Trade mark licencing – What happens a bitter end?

By Chris Brand and Larissa Holtzhausen on 8 September 2020
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The idiom "hope for the best but prepare for the worst" applies to intellectual property in the same way it applies to life.  Although parties typically enter into joint business ventures with high hopes for an enduring and mutually beneficial relationship, experience has shown that these relationships can turn sour.

A spate of recent court cases highlighted the value of ensuring appropriate measures are put in place when a license arrangement comes to an end. 

In the case of Quad Africa Energy (Pty) Ltd v The Sugarless Company (Pty) Ltd and Another (hereafter “SUGARLESS case”), The Sugarless Company, appointed Quad Africa Energy, as its exclusive distributor for its confectionery goods in South Africa.  The goods supplied by The Sugarless Company contained a prominent S SUGARLESS logo, a mark which was registered as a trade mark in South Africa in their name. 

Less than three years after concluding the agreement, Quad Africa Energy gave notice of its intention to terminate their arrangement, which it subsequently did. 

Soon after, The Sugarless Company became aware that Quad Africa Energy had launched a competing brand called SUGARLEAN.   The competing brand’s packaging shared some noticeable similarities with The Sugarless Company’s packaging, including an S SUGARLEAN logo. 

The Sugarless Company instituted proceedings alleging trade mark and copyright infringement, passing-off and unlawful competition.   The court’s decision boiled down to a comparison of the respective trade marks, as well as the packaging of the goods, to assess whether there was sufficient similarity to justify The Sugarless Company’s claims.  In this case, given the descriptive nature of the trade mark SUGARLESS, and the fact that the similarities in the packaging were held to relate to elements that were commonplace in the confectionery industry, The Sugarless Company, bitterly, had to admit defeat. 

A further case which dealt with a licensee’s unauthorised use of the licensor’s trade mark after termination of the arrangement is the case of Dix v Calzanetto Sociedad Limitada (hereafter “CALZANETTO case”).  In the CALZANETTO case, Calzanetto Sociedad Limitada, a Spanish company (Calzanetto Spain), owned the trade mark CALZANETTO in South Africa for various cleaning products. Calzanetto South Africa (Pty) Ltd, a South African company (Calzanetto RSA), was formed with the intention of distributing the CALZANETTO cleaning products in South Africa in terms of a sole distributorship agreement.  Calzanetto Spain held the majority shares, and Calzanetto RSA some shares, in Calzanetto South Africa.   Calzanetto South Africa was subsequently wound up, and the respondent appointed Asprey Holdings (Pty) Ltd as the sole distributor of its goods in South Africa. 

In the meantime, Calzanetto RSA continued to trade under the insolvent company’s name (Calzanetto South Africa), and was continuing to sell genuine CALZANETTO cleaning products.  Upon discovering this, Calzanetto Spain instituted infringement proceedings against Calzanetto RSA.   In his defence Calzanetto RSA argued that his conduct did not amount to trade mark infringement as he was trading in genuine CALZANETTO goods.  This type of conduct, known as "parallel importation" or trading in "grey goods", is considered a valid defence against a claim for trade mark infringement in our law. 

The court decided that, although the sale of genuine CALZANETTO goods constituted a valid defence to a claim for trade mark infringement, the use of the CALZANETTO trade mark on invoices amounted to passing off, as it was held to amount to a misrepresentation about the supplier of the goods to the end user.

Valid and enforceable trade mark rights 

First and foremost, a trade mark owner should always ensure that the rights associated with its trade marks, and which are licensed to a licensee, are not vulnerable to rectification or expungement.  The SUGARLESS case highlights this shortcoming, where the mark licensed was wholly descriptive and the elements of the packaging applied to its goods was commonplace in the market.  In this instance, the licensee became aware of the licensor’s flawed protection and exploited it to gain a share in the market. 
 
Use restrictions and undertakings 

The CALZANETTO case has shown that, even if the trade mark is distinctive and enjoys the statutory protection afforded to trade mark registrations, added measures should be put in place to limit risk of unauthorised use.  The licensors in both the SUGARLESS and CALZANETTO cases could have considered incorporating restrictions and undertakings relating to the licensee’s use of the trade marks, both during the term of the agreement and after its expiration or termination.  These terms could take the form of an undertaking by the licensee to refrain from using the trade mark owners marks, or any similar marks, in respect of similar goods or services or refrain from attacking the validity of the licensors trade mark registrations, following the termination of the arrangement. 

Restraint of trade 

With reference to the CALZANETTO case, where a licensor and a third party has a vested interest in the licensee, the parties may consider binding the relevant shareholders to a restraint provision whereby the shareholders undertake not to compete with the licensor or solicit existing customers from the licensors within specific parameters.  Restraint provisions are quite contentious in our law as they have strict requirements relating to fairness, reasonableness and the interest of public policy.  It is important to note that any restraint imposed by one entity on another could be regarded as a contravention of the Competition Act. 

Conclusion

This cases serve as a reminder to trade mark owners that when entering into any kind of use or license agreement, it pays to keep the end in mind.  

When entering into a licence or comparable agreement, it is advisable to contact an attorney or intellectual property law specialist to ensure that the necessary documentation is in place to regulate the arrangement with the authorised user, both during and after the term of the agreement.

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Please note that the legal topics informally discussed here are general discussions of certain aspects and therefore certainly not intended as legal advice.  We look forward to discussing your particular case with you.