Apparels and appellations

Author: Peter Jabaly (Rutgers Law School)

JA Apparel Corp. v Abboud, 07 Civ. 7787 (SDNY), 12 January 2010

Citation: Journal of Intellectual Property Law & Practice, doi:10.1093/jiplp/jpq035

This case highlights poor contract drafting and the inherent difficulty of segregating a trade mark from its namesake.

Legal context

In any transaction relating to trade marks, the rights and responsibilities of the respective parties do not exist in a vacuum but are related to the specific nature of the trade marks themselves. Where a trade mark which is the subject of a transaction incorporates or alludes to the name of one of the parties to the transaction, the drafting of the contract must take care to reflect both the intentions of the parties and the separate and distinct status of the trade mark. If this is not done, the resolution of any ambiguity becomes a matter for judicial construction.

Facts

Joseph Abboud and JA entered into a Purchase and Sale Agreement by which, in exchange for $65.5 million, Abboud agreed to ‘sell, convey, transfer, assign and deliver’ to JA Apparel ‘all of [his] right, title and interest in and to’ most pertinently, ‘the names, trademarks, trade names, service marks, logos, insignias and designations identified’ in the Agreement's Schedule. The name Joseph Abboud was included on the Schedule but, as the Court reasoned, ‘there [was] no evidence of any negotiations or discussions of the sale of Abboud's name as an asset distinct from the trademarks and related intellectual property’.

At the outset of the negotiations, Abboud became concerned about his ability to compete in the industry if he should choose to continue designing after the relationship with JA came to an end. In follow-up press releases, correspondences, and draft agreements, ‘names’ would be included as a target of the acquisition. However, the parties never addressed the term's inclusion or meaning.

The relationship soured after approximately 5 years. And, once the non-competition clause had expired, Abboud began to design and to market a brand new line of clothing, ‘Jaz’. This line of clothing was advertised as: ‘[the] new luxury collection created by the award-winning designer Joseph Abboud’ underneath the comparatively larger Jaz brand name; ‘a new composition by Joseph Abboud’ in bold next to the similarly sized Jaz brand name. Based on the advertisements, JA alleged trade mark infringement and breach of contract.

Analysis

A contract between sophisticated parties, negotiating at arm's length must be respected and a court should be ‘extremely reluctant to interpret an agreement as impliedly stating something which the parties have neglected to include’ (Vt. Teddy Bear Co., Inc. v 538 Madison Realty Co., 1 N.Y.3d 470, 475 (2004); Belle Harbor Wash. Hotel, Inc. v Jefferson Omega Corp. (‘a written agreement that is complete, clear, and unambiguous on its face must be enforced in accordance with the plain meaning of its terms.’). A court determines a term's ambiguity since it is a question of law. If the court determines an ambiguity, then extrinsic evidence is properly admitted and all ‘surrounding facts and circumstances’ may be considered to ascertain the parties' intended meaning (U.S. Naval Inst. v Charter Comm'ns, Inc., 875 F.2d 245, 248 (1975)).

The parties presented equally persuasive interpretations of the agreement, provided no compelling extrinsic evidence of the sale of the Abboud name except in connection with the sale of IP, and provided no extrinsic evidence that indicated that Abboud had sold his personal name in connection with all commercial purposes. The Court accordingly concluded that Abboud sold the use of his name as a trade mark or brand name.

The Court eventually recognized that the assignment of the Joseph Abboud name in connection with the marks was dispositive of the non-assignment of his name for all commercial purposes. Mindful that this interpretation left the term ‘names’ in the schedule as surplusage, the Court noted that the rule against surplusage should be ‘applied with a grain or two of salt’ as the common technique is used to ensure all meanings are included, ‘not [necessarily] to convey a separate piece of information’ (JA Apparel Corp., 568 F.3d at 407 n 4 (J Sack, concurring)).

Though Abboud had not sold the personal use of his name with respect to every commercial use, he had sold his trade mark, the Joseph Abboud name. The Court therefore next determined whether trade mark infringement, and therefore breach of contract had occurred. To succeed in a trade mark infringement claim, the plaintiff is required to demonstrate the possession of a valid mark which is entitled to protection, and that the defendant's use of the mark is likely to cause confusion as to the origin or sponsorship of the good. The Court of Appeals had determined that the defendants had made a prima facie showing.

The Court next addressed Abboud's fair use defence, which allows for a modicum of confusion and is an absolute defence to a claim of trade mark infringement. To succeed, an infringer must demonstrate that the name or term is being used descriptively, other than as a mark, and in good faith (15 USC 1115(b) (4)). ‘Descriptive use is evidence in such situations "[w]here a mark incorporates a term that is the only reasonably available means of describing a characteristic of another's goods"’ (citing EMI Catalogue P'ship v Hill, Holliday, Connors, Cosmopulos, Inc., 228 F.3d 56, 65 (2d Cir. 2000)).

