Terminating an intellectual property (IP) agreement can be more complex than terminating more common commercial contracts. IP contracts deal with property – intellectual property. Thus the question arises as to what is to happen to that intellectual property upon termination. The agreement itself should provide for this or, if it does not do so explicitly, it may be implicit in the nature of the right granted – assignment or licence.
Assignment vs licence
An assignment of intellectual property, such as a patent, trade mark, copyright or design, is a transfer of the ownership of the right. It is like selling a car – the original owner does not normally get it back again. This is not, however, a blanket statement. In relation to some IP agreements, such as some publishing agreements, there may be a reversion of rights even though the copyright has been assigned by the author, if, for example, the book is not being published.
A licence is quite different to an assignment. A licence is akin to renting a house. The tenant can use the house for their own purposes for the term of the lease or until the lease is terminated earlier, for example, for failure to pay rent.
Similarly, the licensee can use the IP for the term of the licence and it usually pays licence fees and/or royalties instead of rent. When an IP licence terminates, the licensee normally has to cease using the IP – cease selling the patented products or the trade marked goods etc. In a well-drafted licence from the licensee’s perspective, there may be a sell-out period. This allows the licensee to sell its existing stock for a specified period or complete existing contracts.
Consequences of continuing to use
A licensee under a terminated licence who ignores the obligation to cease using the IP does so at its peril. Once the licence is terminated and any sell-out period is over, further sales of the product become an infringement of the IP right. This was the fate that befell the former publisher of celebrity chef Bill Granger. TheCanberra Times1 reported that, after the publishing agreement ended, the publisher, Murdoch Books Pty Ltd, published two cook books under the Granger banner with a compilation of recipes from previous books whose publication had been authorised.
The matter settled with the publisher liable to pay Mr Granger 18.5% of past and future sums received for the compilation cookbooks in paper form, and 25% of sums received for electronic form, less the sum of $60,363.24 that the publisher had already paid to Mr Granger.2 This was presumably something like the royalty rate that Mr Granger would have received under his previous publishing agreement.
One of the main measures of damages in IP cases is the loss that the plaintiff has suffered.
This usually takes one of two forms:
- the profit on sales lost by the plaintiff – on the assumption that each sale made by the defendant is a sale lost to the plaintiff; or
- a reasonable royalty on the sales by the defendant – on the assumption that the plaintiff would have been prepared to license its IP to the defendant for a price.
Each of the assumptions has to be proved to be correct by the plaintiff for it to recover on one or other of these bases.
There are other forms of compensation in an infringement of IP action that are not available in an action for breach of contract following the termination of an IP licence. In IP matters, the plaintiff has the option of claiming an account of profits3, which entitles it to recover the net profits made by the former licensee on its unauthorised sales. This is an alternative to damages and it is up to the plaintiff to choose which remedy would recover the most money. An account of profits would be preferable if the plaintiff cannot show that it has suffered a loss through the infringing activity.
In addition, currently under the Patents Act4, the Copyright Act5 and the Designs Act6, the Court can award additional damages in certain circumstances. These circumstances are spelled out in the Patents and Copyright Acts as including the flagrancy of the infringement, the need for deterrence, the conduct of the defendant and the benefit that it gained from the infringement. On 15 April 2013, amendments to the Trade Marks Act came into effect, which allow a trade mark owner to recover additional damages as well.7
Under the Copyright Act8 alone, a plaintiff may also recover conversion damages. These are in addition to other relief that may be obtained by the plaintiff, although conversion damages may not be awarded if the Court considers the plaintiff has already received a sufficient remedy under the Copyright Act. Under this head of damage, the court assumes the copyright owner is the owner of the physical articles embodying the copyright work, such as the infringing books. It then assumes that these have been stolen from the copyright owner and then allows the copyright owner to recover their value. This used to allow for a very high amount of damages. The Act has now been amended to reduce the damages by taking into account the defendant’s expenses in producing the infringing articles and the importance of the copyright work to the infringing article (if it is only part of it).
However, the main remedy that a plaintiff usually seeks in an IP case, whether following the termination of a licence or not, is to stop the infringing activity. This is granted by a court in the form of an injunction.9 This is ultimately not what Mr Granger obtained because he reached an agreement with his former publisher. The agreement allowed the continued sale of the compilation books to the mutual benefit of both.
Most IP cases, as with most other legal cases, settle before the matter goes to trial. This is the opportunity to reach an agreement which, although a compromise, meets the needs of both parties.
A case in point – domain names
It is not uncommon for a former licensee to want to keep using the IP after the termination of its licence, as did Murdoch Books. Hopefully a letter of demand and some negotiation will resolve the situation. One matter where I acted related to the termination of a distribution agreement. A distribution agreement ordinarily includes a trade mark licence. In this case, the distributor had registered the licensed trade mark as a domain name. The ex-distributor did not cease using the domain name and failed to cancel or hand over the domain name to the trade mark owner. In Australia, the registrant of a domain name needs to sign a form to transfer the domain name, and if the ex-distributor is unwilling, this can be difficult.
A registered trade mark can be infringed by the use of a domain name in relation to a website selling goods or services for which the trade mark is registered (or similar goods), as the domain name is analogous to a shop front sign indicating the goods or services sold within.10 If the licensee adopts a new domain name but continues to have the old domain name pointing to the new website, this can also be an infringement of the trade mark.11
In my matter, the domain name was handed over for a fee paid by the trade mark owner. Sometimes paying out the holder of a domain name is the simplest and least expensive option, rather than taking litigation. A well drafted trade mark licence should state whether or not the licensee may use the trade mark in a domain name, business name, company name, Twitter or Facebook name, and should oblige this use to cease on the termination of the licence. The licence agreement can appoint the licensor as the licensee’s attorney so the licensor can cancel these registrations when the licence is terminated.
The best protection against confusion at the end of an IP licence is to have a well drafted agreement that spells out what will happen in the event of termination. If, despite this, the ex-licensee breaches these terms and continues to use the IP, IP law has a variety of remedies that can be called upon to force this activity to cease and compensate the licensor.