and
(viii)must have planned export earnings which are not on their face unachievable.

In this case, the decision under review determined that ABEE did not satisfy requirement (ii) or (viii) above.

As best as can be obtained from the evidence, ABEE had the rights to a health supplement, MyTonic, which had been developed by Mr Gerrard. There had been one production run of 500 bottles of MyTonic in early 2000. Approximately half of these were sold in Australia to football clubs and the balance was provided as samples in Japan and India. Another product, ActivePlex, had been formulated by a naturopath and some 120 bottles were made in 1998 approximately, and used solely as free samples in Japan and India. ABEE had rights to sell a self‑winding hose reel, AK Reels Pty Ltd (AK Reels), in Japan. A three‑year agreement was signed on 31 March 2001, requiring the exporter to make minimum purchases of $250,000 within the three‑year period. Failing such minimum purchases, the agreement would lapse. A small number of reels were purchased in 2001 solely for demonstration at a trade show. No sales were made and no further purchases made. ABEE had the rights to market a point of sale advertising unit known as Rotavision, subsequently renamed Moving Images. Two units were provided in Japan for demonstration purposes, but no sales were made. Mr Gerrard acknowledged that no units were available for sale as substantial charges in design were required. He said that he had an agreement with MediHerb for 300 products, but he has not promoted or sold any.
Mr Gerrard said that he had identified a common problem with exporters in endeavouring to establish appropriate representatives in target countries. He believed that an appropriate course was to identify overseas students studying in Australia who could establish an import business on return to their own country. He maintained that his concentration had been on establishing such connections, obtaining market information through such connections and then establishing "brands" with the marketing expertise of ABEE through agencies.
Mr Gerrard produced an agency agreement dated 25 November 1999 between himself and a Yasuhito Suehiro of Japan appointing the latter as agent in that country for herbal extracts, vitamin and mineral supplements, amino acids and "other products from the suppliers range". The term of the agreement was for six months. The agreement provided for payment of $25,000 by the agent as consideration for being appointed exclusive agent with the payment due at the end of the agreement. It further provided for payment by the supplier, Mr Gerrard, to the agent of a retainer of $11,000 per quarter and expense reimbursement of $1500 per quarter all payable at the end of the agreement. Commission of 10 per cent of net sales was also payable to the agent. The amounts due by each party were to be offset with any difference not to exceed $500. I am left in no doubt that the agreement was structured to allow Mr Gerrard to show export earnings of $20,000 and export market development expenses of $20,000 at no net cost to himself other than a possible maximum of $500 if the agent actually sold any product for $5000 or more. Mr Gerrard said that this agreement had been extended orally each six months and assigned to ABEE. He acknowledged that no sales of any product had been made in Japan.
An identical form of agency agreement appointing a Shahebaz Khan as agent for India and dated 6 December 1999 was produced. The consideration payable by the agent for the six month agreement was $10,000 and the retainer payable to the agent was $4000 per quarter plus $1000 expense reimbursement. Again, commission was to be 10 per cent with amounts due to be offset and the maximum difference to be $500. Again, no sales were made of any product sourced through Mr Gerrard or ABEE in India. Mr Gerrard said that there was discussion of a possible order for MyTonic and grape seed, but it was agreed that these would not be supplied. A further discussion was held with Mr Khan regarding the possible supply of napkins, but was not proceeded with because of price.
Mr Gerrard accepted that no sales of any products had been made outside Australia. While samples of MyTonic and ActivePlex had been provided some years ago, no orders had eventuated. No sales of the hose reels have been made and he is still considering whether a further cost, estimated at $100,000, is warranted to redesign the hose reel with a smaller casing which is required for the Japanese market. He said there was no market for the reels in India. No sales of the Rotavision/Moving Image unit have been made as again, it is not suitable for the market without major changes.
Mr Gerrard acknowledged that he was not yet in the business of selling tangible products, but maintained that ABEE was selling :brands" or intellectual property which, if I understand him, was selling agencies for a fee. He said that, at the time of the agency agreement had had not decided on the "brand" name, but the "brand" is now ABEE. He believed that his agency agreements provided a means of obtaining market research from the agent for considerably less than he might have been required to pay otherwise. It is not clear from the evidence what market research, if any, was provided by the agents.
There are some concerns in relation to the information shown in the application for a grant. In the schedule showing "Export Earnings – Intellectual Property Rights/Know‑How/Services...", the description of the $105,000 was "The value of minimum quantity purchase agreements has been converted into licensing fees received in exchange for the granting of distribution exclusivity in respect of the claimant's goods in Japan and India". Mr Gerrard accepted that no such minimum quantity purchase agreements ever existed or were in contemplation. Among the expenses shown was an amount of $10,090 as the cost of manufacturing the Rotavision units. However, this was a charge from a company controlled by Mr W. Smith, a fellow director/general manager of ABEE, which was said to have been offset against consulting fees due by Mr Smith's company.
Mr Gerrard was critical of the respondent's emphasis on the marketing of tangible products. He maintained that ABEE was involved in the relevant period in marketing intellectual property or brands by imparting knowledge or know‑how to individuals. He said that he had never intended to sell the one manufacturing run of MyTonic and ActivePlex, but use the product as samples to underpin the "show case". In the statement of facts and contentions, filed and served prior to the hearing, Mr Gerrard stated:
1.The applicant was formed in response to its Chief Executive Officer, Ned Gerrard's success as an independent export consultant and also to help address Australia's export market failure.
2.Having university business qualifications, senior corporate experience in strategic planning, capital raisings and public company representation at board level that has been adapted to a "hands on approach" for SMEs has enabled multi‑million dollar export earnings to be generated for clients and Australia alike (Austrade acknowledges that testimonials have been provided to that effect).