Use of a term to attract public attention is deemed trade mark use. Other considerations, such as size, font, cautionary language, and location, are important in determining whether the term is used descriptively or in a trade mark sense (Third Restatement of Unfair Competition 28 cmt. C). Lastly, the lack of good faith may be inferred from the defendant's breach of an agreement not to use the trade mark (Inst. for Scientific Info. v Gordon & Breach, Sci. Publishers, Inc., 931 F.2d 1002, 1009 (3d Cir. 1991)).

In the case of surnames, the circumstances are more closely scrutinized. A surname may acquire a secondary meaning, but that may not interfere with the business of another person bearing the same name. However, the right is not unlimited in a situation where the individual had sold the right to use the name. After reviewing the advertisements' proposed formats, the Court concluded that Abboud had infringed on the trade mark, and therefore, violating the contract. The Court ordered Abboud to use a disclaimer to limit the significant confusion that would be generated by some of the proposed advertisements. In summation, ‘Abboud may alert consumers that he is the designer behind the Jaz line, but he cannot do so in an "overly intrusive manner."’ (citing Madrigal Audio Labs, 799 F.3d at 823). Further, Abboud was enjoined from using his name as a trade mark. Abboud's counterclaims were dismissed on the basic premise that he had sold the right to use his name.

Practical significance

Even something as personal as a name may become IP, capable of being sold and forbidden to the person who was born with it. One who sells his namesake trade mark may not, after becoming overcome by remorse, find refuge in the argument that it is inextricably part of his personality; limitations may be placed on its use. Abboud failed to recognize that. He agreed to sell his brand name and the attendant good will generated by it. For that reason, he was severely limited in using his name without disclaiming his association with the Joseph Abboud brand. When a trade mark holder sells his trade mark, he is effectively foreclosed from re-entering the industry and capitalizing on that goodwill.

JIPLP at the INTA

The International Trademark Association's 132nd Annual Meeting takes place this year in Boston, Massachusetts (United States), from 22 to 26 May 2010. As in previous years, JIPLP's publishers, Oxford University Press, will be exhibiting a selection of their intellectual property publications in the Exhibit Hall between 23 and 26 May. The INTA Meeting (details here) is the world's biggest gathering of IP owners, lawyers and service industries.

OUP's booth number in the INTA's Exhibit Hall is 429. You can find us via the floor plan here. If you've any suggestions for articles you'd like to write -- or read -- or if you'd just like to meet some of the production and editorial team members, just drop by and say "hello".

Industrial application at the EPO and the Court of Appeal: procedural co-operation ends in conflicting findings

Authors: Sebastian Moore and Andrew Bailey (Herbert Smith LLP)

Eli Lilly and Company v Human Genome Sciences, Inc [2010] EWCA Civ 33

Journal of Intellectual Property Law & Practice, doi:10.1093/jiplp/jpq041

The Court of Appeal for England and Wales confirms first instance decision that a patent application needs to disclose sufficiently specific and credible ways of exploiting the invention to satisfy the requirement for industrial applicability.

Legal context

Articles 52(1) and 57 of the European Patent Convention (EPC), as implemented into UK law by sections 1(1)(c) and 4 of the Patents Act 1977, provide that, in order for an invention to be patentable, it must be capable of industrial application.

In relation to biotechnological inventions, Article 5(2) of the Biotechnology Directive (98/44/EC) allows the patentability of gene sequences, even if the structure of that sequence is identical to that of a natural element; however, Article 5(3) requires that the industrial application of the sequence or partial sequence of a gene must be disclosed in the patent application.

The Recitals to the Directive shed further light on the interpretation of these provisions by stating that a mere DNA sequence, without indication of a function, does not contain any technical information and is therefore not a patentable invention. Further, in order to comply with the industrial application criterion, it is necessary in cases where a sequence or partial sequence of a gene is used to produce a protein or part of a protein, to specify which protein or part of a protein is produced or what function it performs.

Facts

In August 2005, Human Genome Sciences, Inc. (HGS) was granted a European patent over the gene and amino acid sequence for Neutrokine-alpha, a new polypeptide that is a member of the tumour necrosis factor (TNF) superligand family. The HGS scientists had identified the gene sequence for Neutrokine-alpha by bioinformatics (that is by using computational and statistical techniques to solve biological problems) rather than the standard route of a lab-based technique. As a result, HGS had speculated in the patent application as to the possible applications of the protein on the basis of what was already known about other members of the TNF family. Eli Lilly had brought opposition proceedings against the HGS patent at the European Patent Office (EPO) and launched revocation proceedings against the UK equivalent of the patent. Lilly claimed that the patent was invalid for lack of industrial application because HGS's predictions as to the activity of Neutrokine-alpha were speculative. HGS responded that, when the patent was applied for, other members of the TNF family had been shown to have industrial application.

