Licensors must not frustrate licensees' use of trademark

In JLCS Pty Ltd v Squires Loft City Steakhouse Pty Ltd ([2008] FCA 867, June 12 2008), the Federal Court of Australia has considered a licensor’s obligation not to frustrate its licensee’s use of a trademark.
 

The court examined two main issues: 

In an earlier matter before the Federal Court, a declaration was made that the operators of the restaurant (who, at the time, were also the owners of the restaurant) were entitled to operate the restaurant under the name Squire’s Loft. The basis for this entitlement was found to be an unconditional licence formed from informal discussions between the parties.

 

Subsequently, there was a change in ownership of the restaurant, but no change in its operation and day-to-day management. In the present case, the court was thus asked to determine whether the change in ownership affected the licence to use the trademark SQUIRE'S LOFT.

 

The court determined that the change in the restaurant’s ownership had no effect on the trademark licence for the following main reasons:

Although it is within the court’s power to amend a declaration to give effect to the intention of a judge or to record accurately what a judge had decided, there was no evidence that the judge in the earlier matter had determined that the licence was subject to a condition based on ownership. It was not within the court’s power to alter (from unconditional to conditional) a licence that had been settled in another matter.

 

The court held that the operation of a restaurant is different from the ownership of the restaurant. It concluded that the declared right of the operators to use the trademark SQUIRE'S LOFT was not in any way dependent on them owning the restaurant.

 

After confirming the continuation of the trademark licence, the court turned to a cross-claim made by the licensees against the licensors’ grant to a third party of a licence to operate a restaurant under the name Squire’s Loft City Grill Room within 500 metres of the Squire’s Loft restaurant. The court found that the licensees had a reputation in the name Squire’s Loft and that there was a real likelihood of confusion, and evidence of actual confusion, with the two restaurants operating in such close proximity to each other and using substantially the same name.

 

The court found that the licensors had an obligation not to interfere with the licensees’ enjoyment of the trademark licence on two bases. The court’s preferred basis for relief stemmed from the principle that a grantor must not derogate from its grant - a principle which is an independent rule of law. It is usually applied in relation to interests in land, and essentially provides that one must not seek to take away with one hand what one has given with the other. The court found that the licensees should be permitted to use the trademark SQUIRE'S LOFT without undue interference. This imposed an obligation on the licensors not to use, or permit the use of, the name Squire’s Loft in a location so proximate to the licensees’ restaurant that it would result in a significant adverse effect of the goodwill of the restaurant. 

 

In the alternative, on the basis that the licence was informal and obviously incomplete, the court found it necessary for the reasonable or effective operation of the licence that there be an implied term that the licensors were prohibited from using, authorizing or permitting any other entity to use the name Squire’s Loft in relation to a restaurant in such close proximity to the licensees’ restaurant that it would prevent, hinder or impede their enjoyment of the full benefit and advantage conferred by the licence.