WURLITZER licence cancellation is out of tune

In Baldwin Piano Inc v Deutsche Wurlitzer GmbH, the US Court of Appeals for the Seventh Circuit has reversed a district court decision in favour of a trademark owner/licensor who had cancelled a licence, without cause, based upon a rule of applicable state law, which provides that contracts for an indefinite period are terminable at will. The appellate court examined the context of the contract granting the licence and held that the rule of interpretation should not be followed where it would compel an unnatural reading of the contract.

The contract in issue had arisen out of the 1985 division of the worldwide music business of the Wurlitzer Company. It transferred its piano and organ business to Baldwin Piano (BP), plaintiff in this action and owner of the WURLITZER trademark, and at the same time spun off to another company its subsidiary that conducted its business in jukeboxes and associated products, with a licence to use the WURLITZER mark and corporate name in connection with that business. The subsidiary is Deutsche Wurlitzer GmbH (DW), the defendant/appellant in this action.

In relevant part, the agreement provided that the licence "shall continue in force without limit of period" but may be cancelled for material breach, and also would terminate in the case of, among other things, bankruptcy. In 2003 BP notified DW that the licence was cancelled and simultaneously filed suit for an injunction against use of the WURLITZER trademark and corporate name in connection with jukeboxes. This was granted by the district court, which found that the language of the contract was insufficient to overcome the rule of applicable state (Illinois) law, which provides that contracts for an indefinite period are terminable at will. DW appealed.

Recognizing that a contract interpretation that causes major clauses to fall out "usually is not a sensible way to understand the parties' transaction", the Seventh Circuit examined the history and substance of the underlying business deal and noted that the transaction as a whole made no sense if DW did not receive an enduring interest in using the WURLITZER mark on jukeboxes. The subsidiary was spun off as a going concern, not as a mere sale of the tangible assets at scrap value. Given a choice between plausible interpretations, the court chose "a reading that makes commercial sense" rather than an "unnatural reading of the contract that would strip [the purchaser] of the benefit of its bargain".

In support of its decision, the Seventh Circuit distinguished the Illinois court decision on which the lower court had relied in holding the contract terminable at will. It pointed out that the contract in that case was a franchise agreement that contained a non-exclusive list of reasons for termination of a business relationship of a different type not requiring continuity as part of its economic basis. The termination clauses in the WURLITZER licence were written as exclusive reasons for termination of the indefinite term, so both linguistic and economic contexts favoured treating the contract as perpetual.

The case was remanded with instructions to enter judgment for DW.

Thomas M Small, Birch Stewart Kolasch & Birch LLP, Los Angeles