Australia: Its NUT yours, its mine: Kraft Foods v Bega Cheese and the importance of intellectual property due diligence

Last Updated: 17 May 2019
Article by Rebecca Brenikov and Frances Drummond

It's the peanut butter packaging debate that has recently captured the hearts and minds of the Australian public. Whether you were confused or not, the Court's decision (found here) highlights the need for thorough IP due diligence whether you are purchasing or selling a company, and reiterates the importance of understanding the assets being dealt with.

Introductory 'spread' of the facts

Kraft first started making and selling peanut butter in Australia in 1935. Since the 1990s, Kraft sold its peanut butter with a yellow lid, and since the mid 2000's sold its peanut butter with a yellow lid and either a blue or red peanut device. This distinctive peanut butter packaging or trade dress (PBTD) became widely recognised across Australia.

(Kraft packaging pre-sale)

Kraft sold its Australian peanut butter business and various assets to Bega in 2017 (note it was not a share sale). As part of that transaction, Kraft granted Bega a licence to use various Kraft trade marks until December 2017 including, so Kraft thought, the unregistered rights in the PBTD.

When Bega continued to use the distinctive peanut butter packaging after that licence expired, Kraft sued Bega for breach of contract, contravening Australian Consumer Law and engaging in passing off.

(Bega packaging)

The main 'crunch' of it

An Australian Kraft entity called Kraft Foods Limited (KFL) operated the Kraft peanut butter business in Australia for many years. Kraft had thought, due to various assignments and licences that it had entered into pre-Bega-sale, that a Kraft global entity* owned the unregistered rights in the PBTD, and not KFL. Kraft put forward numerous submissions arguing that Kraft had purported to assign, license or otherwise shift the rights in the PBTD from KFL to an upstream company in the Kraft global group in 2012, pre-sale. A significant proportion of Kraft's submissions centred on establishing the beneficial interests and legal ownership in the PBTD.

In his decision, O'Callaghan J confirmed the common law position that an unregistered trade mark cannot be assigned except with the goodwill of the business in respect of which it is used. The crunch of it therefore came down to whether, when Kraft attempted to assign the unregistered rights in the PBTD, they had also assigned the peanut butter business or the goodwill to the Kraft global entity. Unfortunately for Kraft, not only were the terms of the assignment (and the licences) too vague to clearly ascertain what trade mark rights had been assigned or licensed but, even if the wording had been sufficiently clear, Kraft could not have assigned the rights in the PBTD because Kraft hadn't assigned the peanut butter business or the goodwill. As Kraft hadn't assigned the unregistered rights or the goodwill of the peanut butter business to any other Kraft group entity, the unregistered rights remained with KFL.

As a result, when Kraft sold KFL's peanut butter business and various assets to Bega in 2017, Kraft sold the unregistered trade mark rights including the PBTD to Bega. Indeed, the very definition of 'Transferred Assets' in the KFL Sale and Purchase Agreement included the goodwill and 'any unregistered rights in get-up, trade dress, advertising and promotional materials or manufacturing processes'. Bega acquired all rights to the PBTD under the terms of the Sale and Purchase Agreement and, as the owner of the PBTD, Bega was entitled to continue to use the PBTD on its peanut butter packaging.

[*please note that to avoid this blog becoming difficult to digest we have referred to 'Kraft global entity' rather than going into the detail of Kraft's group structure]

'Smooth' operators – the ACL claims

In relation to the ACL claims, as Bega owned the unregistered rights in the PBTD, O'Callaghan J held that Bega's use of the PBTD on packaging and in advertising (even those detailing 'Kraft was now Bega') could not mislead or deceive consumers. The only ACL claim that did stick was in relation to Bega's advertisement which claimed the peanut butter was "Now Australian Owned and Made". Such a statement was held to be misleading because it conveyed that Kraft's peanut butter was not made in Australia, when it was.

In amongst Kraft's claims, Bega made various counter-claims against Kraft. One such claim was in relation to Kraft's manufacturing and selling of a new peanut butter product in April 2018 which used remarkably familiar packaging and the phrase "Loved since 1935" (see below).

The new Kraft peanut butter, whilst similar, was not the same peanut butter product which it had sold to Bega. It was held that this new product was not Kraft's to bring 'back' and, as it was a new product, it could not have been 'loved since 1935' – such conduct was held to be misleading and deceptive and contravened Australian Consumer Law. Another of Bega's claims was that Kraft's use of the PBTD on its new peanut butter amounted to misleading and deceptive conduct. O'Callaghan made quick work of concluding that, as Bega owned unregistered rights in the PBTD, Kraft's use of the PBTD equated to passing off and misleading and deceptive conduct.

Peanuts on the side

Other important takeaways from the decision include;

  • Definitions too vague: One of Kraft's arguments was that the licence in place between the Kraft global entity and KFL in respect of "Subject Trade Marks" was evidence that KFL was not the beneficial owner of the rights in the PBTD. In other words, why would there be a licence in place if KFL owned the rights in the PBTD? The details of the registered or unregistered trade marks were not scheduled to the licence and, unfortunately for Kraft, the definition of "Subject Trade Marks" was so vague as to be unclear. The definition included 'all trade marks used in the Territory by the Licensee at present or in the future under the control of the Licensor as to the character and quality of the goods and/or services connected with such trade marks'. The licence agreement, with no details of the actual trade marks being licensed, was not sufficient for O'Callaghan J to infer ownership rested with anyone other than KFL [212] [223];
  • Cross-jurisdictional issues – don't assume: O'Callaghan accepted that Kraft had tried to assign the rights in the PBTD to a Kraft global entity. However, as the business and the associated goodwill was not assigned, the purported assignment was ineffective as a matter of Australian law. It was acknowledged that the drafters of the assignment document had contemplated that unregistered rights might be separately assignable. However, such an assumption was incorrect and ultimately led to such rights being sold (seemingly unwittingly) to Bega [322][323];
  • Control by a parent does not necessarily mean that goodwill inures to the parent: There was much discussion as to whether, because a Kraft global entity had control over the manufacturing, labelling, promotion and sales of the peanut butter, the goodwill generated by the Australian business inured to a Kraft global entity. It was held that, despite any parental control, as KFL was manufacturing, selling and promoting the peanut butter business and any goodwill ultimately inured to the Australian business, KFL;
  • Acknowledgement or confirmation clauses do not evidence ownership: Another argument run by Kraft was that the existence of acknowledgement or confirmation clauses in other agreements evidenced where the beneficial interests resided. Kraft purported that such clauses in licence agreements indicated that parties acknowledged that a Kraft global entity held a beneficial interest in trade marks legally owned by KFL. Perhaps unsurprisingly, it was held that such clauses are not evidence of the fact of the beneficial interest itself [243][244];
  • Governing law: The governing law of the critical assignment was New York State law, however, it was common ground that Australian law governs the question of whether the assignment was effective in assigning the goodwill in the PBTD because the question whether an intellectual property right is assignable at all and if so, in what conditions, is governed by the law of the country under which the right is created [281].

All in all, this decision provides a useful reminder of the important role for due diligence when considering intellectual property assets, and also highlights that the treatment of intellectual property can vary from jurisdiction to jurisdiction. Understanding these principles is critical when heading into a transaction.

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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