Round 2: A fight about much more than peanuts: Kraft beaten by Bega in crunch trade mark appeal

We've previously cautioned brand owners about the implications of licensing unregistered trade marks in Australia following the first instance decision in the high stakes peanut butter trade dress dispute between Kraft and Bega.

The Full Court of the Federal Court of Australia this month unanimously upheld the primary judge's decision in all material respects (Kraft Foods Group Brands LLC v Bega Cheese Limited [2020] FCAFC 65). Unfortunately, despite having an opportunity to provide clarity in this area, the Full Court’s decision does little to alleviate our concerns regarding licensing of unregistered trade marks in Australia.

The appeal decision also reinforces the benefits of registering all commercially valuable brand identifiers (including distinctive product packaging and get-up) rather than relying on common law (unregistered) trade marks.

Recap: Peanut butter, goodwill, and the trade dress

Kraft Australia had made and sold peanut butter in Australia bearing a distinctive “trade dress” (or product get-up) since 2007. Following a restructure of Kraft's global business in 2012, Kraft Australia became part of the Mondelez group. Kraft Group granted a licence to Mondelez to use the trade dress and other marks in Australia until 31 December 2017. Under this licence, goodwill inured to Kraft Group as licensor. Bega acquired Mondelez's Australian peanut butter business in 2017 (including all of its assets and goodwill) and started selling peanut butter in Australia under the trade dress shortly thereafter.

The principal issue in dispute was who owned the goodwill derived through use of the peanut butter trade dress in Australia (an unregistered common law trade mark) as depicted below:

Kraft's position was that Kraft/Mondelez manufactured and sold peanut butter in Australia using the trade dress only as a licensee, subject to the control and direction of its parent company. Consistent with established law in relation to the licensing of trade marks, Kraft argued that the goodwill generated through use of the trade dress inured to the benefit of the licensor and not the licensee.

In response, Bega argued that the trade dress, being an unregistered trade mark, was an inseparable part of the goodwill of the business conducted by Kraft/Mondelez (which Bega acquired). Bega relied on the established legal principle that the owner of an unregistered trade mark cannot assign that trade mark separately from the goodwill of the business in respect of which the trade mark is used.

Round 1: Bega crunches Kraft

In a nutshell, the primary judge agreed with Bega, concluding that:

• Goodwill is inseparable from the business to which it adds value and cannot be dealt with except in conjunction with the sale of that business. Kraft Australia first put goods bearing the trade dress into the market and thereby attained a reputation sufficient to found an action in passing off or under the Australian Consumer Law. The goodwill in the Australian peanut butter business derived through use of the trade dress therefore inured to Kraft Australia (later Mondelez).
• The assignment or licensing of an unregistered trade mark is not possible without the assignment of the underlying goodwill of the business. The primary judge rejected the argument that Kraft Australia's parent company was the "owner" of the trade dress merely because it controlled its subsidiary and exercised some quality control over its KRAFT branded products.
• Kraft's attempt to assign or shift the trade dress to an upstream company in the Kraft group was ineffective under Australian law because it incorrectly assumed that unregistered trade marks were assignable without the goodwill in the underlying business.

Round 2: Kraft comes unstuck in unsuccessful appeal

The Full Court also found in favour of Bega. It prefaced its reasoning by setting out two "uncontroversial" principles of Australian law:

• Unregistered trade marks or product get-up are not a species of property; rather, the business goodwill or reputation generated by the use of unregistered trade marks can be protected by an action for passing off or statutory misleading and deceptive conduct.
• The goodwill of a business is property capable of assignment, where goodwill is understood to be the “legal right or privilege to conduct a business in substantially the same manner and by substantially the same means that have attracted custom to it”.

Goodwill – control does not confer ownership

The parties directed their arguments on appeal to the creation, ownership and transfer of goodwill associated with the Australian peanut butter business through a series of complex transactions.

The Full Court accepted Kraft's contention that a business might operate multiple product lines, each with varying or overlapping trade marks (registered or unregistered) that will make some contribution to the build-up of the goodwill of the business as a whole. There is therefore a distinction between "business goodwill" of the business as a whole and "product goodwill" in a particular product line.