In July 2008, at first instance Kitchin J found the patent in suit invalid, inter alia, for want of industrial applicability. HGS appealed. At a hearing in February 2009 to set the date for the appeal hearing, Jacob LJ made it clear that the parties should have informed the Court about ongoing EPO proceedings that might have made the UK appeal hearing unnecessary. He also criticized the patentee's perceived unwillingness to assist in accelerating the EPO appeal, despite cooperation on behalf of the Technical Board of Appeal (TBA) to offer an expedited timetable. His solution was to delay the Court of Appeal hearing until a date when the TBA decision would definitely have been given.

Meanwhile, in October 2009, the TBA held the patent valid, albeit after the claims had been restricted by HGS.

However, notwithstanding this finding of validity by the TBA, the Court of Appeal (leading judgment by Jacob LJ) affirmed the first instance decision of Kitchin J and found the patent invalid.

Analysis

Industrial application

In reaching its finding, the Court of Appeal cited with approval Kitchin J's summary of what emerges from the application of Article 57 EPC and Article 5 Biotech Directive, namely that ‘in a nutshell, the industrial application of a gene must be disclosed in the application. If it encodes a protein then the protein or its function must be specified’.

The Court of Appeal emphasized that what is required is a sufficient specification of the function of the protein:

Just describing the existence of a protein and its structure is not enough. Nor is it enough to describe the function at a high level of generality – e.g. that the compound must have a significant function biologically and so it (or its antibodies) may be usable to treat some sort of disease. You have to say what it is for with more particularity. What amounts to a sufficient specification of function will depend on the facts of the case and involves a question of degree.

The Court of Appeal clearly found it influential that, on the facts, only one member of the superfamily had been found to have any use at all, and that even that use was not proved to be directly linked to the supposed common factor of the superfamily.

In the view of the Court of Appeal, the case provides an example of the danger of what can happen if patenting too far upstream is allowed, in that the patent system would be operating to prevent innovation, not to encourage it.

Co-operation between EPO and national courts

Evident from these proceedings is the willingness of the national courts and EPO to cooperate in expediting hearings where important commercial issues are at stake.

While Jacob LJ acknowledged that more often than not oppositions were started on a precautionary basis only, he noted that parallel litigation in the EPO and one or more national courts was only really likely to occur in cases where the patent may have an immediate and obvious important commercial impact. It was this relatively rare class of cases where co-operation can be most valuable.

TBA approach and procedure in English Courts v EPO

The court was at pains to stress the differences in procedure and approach between the English courts and the EPO, which it felt material in the differing results reached.

The process at a first instance trial in England involves an intensive investigation and testing of the evidence, with both factual and expert evidence severely tested by the process of cross-examination. The result of this is that ‘not only must a party put its cards on the table prior to the trial, it must find and play all its best cards at the trial’. On appeal, there are no new witnesses, expert opinions, or other new evidential matter, save in very exceptional circumstances. As a result, the Court of Appeal gives very considerable deference to the findings of fact of the first instance court.

The court contrasted this with the approach in the EPO, where the first instance proceedings are regarded as little more than ‘administrative', with much less room for the testing of evidence, no cross-examination, and no compulsory disclosure. Moreover, there is much more latitude for the admission of fresh material on appeal. (In this case, the TBA had permitted a further 700 pages of evidence from the patentee just three weeks before trial.)

In the Court's view, this difference in approach inevitably leads to the EPO being more of a ‘coarse filter' with something of a ‘benefit of the doubt' given to the patentee. Once a patent has been granted by the EPO and survived any opposition, the ultimate arbiter of its validity in any designated Contracting State is the national court system of that Contracting State deciding the case using its own fact finding procedures.

Findings of fact v setting of legal principle

Citing various English cases, the court considered it well-established that a national court can differ on determination of the facts or questions of degree from the TBA. However, it was well established that, when it comes to legal principles, decisions of the TBA are of ‘immense importance'. The English Courts will ‘follow any principle of law clearly laid down by the EPO, only reserving the right to differ if we are sure that the commodore is steering the fleet onto the rocks' (Actavis v Merck [2008] EWCA Civ 444).

In terms of questions of industrial applicability, the court was satisfied that both the Judge at first instance and the TBA had asked themselves the same key question but ultimately the case came down to an assessment of the specific facts. In this respect, the court felt obliged to follow the findings of Kitchin J, noting that his findings were arrived at following an intensive examination of the evidence and that the Court of Appeal was not bound to give deference to the TBA's findings of fact.

Practical significance

The decision is a clear reminder of the careful balancing act that faces biotech patent applicants between ensuring they are first to file in a highly competitive and fast-moving industry v the need to do sufficient research to disclose the use of the invention in the patent application.

The Court of Appeal's decision confirms that speculative, wide ranging uses identified at the point of patent filing are not enough to satisfy the requirement for industrial applicability. The patent needs to disclose specific and practical ways of exploiting the invention. As a minimum, there must be a real likelihood that a proposition made regarding the function of the product is true. It seems that discovering a nucleotide sequence encoding for a human protein and being able to show that the protein concerned has some common homology with known proteins may satisfy Article 57, but whether it does or not is case-dependent and in particular depends upon how well established the functions of the other members of the family are.

