16 March 2021

The challenges (and terrors) of long term brand licensing deals

This article was written by Scott Bouvier and Karen Litherland.

Structuring and negotiating a long term brand licensing deal is always challenging, even terrifying.  The brand owner wants to get maximum value out of the brand and protect it.  The licensee wants the confidence and flexibility to build the branded business. A lot can change over time and it is difficult to predict the future. The licensing deal struck by Bega Cheese Ltd (Bega) and Fonterra Brands (Aust) Pty Ltd (Fonterra) 20 years ago was recently put under the judicial microscope.  This alert will examine the result, look at the lessons and provide some food for thought for structuring marketing obligations to support brand growth and changing market circumstances. 

In Fonterra Brands (Aust) Pty Ltd & Anor v Bega Cheese Ltd [2021] VSC 75, after 39 days of hearing in 2019 and 2020, the Victoria Supreme Court held that Bega was entitled to use its trade mark in respect of peanut butter and other grocery items, and was not restricted from doing so under its agreements with Fonterra.

The Court considered a number of claims made by Fonterra and counterclaims by Bega, including in relation to contract rectification, restraint of trade and breach by Fonterra of terms covering quality and compliance with laws.  Ultimately, all claims were rejected.  This article focuses on the primary issues raised by each party, being:

  • whether the construction of the TMLA prevented Bega from using its trade mark on any products, or only on certain cheese products; and
  • whether Fonterra breached express or implied contractual obligations by failing to effectively market and promote Bega branded products and the Bega brand.

Background

In 2001, Bega and Fonterra entered into a trade mark and licensing agreement (TMLA) under which Bega granted Fonterra a “sole and exclusive” licence to use the Bega trade mark on, or in relation to, certain cheese and butter products.  The initial term was 25 years, with Fonterra having a conditional right to extend for successive periods of 25 years.  

From 2001 until about September 2017, Fonterra was the only supplier of products bearing the Bega trade mark to grocery retailers in Australia.  In mid-2017 Bega acquired the Australian and New Zealand grocery and cheese business of Mondelez International (Mondelez), which comprised peanut butter, Vegemite, cheese and cream cheese spread products.  Bega notified Fonterra that it intended to launch its own products (which it had acquired from Mondelez) under the Bega trade mark, and did so in late 2017. 

Fonterra’s claim:  Construction of the TMLA

Fonterra claimed that the TMLA provided Fonterra the exclusive right to use the Bega trade mark and that Bega had no right to use the Bega trade mark on products such as peanut butter. 

The key terms of the TMLA are:

3.1  … Bega hereby grants to the Licensee, during the Term, the sole and exclusive:  (a) licence of the Trade Marks … on or in relation to Products for sale in the Territory.”

3.2  For the purpose of clause 3.1, ‘sole and exclusive licence’ means that during the Term Bega agrees … (b) not to use … the Trade Marks (or any trade mark which is similar to any Trade Mark) in the Territory, without the consent of the Licensee. The Licensee consents to Bega using the Trade Marks specified in Schedule 5 for the purposes set out in the Schedule.”

The “Products” referred to in clause 3.1 were effectively the complete range of cheese products manufactured by Bega as at the date of the TMLA. 

While clause 3.1 of the TMLA does not, on its face, prevent Bega from applying its trade mark to products other than those defined in the TMLA, Fonterra argued that clause 3.2 operated to restrict Bega from using its trade mark on any product.  In particular, Fonterra argued that the opening words of clause 3.2 (“[f]or the purpose of clause 3.1, ‘sole and exclusive licence’ means ...”) are not words of limitation which confine the restriction imposed on Bega by clause 3.1 to “Products”, and instead indicate the words that follow “apply to” the licence in clause 3.1.

The Court rejected this submission and concluded that Bega could continue to use its brand on peanut butter, Vegemite and other products outside the definition of “Products”.  The Court found that clauses 3.1 and 3.2 are to be read together, and that the combined effect of the phrase above is to define the meaning of the sole and exclusive licence granted to Fonterra under clause 3.1 – which is a licence on or in relation to the “Products”.  The Court concluded that when clauses 3.1 and 3.2 are read together, the sole and exclusive licence granted to Fonterra meant that Bega was not permitted to use the Bega trade mark on or in relation to “Products” (that is, the cheese products defined in the TMLA) for sale in the Territory.

Fonterra argued that its construction was supported by the consent granted by Fonterra in the final sentence of clause 3.2 for Bega’s use of the Bega trade mark in respect of certain products listed in a schedule.  The schedule included “Products” as well as other grocery items manufactured by Bega at the time the TMLA was entered into.  Fonterra argued that if the sole and exclusive licence was limited to “Products”, this consent would have been unnecessary.  Again, the Court disagreed.

