When a contract isn’t prepared carefully, the parties to the contract may discover when things go wrong that what they agreed to is not what they thought they were getting. This is especially true with intellectual property, such as a trademark.
David P. Hathaway, Chair of Dean Mead’s Litigation Department, cautions business owners entering into trademark licensing agreements to clearly describe the crucial rights and obligations of both parties. A recent decision by the U.S. Court of Appeals for the Eleventh Circuit involving a very high-profile party demonstrates the dangers of relying on an inartfully drafted licensing agreement.
Keeping Up with the Kardashians
The case of Kroma Makeup EU, LLC v. Boldface Licensing + Branding, Inc., began as a simple agreement for the use of a registered trademark. By Lee Tillett, Inc., owner of the KROMA mark used to identify the company’s line of cosmetics, entered into an agreement that gave Kroma Makeup EU a license to use the mark in Europe. Tillett retained ownership of the mark and the right to use it in the U.S., and the agreement gave Tillett both the right and responsibility to enforce the mark against infringers. If Tillett failed to fulfill this contractual obligation, it would be liable to Kroma EU for damages.
All was well and good until the media personalities known as the Kardashian sisters – Kim, Kourtney and Khloe – began endorsing a line of cosmetics called “Khroma Beauty,” sold and manufactured by Boldface Licensing + Branding, Inc. The sisters claimed they had no prior personal knowledge of the KROMA trademark, but their attempt to register the mark with the U.S. Patent and Trademark Office was denied because of the likelihood of confusion with the KROMA mark.
Litigation ensued in a California federal district court between Tillett and Boldface. As a result, Boldface was prohibited from using Khroma Beauty, which subsequently was rebranded as “Kardashian Beauty.”
Kroma EU, however, was not involved in the California lawsuit and did not receive a share of the settlement recovery from Tillett. Consequently, Kroma EU filed an action in Middle District of Florida to enforce its rights under the Lanham Act against the Kardashians and Boldface. Kroma EU also named Tillett as a defendant, but this was stayed because of a compulsory arbitration clause in the licensing agreement.
Despite the fact that the Kardashians had clearly infringed on the KROMA trademark that Kroma EU had been licensed to use, the court held that the agreement between Kroma EU and Tillett gave the latter the exclusive right to enforce the mark. Because Kroma EU lacked the contractual authority to bring an enforcement action against Boldface, the court concluded that it also lacked standing to pursue the infringement action.
The Eleventh Circuit Ruling
On appeal, the Eleventh Circuit affirmed the lower court’s decision. The appeals court, focusing on the plain language of the agreement demonstrating the parties’ intent that Tillett retain all ownership and enforcement rights, ruled that the licensing agreement did not give Kroma EU sufficient rights to sue under the Lanham Act.
Never Trust a Form Contract
The key takeaway from this case, says Hathaway, is that parties should take great caution when entering into a licensing agreement and ensure that they understand the consequences of each term in the agreement. In addition, because each situation is unique, boilerplate licensing agreements are not sufficient to adequately protect the parties’ rights. While a number of traditional clauses and provisions may seem innocuous at first blush, they also can present significant pitfalls if not properly negotiated to fit the businesses’ specific needs.
Hathaway explains that licensing agreements contain a number of clauses and provisions that are worthy of special attention, review and negotiation. Crucial among these is the “grant clause,” which identifies and defines the scope of the legal rights to be given to the licensee and makes the critical distinction of whether a license agreement is exclusive or non-exclusive.
Hathaway urges parties to pay close attention to these other significant clauses:
- Territory (a provision made more complicated by the Internet).
- Permitted uses.
- Infringement, including the authority and responsibility to enforce and who pays the legal fees to do so.
- Reservation of any rights not specifically addressed in the agreement.
- Term or length of the contract.
- Termination, including provisions for it and how any damages for breach of the agreement may be calculated.
Quality control is another critical clause. Whether it is the goods or services themselves or any potential advertising, the ability to direct quality control for either side should never be overlooked. This includes the review and approval of advertising copy and product packaging, as well as how to address the effects of any negative media.
“A licensing agreement can be upset in an infinite number of ways,” Hathaway says. “The key is to draft a reasonable contract that not only contemplates the specifics of the business but also the likely scenarios that could result from success or failure.”