As a consequence of the M2Trade and Take Five decisions of the German Federal Court of Justice (BGH), sublicenses continue to exist once the main license is terminated.  This has a severe impact for both licensor and licensee in the fashion sector.

LICENSING IN THE FASHION INDUSTRY

The advantages of licensing in the fashion industry are numerous, including risk and cost reduction, increase of market penetration, market profile and revenues.  Licensing is commonly used to expand fashion companies and generate additional income beyond the company´s own capacity, geographical reach and production strength.  By means of brand extension licensing, for example, fashion designers license their trademark for use on branded eyewear (e.g., Gucci, Prada, Paul Smith) or perfume (e.g., Polo Ralph Lauren under license to L´Oréal).  Co-branding, character licensing as well as seals of quality or origin are other licensing models that have become key components of today’s value chain in the fashion industry.

THE M2TRADE AND TAKE FIVE DECISIONS OF THE GERMAN FEDERAL COURT OF JUSTICE

Licensing is a very attractive business tool, but it can bring significant risks, especially for the main licensor in cases in which the main licensee is entitled to grant sublicenses.

In its M2Trade and Take Five decisions, the German Federal Court of Justice ruled that the sublicense survives the expiry of the main license in cases in which the main license is terminated.  The Court based its decisions on the principle of protection from succession (Sukzessionsschutz) which applies to industrial property rights under German law.  The only remedy left to the main licensor is a claim against the main licensee for the assignment of any license fee claims against the sublicensee under Section 812 of the German Civil Code (unjust enrichment).

The original decisions were handed down in 2012 and remain highly relevant.  The judgments are generally held valid not only for copyright licenses but for industrial property rights also.  Having been confirmed in several subsequent judgments, the practical consequences of these decisions are becoming fully apparent only now.  As a consequence, an extensive discussion regarding the appropriate drafting of license agreements has ensued.

PRACTICAL CONSEQUENCES

The M2Trade and Take Five decisions create legal certainty for the sublicensee and are intended to protect the sublicensee against the economic consequences of an unforeseeable termination of the sublicense.  On the flip side, the main licensor loses control over its intellectual property.

For the main licensor, the key aim should be to stay in control of its intellectual property rights.  This can be achieved either by entitling the main licensee to grant sublicenses with the prior written approval of the main licensee only, or by choosing the more effective and practical alternative − that is, obligating the main licensee to grant sublicenses only under the condition that the sublicense subsequently expires upon termination of the main license.

The main licensee, on the other hand, bears the risk of being unable to fulfil certain contractual obligations towards the sublicensee once the main license agreement has been terminated, as some of these obligations, such as support obligations, depend on services received from the main licensor.  Upon termination of the main license agreement, the main licensor is no longer obligated to render these services, leaving the main licensee faced with damages claims.

Finally, the sublicensee may suffer negative effects also, despite the court’s intention to protect its economic interests.  Not only does the sublicensee run the risk of no longer receiving necessary services from the main licensee, but the main licensor is now no longer hindered from granting licenses to immediate competitors of the sublicensee; nor is it obligated to maintain its intellectual property or protect it from infringements by third parties.

All parties’ interests may be served and the above negative effects prevented by granting the main licensor the right to take over the sublicenses should the main license terminate.  In any event and given the consequences of the decisions for all sublicenses subject to German law, existing license contracts should be revised and new contractual provisions drafted carefully in order to protect the interests of all parties involved.