In two recent IP decisions in the English High Court, the interpretation of a settlement agreement and a co-existence agreement have been carefully considered. In DKH Retail and Others v SRG Apparel Plc and Others, English law was applied to the interpretation of a settlement agreement whereas inMerck KGaA v Merck Sharp & Dohme Corp and Others German law applied. The results highlight the importance of choice of law. The starting point for both English and German law is the actual language used, but in England this is commonly also the end point whereas under German law, the underlying and unwritten intentions of the parties are given greater weight.

Governing law v Jurisdiction

In the hearing of a dispute by the courts there is a difference between the competence of the court to resolve the dispute (jurisdiction) and the system of law to be applied (governing law). A court that has jurisdiction will sometimes need to apply a different governing law depending, for example, on choice of law clauses or the place that has the closest connection to a contract. It is open to the parties to a contract to agree, if they so wish, that the contract will be governed by, for example, Dutch law, but that disputes will be heard by the courts of England and Wales.

The cases

In Merck, two pharmaceutical companies both using the name ‘Merck’ were in dispute as to the protection afforded by their co-existence agreement originally entered into over 60 years ago. A co-existence agreement sets out how each of the parties may use its trade marks and the extent to which each party will not challenge the other party’s use. The ‘protection’ afforded by such an agreement is the right to use the mark in the agreed manner, without interference from the other. Merck KGaA (“Merck KG”), a German company, and Merck Sharp & Dohme Corp (“Merck U.S.”), a U.S. company, had entered into a co-existence agreement in 1955 which, broadly, provided that Merck U.S. could trade under the MERCK trade mark in the U.S. and Canada and that Merck KG would be able to use MERCK as a trade mark in the rest of the world. This 1955 agreement was then amended by a further agreement in 1970.

Merck KG owned two UK trade marks for the word ‘MERCK’ and two international registrations for a figurative version. Merck U.S. was operating various websites, including merck.com, which were accessible globally and used the ‘MERCK’ brand. Merck KG claimed that Merck U.S. was in breach of the 1970 agreement and was infringing Merck KG’s trade mark rights – primarily by using the ‘MERCK’ brand on globally accessible websites. Merck US argued that its websites (although accessible worldwide) were targeted at the U.S. and Canada where they could legitimately use the signs, and that any access from the UK was just ‘unfortunate overspill’.

At a preliminary hearing it had been held that the 1955 agreement was governed by German law. The parties had agreed that the 1970 agreement would be governed by the same law.

In DKH Retail, the Claimants (Superdry) brought proceedings for passing off against the Defendants in relation to the “get-up” used on their clothing. Shortly before trial the parties reached a confidential settlement. The settlement agreement provided that the Defendants would not sell products that had certain elements “as a part of their graphic representation”. The construction of this provision was the key point in issue in that case.

Intention v clear language

In Merck the court set out the principles of German law which had been largely agreed by the two experts in the case. In particular, the judge noted that German courts would seek to “ascertain objectively the true intention of the parties, not considering itself bound to adhere to the literal meaning of the words in which the agreement is expressed”. As with English law, intentions are assessed objectively from the point of view of a reasonable businessperson and in the context of customary practice. However, the judge noted that when compared to the English approach of starting with the words of the contract and using surrounding circumstances as an aid to construing unclear expressions, German law is much more ready to go beyond the wording of a contract. It was clear that German law took a more purposive approach and was more willing to ‘fill in the gaps’ of an agreement whereas, under English law, judges are more loyal to the actual language used.

Applying these principles, the court held that, under German law, the 1970 agreement governed the use of the word “Merck” as a trade mark or trade name on the internet, even though the agreement did not ostensibly contemplate use on the internet. The Court reached this conclusion by two routes (one favoured by one expert, one by the other expert). The first route was described as being via ‘interpretative tools’. The purpose of the 1970 agreement had been to set up an all-encompassing co-existence model, negotiated by parties that were aware that technology evolved. The ‘interpretative tools’ method involved construing clauses in the agreement that governed activity in the ‘paper’ world to cover analogous activities in the digital world. As such, internet use of ‘Merck’ could be seen as falling within the ambit of the agreement. The second route was via ‘supplementary construction’. Under this method, technological developments since the 1970 agreement had left an unintentional gap which was to be filled by what reasonable parties would have agreed had they thought about the position (taking into consideration the purpose of the agreement). The court ruled that this route led to the same conclusion: the 1970 agreement governed the use of “Merck” as a trade mark on the internet.

