On 14 April 2020, the Full Court of the Federal Court of Australia handed down an appeal decision with important implications for trade mark licensing in Australia, and in particular the licensing of unregistered marks.
In summary, key “take away” messages for trade mark licensors from the case include:
- Rights to an unregistered mark may be owned by the manufacturer of the goods on which the mark appears, not the company which controls or licenses the manufacturer.
- Brand owners should register all distinctive aspects of product packaging, in particular where products are manufactured by a licensee.
- Unregistered trade marks cannot be assigned separately from the business in which they are used, even within a corporate group.
- Brand owners should be careful when referring to products manufactured by a former licensee or in the context of a transitioning to a new licensee.
The factual background to the dispute is complex and in some respects highly unusual. But the Full Court’s reasoning is of general application to trade mark licensing, and is problematic in a number of respects.
In 2012, Kraft Foods Inc implemented a global restructure, whereby it divided itself into a “snack foods” business (owned by Kraft Foods Inc) and a “grocery” business (owned by Kraft Foods Group Inc). The net result of the restructure was that the snack foods business and grocery business became separately owned and were no longer part of the same corporate group.
The restructure involved the allocation of manufacturing facilities and intangible assets (including many valuable brands) worldwide to the two businesses. The KRAFT brand was allocated to the grocery business, and consequently Kraft Foods Inc (parent entity of the snack foods business) changed its name to Mondelez International Inc. The registered owner of the KRAFT mark became Kraft Foods Group LLC, an IP holding company owned by Kraft Foods Group Inc.
In Australia, a subsidiary of Kraft Foods Inc (Kraft Foods Limited, or KFL) had since 1962 manufactured peanut butter at a plant in Port Melbourne, which it sold under the KRAFT brand. KRAFT peanut butter was for many years the clear market leader, with around 65% of sales in a total market worth $110 million annually (as at 2017).
Pursuant to the restructure, KFL (including the Port Melbourne plant) was allocated to the snack foods business, and KFL became a subsidiary of Mondelez. Kraft (via its IP holding company) granted Mondelez (via its IP holding company) various licences to use the KRAFT mark (including in relation to peanut butter in Australia) to facilitate transition to new branding, under a Master Trademark Agreement. The Australian peanut butter licence expired on 31 December 2017.
In late 2016, Mondelez agreed to sell KFL’s peanut butter business to Bega Cheese Ltd, including the plant at Port Melbourne. The sale completed in mid-2017. As part of the sale, Bega was assigned Mondelez’s licence to use the KRAFT mark in Australia. Bega manufactured peanut butter at the Port Melbourne plant, but it did not sell peanut butter labelled KRAFT. Instead, for a few months it sold peanut butter under a new brand THE GOOD NUT, and subsequently it transitioned to the brand BEGA.
Although Bega did not sell peanut butter labelled KRAFT, Bega continued to use the same distinctive colour scheme that for many years had been used by KFL. This involved a jar with a yellow lid and label, and a blue or red nut device (denoting smooth or crunchy peanut butter) as shown below (the Peanut Butter Trade Dress).
From mid-2017, KRAFT peanut butter started to disappear from Australian supermarket shelves as it was replaced by peanut butter manufactured by Bega and branded THE GOOD NUT or BEGA. Meanwhile, Kraft was preparing to sell KRAFT peanut butter in Australia via its subsidiary (HJ Heinz Australia Ltd). HJ Heinz Australia issued a press release stating: “Kraft, a brand steeped in the life, culture and history of Australia since 1926, is set to appear on Australian supermarket shelves again…. Kraft peanut butter will… be back on Australian supermarket shelves in early 2018”.
When Kraft’s peanut butter was launched in early 2018, it featured the Peanut Butter Trade Dress. It also featured a tag line that read “Loved Since 1935”.
Kraft commenced proceedings against Bega. Kraft alleged that Bega’s use of the Peanut Butter Trade Dress breached the Master Trademark Agreement, was likely to mislead consumers in contravention of the Australian Consumer Law, and amounted to passing off at common law.
Bega in turn cross-claimed against Kraft. Bega alleged that it had acquired rights to the Peanut Butter Trade Dress when it purchased KFL’s peanut butter business, and that Kraft’s use of the Peanut Butter Trade Dress was likely to mislead consumers. Bega alleged that Kraft’s press release and tag line were likely to mislead consumers because they conveyed that Kraft’s peanut butter was the “same product” that consumers had previously purchased by reference to the KRAFT brand, when in fact Kraft’s peanut butter was to be made by a different entity in a different factory.
The Full Court unanimously agreed with the primary judge and held that Bega had acquired rights to the Peanut Butter Trade Dress when it purchased KFL’s peanut butter business. Unlike the primary judge, the Full Court held that the Master Trademark Agreement purported to assign the Peanut Butter Trade Dress to Mondelez, not Kraft.
The Full Court also agreed with the primary judge that Kraft’s press release and tag line “Loved Since 1935” were likely to mislead consumers, on the basis that they misrepresented that Kraft’s peanut butter was the same as the peanut butter previously sold by KFL.
Implications for trade mark licensing in Australia
Ownership of goodwill
The Full Court considered it “uncontroversial” that under Australian law, unregistered trade marks are not a species of property. Instead, goodwill generated through use of an unregistered trade mark can be protected by an action for passing off or breach of the Australian Consumer Law. An unregistered trade mark can only be assigned together with the goodwill of the business in respect of which it is used. In this respect, Australian law accords with the position under the US Lanham Act, which prohibits assignments “in gross” (assignments without the goodwill of the relevant business).