The Court considered that consent was consistent with the parties agreeing, for the avoidance of doubt, that Bega was permitted to apply its trade mark to all products manufactured by Bega in 2001.  While the Court agreed with Fonterra that this was unnecessary, the Court determined that the unambiguous opening words of clause 3.2 could not be disregarded.

Key takeaway

  • Clearly draft the licence buckets and boundaries – what is the licensee exclusively permitted to do, what is the licensor permitted to do and what can’t they do, and what areas are for discussion or need further agreement or permission.

Bega’s counterclaim:  Marketing and promotion

Bega’s counterclaim alleged that Fonterra breached various express and implied terms of the TMLA by failing to effectively market and promote Bega branded products and the Bega brand, thereby entitling Bega to terminate the TMLA. 

Bega made a number of submissions in support of its counterclaim, all of which were rejected by the Court.  The Court held that the TMLA did not impose any contractual obligation on Fonterra to:

  1. engage in any particular type of marketing activity;
  2. engage in new product development;
  3. “effectively” promote and develop sales of Bega branded products; or
  4. promote and develop sales of Bega branded products in the foodservices sector.

The Court held that the express words of the TMLA required Fonterra to promote and develop sales broadly consistent with the Agreed Marketing Principles in the TMLA, ensure that the good name and image of the Bega trade marks was maintained and not harmed, and conduct its business operations in accordance with appropriate business standards and in a manner not to damage the value of the Bega trade marks. Provided that  Fonterra’s marketing activities complied with the broad guidelines and Fonterra achieved the agreed minimum royalty payments and market performance requirements,  Bega was not entitled to terminate the agreement. 

Several of Bega’s submissions, and the Court’s comments in respect of these submissions are set out in more detail below. 

Specific marketing obligations

Bega made a number of submissions regarding Fonterra’s breach of specific implied obligations with respect to promoting and developing sales under the TMLA.  Bega submitted that the parties’ failure to expressly identify these obligations in the TMLA was likely due to the fact the obligations could have become outdated given the 25 year term of the TMLA (which could be extended indefinitely). 

The Court stated that the risk of change in market conditions over the course of the long term agreement supported a construction of the TMLA which conferred discretion on Fonterra to conduct marketing activities in a manner responsive to such change, as opposed to requiring Fonterra to comply with express listed obligations.  The TMLA required Fonterra to conduct marketing activities in a manner “broadly consistent” with the Agreed Marketing Principles, and in a manner which preserved the value and goodwill in the Bega trade marks, but Fonterra had discretion as to the activities to be conducted or prioritised. 

New product development

The Court found that the terms of the TMLA did not support Bega’s contention that Fonterra was required to engage in new product development or innovation.  These terms did not appear in the TMLA.  Fonterra was required to promote and develop sales of particular branded products which were listed in a related agreement.  An obligation to develop new products would need to be supported by associated terms, such as how many and within what time. 

“Effectively” promote and develop sales of Bega branded products

The Court rejected Bega’s submission that the TMLA required Fonterra to “effectively” promote and develop sales of Bega branded products.  The Court found that there was no basis for reading this additional word into the relevant clause of the TMLA, and that Fonterra’s effectiveness was dealt with by the agreed minimum royalty payments and market performance requirements. 

Fonterra’s commercial interests

Bega submitted that Fonterra’s obligation to promote and develop sales of Bega cheese was not limited by a reasonable or best endeavours clause, and as such its obligations were not subject to what is reasonable in the circumstances having regard to Fonterra’s own financial or commercial interests.  The Court rejected this submission. 

The TMLA expressly recognised that Fonterra would market products under “a range of brands and trade marks”, including its own Mainland and Perfect Italiano brands.  The absence of a reasonable endeavours clause did not mean that Fonterra was precluded from having regard to its own commercial interests in promoting sales under its own brands. 

Takeaways

  • Build in a marketing governance framework with agreed annual marketing plans and meetings, escalation and deadlock processes, KPIs which evolve over time, minimum marketing spend based on a percentage of sales and specific marketing requirements regarding category exclusivity, NPDs and product innovation, brand positioning, advertising plans and channel strategies.   
  • Minimum royalties and market targets will still provide the ultimate objective protection, as even a fully formed marketing governance framework will need a measure of co-operation and deadlock measures may not be effective for subjective disputes.
  • Carefully consider the benefits of long term licences and distribution agreements, as they are difficult to structure for markets and businesses which will be very different in 10+ years’ time - there is a high chance of missing the mark!

 


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