Malaysia – Breach of License Agreement from the perspective of Intellectual Property

A commentary by Patrick Mirandah on the Landmark Decision of the Federal Court
GS Gill Sdn Bhd v Descente, Ltd. [2010] 5 CLJ 613

INTRODUCTION

The Federal Court in GS Gill Sdn Bhd v Descente, Ltd [2010] 5 CLJ 613 has provided a strict guideline for the licensees in relation to trade mark licensing in Malaysia.

FACTS OF THE CASE

GS Gill Sdn Bhd (“the Defendant/Appellant”) is a well-known sports goods retailer which sells all sorts of sports apparel including sports apparel under the name of “Le Coq Sportif”. The Descente, Ltd (“the Plaintiff/Respondent”) is the owner of that trade mark. It entered into three agreements with the defendant under the terms of which it gave to the defendant the right to manufacture and retail goods carrying “Le Coq Sportif” mark:

  1. “The first license agreement” dated 16 December 1991 ;
  2. “The second license agreement” dated 4 July 1995; and
  3. “The third license agreement” dated 26 August 1996.

In all the three agreements, an important restriction was imposed on the defendant; it could only market the goods in question within Malaysia and Singapore and exporting the goods outside these two countries was strictly prohibited.

During the currency of the first and second agreements, problems arose between the parties. The Plaintiff/Respondent had found Le Coq Sportif goods manufactured in Malaysia in the Japanese market and suspected the Defendant/Appellant of having violated a most important term of the existing agreements. After the third license agreement had been entered into, the Plaintiff/Respondent decided to put the Defendant/Appellant to test. In 1996, it sought legal assistance to see if the Defendant/Appellant was in fact exporting “Le Coq Sportif” goods. An investigator came to Kuala Lumpur on two occasions. He first came on 8 August 1996. He went to the Defendant/Appellant(‘s) premises with the object of obtaining samples and quotations for Le Coq Sportif goods marketed by the defendant. But he was unable to obtain any. He next came in 30 December 1996, that is to say, on the eve of the expiry of the third license agreement. On this occasion he was able to obtain samples. He also purchased about US$10,395 worth of Le Coq Sportif goods for which he paid US$5000 straightaway. The subject goods were shipped by the Defendant/Appellant to an address in Hong Kong.

Thereafter, the Plaintiff/Respondent then issued a writ against the defendant on 16 June 1997 claiming a breach of the third license agreement. On the same day it obtained an Plaintiff/Respondent Anton Piller injunction. Three days later, on 19 June 1997, the plaintiff faxed to the defendant a letter terminating the third license agreement and on the same day executed the Anton Piller order on the defendant.

Issues

1) Termination of the License Agreement

The first question in the case was the reason the Plaintiff/Respondent had to terminate the third licence agreement when, by its terms it lapsed on 31 December 1996. The answer is that although it had lapsed, the parties continued to deal with each other even after the date of its expiry. As was decided by the learned trial Judge, it was confirmed by the Federal Court that without the official notification of the termination, the agreement shall be considered valid if it is proven that the ordinary practices in the agreement is followed by both parties after the expiry of the said agreement.

2) Anton Piller Order

Subsequent to the ex parte Anton Piller orders obtained by the Plaintiff/Respondent on 16 June 1997, the Plaintiff/Respondent took a few days executing it. It was an extensive operation. The products under the licence agreements (“products”) in the possession of the Defendant/Appellant amounting to RM6,824,044.44 (according to the Defendant/Appellant ‘s estimates) were seized and carted away by the Plaintiff/Respondent. According to the Defendant/Appellant, as the result of these Anton Piller orders, the Defendant/Appellant had to abruptly terminate the services of contractors who were appointed by the Defendant/Appellant to manufacture the products locally. As a result, the Defendant/Appellant faces a potential claim of RM957,941.03 from these contractors. In addition, there was the loss of sales of the products amounting to RM40,024,000. And topping this, the Defendant/Appellant claimed that it has suffered humiliation and loss of goodwill estimated at RM35,000,000.

These losses, according to the Defendant/Appellant, should be compensated by the Plaintiff/Respondent who had given an undertaking for damages when the Plaintiff/Respondent applied for the ex parte Anton Piller orders. When these orders were set aside by the High Court on 5 January 2004 (due to defective affidavits), the plaintiff should be responsible to pay the defendant the damages suffered. The trial judge refused to entertain for the following reasons:

  1. The concerns the learned counsel for the Defendant/Appellant had voiced in relation to the trial not proceeding expeditiously earlier. The pleadings also clearly disclosed that there was a counterclaim for damages by the defendant. Therefore it is common sense to have the whole matter determined during the trial.
  2. The evidence adduced on behalf of the Plaintiff/Respondent shows that subsequent sale of the licensed products did take place until as late as April 1998. Therefore, it would appear that the Defendant/Appellant had not suffered damage as a result of the Anton Piller orders because the Defendant/Appellant continued to trade in the licensed products although the Defendant/Appellant should have ceased so trading on 19th June 1997.

