The risk of misappropriation of IP in cross-border licensing
Often the terms of such agreements include the licensor granting the licensee an exclusive right to use its IP: trademarks, patents, designs, domain names, regulatory approval certificates and other proprietary information including customer data and related know-how in the defined territory in relation to specific products/services, subject to certain obligations on the licensee such as its agreeing to adhere to certain quality control criteria/measures or advertising specifications.
Faith in a licensee’s abilities grows over time, and rights are often extended contractually to it (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 may have developed a secure market in the exclusive and defined territory at that stage that it may not be willing to forgo, even if the contractual arrangement with its former licensor is terminated and comes to an abrupt end.
It is then that the danger arises of the original licensor’s IP being misappropriated. A licensee may allege that contractual arrangements are no longer in place that prevent it from using certain IP rights, including trademarks, as its own in the defined territory. It may assert that it has, in any event, gained independent good will and reputation in relation to certain IP rights, which give it a bona fide claim to proprietorship of them. It can allege that the licensor has not used such IP rights itself in the defined territory and 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 between the parties. If a licensee has acknowledged the licensor’s title in its trademark, then no other person, including it, can be permitted to use such IP rights as its own, and it has an obligation to transfer the IP in question back to the licensor.
Furthermore, one needs to look at the timing of when the appropriation/misappropriation took place. It may have taken place when extensive contractual exclusivity was granted to the licensee, eg, a licensor was excluded from making its own products in pre-defined territories, or a licensee enjoyed the benefits of using a licensor’s marketing materials. It is essential to include in any contract, in its original or varied form, acknowledgements that any goodwill or reputation in relation to its products or services must remain to the benefit of the licensor.
A fine line must be drawn between the definition of a proprietor, ie, one who has the exclusive title to use certain IP rights, and the concept of good faith, which is an ethical value or 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 determination of whether a party is acting mala fide.
Although trademarks are territorial, against the background of an ever-increasing globalisation of trade there are certain bona mores emerging that give greater recognition to the goodwill and reputation in a brand arising from worldwide sales. One needs to refer to the contracts in place between trade partners to establish which has the better claim to ownership of certain IP rights.
"The licensee may have developed a secure market in the exclusive and defined territory at that stage that it may not be willing to forgo."
A licensee may gain a reputation and goodwill in relation to its products or services using a licensor’s IP rights in a defined territory, but any claim it makes to proprietorship of those rights will have been tainted by an element of sharp practice and unethical dealing. Even when 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 IP rights can be contrary to good faith.
When a licensor grants a licensee exclusive rights to use its IP in a defined territory, the 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, on termination of the contract, must be included in the initial agreement.
Karen Kitchen is an associate at DM Kisch Inc. She can be contacted at: karenk@dmkisch.com
