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The Kardashians v. Haven Beauty: Can Aggrieved Licensees Withhold Royalty Payments?

Tuesday, September 27, 2016   (0 Comments)
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The Kardashians v. Haven Beauty: Can Aggrieved Licensees Withhold Royalty Payments?

By Oliver Herzfeld

From time to time, licensors have disputes with their licensees. That scenario is not unusual. The question is, in the midst of a dispute, can an aggrieved licensee stop paying royalties while continuing to use a licensed trademark? A recent court decision in the dispute between the Kardashian sisters and Haven Beauty directly addresses this important question.

Background
In 2012, the Kardashians entered into an exclusive five-year trademark license with Boldface Licensing + Branding for a cosmetics line. In 2013, after encountering financial headwinds, Boldface sold its assets, including the license agreement, to Hillair Capital Management which formed Haven Beauty in 2014 as the successor licensee under the license agreement. Thereafter, the legal relationship between the parties deteriorated. Haven Beauty refused to pay any royalties under the license agreement, claiming that the Kardashians failed to provide marketing and promotional support for the licensed products. At the same time, the Kardashians claimed breach of the license agreement and pointed out that their obligation to provide marketing and promotional support was conditioned on the payment of all royalties.

In July 2016, the Kardashians sent a formal notice of termination, claiming an uncured material breach by Haven Beauty. Haven Beauty rejected the termination and continued to sell Kardashian-branded cosmetic products without the Kardashians’ approval. In response, both parties pursued injunctive relief pending arbitration of their disputes as required under the license agreement. The Kardashians sought to enjoin Haven Beauty from any further use of their trademarks, whereas Haven Beauty sought to enjoin the Kardashians from terminating the license agreement and prohibiting Haven Beauty from continuing to use the Kardashians’ trademarks.

The Decision
On August 23, 2016, a federal court in California granted the Kardashians an injunction prohibiting Haven Beauty from making further use of the Kardashian’s trademarks in connection with any goods or services. According to the court, “the licensee cannot both stop paying royalties but nevertheless continue using the trademark… By refusing to make royalty payments due under the license agreement, Haven Beauty forfeited the right to continue using the Kardashian trademarks. This is true even if Defendants are correct that the Kardashians breached first, that Haven Beauty’s breach was excused, or that the Kardashians later improperly terminated the license agreement.” Based on its published opinion, the court would have likely ruled that Haven Beauty materially breached the license agreement and that the Kardashian’s termination was justified. However, the parties agreed to submit all such issues to arbitration and only engage in litigation to pursue an injunction, which was granted by the court here. So the parties will have to resolve the issues of material breach and termination at a later date via arbitration.

Conclusion
In response to a licensor’s breach, a licensee could either (i) terminate the license agreement and commence litigation for its damages, or (ii) continue using the licensed trademarks and making royalty payments and commence litigation for its damages. But both failing to make royalty payments and continuing to use the trademarks is not an acceptable course of action. Essentially, the court’s decision here makes it clear that a trademark licensee cannot have its cake and eat it too.

About the Author
Oliver Herzfeld is the Chief Legal Officer at Beanstalk, a leading global brand extension agency and part of the Diversified Agency Services division of Omnicom Group.