The Full Court went on to consider which entity owned the goodwill generated through use of the Peanut Butter Trade Dress, both before and after the restructure. Prior to the restructure, the question for the Court was whether was owned by KFL, as the entity which manufactured and sold products under the Peanut Butter Trade Dress, or by the Kraft entities which owned and controlled KFL. After the restructure, was the goodwill owned by KFL as manufacturer, or by Kraft Foods Group LLC as owner of the KRAFT mark?
The Full Court concluded that the goodwill was at all times owned by KFL, and subsequently acquired by Bega.
The Full Court noted that KFL had developed the Peanut Butter Trade Dress, and that it had not been used by any other entity within the Kraft Foods Inc group. The fact that Kraft Foods Inc had controlled KFL’s operations was not sufficient to indicate that Kraft Foods Inc owned the goodwill. Having concluded that KFL owned the goodwill, the Full Court held that the goodwill remained with KFL until its business was sold to Bega. The goodwill attached to KFL’s business, and it was not possible for that goodwill to be assigned to Kraft separately from KFL’s business.
It is difficult to reconcile the Full Court’s conclusions in relation to ownership of goodwill with established principles of trade mark law. Trade marks function as a badge of origin, and the relevant trade origin indicated by a mark will typically be the entity that is ultimately responsible for the quality of the goods sold under the mark, whether as manufacturer or otherwise. The primary judge found that the control measures implemented by Kraft Foods Inc related to all aspects of the production process, from sourcing materials through to packaging, and the appearance of trade marks on labels and packaging. There was no evidence that consumers were aware of the manufacturing arrangements for KRAFT peanut butter. These factors suggest that the relevant trade origin indicated by the marks on KFL’s products was in fact Kraft Foods Inc, such that goodwill generated through use of those marks accrued to Kraft Foods Inc.
The Full Court’s approach will be of concern to trade mark licensors. It would follow that a licensee will own the rights to any unregistered marks used by the licensee in conjunction with the licensor’s registered marks, even where the licensor exercises control over the quality of the licensee’s products. It will not be possible for rights in those unregistered marks to be assigned to the licensor without also assigning the licensee’s business, although the Full Court left open the question of whether a licensee might be contractually restricted from asserting rights to goodwill that it owns.
The Full Court did not express a view in relation to whether an unregistered mark could be validly licensed before the licensor has itself used the mark so as to generate goodwill. Further, the Full Court did not consider whether the owner of an unregistered mark for the purposes of section 27 of Trade Marks Act is the person who first uses the mark, or the person who controls that first use. However, the decision suggests that it would be the former, such that a “licensee” could prevent a licensor from registering such a mark under section 58 of the Act.
End of licence transition
The case is a warning to brand owners and licensees who seek to market their products by reference to products made by a former licensee. The primary judge stated that Kraft, through its press release and “Loved Since 1935” tag line, was seeking to “attach itself to a product that it has never had anything to do with”, and the Full Court essentially shared this view. This is a remarkable conclusion given that as at 2017 Kraft had been the owner of the primary brand (KRAFT) appearing on the product for around 5 years, and that the KRAFT mark had been used by KFL as licensee over that time. The Full Court’s approach is inconsistent with the notion that a trade mark is a badge of origin, and the well-established principle that a trade mark owner maintains a connection with its licensee’s goods through the exercise of quality control over those goods. Viewed through the lens of trade mark licensing, from 2012 to 2017 KRAFT peanut butter was very much connected with Kraft, notwithstanding that it was manufactured by KFL as licensee.
The case also illustrates that trade mark licensors should be careful not to suggest that products manufactured and sold by a new licensee are “the same” as products sold by the former licensee. The Full Court found that Kraft’s peanut butter was made to the same recipe and had the same “sensory profile” as the peanut butter made by KFL/Bega, but that nonetheless Kraft’s products were not relevantly “the same” as the products sold by KFL/Bega. The Full Court apparently based its finding on the fact that Kraft’s products were made at a different factory and by a different entity to KFL’s products, and not on any material difference in product formulation. The Full Court’s decision in this respect is surprising, given that brand owners routinely change manufacturing arrangements for their products (and indeed product formulation) without expressly informing consumers.
The case also highlights the potential issues that can arise when an exclusive licensee is not required to use the licensed mark for the entire duration of the licence term, and is permitted to rebrand prior to expiry of the term. Bega successfully transitioned consumers to BEGA peanut butter during the period when Kraft was unable to use its mark.
The Full Court found that Kraft’s use of the tag line “Loved Since 1935” was likely to mislead consumers, because it conveyed that Kraft’s peanut butter was relevantly “the same” as the peanut butter sold by KFL/Bega. The Full Court rejected Kraft’s argument that consumers would view the tagline as a reference to the KRAFT peanut butter brand, which had been first used in 1935.
Brand owners commonly adopt a marketing strategy that involves reference to the brand’s heritage, particularly in the case of long-established brands. However, the Full Court’s approach suggests that such marketing is problematic in circumstances where the place of manufacture or the identity of the manufacturer have changed.
The Full Court’s decision may be found here.