Buyer beware: effecting a sale of unregistered trade marks

Litigation timeline

Federal Court of Australia proceedings

On 9 November 2017, Kraft Brands commenced proceedings in the Federal Court of Australia claiming that it was entitled to use the Trade Dress in relation to peanut butter products, to the exclusion of Bega. Kraft Brands’ causes of action were based on contract, passing off and the misleading or deceptive conduct provisions of the Australian Consumer Law.

In particular, Kraft Brands contended that:

• under the Agreement, Bega, which had accepted contractual obligations relating to the Restructure when purchasing MAFL, was only granted a limited licence for the Trade Dress in Australia and the Trade Dress reverted back to Kraft Brands at the end of the term of the Agreement with MAFL; and
• the goodwill in the Trade Dress was inseparable from the unregistered trade mark (the Trade Dress), which Kraft Brands contended it owned and, as a result, Kraft Brands retained the rights to the Trade Dress under the Agreement.

Kraft Brands also alleged a number of consumer law breaches, which are not relevant for the purposes of this article.  

Bega claimed that Kraft Brands had not been the owner of the goodwill generated by the sale of the peanut butter by MAFL in Australia since at least 2012. Rather, immediately before and after the Restructure, the goodwill generated in respect of the Kraft Brands branded peanut butter bearing the Trade Dress inured to KFL and the rights to the Trade Dress (by virtue of Bega acquiring the goodwill) were sold to Bega in 2017.

An arbitration proceeding in the United States in relation to the goodwill issue was halted while the Australian proceeding was heard.

On 1 May 2019, Justice David O’Callaghan of the Federal Court of Australia handed down his decision in the matter.^[1]

In that decision, O’Callaghan J:

• held that while Kraft Brands had intended to licence the rights to the Trade Dress in addition to the Kraft Brands registered trade marks under the Agreement, this was not material as unregistered trade mark rights cannot be licenced under Australian law;^[2] and
• disagreed with Kraft Brands’ submission that the Trade Dress had only ever been used in conjunction with the Kraft trade mark and was not convinced by Kraft Brands’ argument that the Trade Dress did not generate goodwill itself but only in connection with the trade mark. 

O’Callaghan J agreed with Bega that goodwill does not attach to one particular asset but to the whole of a business. 

At [161], O’Callaghan J stated that:

‘The goodwill in the peanut butter products business that Bega acquired from MAFL in 2017 derived from all the things that MAFL owned and sold to Bega, including, among other things, the plant and machinery within the factory used to make peanut butter, all of the necessary agreements with third parties for the supply of raw materials, the packaging, warehousing, promotion and the sale of all of the peanut butter, and the staff involved in its production, promotion and sale. It is that business, with all of those assets, that created the goodwill that Bega acquired, and which was inseparable from the business.’

And at [168]:

Goodwill inures to an entity by that entity using, in its business, all of the sources that give rise to the attraction of custom in the business.’

Accordingly, O’Callaghan J agreed with Bega’s contention that Kraft Brands did not own the goodwill in the Trade Dress immediately before the Restructure and did not own it after the Restructure. As a result, Bega had acquired the rights to the Trade Dress through the MAFL acquisition in 2017 (in particular through acquiring the goodwill of the business of MAFL) and Kraft was precluded from using the Trade Dress.

On appeal to the Full Court of the Federal Court

On 4 June 2019, Kraft filed an appeal in the Full Court of the Federal Court.

Kraft primarily argued that, under the Restructure, the Trade Dress was allocated to the North American Grocery Business rather than the Global Snacks Business and Bega was bound by the allocation as it has agreed to certain contractual obligations housed within the Restructure documents.

Kraft Brands also contended that the primary judge had erred by failing to distinguish between the goodwill generated in relation to KFL’s business as a whole and the goodwill derived from KFL’s use of an unregistered trade mark (the Trade Dress) on a particular branded product line. Kraft Brands argued that the unregistered trade mark was assigned with the product goodwill to KFL and immediately before the Restructure either the Global Snacks Business or Kraft Brands was the owner of the Trade Dress. This was due to the level of control exercised by Kraft Brands under the Agreement.^[3]

On 14 April 2020, the Full Court of the Federal Court upheld O’Callaghan J’s decision.^[4] 

The Full Court confirmed the following underlying principles:

• unregistered trade marks or product ‘get-up’, such as the Trade Dress, are not recognised under Australian common law as a distinct species of property and rather the reputation or goodwill generated by the use of the unregistered trade mark can be protected by an action for passing off or statutory misleading and deceptive conduct; and
• the goodwill of a business is property capable of assignment.^[5]

The Full Court determined that on the true construction of the restructure documents, viewed in their commercial context, the peanut butter trade dress was allocated to the global snacks business.

The Full Court found that KFL held the rights to the Trade Dress prior to the restructure and that O’Callaghan J was correct to find that unregistered trade mark rights can only be assigned through an assignment of the goodwill of the underlying business.

The Full Court concluded:

‘At a factual level, the primary judge was correct to conclude that the rights in relation to the peanut butter trade dress were held by KFL at the time the peanut butter trade dress was created (in 2007) and that no subsequent step (between 2007 and October 2012, the date of the restructure) effected an assignment of those rights to Kraft Foods Inc or Kraft Foods Global Brands LLC. Accordingly, immediately before the restructure, the rights relating to the peanut butter trade dress were held by KFL.’

Accordingly, Kraft Brands’ contention that the unregistered trade mark was assigned to KFL under the Restructure documents was rejected. Instead, Bega was held to own the rights to the Trade Dress by purchasing the business and assets of MAFL.

High Court

On 13 November 2020, Kraft Brands was denied special leave to appeal to the High Court.

Key takeaways

The key takeaways for a prospective purchaser of an unregistered trade mark (such as a brand or trade dress) in light of these decisions are that:

• under Australian law, goodwill is inseparable from the business and cannot be dealt with except in connection with the underlying business to which the goodwill is associated; and
• accordingly, brand owners cannot effectively sell or assign an unregistered trade mark without also assigning or transferring the goodwill in the business which is associated with the use of the trade mark.