3.Consequently, consulting services demand converted into outsourcing demand with the outcome that selected exclusive product and marketing rights were bundled together with Ned Gerrard's proprietary rights in respect of personally developed formulations of health supplements.
4.The applicant's corporate structure facilitated the application of an innovative export methodology that is able to overcome the major impediments to export success such as language barriers, cultural differences, distance and, above all, the "principal‑agent" relationship. This is a major obstacle to export success as it is all too often compromised by overseas representatives maintaining a lack of independence from a multitude of competing interests.
5.Using the universally accepted "best practice" strategy of building coalitions, the applicant developed a value chain that has linkages between senior business professionals, SMEs, academics and international Master of Business Administration (MBA) alumni from Australian universities.
6.To maintain the commitment of overseas representatives they were given the opportunity of developing their own import business through the exclusive assignment of the applicant's rights in designated territories.
…
8.Austrade was advised on numerous occasions that the applicant's "wholesaling" activities were pert of a two‑step process that initially focused on selling its rights under exclusive agency agreements following which a mutually committed and orderly export market development process could be undertaken to exploit the interest created in the brands in respect of a range of goods to be supplied by the applicant.
9.To develop a sustainable market for the branded goods to be offered, market requirements needed to be assessed. It was agreed that if the agents would conduct extensive market research/intelligence, the applicant's marketing expertise could be applied to establish a competitive advantage through the exploitation of intellectual property.
10.It was further agreed that the value of the agency rights would be well justified and further enhanced if the applicant was willing to underwrite the promotional activities to be undertaken. The applicant accepted provided it could retain control over marketing direction that would work to its benefit in showcasing its rights for on‑sale in other markets and providing a value‑add through the sale of goods either directly to the agents or through the agents for an added price premium.
11.The construction of the offset arrangements was considered to be the most plausible and practical business strategy that could be applied to these commercial circumstances in order to achieve the desired objectives.
12.Austrade has abundant evidence that each party to the agency agreements has complied with its respective requirements.
In the submission filed after the hearing, Mr Gerrard on behalf of ABEE stated:
…
4.The applicant was incorporated to act as an intermediary for the purposes of exploiting and managing Australian intellectual property (IN PARTICULAR) through an evolving value chain structure. As advised, the process was tobe in two parts, with the first being to establish an operational "franchise" license in overseas markets that would become a selling platform for licenses in other markets. The second part would be of a longer term with a focus on deriving an additional revenue stream from the sale of actual goods after a full international franchise/agency network had been established, market knowledge had been obtained and a capital raising program had been completed.
5.The applicant's value chain was based upon Ned Gerrard's export concept and was promoted as a unique franchise model behind which was a valuable "brand". By definition under standard 138 of the Accounting Standards Board (AASB), "the terms 'brand' and 'brand name' are often used as synonyms for trade marks and other marks. However the former are general marketing terms that are typically used to refer to a group of complementary assets such as trade marks and its related trade name, formulas and recipes and technological expertise" (para.37).
6.Evidence on behalf of the applicant given to the tribunal emphasised that the term "brand" referred to its trademarks and their related trade names, produce distribution rights, health supplement formulas and the technical product and marketing know‑how as described under paragraph 32 on page 7 of the applicant's Amended Statement of Facts and Contentions. This brand was disposed of to Australian non‑residents for their "use or enjoyment" in building an import business franchise.
7.The respondent's submission, however, is that the applicant's entire "brand" was represented solely by its trade names My Tonic, ActivePlex, AK Hose Reels and Rotavision, whose value could only be substantiated by sales of produce allied to these names.
8.From this perspective, if there were no product sales there was no fair value to be exchanged under the agency agreements, thus putting into question their genuineness and allowing the respondent to proceed to the matter of intent under section 37 of the EMDG Act.
9.Of course, this narrow focus does not consider the actual value underpinning the applicant's "real brand", such as substantial paid up capital, R&D costs spread over a number of years, "best practice" marketing and management expertise and the right to freely promote (and distribute ifso elected) name brands with an established international reputation.
10.Fair value for the exchange of the applicant's "brand" was expressed in the form of territorial exclusivity and was based on a discounted value of future sales without market knowledge on the part of the agent and the quoted cost of market information from Austrade on the part of the applicant relative to the agent's fees and charges. The minimum purchases quota was the consideration for the distribution agreements as well as a quantifiable measure for the agent's efforts under their commission base as opposed to their retainer structure. To balance out the potential inequities from over‑billing, the applicant introduced the $500 cap. This cap was also intended to restrict the reliance on sales as a means of offset because the volume of information flow from the market to the applicant would be reduced.
It must be noted at the outset that the Tribunal had difficulty with both written and oral evidence and submissions of Mr Gerrard. It was unclear whether he was deliberately seeking to obfuscate or whether he has difficulty expressing himself in plain language without the constant use of jargon.
Section 3 of the EMDG Act sets out the object of the Act as being:
…to bring benefits to Australia by encouraging the creation, development and expansion of foreign markets for Australian goods, services, intellectual property and know-how. It does so by providing for an assistance scheme under which small and medium Australian exporters committed to and capable of seeking out and developing export business are repaid part of their expenses incurred in promoting those products.

