Many risks arise when a company formed in one jurisdiction enters into an exclusive commercial licence and distribution arrangement with a company formed in another jurisdiction, particularly when the contract involves granting the licensee an exclusive licence to operate in a defined territory which is not home to either of the parties.
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.
commercial licence, IP rights, good faith,