Property, intangible

Gosh I love this case. Don’t get me wrong, I think it’s resoundingly wrong, but what a fascinating way to get there.

Plaintiff Quantum, Inc. sells natural health products. It owned the registered trademark MigreLief for “nutritional supplement containing feverfew and other natural ingredients for relieving headaches.” The trademark was registered in 1996, a date I find significant but that the court didn’t mention.

In 2002, Quantum and defendant Akeso Health Sciences, Inc. entered into an agreement where Quantum would purchase “Patented Formula” tablets from Akeso for sale in certain trade channels and in return Quantum granted Akeso a license to use the MigreLief trademark for Akeso’s own sales of the product. It was a fairly informal agreement, a two-page letter, with an ambiguous term but at least 30 months long. It also included a provision that Akeso could purchase the MigreLief trademark on certain conditions, the trigger also ambiguous.

From late 2004 though 2015 the parties continued to do business and tried to negotiate a new deal but never reached a written agreement. There were continuing allegations of improper sales by Quantum through the wrong channels but the companies nevertheless continued to work together.

Finally, on November 30, 2015, Akeso told Quantum it was terminating the 2002 agreement, stopped selling the pain reliever to Quantum, and said that it “was exercising its right to purchase the MIGRELIEF trademark.” Quantum thereafter refomulated and sold a product without feverfew under the MigreLief trademark.

There are two court opinions on the ownership of the trademark. The first was on a motion for summary judgment by Quantum that the 2002 agreement expired on October 31, 2004, countered by claim by Akeso that the 2002 agreement remained in effect until Akeso terminated it on November 30, 2015. This is the relevant part of the agreement:

• For the thirty months, starting on March 1, 2002, Quantum will have all sales and marketing rights for the patented product currently known as Migra-Lieve, and any future formula modifications, for the Health Food and Natural Product Store Class of Trade including GNC stores, and, non-exclusive rights to sell the product over the internet. After the initial thirty months have passed, Quantum may, at its option, extend this agreement for additional two year periods, as long as it thereafter purchases 450,000 tablets per quarter (7,500 bottles at 60 pills per bottle). [Akeso] may cancel this agreement with 60 days notice if Quantum does not meet its minimum sales commitment. Quantum will have the right to sell out remaining inventory. Quantum will have 60 days to remedy a cancellation.

• If [Akeso] chooses to cancel this agreement it may continue to use the trademark by purchasing all rights to the trademark from Quantum for $25,000 within ninety days of cancellation.

Quantum claimed that the agreement had a 30 month duration unless Quantum extended it, which both parties agreed it did not do. Quantum also argued that Akeso could only cancel the agreement (and thereafter exercise its right to buy the trademark) if Quantum failed to meet its commitments during a two-year extension period, but there weren’t any two-year extensions. Akeso’s view was that the agreement had no duration and it was only the exclusivity that ended after 30 months. Akeso also claimed that the right to buy the trademark was independent of the two-year extensions. The court decided:

Upon examination of the plain language of the provisions at issue within the context of the 2002 Contract as a whole, I conclude that the language of the relevant terms of the contract is subject to only one plausible and sensible interpretation and is, therefore, unambiguous. Consequently, it is not necessary consider the extrinsic evidence submitted by either party to resolve the meaning of contract [sic]. I further conclude that the plain language of the contract supports only the conclusion that the 2002 Contract expired, in its entirety, on October 31, 2004.

So Akeso doesn’t get to exercise the opportunity to purchase the trademark as described in the 2002 agreement. But that’s not the end of it; Akeso argued that the parties’ relationship continued after 2004 with an implied contract on essentially the same terms as the original agreement, including the right to purchase the trademark. The second decision is the court’s opinion and order after a trial.

The jury returned a verdict that the parties had an implied contract to transfer the MigreLief trademark to Akeso for $25,000; however, the court decided that the transfer of the trademark was an equitable issue to be decided by the court and therefore treated the jury verdict as advisory. It nevertheless still concluded:

Although it is clear that the parties both intended for Akeso to end up owning the trademark, they never reached a final agreement as to the details of the transfer. The Court is exercising its equitable power to fill in what it considers to be, within the greater context, minor details of the agreement. … The Court agrees with the jury’s conclusion that there is clear and convincing evidence that there was an implied contract to transfer the MigreLief trademark to Akeso. However, the Court does not agree that Akeso proved by clear and convincing evidence that the implied contract dictated transfer of the trademark for $25,000 and, therefore, the Court’s final decision on Akeso’s Ninth Counterclaim departs from the jury’s advisory verdict on that issue.

