Trademark transfer issues for previously licensed trademarks (part 2)

Between a trademark transferee and previous licensee, a common dispute is that the previous licensee sues the trademark transferee claiming transfer contract is invalid. After the transfer of a previously licensed trademark, the previous licensee will usually seek to protect its interests by suing the trademark transferee and the previous trademark owner, and claim that the later transfer agreement is invalid.

However, in practice, out of such considerations as respecting the autonomy of the parties and safeguarding the safety of transactions, as well as on the basis of the fact that, pursuant to the Interpretations of the Supreme People’s Court (SPC), a trademark transfer does not affect a prior effective licence agreement, and deeming that even if the non-breaching party to a contract incurs a loss it may nevertheless seek to make up its loss by asserting breach of contract against the party in breach, but courts are extremely reluctant to find a contract invalid, or generally do not lean toward finding a contract invalid. Accordingly, it is generally very difficult for a previous trademark licensee to have its claim that the later trademark transfer agreement is invalid upheld.

Between trademark transferee and previous trademark owner. In contrast, disputes between trademark transferees and previous trademark rights holders chiefly involve two issues, being the securing of the exclusive right to use the registered trademark, and the obtaining of the royalties under the previous licence contract.

(1) Securing of rights: trademark transfer contract dispute. If, after execution of the trademark transfer contract, the previous trademark owner refuses to carry out the trademark transfer application, the trademark transferee may, pursuant to the trademark transfer agreement, request that a court render a judgment ordering the previous trademark rights holder to perform its transfer obligation and carry out the trademark transfer procedures. Furthermore, the previous trademark owner may not claim that the transfer agreement is invalid, and refuse to submit the transfer application on the ground that the agreement harms the interests of the previous licensee.

(2) Obtaining of royalties: amendment of previous licence agreement and refund of improperly obtained benefits. Pursuant to article 20 of the interpretations, transfer of a trademark does not affect a prior effective trademark licence agreement. As the trademark rights holder changes after a trademark transfer, and there is no longer a basis for the previous trademark owner to charge royalties for the trademark, how is the new trademark owner to obtain the royalties under the previous licence agreement?

What is commonly seen in practice is that the new trademark owner, previous trademark owner and the licensee hold consultations on amending the previous trademark licence agreement, specifying that the trademark royalties are to be paid to the new trademark owner. As the previous trademark owner no longer has a legal basis to charge royalties after transfer of the trademark, theoretically, the new trademark owner may also demand that the previous trademark owner refund any improperly obtained benefits.

Similar cases do exist in practice. However, with respect to royalties received in advance by the previous trademark owner, before the trademark transfer, the court will take into account whether the contract contains any provisions addressing this issue, and the trademark transfer price, in determining whether the same constitute improperly obtained benefits.

Between the trademark transferee and previous trademark owner: (1) A request for confirmation that the transfer agreement is invalid. Disputes between licensees and previous trademark rights holders usually involve the licensee instituting a legal action against the previous trademark owner and trademark transferee, claiming that the trademark transfer agreement between them is invalid. However, due to the relativity of the agreement, and the difficulty in showing in practice that the two executed the agreement in bad faith to harm a third party’s interests or the national interest, courts generally will not find the contract invalid. Please refer to the above-mentioned discussion about disputes between trademark licensees and trademark transferees. (2) A request for continued performance. A licensee may additionally institute a legal action demanding that the previous trademark rights holder continue performing the trademark licence agreement. Under such a circumstance, the court will, based on the actual circumstances and whether a basis for continued performance of the contract exists, decide whether to uphold the claim for continued performance. For example, in the trademark licence contract dispute between Destination Travel International (Beijing) and Tiger Brands, the court held that, given that Destination Travel requested continued performance of the contract, and that a basis for continued performance of the contract by the parties still existed, performance of the contract in question should continue.

Recommendations on the design of trademark licence agreement and transfer agreement clauses. Considering the various types of disputes that arise in practice in connection with trademark transfers where the trademark was previously licensed, the parties to the agreements should pay particular attention to the design of their clauses when executing the agreements so as to effectively minimize risks, and particularly avoid the disputes commonly seen in practice and described above.

For the previous trademark owner, as the prior licence agreement will have a relatively large impact on the transfer of the trademark, e.g., affecting potential purchasers’ intent to purchase and the transaction price, the previous trademark licensor, when executing the trademark licence agreement, should attempt to foresee the likelihood of a trademark transfer, and, at the time of the negotiations, specify clear provisions on whether to grant the licensee priority to renew the agreement or the option to purchase the trademark, and whether the agreement may be terminated in the event of a transfer of the trademark, so as to ensure that any future transfer or licence transaction proceeds smoothly.

The trademark licensee will invest a lot in marketing during the term of the trademark licence, and although it profits from use of the licensed trademark, it also contributes to the goodwill of the trademark, so it should endeavour, in respect of a transfer of the licensed trademark, to secure the priority to purchase the trademark, and should also specify in the trademark licence contract that recordal be carried out with the Trademark Office within a reasonable period, so as to protect its rights.

The trademark transferee should carry out due diligence, determine the ownership status of the trademark it proposes to acquire and the licensing records, and, particularly in terms of contract design, it should ensure the securing of the rights and the securing of the royalties (if there is a prior licence). Additionally, in the transfer provisions, it should specify the transferor’s liability for breach of contract, so as to effectively minimize risks.

Shi Yakai is a partner and Hu Miao is an attorney at Sanyou Intellectual Property Agency

Sanyou Intellectual Property Agency
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