Property, intangible

a blog about ownership of intellectual property rights and its licensing

Unauthorized Registration As Material Breach

I just ran across this older opinion upon seeing a more recent opinion in the case on attorneys’ fees. The situation was interesting enough to make me go back and find the earlier decision.

Defendant Otkrytoe Aktsionernoe Obshchestvo “Spartak” is a Belarusian company specializing in the production of chocolate. Spartak entered into a non-exclusive supply agreement with plaintiff Desly in 2001, which in 2006 became exclusive for a 25 year term.

The 2006 agreement said this about ownership of the trademarks:

Any and all trademarks and trade names, which [Spartak] uses in connection with the rights granted hereunder, are and remain the exclusive property of [Spartak]. Nothing contained in this Agreement shall be deemed to give [Desly] any right, title or interest in any trademark or trade name of [Spartak] relating to the Products. Subject to notice from Owner [Spartak] in writing, which modifies or cancels such authorization, during the term of this Agreement, [Desly] may use the trademarks and trade names specified by [Spartak] in writing for normal advertising and promotion of Products.

The agreement also had this:

[Desly] acknowledges and agrees that the Products and all copies thereof constitutes valuable trade secrets or proprietary and confidential information of [Spartak]; that title thereto is and shall remain in [Spartak]; and that all applicable copyrights, trade secrets, patents and other intellectual property rights in the Products and all other items licensed hereunder are and shall remain in [Spartak]. All other aspects of the Products and all other items licensed hereunder including Remains [sic] the sole and exclusive property of [Spartak] and shall not be sold, revealed, disclosed or otherwise communicated, directly or indirectly, by [Desly] to any person, company or institution whatsoever, other than for purpose set forth herein. It is expressly understood and agreed that no title to, or ownership of, [Spartak’s] intellectual property rights, or any part thereof, is hereby transferred to [Desly].

Needless to say, in 2009 Desly registered the Spartak trademarks. Spartak discovered the registrations in 2012 when it filed its own applications that were refused as likely to be confused with the Desly registrations. Spartak thereupon terminated the distribution agreement. Desly responded to Spartak’s letter saying that the applications were submitted “in a scope of good business practice routinely conducted by [Desly] in order to protect intellectual property being used in connection with goods being distributed on territories where [Desly] holds exclusive distribution rights” and proposed a “discussion” regarding the “possible transfer of rights [to Spartak] to the intellectual property currently owned by Desly.” Spartak instead found a new distributor, so Desly sued both Spartak and the new distributor for trademark infringement and other assorted claims.

I think this is a no-brainer that Desly had no right to register the trademarks and its registrations were invalid, since the owner of the trademarks had not filed the applications. What I found more interesting about the case, though, was whether registering Spartak’s marks was a valid basis for termination of the agreement.

The termination provision of the agreement said this:

This Agreement may be terminated immediately by [Spartak] under any of the following conditions:

(a) if [Desly] shall be declared insolvent or bankrupt;
(b) if a petition [is] filed in any court to declare one of the parties bankrupt or for a reorganization under the Bankruptcy law or any similar statute and such petition is not dismissed in ninety (90) days or if a Trustee in Bankruptcy or a Receiver or similar entity is appointed for one of the parties;
(c) if [Spartak] terminates any provisions of this Agreement for any other reason than stated in the Agreement, [Spartak] has to compensate [Desly] for loss of profit equal to gross profit from previous year.

This section says nothing about termination for breach, but it turns out that was ok. This section describes occasions on which Spartak “may” terminate the agreement, but “unless a contract provision for termination for breach is in terms exclusive, it is a cumulative remedy and does not bar the ordinary remedy of termination for a breach which is material, or which goes to the root of the matter or essence of the contract.”

And “it is a well-settled principle of contract law that, where a party materially breaches an agreement, the non-breaching party is entitled to terminate the breached contract and sue for the entire loss the breach caused.” So, it boils down to whether these unauthorized applications were a material breach. Yes, in this court’s view:

What is inescapable is that Desly’s improper trademark registrations constituted a material breach justifying Spartak’s termination of the agreement granting Desly distribution rights in the United States. The central purpose of the contract, it is beyond dispute, was to make Desly Spartak’s exclusive United States distributor of its products for sale, principally, to Eastern European immigrant consumers already familiar with Spartak, and, not only did not authorize Desly to do anything else with its products, mark and logo, but explicitly provided for the retention of rights to its mark and logo. Thus, by appropriating Spartak’s trademark rights and continuing to distribute product under a mark it had unlawfully registered, though still bearing the distinctive dress and logo that these products bore – which would be recognizable to preexisting consumers – Desly had breached the essential purpose of the distribution agreement. The contract breach by plaintiffs could not have been more material; illicitly arrogating the Spartak mark and logo to itself, Desly severed from Spartak the essential tools for establishing its brand in this country, which was, of course, the key purpose of the exclusive agreement. Such a breach, as a matter of law, entitled Spartak to terminate the agreement.

No fees for Spartak though; there was a back story that made Desly’s actions more understandable.

Desly Int’l Corp. v. Otkrytoe Aktsionernoe Obshchestvo “Spartak”, No. 13-CV-2303(ENV)(LB) (E.D.N.Y. Aug. 29, 2016).

Desly Int’l Corp. v. Otkrytoe Aktsionernoe Obshchestvo “Spartak”, No. 13-CV-2303(ENV)(LB) (E.D.N.Y. Dec. 7, 2018).

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