The resultant dilemma for patentees is deciding at what stage it has sufficiently established the function of a new product in order to file a patent.

Editorial Board members in the news

The subject of the James Nurton Interview in the current issue of Alicante News, the monthly magazine of the Office for Harmonisation in the Internal Marked (OHIM), is Dutch lawyer and JIPLP editorial panellist Willem Leppink. In the interview Willem answers questions on trade mark filing strategy, the Onel case on genuine use and the need for more harmonisation in Europe. You can read the interview with Willem here.

Meanwhile, fellow editorial panellist Anna Carboni -- who is a member of the judiciary, being an Appointed Person to hear appeals against decisions of the Trade Mark Registry -- is leaving her practice at the Bar to return to her former guise as a solicitor. In October she will be taking up a partnership in the intellectual property practice of Powell Gilbert. You can read about Anna's move here.

JIPLP is delighted to see two of its editorial team in the limelight and looks forward to their continued guidance and input in the development of the journal.

Special issue on Anti-Counterfeiting

The May 2010 issue of the Journal of Intellectual Property Law and Practice is now available online to subscribers. The contents of this issue can be viewed here. This issue has a special theme -- the fight against counterfeits -- and it is guest-edited by Marius Schneider. Marius, partner and attorney at law, Eeman & Partners, is also co-editor with Olivier Vrins of Enforcement of Intellectual Property Rights through Border Measures (Oxford University Press, 2006, here). This is Marius's guest editorial:

Counterfeiting counter-fight

Counterfeiting has grown up: from a cottage industry practised in backroom workshops, it has evolved into a worldwide plague, professionally perpetrated on an industrial scale. The peccadillo has become a global felony, prevalently executed through the involvement of organized crime syndicates attracted by high profits at low risk. Product piracy effectively threatens innovation and creativity—the pillars of our developed economy—and poses a threat to the health and safety of consumers. The FBI has called counterfeiting ‘the crime of the 21st century’.
Counterfeiters are always one step ahead because they continuously adapt to technological and legislative change. To make up the leeway, there is an ever-increasing number of ongoing policy and legislative initiatives.

At the global level, the Anti-Counterfeiting Trade Agreement (ACTA), a proposed multilateral treaty for establishing stringent international standards on IPR enforcement is shortly to be completed, yet the detailed content of ACTA has not reliably been revealed: and we are told that this is usual practice in the negotiation of trade agreements. It is therefore difficult to judge whether, despite the high expectations placed on ACTA, the text will bring major changes in the most developed countries, as their standards are already high. International cooperation and the sharing of best legal practices with less developed and emerging economies will certainly benefit all parties. However, the secrecy around the negotiations and the draft text has nourished the partially unjustified fears not only of Pirate Party partisans and anti-ACTA-activists, but also from MEPs and policy makers across all parties, and the EU data protection supervisor. Those who need to decide on and live with ACTA want to have their say and this must be respected. If not, the future of the agreement is at risk.

At the EU level, novel legislation is in the making. First, the Border Measures Regulation 1383/2003 is under revision. The commendable aims of the review are the simplification and modernization of the procedures to reduce costs for right-holders, and a maximum harmonization of national customs administrations practices. No draft is yet available, but the Commission, under the threat of a WTO panel following a brawl over seizures of medicine in transit, has announced that it will delete every hint to what could be interpreted as a ‘manufacturing fiction’. Furthermore, the ‘simplified procedure’ will be mandatory and the de minimis exception for infringing goods in personal baggage will be repealed. Secondly, the draft Directive on Criminal Sanctions for IPR Infringements is to be revived further to the entry into force of the Lisbon Treaty. Given the increasing involvement of criminals in counterfeiting and piracy, there is a need for harmonized penal measures and cross-frontier investigation procedures. Again, the European Parliament must endorse the text and is likely to have its say. Thirdly, the stakeholder dialogue and the discussions in the EU Observatory on counterfeiting and piracy are ongoing and the results are eagerly awaited. Finally, the Court of Justice of the European Union (CJEU) will have to decide on the two questions for preliminary ruling submitted in Nokia and Philips where the ‘manufacturing fiction’ is at stake. The CJEU must clarify the conditions under which right-holders can take action against fake goods in transit under the Border Measures Regulation (a crucial question, since 40 per cent of the articles seized at EU borders are declared as being in transit). It is not certain that the outcome of the case will allow right-holders to come out victoriously. If the Border Measures Regulation is revised and every reference to the ‘manufacturing fiction’ deleted, the reference to the CJEU is a dead end. Whatever the outcome may be, a review of the substantive IP legislation is necessary to allow right-holders to take effective action against fakes in transit.

There are thus many legislative changes ahead. It should, however, not be forgotten that counterfeiters cannot be fought with words alone. Concrete action and efficient cooperation between all parties involved—right-holders and authorities—is the key to success: this has been so in the past and will not change in the future. The men and women engaged in the daily fight against counterfeiting and piracy make the difference: with goodwill and combined forces, many achievements lie ahead of us in the battle against the pirates".

