Philip Gillyon of Erskine Chambers considers the decision in Millen v Karen Millen Fashions Ltd & Anor
The case of Millen v Karen Millen Fashions Ltd & Anor [2016] EWHC 2104 (Ch) shows the dangers for a seller disposing of its business on terms (as are commonplace) that give the buyer rights over the name of the business and similar names and restrict the seller's future use of the names. A widely worded restriction in the share or asset sale agreement may be effective to prevent the seller from using the name in a future business, even where the new business operates in a different geographical territory or in respect of dissimilar products from the business sold (as it was at the time of sale). In Millen, the business sold related to the sale of fashion wear, accessories and related goods principally in the United Kingdom and Europe; but the restrictions in the share sale agreement were held also to preclude the seller's use of the restricted names: (i) in jurisdictions in which the business sold had not had a significant presence (eg China); and (ii) in respect of products (eg homeware) which were not part of the business, as at the date of sale.
The decision in Millen serves as a reminder that a seller who wishes to preserve the ability to use the name of the business in a future endeavour should seek: (i) expressly to limit the restrictive covenants in the sale agreement to specific geographical areas and/or specific products (such as the markets or products which form part of the business sold as at the date of sale); or (ii) expressly to carve out of the restriction a permission to use the name in a future business in a different geographical location or in respect of a different product from the business sold. A principal difficulty for the seller in Millen was that on the proper interpretation of the share purchase agreement, although the intellectual property rights granted to the purchaser were in general limited to those which existed at the date of the agreement, the goodwill in the business name was intended to develop over time and was not ‘frozen in time’. A failure by the seller sufficiently to confine the restrictive covenants may mean that the seller loses all rights to use the name of the business sold or a similar name in a future business endeavour, even in a different geographical location or in respect of a different product.
Following the sale of her fashion business in 2004, Karen Millen (KM) wished to return to the fashion industry. To this end, she planned to launch a fashion label in the USA and China, and sought declarations in Karen Millen v Karen Millen Fashions Ltd [2016] EWHC 2104 (Ch) that the use of her name in association with this new venture would not breach protections contained in the share purchase agreement (SPA) governing the 2004 sale. KM’s proposals also included the sale of non-clothing products (such as homeware).
KM is prohibited from using the trademarks ‘Karen’ or ‘Karen Millen’ in the UK and the EU as a result of previous litigation, but the position regarding trademarks in the USA and China had not been addressed until this case.
Restrictions on use of name
The SPA governing the 2004 sale of the ‘Karen Millen’ business contained various restrictions on the future use of ‘Karen Millen’ intellectual property rights (IPRs) in order to protect the legitimate interests of the new owners in the goodwill of the ‘Karen Millen’ name. Under one such restrictive covenant, KM was not permitted to ‘use the name ‘Karen Millen’ or any other name confusingly similar thereto’. It was not argued that this was an unreasonable restraint of trade, but rather the judge was asked to rule on whether KM’s proposed future acts would breach the restrictions. In particular, he was asked to grant negative declarations that the use by KM of the restricted names in setting up her new business venture in the USA and China would not breach this particular restrictive covenant.
KM argued that the assessment of whether her business plans for the USA and China would breach the contractual restrictions on the use of her name should be done by reference to the state of the business (in particular its goodwill) in 2004 when the business was sold, and when the ‘Karen Millen’ brand was relatively unknown in China and only had a limited presence in the USA. She argued that the assessment should not be made by reference to the business now, and that no developments in the ‘Karen Millen’ business since 2004, in terms of geography or range of products sold, should be taken into consideration.
The judge disagreed. He held that, while the IPRs were limited to those that stood in 2004, and while some IPRs would be clearly and stably defined as at a particular time (eg registered trademarks), the nature of the IPR of goodwill in the ‘Karen Millen’ name was not ‘frozen in time’, and would have changed over the years. When the business was sold in 2004, it had been expected that it would expand both geographically and in terms of goods offered, and it had done so. It was, therefore, impractical to measure KM’s proposed future acts against the business at the time she sold it. Those acts had to be measured against the business (which had been expected to develop) as at the date of the allegedly infringing conduct.
As a result, the judge found against KM and ruled that the acts she sought to do would breach the restrictive covenant.
FromCounsel Practice Points
A client who is looking to sell a business that uses a name which has significant IPRs associated with that name, will need to think carefully about any potential future business plans before sale. Consideration should be given to making provision for how, and the extent to which, the ability of the seller to use the name can be protected in the transaction documentation so as not to preclude its use at a later date. Of course, buyers will seek to ensure that future use is heavily restricted. It is critical that the impact and reach of any such provisions are fully and clearly explained to clients and the extent of the restrictions (including geographical restrictions) are drafted with precision in the sale contract.
For entrepreneurs setting up a business which may later be sold, it would be advisable to give full consideration to the name used for the company (or one which is similar to the name used), recognising that the name may not be available for future business ventures; and that the restriction may apply to a wider geographical area and a wider range of products than the business sold, unless expressly carved out of the restrictive covenants in the sale agreement. This will be particularly relevant in industries that rely heavily on brand recognition, such as fashion.
This piece was first published in FromCounsel's Corporate Digest on 5 October 2016.