Australia: One bad apple can spoil the barrel: the importance of clearly defining intellectual property rights

The Victorian Court of Appeal decision of Apple and Pear Australia Ltd v Pink Lady America LLC [2016] VSCA 280 demonstrates the risks associated with failing to clearly define intellectual property rights that are the subject of an agreement.

The case also highlights the need for clarification by the High Court on precisely when extrinsic material and surrounding circumstances can be relied upon to interpret a written agreement.

THE DECISION

In 2007, Apple and Pear Australia Ltd (APAL) entered into an Option Deed with United States corporation, Pink Lady America LLC (PLA).

Under the Option Deed, PLA agreed to grant to APAL an option to acquire ownership of Pink Lady trade marks that PLA had applied for in Chile. In exchange, APAL agreed to grant an exclusive licence back to PLA to use those trade marks on a royalty-free basis on apples traded between Chile and North America. The option was ultimately exercised by APAL.

The Option Deed defined the specific trade marks the subject of the deed in a schedule. However, at the time the agreement was made, the parties had contemplated and discussed that a "refreshed" trade mark would be registered by APAL at a later point in time and would be adopted internationally for the Pink Lady brand. Despite that trade mark not being specifically referred to in the Option Deed, PLA claimed that the Option Deed was intended to give it a licence in respect of the refreshed trade mark.

In the first instance, Justice Croft held that the Option Deed included the refreshed mark on the basis that both parties were aware, at the time they entered into the Option Deed, that a refreshed mark would later be adopted internationally for the Pink Lady brand. His Honour considered that, without the refreshed trade mark, the licence under the Option Deed would quickly become worthless.

The decision was overturned by the Victorian Court of Appeal. The Court considered that, on a proper construction of the contract, the Option Deed was limited to those trade marks listed in the schedule to the deed. In the absence of ambiguity, the Court could not consider pre-contractual negotiations between the parties in relation to the refreshed trade mark.

AMBIGUITY AND EXTRINSIC EVIDENCE: THE DEBATE CONTINUES

The Court of Appeal acknowledged the ongoing debate on precisely when extrinsic materials and surrounding circumstances can be relied upon to interpret a contractual provision.

In particular, the Court highlighted that current authority is unclear on whether surrounding circumstances can be considered not only when a term is ambiguous, but also to determine whether a term is ambiguous, or even in the absence of ambiguity entirely. The Court commented that those issues need to be resolved by the High Court.

The Victorian Court of Appeal held that, in the present case, there was no ambiguity. Relevantly, the term 'Trade Marks' was specifically defined as the pending trade marks described in the schedule to the Option Deed. The schedule contained the exact numerical identification of each trade mark application. The Court considered this was 'quintessentially unambiguous'.1

The Court also found that, even if there was an ambiguity in the Option Deed, or an ambiguity was not required before a court could take into account surrounding circumstances, the surrounding circumstances did not support the trial judge's construction. Unfortunately, this makes the case less likely to be appealed to the High Court for clarification on the use of extrinsic evidence because, even if PLA could admit pre-contractual negotiation evidence, it might nevertheless not succeed in an appeal.

The Court also noted that, while extrinsic evidence can be relied upon to avoid futility, a literal construction of the Option Deed did not lead to commercial absurdity or futility.

HAVE YOU CAPTURED THE WHOLE DEAL?

While we await clarification from the High Court on the admissibility of extrinsic materials in the construction of contracts, the clear message is that intellectual property licences and agreements must be drafted clearly and comprehensively to take into account all matters understood between the parties at the time of execution. The Apple and Pear Australia decision demonstrates that the Court will not come to the rescue if you fail to do so.

Footnote

1Apple and Pear Australia Ltd v Pink Lady America LLC [2016] VSCA 280 [150].

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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