Painaway case reveals some painful IP licensing lessons

Painaway Australia v JAKL Group both confirms and undermines the value of exclusively licensing trade secrets and provides some painful lessons in drafting IP licences.

Painaway was granted an exclusive, perpetual and non-revocable licence to use the secret Painaway formulas and trade marks to manufacture, market and distribute arthritis and sports creams and sprays.  After a few years, Painaway went into receivership and administration.  There was then a complicated JV/shareholder fight in which the IP owner (also a shareholder) tried to stop the administrator from transferring the IP licence.  Their main argument was that the licence rights were not transferable because of the nature of the particular licence rights.

As an aside, the majority of IP owners would not have needed to rely on such creative arguments.  Contrary to most licences, this licence was only terminable in the event of the licensee being wound up by a court order (and not at the mere hint of insolvency).  In addition, the licence was freely assignable provided that the assignment did not materially affect the integrity of the licensed IP.  There may have been good commercial reasons for structuring the IP licence so freely but in most IP licences there would have been a more restrictive approach (and this case would have been avoided).

In this case, much to the relief of IP licensing lawyers, the judge (Ward J) confirmed that the licences provide by the IP licence had value and were assignable.

On the trade marks licence, the judge decided that the exclusive licence to use the trade marks was capable of being assigned and had value. The attack by the IP owner was based on an argument that an exclusive licensee of a trade mark cannot actually sue the trade mark owner for infringement.  As the value of any trade mark depends on maintaining exclusivity, then it is important that an exclusive licensee can take action against others stopping their use of the trade mark, including the trade mark owner.  Perhaps surprisingly for those who haven’t looked at s 20 of the Trade Marks Act closely, the judge agreed that they couldn’t actually sue the trade mark owner for infringement.  However, this was a pyrrhic victory.  The judge went on to decide that an exclusive licensee didn’t need the Trade Marks Act but could rely on contract law to obtain an injunction to stop the trade mark owner using the mark and also seek damages.  Hence, the exclusive licence to use the trade marks had value.

The questions relating to the exclusive trade secrets licence of the formulas were more complicated.  The judge confirmed the long standing Australian law that trade secrets are not actually a form of property. A characteristic of property was its ability to be enforced against the world without the need to establish a pre-existing relationship between the rights owner and the defendant.  Trade secrets are protected by obligations of confidence either under a contract or under equity i.e. they generally depend on a pre-existing relationship.  Therefore, because trade secrets are not property, they are not capable of being assigned.

Even though the trade secrets were not themselves assignable, the judge decided that the licensee could still assign the contractual rights it had under the IP licence which obliged the IP owner to keep the secret formulas confidential.  As the secret formulas were only held by the IP owner and licensee, then those rights had value and an assignee of the licence would have the right to enforce them against the licensor. 

The IP owner also unsuccessfully attacked the exclusive nature of the trade secrets licence.  An exclusive licence is a licence to do a thing and a contractual promise by the licensor not to do the same thing or give permission to anybody else to do the same thing.  The judge decided that Painaway’s contractual rights under the licence to hold the licensor to the promise not to itself use the trade secrets was assignable.

In the end, the licence agreement had the effect that it was drafted to have but it looks like the IP owner will regret putting their IP in the JV. 

The case highlights that licensing IP rights is not a straightforward matter.  IP is not real estate, equipment or services – it is a bundle of complicated rights to do something and, importantly, to enable you to stop someone else doing similar things.  Those bundle of rights vary between countries, between different forms of IP and in the case of trade secrets are not even property rights!  IP licences really need to be drafted by someone who  understands the IP, the relevant technology and contract law.

The other takeaway message is a reminder about the hazards of relying on trade secrets as your primary form of IP.  Maintaining the confidentiality of trade secrets and not patenting them can be a very effective protection when they held within a company.  However, complications arise if you are looking to realise value through the licensing of trade secrets or selling the assets of a business which relies on trade secrets.  Business acquirers and licensees should be very cautious about situations in which competitive edge depends on trade secrets.  They should be careful that they understand the legal complications and risks which arise with transferring such trade secrets’ rights.

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