This issue was also canvassed by the Defendant/Appellant in the Court of Appeal but was rejected. The Court of Appeal further explained that a court has no power to compel an applicant for an interim injunction to furnish an undertaking as to damages. All that it can do is to refuse that application if he declines to do so. The undertaking is not given to the defendant but to the court itself. Non-performance of it is contempt of court, not breach of contract, and attracts the remedies available for contempt; but the court exacts the undertaking for the defendant’s benefit. It retains discretion not to enforce the undertaking if it considers that the conduct of the defendant in relation to the obtaining or continuing of the injunction or the enforcement of the undertaking makes it inequitable to do so. Applying the same principle in the present case, the finding of the learned trial judge that the Defendant/Appellant had violated its solemn promise not to export the subject goods in the circumstances that required the Plaintiff/Respondent to resort to investigative methods at its own costs – because the Defendant/Appellant had concealed it from the Plaintiff/Respondent until Isaac Leung’s transaction brought it to the surface must have led the learned judge to exercise discretion against the former.

In the Federal Court, analyzing the issue, based on the merits of the case and precedents, ruled that discretion of the trial judge in refusing to order an inquiry to damages should not be disturbed for the following reasons; The first and second ex parte Anton Piller orders were indeed set aside but they were on the basis of a defective affidavit rather than on merit. At the inter parte hearing for the Anton Piller orders, the Plaintiff/Respondent’s application was allowed. This shows that the Plaintiff/Respondent had merits in its application for an interim injunction, and the two earlier ex parte orders were set-aside merely on technical grounds. Further, upon final determination of the case at the end of the trial, the trial judge found in favour of the Plaintiff/Respondent and ordered the injunction sought to remain permanent. This fortified the Plaintiff/Respondent’s claim that the injunction sought from the very beginning is not without merit. The Federal Court further stated that the trial judge had correctly taken into account the conduct of the Defendant/Appellant subsequent to the ex parte injunctions obtained by the Plaintiff/Respondent when deciding not to order an inquiry to damages. Instead of abiding by the terms of the orders, the defendant violated these orders and continued to sell the products in its shop. Such activity continued until the Plaintiff/Respondent obtained an order demanding the defendant to surrender the products. Such misdeed is another factor for refusing an inquiry as to damages. The Federal court also approved the approach of Court of Appeal, which has taken the Defendant/Appellant’s clandestine activity in exporting the products outside its territorial restriction as a factor in justifying the trial judge’s decision for not ordering an inquiry to damages.

3) Breach of license agreement

The question to be answered in this point is whether the Defendant/Appellant’s transaction with Isaac Leong was an over counter sale or an export sale which is prohibited by the third license agreement which says that the Defendant/Appellant should refrain from exporting directly or indirectly the products outside Malaysia and Singapore. The provisions of the agreement, according to the Federal Court, are clear and in fact admitted by the parties that based on the said agreement the Defendant/Appellant refrains directly or indirectly from exporting the products outside Malaysia and Singapore.

The Federal Court emphasized that, [citing the case of Miramar Maritime Corporation v Holborn Oil Trading Ltd [1984] AC 676 and Antaios Cia Nabiera SA v Salen Rederierna AB, The Antaios [1984] 3 All ER 229 at 233], the relevant provisions in the agreement must be given a purposive interpretation that makes good commercial sense on what has agreed. By relating this rule to the case where the customer being a foreigner, the purchase was transacted in a foreign currency, the large quantity of the products purchased, or even for the matter the assistance rendered in freighting the products overseas and the confirmation of the balance payment by an overseas bank, the Federal court ruled that although these elements taken on their own way may not be considered as export, nevertheless, these taken in entirety a reasonable man could not have come to any other conclusion except an export sale which is prohibited by the terms of the third license agreement.

DECISION

Based on the merit of the case in each issue discussed at the appeal stage in the Federal Court, the appeal was dismissed with costs to the Defendant/Appellant.

CONCLUSION

The statistics in the Malaysian Intellectual Property Court in Malaysia has shown that the number of cases being filed for breach of trade mark license agreement is increasing tremendously every year. This decision has set out a perfect guideline for the judges and the counsel on the famous issue in breach of trade mark license agreement i.e. territorial restriction and damages for injunction.

Leave a Reply

Your email address will not be published. Required fields are marked *