So, whoa. Let’s start with some law of implied-in-fact contract, as explained by the court:

Like an express contract, an implied contract is based on mutual expressions of assent. That assent and the terms of the parties’ agreement may be inferred from the parties’ conduct. An implied-in-fact contract can also arise when a written agreement expires and, without more, the parties continue to perform as before. Depending on the conduct of the parties, the implied contract might incorporate some or all of the terms and conditions of the expired express contract. However, the contract must be definite in all material aspects, with nothing material left to future negotiation.

The evidence reflects detailed negotiations from 2005 through 2007 trying to reach a new deal. It is clear that a trademark assignment and license-back were always contemplated, but only as part of much bigger deal. At one point there was a 14-point deal memo that outlined exclusive channels, non-exclusive channels, means to ensure distributors observed the restrictions, minimums required for automatic renewal, delivery windows, pricing, and a trademark assignment with an assignment-back in the case of expiration or Quantum’s breach. The document said specifically, though, “this document is not the final agreement,” so it is only a non-binding framework for what the ultimate terms would be. And the devil is in the details; anyone who does deals knows that they are whole beasts, you don’t know what concessions ultimately will be made to get to a final agreement. A draft distribution agreement was circulated but it wasn’t ever signed. As drafted, the trademark assignment was a separate document and apparently never created, so we don’t know what it ultimately might have said about termination or reversion.

The parties again tried to negotiate a new deal in the 2014-2015 time period, by which time it looks like Quantum had a change of heart. Rather than offering a assignment it offered a license. Akeso rejoined “In the original agreement, Akeso had the open ended right to purchase the trademark for $25,000. If we draft a new agreement, I would like for Akeso to continue to have that right. Akeso will agree that if it purchases the trademark, then Quantum will have the right to use it in the markets that it is licensed to sell MigreLief. (In essence, it is just flipping the roles of each of the companies).” An internal Quantum email said “we won’t do this.”

So I am at a loss to understand how the court could conclude that any implied-in-fact contract was “definite in all material aspects.” But:

The Court has weighed, evaluated, and considered all the evidence presented at trial and all of the arguments of counsel. … The Court concludes that Akeso has established by clear and convincing evidence that the parties had an implied-in-fact contract that included an agreement to transfer the MigreLief trademark to Akeso. Furthermore, the Court, invoking its equitable powers, concludes that the parties’ intent is best accomplished by setting fair and reasonable monetary consideration for the transfer of the MigreLief trademark at $100,000.

Why $100,000? That number was mentioned in an earlier draft of the deal memo, prepared by Quantum:

Trademark Transfer: Upon signing of a new agreement, Quantum will transfer registration of the MigreLief trademark to [Akeso] and [Akeso] will license the right to use the trademark back to Quantum. If [Akeso] cancels this agreement for any reason other than breach, [Akeso] will transfer the trademark registration back to Quantum immediately or pay Quantum a fee of $100,000.

However, the signed version of the deal memo said:

Trademark Transfer: Upon signing of a new agreement, Quantum will the transfer registration to the MigreLief trademark to [Akeso] and [Akeso] will license the right to use the trademark back to Quantum as long as Quantum remains a licensee. If [Akeso] cancels this agreement for any reason other than breach or expiration, [Akeso] will transfer the trademark registration back to Quantum.

The court, in my view wrongly, used this draft language as the value Quantum had placed on an unrestricted transfer:

Although, the July 2005 Agreement memo draft was just that, a draft, it communicates Quantum’s willingness to transfer the MigreLief trademark to Akeso for no money upon the signing of a final agreement and assigns a $100,000 retention cost for Akeso to keep the trademark with no strings attached. I recognize that neither the subsequent signed September 2005 Agreement Memo prepared by Quantum or the Distribution Agreement prepared by Akeso and revised by Quantum contain the $100,000 fee. These documents all do, however, contain provisions that would, upon finalization of the contemplated future agreement, transfer the trademark to Akeso. These documents, as well as the parties’ entire prior history, are totally inconsistent with David Shaw’s trial testimony that “it was always in my mind to control that mark.” The specification of the $100,000 sum indicated Quantum’s valuation for a no-strings-attached transfer of ownership at a time in close proximity to three written documents that were either prepared or edited by Quantum and that reflect Quantum’s willingness to transfer the trademark to Akeso. The terms of the July 2005 Agreement Memo draft, the September 2005 Agreement Memo, the detailed October/November 2005 Distribution Agreement and David Shaw’s redline edits of that document, though not binding in and of themselves, adequately convey the parties’ intentions regarding the trademark. These written documents, supported by the evidence presented at trial of the value of the brand to each party and of each party’s conduct vis-à-vis each other and the trademark, itself, satisfy this Court that the sum of $100,000 is a fair amount to give effect to both parties’ intentions.