Section 5(2) of the EMDG Act provides:

(2) The underlying principle is that only small or medium Australian businesses that:
(a)are developing export markets for eligible products; and
(b)have a prospect of success in their export enterprise;

should be eligible for a grant.

Under s 26 and s 27, eligible intellectual property and eligible know‑how are defined in the following terms:

26 Intellectual property is eligible intellectual property if Austrade is satisfied:
(a)in the case of rights relating to a trade mark—that the trade mark
(i)was first used in Australia; or
(ii)has increased in significance or value because of its use in Australia; or

(b)in the case of rights relating to any other thing—that the thing resulted to a substantial extent from research or work done in Australia.

27(1) Know-how is eligible know-how if Austrade is satisfied that it resulted to a substantial extent from research or work done in Australia.
(2) In subsection (1):
know-how means private knowledge, information or expertise relating to commercial or industrial operations that:

(a)is of commercial value; and
(b)is imparted for the purpose of enabling the recipient to carry out a particular activity.

Claimable expenses are set out in s 33 of the EMDG Act and each category is qualified by the term "for an approved promotional purpose". Under s 37, an activity is for an approved promotional service "if it is carried out for the purpose of creating, seeking or increase demand or opportunity in a foreign country for eligible intellectual property or eligible know-how…owned by the applicant; and…that the applicant intends to dispose of".

In relation to Mr Gerrard's emphasis on marketing brands or intellectual property, it is difficult to see what brands or intellectual property was either possessed or marketed by ABEE. It may well have the rights to MyTonic and ActivePlex, although it is not clear precisely what those legal rights were. Nevertheless, it is clear that ABEE was not seeking to dispose of such rights by either sale of the right or licensing such right. At best it may have, some day, sought to market the actual product through agents appointed as selling agents. In relation to the AK Reels and Rotavision/Moving Images, it would appear that ABEE had the rights to sell the product in particular markets, but did not own or seek to market any intellectual property or know‑how in those products. At best, it may seek to sell the products through agents if the products could be made suitable for sale in the overseas market. What I can best interpret from the evidence and submissions of Mr Gerrard is that the intellectual property he was referring to was his "innovative export methodology". This appeared to be the identification of suitable students from overseas in Australia and the use of the "marketing expertise" of ABEE. What brand Mr Gerrard was referring to was not ascertainable and how whatever it is would be disposed of was equally unclear. As a result, I am satisfied that ABEE did not appear to possess either eligible intellectual property or eligible know‑how within the meaning of the EMDG Act and, even if it did, there was no achievable planned export activities in relation to it.
In relation to the products which, at the date of the application and since, have been considered for possible export, it is clear that no effort has been directed at promoting such exports. Apart from some general market information, the provision of some samples of the products and a visit to Japan, no achievable export activities have been planned either at the date of the application or since. I do not accept that the amounts shown in the application were "export earnings". They were simply contra entries with both ABEE and the overseas agent paying and receiving an identical amount with little or no actual services provided by either. In any event, the alleged payment for the right to be an agent for a limited period does not appear to be included in the meaning of "export earnings" under s 10 of the EMDG Act or consideration for an "eligible product" under s 23 to s 27 of the EMDG Act.
As a result of the foregoing, I am satisfied that ABEE, at the time of its application, did not have planned export activities which were not on their face unachievable, nor planned export earnings which were not on their face unachievable. At best, it had spent some time in considering whether it was possible to plan export activities and export earnings.
It follows that the decision under review should be affirmed that the applicant, ABEE, did not meet the grants entry requirement under the EMDG Act.

I certify that the twenty [20] preceding paragraphs are a true copy of the reasons for the decision herein of

Mr B.H. Pascoe, Senior Member

(sgd) Catherine Thomas
Clerk

Dates of Hearing:  7—8 December 2004
Date of Decision:  2 March 2005
Advocate for the applicant:          Mr N. Gerrard, Chief Executive Officer,
Australian Brand Equity Enterprises Pty Ltd
Counsel for the respondent:        Ms S. Marks

Solicitor for the respondent: Collins House Legal