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Thursday, 12 February 2015

If Innocent is innocent, who then is at fault? A tale of Dudes and Smoothies

Innocent until proven ... innocent. Fresh Trading Limited v Deepend Fresh Recovery Limited and Andrew Thomas Robert Chappell [2015] EWHC 52 (Ch), a Chancery Division, England and Wales, decision of Robert Engelhart QC, is a fascinating case which has much to teach the business community and the design profession. Here to lead readers through the case is solicitor and long-time Katfriend Richard Kempner, who explains as follows:

In Fresh v Deepend the courts found in favour of Fresh (the people behind the Innocent smoothie brand), in its hotly-contested action as to who owns the copyright in the ‘Dude’ (the stylised face with halo, right), the logo used by Innocent for the past 15 years on all its smoothie bottles.  Deepend had applied at OHIM to invalidate certain of Fresh’s Community trade marks that incorporated the Dude; in November 2012 OHIM agreed with Deepend that the copyright was owned by Deepend and invalidated Fresh’s marks (see previous IPKat commentary here).  It was OHIM’s decision that no doubt prompted Fresh to commence these High Court proceedings, seeking a declaration that it, not Deepend, owned the copyright. Deepend counterclaimed for copyright infringement.  
Factual Background 
Back in 1999, David Streek, then working at the Deepend design agency, created the logo for Fresh as part of its remit to design a brand of smoothies for Fresh (name, logo, bottles, packaging, etc).  This took thousands of hours of work.  Deepend at the time did a deal with Fresh that said that, instead of receiving payment for the work, it would be paid in shares in Fresh.  What sets this case apart from almost all the others that have come to court is that the payment was never made.  The shares were never allotted, and Deepend never received any other kind of recompense. 
The contract (not drafted by lawyers) set out the scope of each party’s obligations.  The parties agreed to work co-operatively and collaboratively together.  Clause 4 set out the value, method of determination, and nature of the remuneration together with the parties’ obligations to bear costs and clause 5 dealt with the ownership of IP: 
“Fresh Trading Ltd receive full intellectual copyright of any work, creative ideas or otherwise presented by the agency and then subsequently approved by Fresh.  Work not approved by Fresh remains under the ownership of Deep End”.   
There was no dispute that Fresh had approved the Dude logo, and much of the other work done by Deepend.  
The Deepend which was party to this litigation was the original Deepend’s successor in title, old Deepend having gone into liquidation within a year of doing all the work.  The new Deepend had, via one of its shareholders, a Mr Chappell, who bought the copyrights from the liquidator in 2007 and assigned the rights to new Deepend in 2009.  New Deepend’s shareholders were Mr Chappell, David Streek, and Gary Lockton, the previous MD of old Deepend.   During the time that he owned the rights, Mr Chappell asserted them against Fresh, who ignored him.  
There was a dispute between the parties as to whether the original arrangement between Fresh and old Deepend was signed, the only evidence of the arrangement existing in an unsigned ‘Heads of Agreement’ document, expressly marked ‘subject to contract’.  Neither party was able to find any signed original or copy. The court had to decide whether, despite Fresh’s failure to pay Deepend the shares, it (or Deepend) should own the copyright in the work (in law or equity), or benefit from an exclusive licence to use it; if not, had there been any kind of acquiescence in its use that precluded new Deepend from enforcing its rights? 
The decision 
The High Court (Deputy High Court Judge Robert Englehart QC) found that, while there was insufficient evidence to justify a finding that the parties had signed anything, they were acting in accordance with the unsigned Heads of Agreement, despite the use of the words ‘subject to contract’.  That was important because, without the signed document, the judge was unable to find that the legal title had passed to Fresh under s.90 of the Copyright, Designs and Patents Act (CDPA) 1977, which requires an assignment of copyright to be signed by the assignor.  Fresh sought to argue that the unsigned Heads could act as an assignment of future copyright (under s.91, CDPA) but the judge disagreed, agreeing with Deepend that s.91 could not cover an assignment of rights that only came into existence on the fulfilment of a subsequent condition -- that condition (in this case) being that the work had to be approved by Fresh. 
The judge however did find that there was, in his view, an equitable assignment of copyright, based on his construction of the contract.  He decided that the share allotment provisions and the IP assignment clause were separate obligations, not one which was conditional on the other.  On the facts, there had been no positive act of ‘refusal to allot the shares’ by Fresh: even though the shares were not actually ever allotted by Fresh, ‘the consideration for the [IP assignment] was the promise to allot shares … rather than the actual allotment’.  With this finding, it was no longer necessary for the judge to decide whether there was an implied licence in favour of Fresh, or whether Deepend’s counterclaim was barred by any kind of acquiescence. 
However, the judge felt that ‘there would be much to be said for the implication of an equitable assignment of copyright’ because the works were created specifically for, and were approved by, Fresh, for use in its business, and it would be unrealistic to envisage Deepend using the marketing materials for themselves or other clients.  Moreover, given the potential effect on the Fresh business, the possibility of licence termination tended to militate against the implication of a mere licence.  The judge’s inclination would have been (had it been necessary to decide the point) to refuse Deepend’s claim for an injunction, in view of the lapse of time and the fact that in that time, the Dude logo had become fully identified with Innocent smoothies. 
Commentary 
In this author’s opinion, “he who comes to equity should do equity”.  That appears to be the point that the judge ignored.  Had he not done so, he would have concluded that it was inequitable to grant title to Fresh without Fresh complying with its part of the bargain between the parties – namely to compensate Deepend for the work it performed to develop the copyright material.  
The Judge allowed Fresh to obtain the full benefit of the agreement (assignment of copyright) without having to perform its obligation (to allot and issue the agreed shareholding).  This interpretation of the parties’ agreement –- requiring Deepend unconditionally to assign the copyright without any compensation -– imposed upon Deepend all the risk of the agreement without conferring upon it any benefit and in particular without any requirement that Fresh provide the agreed consideration for the work done.  
In the author’s view, there was another way to look at the construction of the contract, if one regards the relevant matrix of fact as this:
(a)   the contract was not prepared by lawyers, but was drafted by a layman with no legal training; 
(b)   the contract was an incomplete document, which did not set out all material details of the agreement between the parties and was headed “Heads of Agreement” and “Subject to contract”; 
(c)    the wording in the contract was unclear and ambiguous; 
(d)   it was standard practice in the design industry that no copyright would be transferred to a client until all outstanding payment and/or payment-in-kind had been received for its work; 
(e)   read as a whole, the contract was an investment agreement in which Deepend would invest its talents and vast resources in a start-up business in return for an equity stake in that business. As such, the contract was a risky one for Deepend and there was no reason why Deepend would have agreed to the additional risk of consenting to an obligation to transfer copyright that was wholly independent of its client’s obligation to pay; 
(f)     as a matter of commercial reality, the agreement only made business sense if the obligation to transfer copyright under clause 5.1 was read as being conditional upon the obligation to allot shares under clause 4. 
Looking forward to Classic FM ...
Had this alternative approach to construction been adopted, the obligation to transfer copyright could have been found to be conditional on the obligation to allot shares, and that the failure to allot shares meant that no obligation to transfer copyright ever arose here, absent payment of the shares. Against the finding that there was ‘much to be said for the implication of an equitable assignment of copyright’, the principles in Robin Day v Classic FM [1998] FSR 622 require that any implied term must be one that is reasonable and necessary to give business efficacy to the contract. There was, in the author’s view, no necessity to imply an equitable assignment here, in circumstances where Fresh had not paid.  A bare licence could have done the job. 
In relation to the finding that Deepend was barred from asserting its copyright by reason of acquiescence, estoppel and/or laches, it is hard to see that there were any acts or omissions by Deepend (old or new) relied upon by Fresh, sufficient to justify such a finding, tentative though it was. 
Practice point 
For designers and design agencies in particular, this case shows how important it is for contracts to make it expressly and unambiguously clear that the transfer of IP is conditional on payment being made, and deal with the situation where payment is not made but the works are used for an extended period (i.e. a bare and revocable licence is all that is granted).