Now, I am not privy to trial testimony or the trial exhibits not on PACER, several of which appeared critical to the court’s thinking. So I am missing a lot of color one would have seen at trial. And the jury found in favor of the transfer. But based on the summary judgment exhibits, Quantum was consistent that the only way the trademark would not revert to it at the end of the relationship (at which point Quantum could also no longer distribute the Akeso patented formula) would be Quantum’s own breach of the agreement. This is not inconsistent with Quantum saying “it was always in my mind to control that mark” – if you know that the only reason you won’t get it back is your own breach, well then you figure you just won’t breach, so it is entirely within your control. The deal memo mentioning the $100,000 isn’t inconsistent with the concept because the deal memo didn’t address termination. Nor does the absence of a reversion in the 2005 draft distribution agreement mean that Quantum was willing to entertain a sale at Akeso’s sole discretion, because the document was missing the incorporated trademark assignment agreement. The court seems think these omissions are meaningful but I don’t think they are, they are just how things go when doing deals. So $100,000 as the valuation of the trademark when we don’t know the conditions for reversion is just spit-balling and, in my view, another way in which material terms are missing.

The assignment, license-back and reversion structure is a rational business choice. For years the parties had border disputes over distribution channels, so putting Quantum at risk of losing of the trademark seems like a pretty good way to keep Quantum in line. From Quantum’s viewpoint, it had owned the trademark for years before applying it to the Akeso product and ultimately would be able to get it back when the relationship ended, so there was no harm in allowing Akeso to own it temporarily. But instead what appears to have happened is that the court plucked the trademark out of Quantum’s hands entirely, ignoring that the transfer was conditional in one shape or form.

There are valid reasons to be sympathetic to Akeso. Akeso invested heavily in the marketing of the product, Quantum admitting that Akeso was responsible for “gaining confidence for the brand among health professionals and consumers.” Akeso had extended the brand, adding MigreLief +M, Children’s MigreLief, and MigreLief Now, while Quantum only sold the original product. The court noted “Without MigreLief, the name attached to its primary product line, Akeso would lose its significant investment in the brand and, potentially would have to rebuild its entire business.” Perhaps so, although there is no mention of what happens to Quantum when it loses the brand.

I think the reason I am so shocked by this opinion is that the deal was never done – and if we can’t count on the status quo remaining until both parties have assented to the same terms, then what? It’s why we create writings, it’s why the deal memo said expressly it was not the final agreement. The parties didn’t reach a formal agreement and both of them proceeded at their own peril. I don’t have a lot of sympathy for someone who continues to walk further out onto thin ice.

I do see one way where this is a rational analysis, and perhaps it’s what the court was thinking, just not expressed in the opinion. Based on the evidence, any implied-in-fact contract would have included a provision that the trademark reverted to Quantum if the agreement ended for anything but Quantum’s breach. And the breach was admitted: “The parties agree that they had an ongoing enforceable agreement regarding sales channels and that Quantum breached that agreement.” So I suspect what may be going on here is that the court understood, but did not state, that the implied-in-fact contract would have allowed Akeso to keep the trademark if Quantum breached, and Quantum did.

But there is still one gaping problem with this rationale for an assignment: “Assignments shall be by instruments in writing duly executed.” Lanham Act § 10, 15 U.S.C. § 1060. There is no writing.

Trademark registrations can be transferred in ways other than by assignment, like inheritance, or the disposition of corporate assets through organizational change or bankruptcy as some examples. The Lanham Act also provides that “the court may determine the right to registration … and otherwise rectify the register with respect to the registrations of any party to the action.” Lanham Action § 37, 15 U.S.C. § 1119. So a court can decide that the record owner isn’t the true owner and order a transfer. Or, a court could order the assignment of a trademark registration as a remedy, in a collection case for example. But those aren’t assignments per se, those are judicial acts authorized by the Lanham Act or other laws. Here though, the question the court was answering expressly was whether there was an assignment in an admittedly unwritten, implied-in-fact contract. So I think the supposed assignment, at least on the reasoning given, is not valid because it is not in writing. If a judicial opinion that there is an assignment in an implied-in-fact contract is a proxy for the writing that Section 10 requires, then the rule has been swallowed.

Quantum, Inc. v. Akeso Health Sciences, LLC, No. 3:15-cv-00334-JE (D. Or. June 5, 2017)(Summary judgment on term of the 2002 agreement)
Quantum, Inc. v. Akeso Health Sciences, LLC, No. 3:15-cv-00334-JE (D. Or. Aug. 2, 2017) (opinion on assignment of trademark)

This work is licensed under a Creative Commons Attribution-NoDerivatives 4.0 International License.