Choice of Law and Trademark License Agreements: Rethinking Delaware as an Appropriate Jurisdiction

Although substantive portions of trademark license agreements receive most of the attention, as shown in a recent decision of the Delaware Court of Chancery, choice of law provisions, such as those frequently found in the boilerplate of most agreements, should receive careful consideration as well. In Mrs. Fields Brand, Inc. v. Interbake Foods LLC (a copy of which is viewable here), a well-known cookie company, Mrs. Fields as licensor, sought a declaratory judgment that its contract manufacturer, Interbake as licensee, could not terminate their license agreement before the expiration of the then-current term. Despite a lengthy record showing the rapid deterioration of the licensed brand and a lack of resources devoted towards improving it (including the firing of Mrs. Fields’ entire marketing department and well known quality issues originating with the licensor), in applying the law chosen by the parties, Delaware, the Court found in favor of the licensor and refused to permit the licensee to terminate the agreement early. 

In addition to other theories, Interbake sought to terminate the license agreement for (a) a material breach of a representation or warranty made in the agreement or (b) material damage to the MRS. FIELDS brand or the goodwill embodied by it.[1] With respect to (a), the breach of a representation or warranty, Interbake claimed that Mrs. Fields had materially breached the following:

MRS. FIELDS represents and warrants that it has no knowledge of any event, occurrence, fact, condition or change that is, or could reasonably be expected to become, individually or in the aggregate, materially adverse to (a) the business, prospects, condition (financial or otherwise) or assets of MRS. FIELDS, its goodwill, or Licensed Names and Marks, (b) the value or marketability of the Royalty Bearing Products, or (c) the ability of LICENSEE to consummate the transactions contemplated hereby, including but not limited to changes in the current customer base, knowledge of an impending or threatened loss of a material.

Despite the obvious contextual differences, the Court noted the similarities between this provision and the “material adverse change” or “effect” clauses (“MAC” or “MAE” clauses) that are a routine fixture in merger agreements. In applying the well known standard established in the Merger & Acquisitions (“M & A”) context, [2] the Court found that the known quality and brand issues of MRS. FIELDS did not meet this rigorous standard.

To further compound the issue, the Court applied the same M & A standard in determining whether there had been material damage to the MRS. FIELDS brand or the goodwill embodied by it. In applying this standard, the Court unsurprisingly found that the licensor had not breached this provision and granted declaratory judgment in favor of the licensor.

Although early termination of an agreement is an extreme measure that should not be freely granted, the M & A standard applied by the Court is problematic given the inherent differences between license and merger agreements. Admittedly, the parties could have avoided this problem through more careful drafting (such as clearly defining the efforts that the licensor should have taken to ensure the quality of the licensed brand and its products), however, application of a standard established in Delaware M & A law likely defied the original intent of the parties.

Because many companies are incorporated or organized there, Delaware law is frequently a neutral jurisdiction whose law is selected to govern the interpretation of many agreements. However, given this recent decision of the Delaware Court of Chancery, both licensors and licensees are encouraged to carefully consider whether they desire M & A concepts to govern their relationship or whether the law of another jurisdiction may be better suited for their license agreement.

[1] The applicable provision reads as follows:

If MRS. FIELDS (i) has made a representation or warranty in this Agreement that was not correct in any material respect at the time it was given; . . . or (iii) materially damages the value of the Licensed Names and Marks or the goodwill associated therewith, that directly renders the performance of this Agreement by LICENSEE commercially unviable (including but not limited to, a change that materially changes the market for the Royalty Bearing Products and/or materially changes the cost structure of the Royalty Bearing Products)(each a “Material Program Change”), then this Agreement may be terminated upon thirty (30) days written notice to MRS. FIELDS, without prejudice to any and all other rights and remedies LICENSEE may have hereunder or by law provided.

[2] Under the standard established in Frontier Oil v. Holly Corp (2005 Del. Ch. LEXIS 57, 2005 WL 1039027 (Del. Ch. Apr. 29, 2005), the Court considered the factors of knowledge, magnitude, and duration to determine whether the purported MAC or MAE clause had been materially breached. As noted by the Court, this is rigorous standard even when applied in its proper context.

Tags: Trademark

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