Contributors, please note!

After another heavy bout of editing, I've compiled a few more pointers for contributors who wish to stay in my favour.

1. UK Court of Appeal. Like the hippogriff this is a legendary hybrid of concepts which should be reserved for use in works of fiction. The United Kingdom exists and so does the Court of Appeal -- but there are separate Courts of Appeal for England and Wales and for Northern Ireland. Scotland -- which has not yet been granted independence from the UK -- has a stand-alone legal system with an appellate court which is not called the Court of Appeal. There are plenty of variants upon this vice: to mention one, the UK doesn't have a High Court either.

2. "In a sense". These words, formerly beloved by academics alone, have now been adopted by many practitioners too. They are usually deployed at the beginning of a sentence and generally add nothing to its meaning. Thus, instead of "The application to cancel the registration was bound to fail" one reads "In a sense, the application to cancel the registration was bound to fail", no explanation being forthcoming as to what the sense is. The normal consequence is deletion.

3. "... of all". When delivering a lecture, the expression "First of all" adds emphasis and gives the listener a moment longer in which to absorb the speaker's meaning. On the printed page, "... of all" is padding. It's not as if one often encounters within legal writing the concepts of "First of some" or "First of third". The word "first", when used without qualification, implies the "of all" element. A similar malaise affects the expression of percentages. Thus one reads: "Only 16% of all patents are renewed into their 20th year". The concept of percentage also implies the words "of all", which can safely be omitted by the writer or eliminated by the editor.

4. Acute Parenthetic Syndrome. This condition is manifested by pro references to, for example, " Eli Lilly and Company Limited ("Eli Lilly")", where any reader will instantly recognise, without further guidance from the author, that references to Eli Lilly are references to the company of that name and not to its eponymous founder who died nearly 112 years ago. Likewise ("the Act"), ("the Directive"), ("the Court"), where the average reader would have no problem guessing which Act, Directive or Court is referred to since the author only mentions one.

5. Grindingly painful full-text repetition. In any article on acquisition of IP rights through a registration process, the word "application" is likely to get a few mentions. Where the author is discussing a decision involving the registration of a trade mark, there is nothing wrong with referring to an "application for registration". However, where the piece in question mentions no other form of application, it becomes tedious to read repeatedly the words "application for registration". If however it is important to distinguish the application for registration from a subsequent application for cancellation, or for applications for university admission, dog licences or permission to excavate ancient ruins or dog licences, the full form may -- if no alternative is available -- be used.

6. Footnote-notes. Notes at the foot of the page are called footnotes. The 'foot' bit refers to their location; the 'note' bit describes their function, which is to enable the reader to note something. There is nothing to be gained by commencing a footnote with the words "It should be noted that ...", which can be painlessly deleted without loss of value on the part of the reader.

7. Gender issues. The uncertainty on the part of many authors as to how to tackle gender is matched only by the uncertainty on the part of many publishers and editors as to how to deal with the author's preferred solution. The best and safest course of action for authors to take is to ask, before writing, whether the publisher has a preferred style and, if so, what it is. However, in getting on for 30 years in editorial work, I have never been asked these questions. The uncertainty of authors is plain to see and it runs wider than issues of political correctness. Thus an incorporated plaintiff can oscillate between "he", "it" and even "they"; the possessive pronoun

corresponds accordingly as "his", "its" and "their". "He/she", "s/he", "(s)he" and "he or she" abound. I even had a continental author who referred constantly to a claimant company as "she". When challenged, he pleaded linguistic ignorance, though I found it strange that an author whose English reading skills enabled him to read and discuss court judgments of some complexity, he had never noticed that companies are not normally referred to as "she".

8. The Author Knows Best. If eBay chooses perversely to spell its name with an initial lower case "e" and a capital "B", the author has no locus standi to correct it to Ebay. Likewise, the acute accent on the "e" of L'Oréal is not an optional extra, to be added or omitted at the whim of the author, any more than is the redundant "n" with which both Lord Hoffmann and Hoffmann-La Roche conclude their H-names. When a piece is submitted for publication, it is a courtesy to editor and future reader alike for the author to present the name in the manner in which it is correctly designated by its owner and, incidentally, in the manner in which an online search, using that name as a search term, will produce the correct search results (many search tools, including those provided for data on the websites of the Office for Harmonisation in the Internal Market and the Court of Justice of the European Union, being sensitive to diacritical signs).

9. Word creep. The tendency to add words is a familiar malaise. Thus "infringe" has in US circles become "infringe on", the short form of "infringe upon"; "until" is growing into "up until". Is this a cultural throwback to the days when we lawyers were paid by the word? Other examples: "when" grows into "at a time when"; "where" is often shunned for the increasingly popular "in circumstances where", "prior to" and "pursuant to" are heavily-used substitutes for terms like "before" and "under", while "a number of" has nearly exterminated"numerous". Word creep blends gently into tautology too: thus the "result" is not as impressive as the "end result".

