Licensing is one of the most effective ways to maximize the value of a trademark. It is also the easiest way for a trademark owner to expand internationally within a short period of time. Similarly, a trademark licensee obtains the marketing benefit of using an already well-established brand for its products. However, because trademark regimes differ from country to country, licensors and licensees may find that terms that they thought were clear can actually have multiple interpretations based on the differing national laws and practices of the parties.
The recent decision in Sunstar, Inc. v. Alberrto-Culver Co., 2009 U.S. Lexis 23759 (7th Cir. October 28, 2009) illustrates the type of language-based issues that can arise in cross border licensing disputes. In that case, Alberto-Culver, owner of the famous VO5 hair care trademarks, had licensed its marks in Japan to Sunstar, a well known hair care company in Japan. During the course of the license, Sunstar desired to "update" the VO5 logos by making changes to the appearance of the logos. Alberto-Culver objected to the changes to the logos, asserting that any change to the logos was (a) contrary to the terms of the license agreement, and (b) "endangered" its rights to the mark. Sunstar maintained that the terms of the license agreement gave it some freedom to update the VO5 logos. Unfortunately, both parties could point to different provisions of the license to support their various positions. Ultimately, the dispute led to litigation in United States, first in the U.S. District Court for Illinois, and then in the Court of Appeals for the Seventh Circuit.
Throughout the litigation, Sunstar argued that, while the license agreement was written in English, the contract used the Japanese term "senyoshiyoken," meaning "exclusive-use right," to characterize the license. Sunstar argued that the right conferred by the Japanese concept of senyoshiyoken would allow it to modernize the logo, especially since the period of the license agreement was extremely long, originally to last 99-years. Alberto-Culver argued that the agreement specifically forbade Sunstar from registering any new marks containing the V05 mark. Moreover, the agreement provided that any disputes were to be governed by Illinois law rather than Japanese law. Accordingly, Albererto-Culver argued that the term "senyoshihoken" does not confer rights on Sunstar that it normally would under Japanese law. Instead Alberto-Culver claimed that the term was merely intended to indicate that Sunstar could register the license agreement with the Japanese Trademark Office.
Both Sunstar and Alberto-Culver faced serious problems of interpreting a cross-border license agreement. In such situations, it is imperative that foreign parties understand the rules of contract interpretation that U.S. courts typically employ. To start with, historically many U.S. courts employed the "Plain Meaning Rule" that ignored extrinsic evidence relating to the license agreement, such as drafts, correspondence, and course of performance, if the terms of the agreement are plain on their face. This rule is often reinforced by a "Merger Clause" that parties sometimes include in agreements to indicate that all past negotiations have been "merged" into the current agreement. However, more recently U.S. courts have been willing to look to extrinsic evidence to determine the parties intent, especially where the terms have no "plain meaning". See Restatement 2d of Contracts § 212.
In this case, the Court of Appeals determined that the key issue was the meaning of the term "senyoshiyoken"--a meaning not clearly evident from the terms of the license agreement alone. The appeals court rejected Alberto-Culver’s argument that it should look to the negotiation of the license and assign the term a private meaning from that context. Instead, the Court stated that technical terms, when used in a contract between sophisticated parties, must be presumed to be used in a technical sense. Because "senyoshiyoken," had no meaning under Illinois law, the court looked to Japanese law to determine its meaning. Based on the scholarly literature, the appeals court concluded that a "shenyoshiyoken" stands in the shoes of the trademark owner and thus has the same rights as the trademark owner to make minor changes to the mark without endangering the owners rights to the mark. Therefore, the Court found that Sunstar had not violated the terms of the license and was free to make the minor changes to the mark.
The Sunstar case teaches us that the precise terminology of the license is very important and that the parties should be as explicit as possible to avoid contract interpretation disputes during the course of the license. This dispute could probably have been avoided had Sunstar insisted that the Japanese definition of "senyoshiyoken" be included in the agreement, or had Albert-Culver deleted "senyoshiyoken" in favor of English terminology to define Sunstar’s right to alter the licensed mark.
The following hypothetical, inspired by real life events, illustrates the difficulties that can arise due to (a) use of an overtly shortened license agreement, and (b) using multiple language for license negotiations and drafting. A U.S. trademark owner, known for quality goods in the field for household appliances, licensed its mark worldwide to a foreign company in connection with a specific list of consumer electronics goods ("phonographs, tape recorders, stereos and speakers, televisions, and radios"). The license agreement is in English (with a U.S. foreign selection clause) but all of the negotiations and correspondence was in the foreign company’s native language. The license is very short containing only provisions to identify the mark, list the licensed goods, identify the term and renewal periods, and setting the necessary quality control regime. The parties had a successful relationship for 20 years until the foreign licensee announced (without consulting the licensor) its intention to start offering additional goods under the licensed marks, including home computers, cell phones, MP3 players, personal organizers, and GPS systems. The U.S. licensor objected to the expansion on the ground that the new goods are not listed in the license agreement, and that the license agreement includes no provision for expanding the original list.
The foreign licensee argued that such goods are within the scope of the license because the negotiation papers describe the licensed goods using a broad foreign term (allegedly translated as "electronics") that would encompass both the original list and the new goods. Further, the foreign registrations for the licensed mark (filed on behalf of licensee by the U.S. licensor) used this same general foreign term rather than the specific list of goods found in the license. In reply, the U.S. licensor pointed out that in negotiations, it specifically deleted products from the licensed goods that were not audio/visual equipment. The U.S. licensor also argued that the use of the broader foreign term in negotiation correspondence was merely a linguistic convenience to avoid repeating the list over and over again. Further, when translated, the broader foreign term really suggests "audio/visual equipment" rather than all forms of "electronics."
In the ensuing litigation, the U.S. Court was faced with deciding whether (a) the license should be taken "as written," (b) the negotiation correspondence previous drafts of the license should be considered to determine the parties intent, and (c) the meaning of the broad "foreign term" used in the negotiations and foreign trademark registrations to "describe" the licensed goods. Given the considerable uncertainties the parties faced in litigation, the case settled, so we do not have any guidance from the court on how these issues would have been resolved. The lesson of the hypothetical is that the parties failed to consider their possible differing understandings of the scope of the license due to the ambiguities of using multiple languages in the negotiations, and due to their attempt to be thrifty in drafting a "bare-bones" license. Had the parties taken extra time in drafting the license to make certain that their true intentions were specified in the agreement itself, they could have avoided this dispute.
In conclusion, a successful cross-border trademark licensing arrangement should not be entered into without (a) reviewing the agreement and negotiations for ambiguous wording and translations, and (b) considering how U.S. courts would likely approach an effort to interpret and enforce the license agreement. The parties should make certain that the terms are as clear as possible in the agreement itself, preferably including a "definitions" section that would discuss all key wording. Further, if negotiation paperwork would provide meaning to the agreement that is not clear on its face, the parties should consider making that meaning explicit in the contract. Extrinsic evidence of the parties’ intent may not be considered by a U.S. court under certain circumstances, so reliance on negotiations or other evidence to supply a meaning is inherently risky. Given the greater potential for ambiguity due to foreign language usage, cross-border licenses may not be the best candidates for the very short trademark license formats. Instead, to avoid problems in interpreting the agreement, parties to an international trademark license should take extra time to make the agreement as explicit as possible and should err on the side of including more details rather than less