Goodwill and trade marks: crunchy not smooth

What you need to know

• The Full Federal Court has upheld the decision of the trial judge in Kraft Foods Group Brands LLC v Bega Cheese Limited (No 8) [2019] FCA 593, dismissing the appeal by Kraft Foods Group Brands LLC (Kraft) and H.J Heinz Company Australia Limited. 
• Bega will retain the right to use the Peanut Butter Trade Dress, which it acquired through purchasing the peanut butter business of Mondelez Australia in 2017. 
• The Full Court confirmed that an unregistered trade mark cannot be assigned without associated business goodwill as part of a sale of the business  because business goodwill cannot attach to individual assets.  But the Court clarified that this does not necessarily require a sale of the whole business, just the part that uses the unregistered mark (if that is a separate operation within the whole business). 
• The Full Court declined to express a view on whether an unregistered trade mark can be licensed, which was cast into doubt by the earlier judgment. 

What you need to do

• Businesses should apply to register trade marks, including "get up" and other key indicia which may be important to the business, before allowing others, including related entities, to use the trade marks.  
• Ensure there are proper intellectual property licensing arrangements between entities within a corporate structure to remove doubt about the scope of rights of each entity. 
• If selling a business, carefully consider which intellectual property rights are to be sold with the business and ensure this is appropriately set out in the transaction documents and whether the transaction can be structured to avoid uncertainty, such as by way of a share sale rather than asset sale.  
• If selling registered trade marks, consider carefully whether it is necessary to include goodwill as the decision casts doubt on the ability to transfer registered marks with goodwill also. 
• Exercise caution and seek legal advice when licensing trade marks, whether registered or unregistered.  While not discussed by the Full Court, the trial judge stated that unregistered marks cannot be licensed and that goodwill arising through use of a mark cannot be transferred under a licence – opening up the possibility that licensees or other users of marks will acquire goodwill by virtue of their use alone and such goodwill cannot flow back up to the licensor . 

How the dispute started

In mid-2017 Bega Cheese Ltd (Bega) acquired the peanut butter business of Mondelez Foods Australia Ltd (Mondelez) (which was formally known as Kraft Foods Limited).  Subsequently, Bega began selling peanut butter using the Peanut Butter Trade Dress depicted below.

Kraft sued Bega over  its use of the Peanut Butter Trade Dress.  At first instance, the Federal Court concluded that Bega had the right to use the Peanut Butter Trade Dress as a result of its acquisition of the peanut butter business in 2017.  You can read more about that earlier decision in our Food Law Update available here.

Kraft appealed the Federal Court's decision.  Its primary argument was that the documents relating to Kraft's corporate restructure were not properly construed at first instance and therefore that the rights in the Peanut Butter Trade Dress were not assigned to Bega.  This contention was resoundingly rejected by the Full Court and Kraft's appeal was dismissed.

Kraft's restructure

In October 2012, Kraft Foods Inc restructured and split the business into a global snack food business (the snacks business) owned by Kraft Foods Inc (later renamed Mondelez International Inc) and a North American grocery business (the grocery business) owned by Kraft Foods Group Inc.  The Kraft brand was allocated to the grocery business, who then licensed the Kraft brand to the snacks business for use on certain products until 31 December 2017.  

Kraft contended that the proper construction of the restructure documents was that the Peanut Butter Trade Dress was allocated to the grocery business, claiming the business was divided based on branded product lines with the Kraft peanut butter product line allocated to the grocery business.  

The Full Court rejected Kraft's construction, disagreeing that the restructure documents divided the business based on branded product lines.  Instead, the Full Court considered that the true construction of the restructure documents was that the Peanut Butter Trade Dress was allocated to the snacks business as part of a Kraft Foods Developing Markets segment (which incorporated Australia). 

Assignment of unregistered trade marks

The Full Court rejected Kraft's submission that an unregistered trade mark could be assigned without a sale of the business which held the related goodwill, stating that this does not represent Australian law.  

Under Australian law, rights in relation to unregistered trade marks can only be assigned by way of an assignment of goodwill of the underlying business, which cannot be separated from the whole business itself.  However, if a company carries on several discrete businesses, the Full Court considered those business could be separated and hence the goodwill of each business separately dealt with as part of a sale transaction.   

Kraft relied on a number of United States authorities, and to the extent they are contrary to the above principle, the Full Court stated they are not part of Australian law.  However, the above principle is not dissimilar to principles in the United States.  Notably, common law in the United States has recognised that goodwill is inseparable from the business with which it is associated and "when one speaks of the transfer of goodwill that accompanies a mark, one necessarily means the transfer of the portion of the business or service with which the mark is associated." 

Rights relating to the Peanut Butter Trade Dress

Upholding the decision at first instance, the Full Court considered that at the time of the restructure the rights relating to the Peanut Butter Trade Dress were held by Kraft Foods Limited (renamed Mondelez). Those rights were not assigned to another Kraft entity because it is not possible to assign the Peanut Butter Trade Dress and associated goodwill without a sale of the underlying business. 

When Bega entered into a Sale and Purchase Agreement with entities from the Mondelez Group regarding the purchase of the peanut butter business from Mondelez in 2017 it acquired the rights relating to the Peanut Butter Trade Dress along with all assets and other goodwill comprising the peanut butter business in Australia.  

The Full Court considered that although Bega acquired only part of the various businesses conducted by Mondelez, that did not mean that the part transferred was any less of a business itself. 

Other claims

The Full Court also dismissed Kraft's appeals relating to various misleading and deceptive conduct claims over Bega's advertising, as well as Bega's cross-claim in relation to a trade mark infringement allegation concerning its use of the KRAFT logo and a misleading and deceptive conduct claim on which it failed.

Authors: Philippa Anstey, Lawyer; Annika Barrett, Senior Expertise Lawyer; and Kellech Smith, Partner.