The JIPLP index

The print version of the 2009 index has been sent out with the April 2010 issue of JIPLP.

The JIPLP production team discussed the future of the index earlier this year. Since the basic subscription is now for the online version, there is an attractive argument that the index should be made available online too (at present it is not accessible via the journal's website). If this is done, a further option is to operate a single consolidated and monthly updated index, rather than following the traditional model of one-year indexes which correspond to the volume year.

From the point of view of contributors who are keen to make their writings accessible, as well as subscribers and the general IP public, a strong argument can also be made for making the index available online to everyone and not merely to subscribers.

At the top of the side bar of this weblog you will find a short poll regarding possible treatments of the index. Can you please let us know your preference? The poll closes next week, on Tuesday 20 April.

Licensing lessons

Author: Chris de Mauny (Hogarth Chambers, London)

Hudson Bay Apparel Brands LLC v Umbro International Ltd [2009] EWHC 2861 (Ch), Mark Herbert QC, sitting as deputy judge of the Chancery Division (England and Wales), November 2009

Citation: Journal of Intellectual Property Law & Practice, doi:10.1093/jiplp/jpq031

A seemingly commercially attractive trade mark licensing agreement leads to litigation on account of the manner in which its obligations were expressed in the agreement and construed by its parties.

Legal context and facts

Hudson was a small US company specializing in manufacturing branded clothing. Umbro was a large English company which licensed for manufacture sports clothing bearing its trade marks, principally football-related clothing. A third company, Umbro US, was involved in the events giving rise to the dispute.
In 2006 and 2007, Umbro granted two exclusive licences for football-related clothing to be sold in the USA, one to a third party called Dick's Sporting Goods for on-field wear and the other to Hudson for off-field wear. The dispute in these proceedings revolved around the dividing line between those two licences. Hudson claimed Umbro had allowed Dick's to market off-field wear, breaching Hudson's exclusive licence to the same, and had hindered Hudson from exploiting their licence, contrary to an implied duty of co-operation. Umbro countered that the clothing marketed by Dick's was actually on-field wear and counterclaimed that Hudson were in fact in breach of their licence for marketing on-field wear. This rather surprising dispute arose from a range of garments known as ‘pocketless soccer basics’ which resemble in some respects the type of shirts and shorts worn by football players on the pitch.

Hudson and Umbro worked together during 2007 to produce a new range of off-field wear. At this stage, the licence agreement had not in fact been signed, though it had been drafted and circulated and purported to have effect from 1 January 2007. The intention was that this new range of clothing should broadly resemble Umbro's on-field wear for three particular reasons:

• it enabled the range to be put into production earlier since it could be modelled on the on-field wear;
• the target market was expected to favour leisurewear that resembled on-field teamwear; and
• it was thought that the success of the on-field wear would encourage success with the off-field wear and visa versa.

Although this strategy made commercial sense, it gave rise to the problem at the heart of the eventual dispute: if the off-field wear produced by Hudson were to resemble the on-field wear produced by Dick's, how was one to be distinguished from the other?

The distinguishing feature most commonly employed in the range was the presence or absence of pockets: FIFA rules prevent on-field shirts and shorts from including pockets for safety reasons. However, in practice, it was difficult to incorporate pockets into the shirts and this distinction could not be used for track-suits since they usually have pockets in teamwear ranges. To complicate matters, a member of the Umbro US management, Miss Jackson, who liaised with Hudson in relation to this licence agreement, did not adhere to the formalities of the licence agreement requiring written approval for products produced under the agreement but rather approved most products only orally or by way of unsigned written confirmations.

During the design process, Hudson was bought out by a third party leading to a slight change in strategy. In particular, Hudson then sought to produce products of essentially the same design as those previously put forward, but this time without pockets. Although these were supposed to be marketed as off-field clothing, it was quite possible that they might end up being sold to football teams and used as team kit, thus potentially infringing Dick's exclusive licence for on-field wear. However, Hudson took the commercial view that its business and Dick's business were sufficiently different that Dick's would not be harmed by such a move. This was authorized orally by Miss Jackson, but, as before, no formal written approval was given. Shortly after this event, the licence agreement between Umbro and Hudson was signed.

Meanwhile, some of the range including pockets went on sale in the USA. Dick's complained that the range was off-field wear and Miss Jackson recognized that the pockets involved (eg an iPod pocket on the sleeve) were not sufficiently prominent and might go unnoticed. As the pocketless shirts were also now going on sale, Miss Jackson purported to sign a variation of the Hudson licence which would enable them to sell specific types of shorts and shirts without pockets that might otherwise, at least arguably, be considered on-field wear. Not long afterwards, Miss Jackson was dismissed from Umbro US for unrelated reasons.

