What happens when an IP licence agreement is terminated? The obvious answer would of course be that the licence terminates too.  However, as the latest instalment in an ongoing saga involving the well-known PINK LADY brand of apples reminds us, imprecisely drafted licence agreements may come back to haunt unsuspecting licensors.

How do you like them …

In 2015, a dispute concerning the rights to a Chilean trade mark for PINK LADY apples came before the Victorian Supreme Court in the matter of Apple & Pear Australia Ltd v Pink Lady America LLC [2015] VSC 617.

It was alleged that, pursuant to an Option Deed between the parties, Apple & Pear Australia Ltd (APAL) had acquired the rights to a particular Chilean PINK LADY mark and had then, as required by the deed, granted Pink Lady America LLC (PLA) a license to use that mark.

When the Option Deed was terminated, PLA claimed it was still entitled to use the Chilean PINK LADY mark because the relevant clause of the deed stated that the licence would “last in perpetuity subject only to the quality control provisions contained herein.” With no reports of poor-quality apples in the bunch, PLA argued that its licence was an accrued right which should not be, and in fact had not been, affected by the termination of the deed.  APAL, meanwhile, submitted that the licence had no existence separate from the contract that conferred it.  If the latter was terminated, argued APAL, so was the former.

Not so, said Justice Croft, the single judge hearing the matter. In Justice Croft’s view, PLA had paid for a perpetual licence and a perpetual licence, which survived termination of the underlying contract, was precisely what it had acquired.

Second bite of the …

The decision was reversed in the Victorian Court of Appeal (Apple and Pear Australia Ltd v Pink Lady America LLC [2016] VSCA 280), with the Court finding that the Option Deed did not cover the disputed mark in the first place.  That mark had been registered after the deed was executed and was not referred to in the schedule listing all the pending trade marks that APAL was explicitly entitled to acquire under the deed.

Justice Croft had considered that, given the circumstances known to the parties when the deed was executed, the Option Deed should be interpreted to cover the disputed mark. However, the Court of Appeal found that there was no ambiguity about the marks covered – it was clear only those included in the schedule were meant to be part of the agreement.

Two consequences flowed from this. Firstly, Justice Croft should not have taken extrinsic evidence (including other agreements and documents produced by the parties) into account when determining the appropriate construction of the contract; secondly, PLA could not hold a licence in respect of the disputed mark after termination of the Option Deed because the mark had never actually been licensed at all.

Avoiding undead licences

In granting APAL’s appeal, the Court of Appeal did not overturn Justice Croft’s finding that the construction of the Option Deed could support the ruling that the licence would survive termination of the Deed. Instead, the Court held merely that the issue did not arise on its analysis.  Last month, PLA attempted to take the matter to the High Court but leave to appeal was refused, meaning this aspect of Justice Croft’s judgment will remain undisturbed.

While further judicial guidance on the subject would be welcome, particularly at the appellate level, clearly no prospective or actual licensor would want to take on the risky role of “next test case”. In the interests of minimising that possibility, it would be advisable to consider the following when drafting IP licence agreements:

  • Don’t rely on a court being able to take extrinsic evidence into account to interpret what is meant by a contractual term, as this is generally only allowed in the unfortunate event that the term is ambiguous. Make sure the contract records exactly what you mean it to.
  • If it is intended that the licence will not survive termination of the underlying agreement, this should be made clear in the contract.
  • Particular care should be taken to consider the termination options in cases where licences are expressed to be “perpetual”.
  • Also watch out for cases where a licence is expressed to operate as long as certain conditions are met, especially where those conditions are more limited than the grounds for terminating the underlying contract.
  • To guard against the possibility of extra IP being ‘caught’ by a licence agreement, as occurred at first instance in the PINK LADY case, the agreement should be as specific as possible about what IP is subject to the licence.

We would like to acknowledge the contribution of Lauren Holz in preparing this blog.