We will never know ...

The simple action for damages for breach of contract or specific performance of the obligation to allot shares was time-barred by the time new Deepend became involved.  We will never know whether such a claim would have succeeded.  That left only the copyright to enforce as the sole means of obtaining recompense.  Early on in his judgment, the judge said ‘Mr Chappell is an investment banker who thought that there might be an opportunity to turn a possible claim to the intellectual property to his financial advantage’.  In fact, as the evidence showed, Mr Chappell and Mr Streek were very good and longstanding friends.  Mr Chappell was keen to help his friend and so attempt to ‘right’ the perceived injustice done to Mr Streek and to Deepend when Fresh did not allot the shares in return for the work that was done.  The judge nevertheless decided that Fresh was ‘innocent’. 
Richard Kempner (partner, Kempner & Partners LLP) acted for Deepend in this litigation.

Deep End here
Innocent until proven guilty here
The real Dude here

3 comments:

Tim Jackson said...

Compare the Dr Martens case in the Court of Appeal, Griggs v Evans. That case also found that there was an equitable assignment of the copyright in a trade mark logo.

Thayne Forbes said...

That's an interesting commentary on copyright ownership, an issue which often comes up in practice. It's a pity that damages couldn't be quantified as that would have been interesting.

Anonymous said...

Wasn't there a similar case in which an architect had designed some houses, but the firm building them went bust before he got paid? Another firm (possibly related to the first, I forget) built the houses, but when he asked them to pay him he was told that they were a separate firm and weren't responsible for the debts of the old one. So he sued for copyright infringemnt, on the grounds that if they hadn't paid him they didn't have the right to build houses according to his plans.

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