New laws on trade mark licensing

Hidden by the noise over Brexit and IP, the UK has recently introduced secondary legislation that substantially amends UK trade mark law. The Trade Mark Regulations 2018 came into effect on 14 January 2019. The Regulations are intended to implement EU Directive 2015/2436. Sections 2-33 of the Regulations revise the Trade Marks Act 1994. Later sections revise UK trade mark practice rules.

Many of the changes are technical and of interest mainly to those involved in the details of applying for or litigating UK-registered trade marks. But buried among these changes are a few revisions to the law concerning the assignment and licensing of trade marks, which should be of interest to readers of this blog. See in particular sections 14 to 17.

Implied term on trade marks in sale of business agreements

This article will focus on two of those changes, namely sections 14 and 16. The first is of interest to M&A lawyers. Section 14 reads as follows:

14. In section 24 [of the Trade Marks Act 1994] after subsection (1) insert—

“(1A) A contractual obligation to transfer a business is to be taken to include an obligation to transfer any registered trade mark, except where there is agreement to the contrary or it is clear in all the circumstances that this presumption should not apply.”.

This is presumably intended to apply where the sale of business agreement doesn’t specifically provide that the selling business’s trade marks are included in the sale. If the issue is covered in the agreement, why would one need a statutory provision?

The above provision is designed to comply with Article 22 of the EU Directive, which reads as follows:

A transfer of the whole of the undertaking shall include the transfer of the trade mark except where there is agreement to the contrary or circumstances clearly dictate otherwise. This provision shall apply to the contractual obligation to transfer the undertaking.

Students of legislative drafting have, in the above two extracts, an interesting example of the different drafting styles in the EU and the UK.

IP Draughts has reservations about automatically (i.e. by statute rather than as a matter of interpretation for the judge in the individual case) implying terms into contracts that the parties may not have addressed their minds to. Sometimes, the implied term will reflect what they intended. Other times, it will not. He is aware, for example, that many commercial practitioners don’t realise that transferring property “with full title guarantee” or “with limited title guarantee” automatically introduces the implied warranties and terms respectively described in section 1 of the Law of Property (Miscellaneous Provisions) Act 1994. It can be alarming to discover that a few, innocuous-sounding words in a contract automatically introduce paragraphs of contractual obligation.

Thankfully, there are relatively few instances of “magic words” in commercial contracts made under English law, that have a meaning required by statute. There are more words that have accretions of case law attached, such as “best endeavours”.

In this case, the implied term is introduced into English law to comply with an EU Directive. IP Draughts is conscious that most countries of the EU have a version of civil law, rather than common law. Civil law seems to be more willing than the common law to imply terms into contracts, so perhaps the new law mentioned above will not cause any surprise or consternation among IP Draughts’ continental European readers. He would be interested to hear from them about this point.

Some limited explanations for the changes described in this article appear in the EU Trade Marks Directive to which the UK Regulations relate. For example, Recital (34) of the Directive reads:

For reasons of coherence and in order to facilitate the commercial exploitation of trade marks in the Union, the rules applicable to trade marks as objects of property should be aligned to the extent appropriate with those already in place for EU trade marks, and should include rules on assignment and transfer, licensing, rights in rem and levy of execution.
To IP Draughts, this is not a persuasive statement. If it is appropriate to align EU rules on assignment and licensing, there is much larger task to be performed than tinkering with a small and almost random selection of transaction-related provisions as this Directive does (specifically in Articles 22-25). Some of the transaction-related terms that could usefully be addressed in EU legisation are discussed in the two articles on this blog that immediately precede this article – a series that will be continued in the coming weeks.
Licensor’s right to sue licensee for trade mark infringement
The second topic that has attracted IP Draughts’ attention in the UK Regulations concerns the interplay of contractual rights and trade mark rights. Anyone advising on a dispute between a licensor and licensee should be interested in this provision. Section 16 reads as follows:

In section 28 [of the Trade Marks Act 1994] after subsection (4) insert—

“(5) The proprietor of a registered trade mark may invoke the rights conferred by that trade mark against a licensee who contravenes any provision in the licence with regard to—

(a) its duration,

(b) the form covered by the registration in which the trade mark may be used,

(c) the scope of the goods or services for which the licence is granted,

(d) the territory in which the trade mark may be affixed, or

(e) the quality of the goods manufactured or of the services provided by the licensee.”.

