Terminating licence agreements for breach: how not to do it

At some point, IP Draughts will get around to reviewing and commenting on the recent English court decision on FRAND licensing. Mr Justice Birss’s 87,000-word decision is considered to be of great significance by those who are involved in this area. But that is a topic for another day.

Instead, IP Draughts’ eye has been caught by another Chancery Division decision, this time by Mr Justice Warren, on the subject of trade mark licence agreements. Judgment in the case of General Nutrition Investment Company v Holland And Barrett International Ltd & Anor (Rev 1) [2017] EWHC 746 (Ch) was published last week. This is another lengthy judgment (only 51,000 words rather than 87,000!) which has something for everyone – the effect of IP assignments, notices, contractual interpretation, and implied duties of good faith are just some of the topics that the judge has to address.

Readers based in the UK will be familiar with the Holland & Barrett (H&B) shops that sell health supplements. H&B is also the UK licensee of the “GNC” and “GNC Live Well” trade marks, which are owned by a US corporation, General Nutrition Investment Company (GNIC). It appears from the judgment that GNIC has a reputation in the USA, inter alia, for selling “sports nutrition” products to body builders, though GNIC has sought to broaden its appeal beyond this market.

Part of the dispute between the parties seems to have related to H&B’s focus on selling GNC-branded products to the body building market, rather than the broader market that GNIC was seeking to cultivate, both in the USA and other countries. In the words of Warren J:

Much of GNIC’s complaint appears to me to be about an alleged change in the brand image of GNC in the UK.  According to GNIC, H&B has changed the brand image of GNC from being a general health and wellness brand, to being a sports nutrition brand.  Frequently, and pejoratively, that latter description is juxtaposed in the presentation of GNIC’s case with “body building” with a view, it seems to me, of tainting the brand image actually developed (sports nutrition) with something which would be perceived by some as less savoury (body building) and thereby to demonstrate a breach of clause 3.1(b) of the [Licence Agreement].

Various other breaches were alleged. Warren J concluded that there had been no material breaches that entitled GNIC to terminate.

The real interest of this case to IP transactional lawyers lies in some of the other topics that were discussed in Warren J’s judgment. In brief summary:

  1. Legal or equitable assignment. If you are not the original licensor under the licence agreement, you need to take care that the licence agreement (and therefore the right of action for breach) has been validly assigned to you, and that the licensee has received notice of that assignment. Under English law, notice of a legal assignment must comply with section 136 of the Law of Property Act 1925. If such a notice has not been given, the most you can have is an equitable assignment, and any action for breach (in the case of assignment of a contract) may require the assignor to be joined as a co-claimant. Warren J dismissed the claimant’s case on the ground that effective notice had not been given, but went on to consider other aspects in case he was overruled by the Court of Appeal on this point.
  2. Notice of breach. Notices of breach must be clear to be effective. This includes being clear as to which legal entity is giving the notice and what breaches are alleged. In the present case the party alleging breach had the same name and was incorporate in the same US State as the original licensor, but was in fact a different legal entity and this was not clear from the notice.
  3. Relational contracts and implied duties of good faith. The English courts have been prepared, in some cases, to imply a duty of good faith into certain types of contract where the parties have an ongoing relationship and need to cooperate with one another to make the contract work. The law in this area is still evolving. The category of contracts where such obligations have been implied are sometimes referred to as “relational contracts” and might, for example, include a long-term distribution agreement. IP Draughts has long considered that IP licence agreements are potentially within this category, particularly since he obtained a written opinion from the late Christopher Carr QC, some years ago, that his client (a licensor) was entitled to sue for breach of an implied obligation of good faith by the licensee under a patent licence agreement. In the present case, Warren J seems to pour cold water on the idea that a trade mark licence agreement is a relational contract.

On the relational contracts point, Warren J states (at paragraph 321:

In my judgment, no general obligation of good faith is to be implied into the LA.  I do not consider that the LA is a relational contract in the sense in which that term has been used in the cases.  Although the LA is a long-term contract, it is one where there ought to be no need for any ongoing communication of the sort envisaged in the cases and required to enable the contract to operate effectively.  In any case, even if the LA is relational in the required sense, it is not necessary to imply an obligation of good faith.  Such control as GNIC has over the use of the marks is already subject to express provisions making an implied term in relation to those aspects unnecessary.

The judgment also includes a small point of contractual interpretation. In the following clause, do the words “to an extent likely to cause material loss to the Licensor” qualify the whole of the previous wording of paragraph (a) or only qualify the words “otherwise infringes the Licensor’s rights under the Trade Marks”?

5.2       The Licensor may terminate this Agreement immediately by notice in writing if:

(a)      The Licensee materially breaches this Agreement or any other member with the H&B Group commits an act which would amount to a material breach of this Agreement or (without prejudice to the Licensor’s other rights to terminate under this Agreement) otherwise infringes the Licensor’s rights under the Trade Marks to an extent likely to cause material lost to the Licensor; or …

Sensibly, the judge concludes that the words highlighted above in red qualify only the words highlighted above in blue and not the words highlighted in green. Of course this dispute could have been avoided if the drafter had been more careful, eg by drafting the above wording (with some additional editing – IP Draughts can’t resist it) as follows:

5.2       The Licensor may terminate this Agreement immediately by notice in writing to the Licensee if:

(a)      the Licensee materially breaches this Agreement;

(b)      any other member within the H&B Group commits an act which, if committed by the Licensee, would amount to a material breach of this Agreement; or

(c)      (without prejudice to the Licensor’s other rights to terminate under this Agreement) the Licensee [or any other member within the H&B Group] otherwise infringes the Licensor’s rights under the Trade Marks to an extent likely to cause material lost to the Licensor; or …

The case provides some useful reminders of the need to deal with legal housekeeping points, as described above, before attempting to terminate a licence agreement for breach.

On the format and text of the judgment, IP Draughts is reminded of the frustration he feels that:

  1. High Court judgments have become so long; and
  2. They adopt a very old-fashioned approach to setting out key terms of the contract that they are being asked to interpret. It would be much better, in IP Draughts’ view, if a new convention were adopted in which the full agreement is pasted as an annex to the judgment so that the reader can see its terms in context. If it is considered appropriate to highlight particular terms, this could be done through colour-coding or some other modern method. IP Draughts would have liked to see, for example, whether the licence agreement in this case included any term restricting assignment.

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