Monday 9 March 2015

Consideration of (and for) Restrictive Covenants

The case of Re-Use Collections Ltd v Sendall & Anor [2014] EWHC 3852 is another illustration of the difficulties in enforcing restrictive covenants in a contract of employment.  The former employee was found on the facts to have been involved in a competing glass-recycling business, which he had been involved in setting up before he left.  There were post-termination restrictive covenants in his contract prohibiting him for 6 months from working for specified companies, soliciting or dealing with clients or soliciting senior employees and for 12 months from setting up a competing business.  The judge held this was too long; 3 months rather than 6 months was all that would have been reasonable, and there was no basis for the 12 month restriction on setting up post termination.

This is all pretty standard stuff, but the interesting point in this case was that the restrictive covenants were in a new contract of employment, which had (for once) actually been signed by the employee, but on 22 February 2013 (after having been with the business since 1980), and were held to be unenforceable for lack of consideration.  Arguments by the employer's counsel that there was sufficient consideration in the other provisions of the contract failed, as they essentially restated the employee's existing terms and no increased benefits or salary increase were proved.  Nor was it sufficient consideration that the employer had continued to employ Mr Sendall on these terms, as there was no real threat he would have been dismissed if he had not signed the contract.

If you are an employer, alarm bells should be ringing by now.  It is a common practice to sign senior employees up to written contracts of employment with restrictive covenants after they have started working - often some considerable time afterwards.  Typically such contracts simply record in writing the existing terms of employment, and in reality they add provisions which the employer has been advised are appropriate, such as restrictive covenants, confidentiality (which also failed in this case for lack of consideration) and ownership of intellectual property.  It is unusual for any specific payment to be made by the employer for such provisions and itemised as consideration for them.  On the basis of this decision, all such provisions must be considered to be at risk.

The simple solution is to execute the contract of employment as a deed (so no consideration is legally required) or put such provisions in a separate, US-style "unfair competition agreement" which would be executed as a deed.  Most employers are unlikely to be willing to agree to pay substantial amounts for such covenants, and providing for nominal consideration of £1, receipt of which is acknowledged but in reality is not paid, risks being held a sham.

In Re-use v Sendall, Mr Sendall was in fact caught by his implied duty of fidelity and good faith, which he was found in breach of by his involvement in setting up the competing business before he left, and was held liable to pay £51k of damages (as against some £747k claimed by Re-use).  This is a liability arising out of the employment relationship, which did not depend on the written contract of employment.  Although Re-use were able (despite some self-serving evidence) to establish it on the facts in this case, it has its limitations (in particular not applying after the termination of the employment), which is why express restrictive covenants are always advisable.  If you can establish consideration for them that is.

Tuesday 3 March 2015

Russel Rabbit Fails to Reign Supreme

As well as featuring some amusing fictional animals, the recent trade mark case of Supreme Petfoods Ltd v Henry Bell & Co (Grantham) Ltd [2015] EWHC 256 (Ch) includes some useful lessons for brand owners about the scope of trade mark protection (or lack thereof).

Supreme Petfoods produced a muesli rabbit food under the name "Russel Rabbit" together with a range of species-specific muesli petfoods under the names "Gerty Guinea Pig", "Harry Hamster", "Charlie Chincilla", "Reggie Rat", "Frankie Ferret" and "Gerri Gerbil".  These are all distinctive brands, which the evidence showed had a degree of customer recognition - at least for their "Russel Rabbit" flagship product.  However the UK and European Community registered trade marks which they were seeking to enforce were for the word "SUPREME" and logos consisting of a stylised word "Supreme" and a ribbon device featuring the stylised word (which can just be seen at the top left of the packaging below, beneath the cartoon Russel Rabbit).


Henry Bell also produced a range of small animal feeds, including "Mr Johnson's Supreme Rabbit Mix", the latest packaging for which was like this:

Supreme Petfoods objected to Henry Bell's use of the word "Supreme" on this packaging and on their revamped "Supreme" range of feeds.

The original Mr Johnson's range, which had been acquired by Henry Bell, included such products as "Amos Hamster Mix", "Gloria Guinea Pig Mix" and "Rupert Rat Mixture", but sadly these plucky animals played no further part in the proceedings, and did not go into battle against Harry Hamster, Gerty Guinea Pig and the others.

The first lesson from this case is that descriptive trade marks are not a good idea.  You are not supposed to be able to register trade marks that are descriptive of the goods and services on which they are to be used, as this would give you an unfair monopoly of such terms.  Supreme Petfoods had somehow managed to get away with registering the word "Supreme" as a trade mark despite its being descriptive or laudatory (as Mr Justice Arnold put it) of the goods.  But there was considerable evidence of the word being widely used in a descriptive fashion in the petfood sector (35 examples are listed in the judgment) and Arnold J. therefore declared the word and stylised word marks invalid for lack of distinctiveness, except in respect of small animal feeds - for which he found they had "acquired a slender degree of distinctive character" through use.  A trade mark can still be declared invalid after it has been registered, and it's a valid tactic for an alleged infringer to counterattack by counterclaiming for invalidity.

The second lesson is that even if you can register your descriptive trade mark in the form of a fancy logo, it still won't do you much good.  The ribbon marks were declared valid, but Supreme still had to establish infringement, and Henry Bell weren't using the word "Supreme" on a ribbon.

The third lesson is that infringement is not as straightforward an issue as clients often seem to think.  Supreme had survived the invalidity challenge to their word and stylised word marks in respect of small animal feeds, which was what Henry Bell were using the word "Supreme" to describe.  But the law on infringement is not straightforward (as Arnold J's detailed analysis of the case law of the Court of Justice of the European Union demonstrates).  The main reason Henry Bell were held not to be infringing in this case was that their use of the word "Supreme" was not as a trade mark (i.e. for the purpose of distinguishing its goods), but was purely descriptive.  This demonstrates another problem with descriptive marks.  Even if you can manage to register them, and survive an invalidity challenge, you may still not be able to stop a competitor using them if they do so descriptively.

The final lesson is that trade mark disputes can be complex and therefore costly.  You therefore do not want to get into a serious dispute that will go to Court unless you really need to do so to protect your brand and are sure of your ground.  To conclude with Arnold J.'s opening remarks: “It ought to be possible for such a dispute to be resolved without great legal difficulty or expense. Such is the current state of European trade mark law, however, that instead it has thrown up a considerable number of legal and factual issues […]. As a result, I fear that the costs will have been out of all proportion to what is at stake.”