Brand owners should review their licensing arrangements in Australia, because licensing of unregistered trade marks may now be ineffective without assigning the underlying goodwill in the business in which the trade mark is used.

The Federal Court of Australia this month handed down an important decision for brand owners and businesses involved in trade mark licensing in Australia. The case highlights the potential problems with relying on unregistered common law trade marks (including trade dress and get-up), and reinforces the benefits of registering all commercially valuable brand identifiers as a trade mark wherever possible.

In Kraft Foods Group Brands LLC v Bega Cheese Limited (No 8) [2019] FCA 593, Justice O'Callaghan considered competing claims to the right to sell peanut butter in Australia in distinctive trade dress: "a jar with a yellow lid, yellow label, blue or red peanut device, and having a brown appearance when filled". The parties were fighting over potential annual sales of more than $60 million – much more than peanuts.

The common law trade mark in peanut butter trade dress

Kraft Foods Limited (Kraft Australia) had made and sold peanut butter in Australia bearing the trade dress since 2007.

In 2012, Kraft restructured its global business which resulted in Kraft Australia becoming part of the Mondelez group. The restructure included a Master Trademark Agreement (MTA) which purported to assign the trade dress to Kraft Group, which in turn granted a licence to Mondelez to use the trade dress in Australia until 31 December 2017. Under this licence, goodwill inured to Kraft Group as licensor.

On 19 January 2017, Bega entered into a Sale and Purchase Agreement to acquire the Australian peanut butter business of Mondelez (formerly Kraft Australia) including all of its assets and goodwill.

On 31 January 2017, Kraft Group filed applications to register the following trade marks in Australia:

In July 2017, Bega completed its acquisition of the Kraft/Mondelez business. Bega later ran a series of advertisements to the effect that Kraft peanut butter was now Bega peanut butter, prompting the commencement of these Federal Court proceedings against Bega for false or misleading representations.

The principal issue in dispute was who owned the "Peanut Butter Trade Dress" in Australia (namely the get-up and visual appearance of the packaging), as depicted in various forms below:

The parties agreed that the trade dress was an unregistered (or common law) trade mark. Rights associated with unregistered trade marks are rights to protect the reputation or goodwill of the business in which the mark is used, by bringing an action in the tort of passing off or for misleading or deceptive conduct under the Australian Consumer Law. Accordingly, whoever owned the goodwill derived from use of the trade dress could prevent the other party from selling competing peanut butter in Australia using the trade dress.

Kraft's position: licensor gets the goodwill

Kraft argued that Kraft/Mondelez manufactured and sold peanut butter in Australia using the trade dress only as a licensee, subject to the control and direction of its parent company. Consistent with established law in relation to the licensing of trade marks, Kraft argued that the goodwill generated through use of the trade dress inured to the benefit of the licensor and not the licensee.

On the issue of goodwill, Kraft argued that the trade dress was a "diagnostic cue" for the KRAFT brand, and that its use enhanced the goodwill and attractive force only of the KRAFT brand and its owner. Kraft alleged that once the Mondelez licence expired, the attractive connection between the brand and the consumer could no longer be a source of goodwill to Bega's manufacturing operation. Accordingly, Kraft argued that it was entitled to "repatriate" the trade dress in Australia once the Mondelez licence expired.

Bega's position: we bought the goodwill

Bega's position was that Kraft/Mondelez was at all material times the legal and beneficial owner of the goodwill derived through use of the trade dress in Australia, having been the entity that continuously manufactured and sold peanut butter from the same factory using the trade dress since 2007.

Bega argued that the trade dress, being an unregistered trade mark, was an inseparable part of the goodwill of the business conducted by Kraft/Mondelez (which Bega acquired). Bega relied on the established legal principle that the owner of an unregistered trade mark cannot assign that trade mark separately from the goodwill of the business in respect of which the trade mark is used.

The Court's decision: goodwill went with the business – and the common law marks went along with the goodwill

The Court agreed with Bega. Justice O'Callaghan found that the goodwill in the Kraft/Mondelez business, including the goodwill derived through use of the trade dress, inured to the benefit of Kraft/Mondelez. It was Kraft/Mondelez that applied the trade dress to the goods, put the goods bearing the trade dress into the marketplace, and thereby attained a reputation sufficient to found an action in passing off or under the Australian Consumer Law. It was this business, assets and goodwill that Bega acquired.

While Justice O'Callaghan accepted that Kraft purported to assign the trade dress and goodwill to Kraft Group, that assignment was held to be ineffective under Australian law because it incorrectly assumed that unregistered trade marks were assignable without the goodwill in the underlying business. As noted by Justice O'Callaghan, "[o]n one view, that may seem a surprising conclusion, because parties are usually assumed not to have intended to do something that is legally ineffective".