The Full Court accepted that where a company carries on several discrete businesses, an unregistered trade mark may be assigned together with the goodwill of that business, rather than the business as a whole. The Full Court observed that "[v]iewing the matter in this way provides an appropriate amount of flexibility in applying the principles regarding the assignment of the rights in relation to unregistered trade marks and, indeed, derives some support from the US cases cited by Kraft in its submissions". The authors consider that this is a welcome clarification of the law, and is consistent with long-standing Australian practice.

The mere fact that a Kraft parent company could exercise control over the character and quality of the KRAFT branded products did not change who held the rights in relation to the peanut butter trade dress. While the exercise of control by the licensor is an essential element of a licence to use a registered trade mark, the Full Court found that the exercise of control does not itself confer ownership of an unregistered trade mark. Consistent with the primary judge, the Full Court agreed that the question of ownership of an unregistered common law trade mark is to be resolved by asking who owns the goodwill in the relevant business.

The Full Court found no error in the primary judge's findings that there was no assignment of the goodwill of the peanut butter business from Kraft Australia to another Kraft group entity, this being necessary for the (unregistered) trade dress to be assigned as a matter of Australian law.

Licensing of unregistered trade marks

In our earlier article we expressed concerns with the primary judge's observation that the licensing of unregistered trade marks is not possible without the assignment of the underlying goodwill of the business. Regrettably, the Full Court declined to clarify this important issue.

The Full Court referred to JT International SA v Commonwealth [2012] HCA 43 (the Tobacco Plain Packaging Case), where Justice Gummow stated that, at common law, goodwill is assignable only in conjunction with the goodwill of the business in respect of which the get-up is used. The Full Court said "[w]e note for completeness that Gummow J also stated at [142] that the same reasoning “may” apply to licensing of common law marks, but did not express a concluded view on the position with respect to licensing. For present purposes, it is also unnecessary to express a concluded view on the requirements regarding licensing of an unregistered trade mark."

Unfortunately, this leaves the state of the law in this area in considerable doubt. Licensors should take little comfort from the fact that the Full Court did not explicitly approve the primary judge's statement. Effectively, the Full Court is saying that this is a problem for another day.

This uncertainty raises serious concerns for businesses that rely on licensing of unregistered trade marks, including franchisors. The primary concern is that contractual terms can be displaced, despite the parties agreeing that an unregistered mark is a licensed mark under the terms of the licence.

On appeal, Kraft's first contention was that Bega had breached a Master Trademark Agreement. However, the Full Court preferred to examine who had the right to use the trade dress before and after the restructure, rather than first looking at the terms of the agreement. The result of that assessment was that Kraft did not in fact own the rights it purported to own in the licence agreements, even though Bega assumed certain obligations under that agreement.

In commercial transactions, it is common for registered and unregistered trade marks to be listed in schedules of licensed IP rights. These arrangements have been considered uncontroversial where the brand owner exercises sufficient control over the use of the licensed trade marks. Given the legal effectiveness of these transactions remains uncertain, licensors should review their licence agreements for material risks. If appropriate, the brand owner should file trade mark applications for unregistered trade marks, particularly for distinctive packaging and get-up and other valuable common law marks.

Four important takeaway messages from Kraft v Bega

First, it remains unclear whether brand owners can validly license common law trade marks. Unregistered trade marks are not property rights and cannot be assigned other than with the assignment of the goodwill in the underlying business in respect of which the trade mark is used. This reasoning may also apply to licensing of unregistered common law trade marks.

Secondly, the entity which controls the use of an unregistered trade mark will not necessarily be the owner of the trade mark at common law. Rather, the inquiry must be directed to the owner of the goodwill generated through use of unregistered trade marks sufficient to found an action for passing off or under the Australian Consumer Law.

Thirdly, Australian Courts will look beyond the terms of the licence to determine which party has the right to use unregistered marks. The party that owns the goodwill in the relevant business will usually be obvious. As this case demonstrates, however, where local subsidiaries have their own manufacturing and distribution facilities, the local manufacturer / licensee may own the goodwill in the business, and therefore have the right to use unregistered trade marks such as distinctive product packaging and get-up. This is particularly problematic when the licence is between unrelated parties rather than within a corporate group.

Finally, this decision reinforces the benefits of brand owners registering all distinctive product packaging and get-up as a trade mark in Australia rather than relying on unregistered common law rights. This is particularly important where the trade dress originates with a local subsidiary, licensee, manufacturer or distributor, notwithstanding that goodwill inures to the brand owner under contract.