In Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd, the Full Court of the Federal Court found that a purchaser of a business did not acquire the right to terminate a trade mark sub-licence the vendor had granted to a competitor. The decision provides some pertinent reminders for those involved in assigning contractual rights, especially in the context of acquiring businesses. In particular, it would seem that a novation agreement rather than a standard assignment agreement is required in virtually every instance concerning intellectual property rights.
Please see the diagram below for a summary of the parties involved.
As part of a sale of its Australian business to Pacific Dunlop Ltd (Pacific Dunlop), Sara Lee Apparel (Australasia) Pty Ltd (Sara Lee) purported to assign the benefit of a trade mark sub-licence (SubLicence) that it had granted to Underworks Pty Ltd (Underworks). Sara-Lee also sold the underlying registered trade marks to another member of the group, Pacific Brands Licensing Pty Ltd. The SubLicence was for the exclusive use in Australia of the well-known “King Gee” and “Stubbies” trade marks in relation to certain underwear and socks for 5 years and an option to renew for a further 5 years. Pacific Dunlop is a competitor of Underworks. Underworks did not consent to the assignments.
Pacific Dunlop then purported to assign the benefit of the Sub-Licence, insofar as it related to the “King Gee” trade marks, to Pacific Brands Sports & Leisure Pty Ltd (PBSL), and the benefit of the Sub-Licence insofar as it related to the “Stubbies” trade marks to Pacific Brands Clothing Pty Ltd (PBC). Pacific Brands Licensing Pty Ltd also assigned the relevant trade marks to each entity such that the “King Gee” trade marks were held by PBSL, and the “Stubbies” trade marks were held by PBC.
PBSL then purported to terminate the Sub-Licence for breach (both at common law and under an express right in the Sub-Licence) by Underworks, who PBSL alleged had:
- failed to “exploit” the products the subject of the Sub-Licence;
- failed to submit any or any appropriate marketing plan; and
- failed to submit audit reports of its manufacturing facilities.
Thus, whether PBSL’s termination was effective depended on the Court’s decision on whether (in the absence of Underworks’ consent) Sara Lee had validly assigned its rights under the Sub-Licence (including the right to terminate) to Pacific Dunlop.
In the majority judgment, Finn and Sundberg JJ concluded that the nature of the Sub-Licence precluded Sara Lee from assigning certain rights in the Sub-Licence without Underworks’ consent, including those rights which PBSL alleged had been breached.
The Court noted that all rights are prima facie assignable. The only bar to the assignment of a certain right under contract would be whether any factors existed to prohibit such an assignment.
Finn and Sundberg JJ held that Sara Lee’s power to terminate contained in the Sub-Licence arose for a breach of “any term or condition”. Consequently, that power was not severable or separable from the totality of Sara Lee’s interest in the contract and was only assignable where all substantive rights under the Sub-Licence had been assigned effectively. It followed that if the totality of the benefit of the Sub-Licence had been assigned, so too would the common law right to terminate have been assigned.
Finn and Sundberg JJ also held that the identity of Sara Lee as the Sub-Licensor was material to certain rights granted by Sara Lee. As a consequence, Underworks’ consent was required to assign the benefit of those rights.
Finn and Sundberg JJ found instances in the SubLicence indicating that “the particular will to which [Underworks] was asked to subject itself was Sara Lee’s”. For example:
- Underworks had been authorised to indicate itself as manufacturer under licence from Sara Lee or the Sara Lee Corporation;
- the Sub-Licence required Underworks to comply with the Sara Lee Corporation’s Guidelines and to allow Sara Lee to audit compliance; and
- other clauses giving the Sub-Licensor judgemental power over the Sub-Licensee, suggesting that the powers were meant for Sara Lee specifically (such as trade mark quality control, use of trade mark, approval of manufacturing facilities provisions etc, which were to be set by Sara Lee).
Finn and Sundberg JJ also found that the reference to a “permitted assign” in the Sub-Licence did not allow assignment without Underworks’ consent. An assignee could only be described as a “permitted” assign where permission was required and had been given. Interestingly, the majority also noted that had the Sub-Licence defined Sara Lee as “Sara Lee and its assigns”, this “would, save in exceptional circumstances, signify a contractual intention that Sara Lee’s benefit [under the Sub-Licence] would have been assignable” without Underworks’ consent.
PBSL argued that since Underworks had continued to deal with PBSL following the sale of the business, Underworks had by its conduct consented or acquiesced to the assignment. Finn and Sundberg JJ disagreed and found that these actions had to be understood in context – Underworks had strenuously objected to consenting to PBSL (a competitor) enjoying the benefit of some of the rights in the Sub-Licence. At the time, Underworks was also operating as a going concern and therefore had to deal with PBSL out of necessity.
Thus, while the right to terminate was assignable, it was only assignable if the entire benefit of the Sub-Licence was assigned. As the substantive obligations of the Sub-Licence included “personal” rights, and the consent of Underworks was required to assign those rights, Sara Lee had not effectively assigned the right to terminate to PBSL.
Lessons from the case
As a result of the decision a competitor of the Pacific Brands group has an ongoing exclusive licence from Sara Lee to use registered trade marks owned by members of the Pacific Brands group. The Pacific Brands group must now rely on Sara Lee to administer certain aspects of the Sub-Licence (including the right to terminate) with Underworks. However, Sara Lee may not have any commercial motive to enforce the Sub-Licence, as it no longer owns the “King Gee” or “Stubbies” trade marks. More troubling for PBSL (and PBC) is the fact that the longer that the “King Gee” and “Stubbies” trade marks are used exclusively by Underworks under the control of Sara Lee (and not under the control of the registered owners, PBSL and PBC), those marks become vulnerable to a non-use action to remove them from the register. (Section 92 of the Trade Marks Act 1995 allows the removal of a registered trade mark if it has not been used by or under the control of the registered owner for a period of 3 years.)
In this case, it was never likely that Underworks would have agreed to execute a novation agreement given that Pacific Brands was a competitor. A novation agreement requires the consent of all three parties, and substitutes a new contract for the existing one. The existing contract is discharged so no rights or obligations continue. However, since the parties to that contract remain liable for any obligations which have arisen before discharge (eg. payment of outstanding royalty fees), it is common for the new party to assume the obligations of the party substituted.
Had the parties executed a novation agreement, no issue regarding the validity of an assignment of rights would have arisen. Instead, Pacific Dunlop Limited and Underworks would have been deemed to have entered into a separate sub-licence upon execution of the novation agreement. Of course, if the language is clear enough, it is possible to provide for a “transfer” of rights to a third party without needing to seek consent of the other party(s). However, the decision also affirms that it is not legally possible to assign contractual obligations.
Accordingly, even if Underworks’ consent had been obtained to the assignment of rights from Sara Lee to Pacific Dunlop Limited, Sara Lee would have retained the obligations under the Sub-Licence. In that situation, Underworks would have owed obligations to Pacific Dunlop Limited and have enforceable rights against Sara Lee. Since an intellectual property licence generally contains many interwoven rights and obligations, significant practical difficulties are likely to arise where rights and obligations are owned by separate parties.
Again, these issues do not arise where a novation agreement is used, since a novation agreement allows the substituted party (eg. Pacific Dunlop Limited) to assume all rights and obligations by putting in place a fresh contract with the same terms and conditions as the existing contract.
Diagram 1: parties to the case