Carefully drafted agreements, which also consider intangible assets, are the best way to prevent problems in advance and to combat the illegal exploitation of brand rights, especially in the international market, reminds our lawyer Jani Kaulo.
When it comes to preventing business and IPR-related risks, good and comprehensive contracts are the basis of everything. When the parties to the contract understand exactly what has been agreed, it significantly improves the probability that the agreed terms will also be followed.
If the agreement is on an oral basis and depends on the interpretation of what each party has understood from the discussions, the risks are not only memory lapses but also intentional or unintentional misunderstandings, especially if situations and circumstances change later.
A breach of contract occurs when the other party does not fulfill its contractual obligations. Typically, it is about incorrect or delayed performance compared to what was agreed. A commonly used method in contracts to prepare for contract infringements is to set a contractual penalty in case of violation of the critical or the most important terms. For example, a contractual penalty is typically always recorded in non-disclosure agreements.
Prepare for IP infringements with separate IPR clauses
Especially in the international market, IPR-related risks increase if they are not well prepared in all contracts with local partners − in addition to the protection of one's own intellectual property rights.
Separate IPR clauses as part of local partner agreements are therefore very important. When all matters related to the utilization of brand rights have been unequivocally agreed upon, it substantially reduces the risk of their illegal utilization.
Typical IPR-related contract infringements include, for example, manufacturing of extra products during the "night shift" and overselling, non-payment of royalties in whole or in part, continuing the manufacture and sale of products after the end of the cooperation agreement, and registering IPRs such as trademarks and domain names in one's own name.
What to do if the partner does not follow the agreement?
The first task is to assess whether it is a breach of contract or possibly an IP infringement. It is important that the situation is evaluated by a lawyer familiar with the local legislation, because in the cases of contract breaches and IP infringements, the legislation and the means to intervene in these separate type of infringements vary from country to country.
Before contacting the counterparty, it is important to gather evidence and ensure that sufficient evidence is obtained that the breach of contract has actually occurred and is possibly still ongoing. When collecting evidence, it is also possible to use private investigators as help; for example, in China it is very common to use detectives specializing in IP infringements to gather evidence.
After the assessment of the situation and the collection of evidence, a strict cease-and-desist letter is sent to the party that violated the contract, the claims of which are based on either a breach of contract or an IP infringement − or possibly both. When a lawyer familiar with the local legislation also prepares the C&D letter, the risk of it turning into the company's own damage later is avoided.
Fixing the breach of contract is the primary claim
The rectification or correction of the breach of contract or the demand to immediately stop the IP infringement, is the primary claim of the cease-and-desist letter. The contract party subject to the breach can also refrain from its own performance until the breach has been rectified by the other party.
If the C&D letter and the negotiations do not produce the desired result, corrective actions can be taken with the help of authorities and force the contract party to perform according to the agreement. It will probably require a court process.
If, for example, the payment is late, the typical penalty is late payment interest. Ultimately, the contract can also be terminated, which, however, basically requires a very substantial breach of contract. Again, it's good to remember that the legislation varies from country to country regarding what can be claimed and what can be done in various kind of infringement cases.
If the breach of contract has resulted in financial damage, the party subject to the breach may also claim damages. However, it is necessary to be able to demonstrate the occurrence of the damage and its amount. If, for example, the products have been manufactured without permission, the demand letter requests information on the quantities and sales prices of the manufactured products to assess the lost profit or the damage caused.
Cease-and-desist letter starts settlement negotiations − what if a settlement is not reached?
The C&D letter contains a notice of what will happen if the claims are not agreed to. It also includes a deadline for the counterparty to react and provide an answer. In Finland, this deadline is generally two weeks.
The C&D letter initiates settlement negotiations and, in most cases, leads to a settlement agreement. In the best case, the counterparty agrees to the demands immediately and takes care of the contractual duties without fuss.
If no settlement is reached, the dispute resolution clause of the contract specifies the court and the country where the disputes will be settled; whether they are resolved by arbitration, by which institution and in which country; whether it is possible to use mediation and what is the entity conducting the mediation.
The most used dispute resolution method is arbitration, especially for large value contracts. For example, disputes regarding royalty payments of listed companies have been resolved in arbitration. It is not necessarily worth using in contracts of low value due to its high cost.
If the C&D letter is based on an IP infringement, and not a breach of contract, the dispute must be processed in court. However, in China, an administrative procedure is also possible; practices vary from country to country. In case of a gross IP infringement, it is also possible to initiate criminal proceedings.
Do you need help in drafting contracts or defending your brand rights?
Contact us:
Jani Kaulo
Managing Partner, Licensed Legal Counsel, EU Trademark and Design Attorney
jani.kaulo@kaulopartners.fi, +358 40 637 5442
Maria Puronvarsi
Partner, Licensed Legal Counsel, EU Trademark and Design Attorney
maria.puronvarsi@kaulopartners.fi, +358 40 669 0527
