Many risks arise when a company formed in one jurisdiction enters into an exclusive commercial licence and distribution arrangement with a company formed in another jurisdiction, particularly where commercial arrangements involve granting the licensee an exclusive licence to operate in a defined territory, not home to either of the parties to the arrangement.
Often the terms of such agreements include where a licensor grants a licensee an exclusive right to use intellectual property i.e. trade marks, patents, designs, domain names, regulatory approval certificates (where applicable) and other proprietary information including customer data and related know-how in the defined territory in relation to specific products/services, subject to imposing certain obligations on the licensee such as it agreeing to adhere to certain quality control criteria/measures, including adhering to defined labelling, packaging, and advertising specifications.
Situations may arise where faith in a licensee’s abilities grows over time and rights are often extended contractually to it (either verbally, or in writing) in the defined territory. Rights and obligations in terms of the initial arrangement become blurred and indeterminate and often disputes result. The licensee has often developed a secure market in the exclusive and defined territory at that stage that it may not be willing to forego, even if the initial and extended contractual arrangement with its former licensor is terminated and comes to an abrupt end.
It is at this juncture that typically the original licensor’s intellectual property tends to be misappropriated. A licensee may allege that contractual arrangements are no longer in place that prevent it from using or adopting certain intellectual property rights, including trade marks, as its own in the defined territory. It may assert that it has, in any event, gained an independent goodwill and reputation in relation to certain intellectual property rights which give it what is termed a bona fide claim to proprietorship to same. It can allege that the licensor has not used such intellectual property rights itself in the defined territory and thus never had any bona fide intention of doing so in the future other than through its licensee.
This is when one has to review the initial and extended contractual arrangements that were in place as between the parties. If a licensee has acknowledged the licensor’s title in its trade mark, then no other person, including it, can be permitted to use such intellectual property rights as its own and has an obligation to transfer the intellectual property in question back to the licensor. Furthermore, one needs to look at the timing of when appropriation/misappropriation of this nature took place. It may have taken place when contractual exclusivity of an extensive nature was granted to the licensee i.e. in some instances a licensor is excluded from making its own products in pre-defined territories, or a licensee enjoys the benefits of using a licensor’s marketing materials. It is essential to include in any contract albeit in its original or varied form, acknowledgements that any goodwill or reputation in relation to certain products or services must inure to the benefit of the licensor.
A fine line must be drawn between the definition of a proprietor on one hand i.e. one who has the exclusive right or title to use certain intellectual property rightsand the concept of good faith, which is an ethical value or controlling public policy principle founded upon community standards of fairness and decency. Whether one has a bona fide claim to proprietorship involves an ethical value judgement as does a determination of whether a party is acting mala fide.
Although trade marks are territorial, if regard is had to an ever increasing globalisation of trade, there are certain bona mores emerging which give greater recognition to the goodwill and reputation in a brand arising from worldwide sales. One needs to go back to the contracts in place between trade partners to establish who has the better or greater moral claim to ownership in certain intellectual property rights. Whilst it can be said that a licensee gains a reputation and goodwill in relation to its products or services using a licensor’s intellectual property rights in a defined territory, any claim it makes to proprietorship of certain intellectual property rights will have been tainted by an element of sharp practice and unethical dealing. Even if initial or extended contractual arrangements are terminated a claim of proprietorship by a licensee falls short of the ethical standards of acceptable commercial behaviour. It is also important to note that even where no contractual or pre-contractual relations have existed between two or more parties, circumstances can arise where it can be inferred that adoption of third party intellectual property rights can be contrary to good faith.
It is essential to include in contractual arrangements between global partners that when a licensor grants a licensee exclusive rights to use its intellectually property in a defined territory, there is a clear obligation for the licensee to transfer back to the licensor instruments that are likely to be misappropriated such as domain names, customer data and regulatory approval certificates (when applicable) and the like on termination of the contract.
- Victoria’s Secret Inc v Edgars Stores Ltd 1994 3 SA 739 (A)
- Reynolds Presto Products Inc t/a Presto Products Company v P.R.S. Mediaterranean Limited and The Registrar of Trade Marks – Judgment handed down on 13 March 2014 (Unreported at this stage)
For more information please contact:
Department: Trade Mark
Tel: +27 (0)11 324 3057
Author: Karen Kitchen