How precisely should a licence for use of an industrial design be worded? | In Principle

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How precisely should a licence for use of an industrial design be worded?

Contracts are signed expecting the worst. The provisions should be precisely formulated, particularly when a failure to be explicit can lead to application of rigid statutory provisions instead. When a dispute arises, the court’s interpretation of the parties’ intent may differ from the literal wording of the contract.

Supreme Court of Poland judgment of 21 January 2015, Case IV CSK 225/14

In 2006 a group of furniture companies entered into an understanding with a manufacturer of construction materials to amicably resolve disputed issues arising out of the furniture companies’ use of industrial designs belonging to the manufacturer. The understanding covered Polish and Community-registered industrial designs for flooring strips. The users regarded the understanding as a preliminary agreement under which the manufacturer which held the designs undertook to enter into a licence agreement in the future. When the manufacturer refused to sign the promised licence agreement, the furniture maker sued, seeking a court order requiring the defendant to grant a non-exclusive licence to use the rights covered by the registered industrial design in exchange for a fee of PLN 200,000.

The claim was upheld by the regional court and the court of appeal. They found that the understanding fulfilled the requirements for a preliminary agreement set forth in Art. 398 of the Polish Civil Code.

The defendant filed a cassation appeal with the Supreme Court of Poland, essentially disputing the correctness of the finding by the court of appeal that the understanding from 2006 qualified as a preliminary agreement. In the defendant’s view, there was no basis to require it to consent to a licence agreement under the terms adopted in the understanding. The defendant argued that the agreement failed to identify precisely which Community designs were covered, and neither did it indicate the territorial range of the licence to be granted. Without those elements, the defendant claimed, the understanding lacked essential provisions of the final agreement, meaning that it did not meet the requirements set forth in Civil Code Art. 389 §1, rendering the agreement invalid or ineffective. Moreover, the exact entity that would be a party to the licence agreement was not named, but only a group of companies.

Subject of agreement

It was undisputed in the case that the Community design for flooring which the 2006 understanding involved had been registered in a manner that awarded the defendant a separate registered design for each of six elements of the flooring. Thus formally there were six industrial designs. Each of them had the same main number, but the end numbers varied, from 0001 to 0006.

The defendant relied in this respect on two irregularities in the 2006 understanding. First, the Community registration number for all six elements of the flooring was not mentioned, but only the main number. Second, the main number itself was stated erroneously—missing one zero. But the Supreme Court interpreted the understanding and found that this imprecision did not disqualify it as a preliminary agreement. The court stressed that the parties knew exactly which Community design they had in mind, particularly since the understanding also referred to a Polish registration issued for the same elements of flooring, under just one number.

Territorial range

The Supreme Court also held that an explicit indication of the territorial range for the licence was not essential content in a licence agreement for a Community design.

To reach this conclusion, the court first turned to Art. 32(1) of Council Regulation (EC) No. 6/2002 on Community designs, which provides: “A Community design may be licensed for the whole or part of the Community.” By permitting a licence to be granted for either all of the Community or just a part of the Community, the regulation indeed does not determine what is the ultimate territorial range of a licence. However, Art. 88(2) of the regulation incorporates national law by reference with respect to matters not covered by the Community regulation (“On all matters not covered by this Regulation, a Community design court shall apply its national law…”).

The regulation thus calls for the Polish Industrial Property Law of 30 June 2000 to be applied on this issue. Under Art. 76(2) (and 118(1)) of the Polish act, a licence agreement may limit the use of an invention (or design), i.e. through a limited licence, with restrictions in time, subject matter or territory. If the scope of use of the invention is not limited in the licence agreement, the licensee is deemed to have the right to use the invention in the same scope as the licensor (i.e. a full licence). Similarly, a licence agreement for a Community design need not specify the territorial range of its application. In that case, it should be assumed that the area where the licensee has the right to use the design coincides with the area for which the design has been registered, that is, the territory of the entire European Union.

Identification of the parties

The Supreme Court also rejected the defendant’s arguments concerning the imprecise identification of the party to the understanding. The use of legally imprecise, generalised identifications such as “company X” requires the court to conduct an interpretation of the terms. In this case the courts had admitted testimony from the parties and determined which company was intended. The Supreme Court held that this should not be regarded as admitting parol evidence contradicting the terms of the document, but was intended to interpret the intentions expressed in the understanding—and any evidence may be used to determine the true intent of the parties.

The Supreme Court thus confirmed that the agreement reached between the parties in 2006 contained all the essential elements necessary to determine the substance of their promised future agreement—subject matter, price, and term. The defendant was therefore obligated to conclude the licence agreement with the plaintiff.

Territorial range of a licence had better be defined precisely

It is important to realise that if one of the parties refuses to go through with the promised final agreement, it is possible to replace the party’s statement of its consent with an order from the court, as in this case. Nonetheless, as when entering into any contract, in a licence for various intellectual property rights, such as trademarks, industrial designs or patents, the parties should be careful to precisely identify the subject matter of the contract as well as the territory where the licensee will be permitted to exercise the rights, particularly if the intention of the parties is to narrow the operation of the licence.

Otherwise, the licensee will obtain the broadest possible licence. If the subject of the agreement is a Community right, the territorial scope will then cover the entire EU. This could then, for example, block the licensor from granting a greater number of authorisations to other licensees in other territories. And it could also expose the parties to the risk of lengthy litigation and uncertainty about their rights and obligations.

Lena Marcinoska, Intellectual Property Practice, Wardyński & Partners