Goodwill

Justice O'Callaghan observed that "goodwill" is the attractive force which brings in custom, is inseparable from the business to which it adds value, and cannot be dealt with except in conjunction with the sale of that business. Rights relating to goodwill are not positive rights – they are negative rights to exclude others and cannot be viewed as separate from the underlying business.

The Court rejected Kraft's contention that goodwill in a trade mark only attaches to the entity which controls the brand, or that the trade dress was a "diagnostic cue" for the Kraft brand only. Justice O'Callaghan found that goodwill inures to an entity by that entity using, in its business, all of the sources that give rise to the attraction of custom in the business, and that goodwill does not attach to individual assets. It was Kraft/Mondelez's business and its assets (including plant and machinery, agreements, packaging, warehousing, promotion and staff) that created the goodwill, which was inseparable from the business.

Justice O'Callaghan also rejected Kraft's argument that because other Kraft entities "controlled" Kraft/Mondelez's manufacturing, labelling, promotion and sales of peanut butter, the goodwill generated through use of the trade dress inured to the benefit of the relevant Kraft licensor entity. Justice O'Callaghan was not persuaded by the fact that the MTA defined the trade dress as a licensed mark and that goodwill generated through use of the licensed marks inured to the benefit of Kraft Group as licensor.

Assignment and licensing of unregistered trade marks

Although the MTA was governed by New York law, the parties agreed that the question as to whether the MTA was effective to assign the goodwill in the trade dress was to be determined in accordance with Australian law (given that the rights in the trade dress were created in Australia).

Justice O'Callaghan dismissed Kraft's contractual arguments, stating that he accepted "Bega’s proposition that the assignment or licensing of unregistered marks is not possible without the assignment of the underlying goodwill of the business (here, the peanut butter business of [Kraft/Mondelez])." Even if Kraft had purported to licence, assign or otherwise "shift" the trade dress to another Kraft group company, Justice O'Callaghan found that this would have been ineffective to assign the rights in the trade dress as an unregistered trade mark under Australian law. Justice O'Callaghan therefore rejected Kraft's case that the trade dress was validly assigned or licensed, or could be validly assigned or licensed, without the sale of Kraft/Mondelez's Australian business (which did not occur before or after the restructure).

Justice O'Callaghan's observation that the licensing of unregistered trade marks is not possible without the assignment of the underlying goodwill of the business is at odds with contemporary licensing practices. It is common for registered and unregistered trade marks to be listed in schedules of licensed trade mark rights as they were in the MTA, and provided that the brand owner exercises sufficient control over the use of the licensed trade marks, such arrangements have been considered to be uncontroversial. In these circumstances, goodwill is generally taken to inure to the benefit of the brand owner as licensor, and not to the user of the trade mark as licensee.

These comments therefore raise serious concerns for businesses that rely on licensing of unregistered trade marks as part of their normal business operations, including (but by no means limited to) franchisors. The primary concern is that contractual terms can be seemingly displaced, despite the parties agreeing that an unregistered mark is a licensed mark under the terms of the licence. While this case concerned trade dress and get-up, the principles would apply to any unregistered word or logo mark which is licensed to another party.

Another reason to protect your trade marks via registration

This case highlights the limitations of unregistered common law trade marks. Common law marks are not always listed during M&A and due diligence activities, are difficult to define in terms of exclusive rights, and are not easily transferrable. Section 106 of the Trade Marks Act 1995 (Cth) allows the assignment of a registered trade mark "or a trade mark whose registration is being sought", with or without the goodwill of the business concerned in the relevant goods. This essentially displaces the common law position, thus highlighting the potential additional benefits of filing an application to register all common law trade marks that are commercially valuable to a business.

If Kraft Australia had filed trade mark applications to register its trade dress marks prior to the execution of the MTA, this dispute may not have arisen. Unfortunately for Kraft, on Justice O'Callaghan's findings it filed applications to register the trade dress too late and in the wrong name.

There are three important takeaway messages arising from this decision.

First, it reaffirms that, under Australian law, goodwill is inseparable from the business to which it adds value and cannot be dealt with except in conjunction with the sale of that business. It follows that unregistered common law trade marks, as a source of goodwill, cannot be assigned other than with the assignment of the goodwill in the underlying business in respect of which the trade mark is used.

Second, it reinforces the benefits of registering all commercially valuable brand identifiers as trade marks (including aspects of packaging, trade dress and get-up) rather than relying on unregistered common law rights. Indeed, this decision casts doubt on whether brand owners can validly license unregistered trade marks without assigning the goodwill in the underlying business concerned.

Finally, the decision highlights the importance of ensuring that agreements to assign or license intellectual property rights are drafted through the lens of the jurisdiction in which those rights were created.