Saturday 21 November 2009

Trade mark licences: beware of the unconventional

While practitioners certainly like to preach against uncertainty in the terms of a licensing agreement, we know how difficult this is to achieve, especially when it comes to provisions relating to termination. The uncertainty may arise from the inevitable elusiveness of achieving drafting perfection, compromises reached during negotiations, or the intention of the parties to leave the issue ambiguous. Whatever the reason, the result is that the parties may find themselves fighting over the meaning of the provision giving rise to the claim of termination.

This lesson was brought home in my favourite trade mark licensing case of the decade, the Australian case of Pacific Brands Sports & Leisure Pty. Ltd v Underworks Ptd. Ltd [2006] FCAFC 40 (for anyone who wants to confront a wide-ranging judicial debate on the meaning trademark assignments and licences, this is the case for you). While the issue of termination was strictly relevant to the disposition of the case, the court could not reach a single view on the proper construction of the licensee/sublicensee's obligations under an unusual form of grant clause. The resulting difference of opinion by the court on the meaning of the provision is instructive about the risks entailed in drafting such a clause.

The licence agreement provided that the licensee was authorized to use the licensed trade marks in connection with specified goods. The issue arose with the addition to the clause that the licensee undertake to “exploit the Products within the Territory to the best advantage of the parties.” The licensee had not succeeded in selling, under the licensed mark, some of the specified goods included within the defined term “Products”. The licensor alleged that since the licensee had not done so, the licensee was in breach of the provision.

What is unusual about this provision? At least two issues come to mind. The first is the use of the term “exploit” (a term more typically found in connection a patent licence) regarding the licensee’s undertaking, as opposed to a term such as “use”. This is especially so, since the term “use” appears elsewhere in the same clause. Does “exploit” mean something other than “use”; if so, what is the difference in meaning between the two terms?

The second issue is the reference to the requirement that the "exploitation be for the “best advantage of the parties.” There is extensive case law and commentary on terms such as “best efforts”, “best endeavours”, “reasonable efforts”, “reasonable endeavours”, and the like, as a self-contained undertaking in a licensing agreement. It is unusual, however, to speak of the “best advantage of the parties”.

To cut to the chase: What is the significance of linking the obligation to “exploit” the mark with a performance criterion defined as the "best advantage of the parties", especially when the meaning of the first term is uncertain and the use of the second term is unusual to an extreme? It is no surprise therefore that the court could not agree on the meaning of the provision.

The majority view of the court of appeal reasoned that no breach had occurred. The licensee was not obliged to use the licensed marks in the event that no market exists for some goods, or that there was no profit to be made with respect to such goods. The majority also rejected the claim that use is required to protect the mark against a claim of non-use of the trade mark. There were other ways within the scope of the agreement to avoid a non-use claim. As well, reference was made to the opinion of the trial court, most notably the original parties to the agreement had recognized the risk that the products might not find a market and that there was a separate right of termination for failure to meet minimum sales (as opposed to termination for no sales with respect to a given product category).

The minority view took a different approach. It focused on the meaning of the word ”exploit”, which it construed as requiring something more extensive than mere “use” of the marks. The requirement that “exploitation” be for “the best advantage of the parties” did not detract from this undertaking, since selling the goods would clearly be to the advantage of both parties. The failure of the licensee to do so was a breach of this undertaking.

Trademark Licenses Can Be Quixotic Too

When confronted with these incompatible constructions of the meaning of the clause, two points come to mind.

First, stick to conventional words and terms when drafting. Within the context of a trademark license, a term such as “use” may cause less difficulty in construction than the the term “exploit”. Even better, provide for a specific description of the intended uses of the mark. The admonition is even stronger when a starkly unconventional term as “best advantage of the parties” is relied upon. Here, as well, specific standards of performance are preferable.

Second, pay close attention to the structure of the license agreement. The terms of the grant, and the measure of the licensee’s performance, are separate and distinct issues. First set out the permitted kinds activities; secondly (and separately), define the performance standards. As was graphically brought home in the Pacific Brands case, conflation of the two provisions only result in uncertainty, if not worse.


Unknown said...


Great post. I would add 2 things to your list.

3. Stress test the license. Then stress test it again. Ask someone from outside the deal to play "bad guy" and try to get out of the license or not pay the obvious measure of royalties.

4. Don't worry about the legal terms until the business terms are fully fleshed out. I have seen too many licenses get complicated and (almost) unintelligible by the participants bringing a shell license agreement and filling in the business terms into this license. This often makes the license too hard to read and vet. Once the shell license and the actual business terms are filled in, keep the business terms close and review them often. (Maybe this one should go first.)

Neil Wilkof said...


Thanks for the comments. I would push back on (4) to this extent. I have experienced circumstances where business terms, if fleshed out first, are so disconnected with the legal framework that there is no way to bridge the gap. The client is wedded to the deal, we scratch our heads (in vain) trying to figure out how to structure legally, and everyone becomes frustrated. To avoid this, it helps that the client has at least mental check-list of the legal constructs when it sorts out the business terms, otherwise, the results can be unpleasant or worse.