The new Umbro US manager taking over Miss Jackson's role was surprised by some of the products that had been approved for sale by Hudson, being of the opinion that they clashed with the exclusive rights of Dick's, the more important client. Umbro then began to investigate which products have received formal written approval within the terms of the licence agreement. The situation deteriorated and by February 2008, Umbro formally complained to Hudson that it was supplying on-field kit in breach of the licence agreement. Hudson's view was that Miss Jackson has approved the strategy which they took and it was a by-product of that initial strategy which caused many of the products to resemble on-field wear. Following meetings between the two, Hudson's then-current designs were approved. However, further problems with approving designs occurred and Hudson suffered commercially with some retailers cancelling their orders. Proceedings followed as described above with Hudson complaining about some items sold by Dick's.

Off-field/on-field

The licence agreement defined this distinction by specifying that an article ‘specifically intended for use on the field of play’ was on-field wear. The judge construed this phrase so as to attribute to ‘specifically’ a meaning approaching ‘exclusively’ and ‘field of play’ as meaning the actual field of play including those used for practice games. The ‘intention’ was not that of the ultimate buyer but that of the hypothetical supplier or buyer. From this construction, it was possible to decide for each particular design of clothing whether it was on- of off-field wear.

Analysis

As a result of this construction, the judge held that Umbro had knowingly permitted Dick's to market certain goods falling within Hudson's exclusive licence for off-field wear, those goods containing features which marked them as not being specifically intended for use on the field of play; they were really fashion items and hence off-field wear.

In addition, the judge held that Umbro succeeded on its counterclaim that much of the clothing marketed by Hudson was in fact on-field wear and thus not within the terms of Hudson's licence. The performance characteristics of these goods were not as high as might be expected for on-field wear, but the visual features of their design meant that they could not be properly distinguished from on-field wear. In addition, they were marketed in a manner that would appeal to players rather than merely to fans.

Hudson's defence to the counterclaim arose primarily from Miss Jackson's approval of the designs. This defence was problematic due to the lack of formal written approvals as required by the licence, but the judge also looked further at the issue of whether Miss Jackson had the authority to modify the licence so as to allow Hudson to market on-field wear. Examining her authority, the judge took into account that she was not a director or even an employee of Umbro UK but rather of Umbro US. While she had been delegated the authority to approve designs as part of the day to day management of the agreement, she did not have the authority to change the terms of that agreement. Thus the purported variation to the licence agreement was of no effect.

Hudson obtained a declaration that Umbro had knowingly permitted Dick's to market off-field wear and for damages to be assessed flowing from that. Umbro obtained delivery up of the offending on-field wear from Hudson and damages.

Practical Significance

This case highlights the difficulties that may be encountered in adopting a commercial strategy that is inconsistent with the licensing regime. By choosing to produce clothing that resembled on-field wear, Hudson were always at risk of their clothing being perceived as on-field wear and thus as falling outside the terms of their licence. Unfortunately for Hudson, they were unable to rely on the apparent assurances of Miss Jackson as she was not in a position to remove the restrictions of the licence agreement.

Ownership of IP derived from publicly funded research: the State steps in

Author: Lee-Ann Tong (Department of Private Law, University of Cape Town)

Intellectual Property Rights from Publicly Financed Research and Development Act No. 51 of 2008, South Africa

Citation: Journal of Intellectual Property Law & Practice, doi:10.1093/jiplp/jpq021

South Africa has introduced legislation to regulate allocation and commercialization of IP derived from research and development undertaken with public funds.

Legal Context

The Intellectual Property Rights from Publicly Financed Research and Development Act 2008 aims ‘to provide for more effective utilisation of intellectual property emanating from publicly financed research and development’ (Preamble). It seems that government has decided that it can rectify South Africa's low patenting rate by forcing recipients of public finance for research and development, such as universities and research institutions, to protect and commercialize their research results. The legislation has attracted much criticism, raising many questions about the role of research institutions as revenue-generating enterprises, the potentially detrimental effect of the imperative to commercialize research results on the dissemination of information, the negative impact that the Act may have on institutions' ability to work as part of research consortia and to attract foreign funders, the practicality of the bureaucratic processes that have to be followed and the administrative burdens associated with the reporting, disclosure, and commercialization requirements. Although the Act was passed on 22 December 2008, it can only come into effect once Regulations have been passed which will set up the necessary institutional structures. The draft Regulations were first released for public comment in April 2008, but by the start of February 2010, they had yet to be passed.

Facts and analysis

The stated objective of the Act is to ensure that

intellectual property emanating from publicly financed research and development is identified, protected, utilised and commercialised for the benefit of the people of the Republic, whether it be for a social, economic, military or any other benefit (section 2(1))

This broad objective is implemented through provisions on the allocation of rights to the IP, the statutory protection of IP, the rules of IP transactions, the obligation to enter into benefit-sharing arrangements, the rights of the state to the IP, and the creation of new administrative institutions such as a National Intellectual Property Management Office (NIPMO) (sections 8–9) and technology transfer offices at institutions (sections 6–7).