This wording tracks very closely Article 25(2) of the EU Directive, so it is not worth reproducing the latter wording here.

If he has understood correctly, this wording is clarifying that activities by the licensee that fall outside the permission granted by the licence may be both:

  1. A breach of contract (i.e. of the terms of the licence agreement); and
  2. An infringement of the licensor’s trade mark.

It is not clear to IP Draughts why this wording is needed, as a matter of English law, though he sees the merit of stating the position explicitly in English law if it is to be harmonised throughout the EU. Isn’t it obvious that, if a licensee does something that is not permitted by the licence, he could be infringing the trade mark and therefore could be sued for infringement by the licensor?

Well, not according to some legal theories. IP Draughts has seen this point raised by US practitioners but not by English IP lawyers. For example, on a quick Google search, he found the following statement by a US lawyer:

[I]f the license agreement is limited in scope and the licensee acts outside the scope, then the licensor can bring an action for infringement. To prevail, the licensor must establish that the license terms are limitations on the scope of the license, rather than independent contractual covenants, and that the licensee’s actions exceed the scope of the license.

Courts have held that where the licensee has been granted an exclusive license, unlicensed use of the IP is merely a breach of contract. The underlying rationale stems from the understanding that an exclusive license transfers ownership of the IP rights. The licensee is incapable of infringing an interest in IP that he owns.

To IP Draughts’ European mind, the second paragraph quoted above relates to a quirk of US copyright law, that treats an exclusive licence as if it were an assignment. He will avert his eyes from this peculiar idea, and move quickly on.

The first paragraph quote above may have more universal interest. The idea is that if you grant someone a licence, the licence as a matter of property law covers all fields. Any restriction on the field of the licence is a contractual restriction only, i.e. it doesn’t affect the unlimited scope in property law. Therefore if you want to sue your licensee for acting outside the field permitted by the licence agreement, your only remedy is for breach of contract. You can’t sue for infringement.

This is not a concept that IP Draughts has come across in domestic English law, though it has surfaced in EU competition law. Several decades ago, he took a course on competition law, taught by Professor Valentine Korah of UCL. Although much of what he was taught failed to stick in his head, he does remember coming across a theory very similar to that mentioned above. In the words of Professor Korah’s yellow book on EEC Competition Law and Practice (4th edition, 1990, page 174):

The [competition directorate of the European] Commission has gone further and considers that a licence limited territorially is an unrestricted licence, subject to a contractual ban on exploiting outside the territory, which is unlikely to merit exemption [from what is now Article 101 of the EU Treaty].

The commentary around this quotation suggests that Professor Korah didn’t think much of this approach by the Commission, which seems to have been a convenient way of enabling the Commission to challenge territorial restrictions in an anti-competitive contract without challenging IP laws per se. But it is interesting that it was part of the Commission’s thinking. Others, more familiar with EU competition law than IP Draughts, may be able to comment on whether this theory remains part of the Commission’s armoury.

In any event, section 16 / Article 25, quoted above, seems to be clarifying that as a matter of English and EU law, you can sue your licensee for trade mark infringement.

At least that is what IP Draughts assumes is being said by the above provisions. He has not come across any definitive explanation of these provisions or why they were introduced, so he may be barking up the wrong tree. If any reader can point him to a source that confirms (or otherwise) his understanding, he would be grateful.

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Filed under Intellectual Property, Legal Updates, Licensing

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