Having come to this conclusion, the court considered the argument of Merck U.S. that the use was targeted at U.S. and Canada and that accessibility from the UK was unfortunate overspill. The judge rejected this contention because the evidence was that the websites were global, the architecture of the websites directed users of the .co.uk domain to a .com website, there was substantial visitor traffic from outside the U.S., and the defendant had failed to use means to restrict access from elsewhere, such as ‘geo-targeting’ (the practice of restricting access to a website from particular geographic locations).

The DKH Retail decision demonstrates the English approach that wider considerations such as ‘commercial common sense’ are ordinarily of little importance where the language of the contract is clear in and of itself. In DKH Retail, the parties had used more onerous and wider language in the settlement agreement than the language that had been pleaded in the proceedings that led to the settlement agreement but as they had control over the language they used and that language was clear, there was no reason for the court to construe it artificially in light of the surrounding circumstances.

The judge looked to the judgment of Lord Neuberger in the recent Supreme Court case of Arnold v Brittonwhere he made clear that the first point to consider is the language used by the parties and, if that language is clear, it should be given its natural meaning. In contrast to German law principles, Lord Neuberger stated that reliance upon the surrounding circumstances should not be invoked to undervalue the importance of the language of the provision which is to be construed. The judge in DKH Retailexplained that when agreeing the wording of a provision, save for in a very unusual case, the parties must be taken to have been specifically focusing on the issue covered by that provision.

Older agreements in a new age

One of the key questions at the heart of the Merck case was how a co-existence agreement ultimately dating back to 1955 could operate in the age of the internet. The case demonstrates the importance of considering older co-existence agreements as technology develops and businesses expand. Geo-targeting was recognised by the court as being one tool that could be used to comply. It may be appropriate to revisit and even renegotiate ‘out of date’ agreements before a dispute arises.

A U.S. chapter

Merck U.S. has said that the English judgment will be appealed and has also filed its own claim in the New Jersey federal court to protect its name in the U.S. against Merck KG. The U.S. Complaint raises various claims, including breach of the co-existence agreement and trade mark infringement. It will be interesting to see how U.S. courts approach the co-existence agreement.

Comment

Save for in exceptional cases, the English courts will not depart from the language used by the parties if that language is clear. Under German law, whilst the language used will of course be the starting point, the underlying intentions of the parties (objectively assessed) carry more weight and the court is more willing to fill in gaps in the agreement. In essence, the German court is more prepared to look outside of the wording of the contract and consider what would have been agreed by reasonable business people.

The English approach offers greater certainty as the parties can be more confident relying on the particular words of the contract. However, there is scope for injustice in situations where a party has made a ‘bad bargain’ because of poor contractual drafting. It is clear from Lord Neuberger’s judgment in Arnold and its application in DKH Retail that even in a situation where one of the parties could be viewed as having made a ‘bad bargain’ it is not the function of the court to re-write that bargain where the language is clear. In such cases, the German approach may reach a different conclusion by looking more broadly at the initial sense and purpose of the contract even where the language is unambiguous.

The determination of governing law may be crucial in many cases. Parties should be aware of differing rules of interpretation under different laws and consider the implications of choice of law clauses with care. The Merck case highlights the particular challenges associated with co-existence agreements because of their generally perpetual nature and the need to anticipate future technological developments affecting both the goods and services that may be partitioned between the parties and the media through which brands are used. Parties could consider putting a review mechanism into their agreement to allow for renegotiation after a certain amount of time to account for new circumstances or new technologies. Co-existence agreements should be drafted with utmost care, particularly where they are to be governed by English law.