The Act applies whenever public funds (excluding funds allocated for scholarships and bursaries), regardless of amount or proportion, are used for research and development by a recipient and applies to all IP emanating there from. For the purposes of the Act, ‘IP’ is defined quite broadly as

any creation of the mind that is capable of being protected by law from use by any other person, whether in terms of South African law or foreign intellectual property law, and includes any rights in such creation, but excludes copyrighted works such as a thesis, dissertation, article, handbook or any other publication which, in the ordinary course of business, is associate with conventional academic work (section 1).

There is a concern that the definition is overly broad even though it excludes certain copyright works. It would appear that even IP that would not ordinarily have statutory protection within South Africa may have to be protected if it would constitute protectable subject matter in a foreign jurisdiction. An example is that of a computer program which may need protection under a software patent in a foreign country, even though software patents are not the norm in South Africa.

Ownership of IP

The Act provides that a recipient of public funds owns the IP emanating from the research, however, if the recipient, ‘prefers not to retain ownership in its intellectual property or not to obtain statutory protection for the intellectual property’ (section 8), it must inform NIPMO (section 4(2)). This situation may arise, for example, where the recipient wishes to disseminate the research results to the public in terms of a collaboration agreement. If NIPMO does not agree that the IP need not be protected through ‘statutory protection’ then it may acquire ownership of the IP and seek such statutory protection itself (section 4(3)). However, if NIPMO decides not to take ownership, the recipient is still obliged to offer the option of acquire ownership and to obtain statutory protection firstly to any co-funders, and failing that, to the IP creators (section 4(4)).

Where the IP emanated from an institution, for example a university (section 1), the Act makes provision for possible co-ownership of the IP by co-funding private entities or organizations (section 15). Co-ownership is, however, subject to a contribution of resources, joint IP creatorship, a benefit-sharing arrangement for the IP creators at the institution, and the conclusion of an agreement for commercialization between the private entity and the institution (section 15(2)).

IP transactions

The Act imposes various conditions on all IP transactions, whether licensing or assignment. A distinction is made between non-exclusive licences and exclusive licences, and in addition, between normal transactions and offshore transactions. Although the recipient of public funds is left to determine the nature and conditions of IP transactions with third parties, in doing so it must take account of a number of factors, including giving preference to non-exclusive licences (section 11(1)(a)), to South African licensees and specifically to BBBEE (broad-based black economic empowerment (sections 11(1)(b) and 1) licensees, and to parties that will use the IP to benefit the people of the Republic (section 11(1)(c)). Exclusive licensees must undertake where feasible to commercialize within the Republic (section 11(1)(d)). Where the exclusive licence is in relation to IP from an institution, there is the added requirement that the exclusive licensee ‘has the capacity to manage and commercialize the intellectual property in a manner that benefits the Republic’ (section 15 (1)). Offshore transactions have additional requirements, including that that it be shown that there is insufficient capacity in the Republic to develop or commercialize the IP locally, and that the Republic will benefit from the offshore transaction (section 12(1)–(2)).

Furthermore, in all cases, licensees must provide the State with an irrevocable, royalty-free licence to use or have the IP used throughout the world for the health, security, and emergency needs of the Republic (section 11(1)(e)). In each IP transaction, the party must agree that a failure to commercialize the property will lead to the State having the right to acquire the IP or to demand a compulsory licence be issued (section 11(2)).

Benefit-sharing

IP creators at institutions are entitled to share in the benefits that accrue to the institution from such IP for as long as the right subsists. The Act provides that they and their heirs are entitled to share in at least 20 per cent of the revenues accruing to the institution for the first one million rands of revenues or such higher amount as Minister of Science and Technology may prescribe; and thereafter, in at least 30 per cent of the net revenues accruing to the institution from the IP (section 10(1)(a) and (b)). This amount is to be shared by all the IP creators. It would seem that if the creators are to share in any benefits that may accrue once the IP right in question has expired, then they would need to enter into an agreement to that effect.

Government rights

IP that is not commercialized by a recipient of public funds may be subject to review by NIPMO, and in the event that it is found that there could be commercialization, the recipient may be required to grant a compulsory licence to a third party (section 14(4)). Recipients who do not disclosure IP to NIPMO run the risk of having the IP assigned to the State (section 14(5)).

Practical Significance

Before the Act, IP that was developed at institutions such as universities was dealt with under the general IP statutes, such as the Patents Act 1978, the Designs Act 1993, and the Copyright Act 1978. The new legislation is of utmost significance to research institutions, as well as to any entity that is considering embarking on collaborations with such institutions or even with individuals at such institutions. In every case where there is use of public finance, for example in the form of professors' wages, office space, use of facilities, or use of existing IP, the Act will kick in. Potential donors and collaborators need to be alert to the fact that even if they are contributing significant resources to a research project with a local university or institution, anything less than funding on a full cost model, will result in a severe curtailment of the ability of the funder to decide on the status of the resultant IP.

The Act not only alters the general position that the IP creator is entitled to first ownership of the IP, it imposes enormous administrative burdens on recipients of public funds who have to meet the reporting, disclosure, and commercialization conditions.