Where in the world ...? Mercks clash over law governing coexistence deal

It is only a short time since this Kat thundered about the awful consequences of parties entitled to use the same name not getting together to settle their differences by negotiation and mediation rather than litigation. Sadly, even when those parties do get together and sort things out between themselves, there is no guarantee that they will not end up in court as determined adversaries.  One such instance is Merck KGaA v Merck Sharp & Dohme Corp and others [2014] EWHC 3867 (Ch), a Chancery Division, England and Wales, decision of Mr Justice Nugee of 21 November.

Readers may remember that this trade mark spat has already featured several times on this blog. Essentially it is a dispute between two companies called Merck (one German, one American) which once upon a time were the same company, with regard to their respective entitlements to use the name MERCK which has been registered in all sorts of ways as a trade mark. The two Mercks had previously entered into an agreement regulating the use of their respective trade marks throughout the world. However there was some doubt as to the law governing the agreement. First, this blog featured a ruling by the same judge back in February of this year as to whether the question of which law governed the coexistence agreement should be heard as a preliminary issue (answer: yes). Then came a helpful explanation by guest contributor Christian Schalk as to why both companies should be so keen on retaining their right to use the name. The IPKat also ran a readers' poll in which 60% of the unusually round number of 500 respondents opined that the American Merck should give the name back to the German one.

In short, the German Merck ('Merck') owned registered UK and international trade marks for the word MERCK for pharmaceuticals and other goods. In 1932, Merck and its American counterpart ('MSD') struck a deal that MSD would have exclusive use of the word MERCK in the US and certain other countries, leaving Merck with the exclusive right to use the same word in more or less the rest of the world.  So far so good but, in 1943, the US Government decreed that the agreement was an unlawful contract in restraint of trade and ordered MSD not to reserve for Merck any right to use any trade mark adopted by MSD, which now had to obtain approval from the Department of Justice as well as the District Court, New Jersey, if it wished to make any agreement with Merck relating to or affecting its business policy.

In 1955 Merck and MSD entered into an agreement in Germany, regulating use of their respective trade marks throughout the world. Both the US Department of Justice and the District Court New Jersey gave the deal their approval, but that court did not discuss which law governed the agreement. The terms of the agreement were restated in a further agreement in 1970, then further clarified in a letter in 1975.

In this action before Nugee J, Merck alleged that MSD had used its trade mark without consent. At this point the dispute arose as to whether the 1970 agreement and the 1975 letter were governed by German law or by the law of New Jersey, it  being agreed that the governing law of the 1970 agreement and the 1975 letter must be the same as that governing the 1955 agreement. Nugee J therefore had to decide which law governed the 1955 agreement, addressing two questions:

(i) when the US district court approved the 1955 agreement, was it applying US federal law or the law of New Jersey? 

(ii) did the requirement to put the 1955 agreement before the district court for approval mean that New Jersey law was its governing law?

To cut a long story short, Nugee J held, at paras 95 to 97 of a 98 paragraph ruling, as follows:

* while the requirement to obtain a Court order from the District Court in New Jersey demonstrated the existence of a connection with the law of New Jersey, that the transaction as a whole had a connection with German law.

* which was closer, the New Jersey Law or the German? This was  bit of an artificial task since the two were incommensurable, but the connection with German law was "the closer and more real connection" on the basis that the key issue was the substance of the transaction – what the transaction actually did– rather than matters which were "essentially subsidiary and ancillary to the transaction", the requirement of obtaining the approval of the District Court being more relevant to the ability of MSD to enter into the 1955 Agreement than to the agreement's substance.

* the reality of the position was that the 1955 Agreement was a contract made in Germany; its main effect was a grant by a German rights-owner of permission to an American to do things -- something more aptly characterised as a German contract.

The judge also made some fascinating observations concerning the state of American contract law. As he pointed out, if the New Jersey District Court had had to construe the 1955 agreement, it would not have applied federal common law principles: US contract law varied from state to state and there was no nationwide federal contract law available to apply.  If this proposition was correct, the New Jersey court would simply assess the effect of the agreement by reference to its plain language, without applying any particular system of law.

Merpel points out that there were two Merck v Merck rulings by the same judge on the same day, the other being a decision on costs which can be found at [2014] EWHC 3920 (Ch). Here Nugee J had to decide whether it was appropriate in the circumstances for the court to depart from the general rule under the Civil Procedure Rules (CPR r.44.2(2)(a)) that MSD, as the unsuccessful party in these preliminary proceedings, should pay Merck's costs. Ordering MSD to pay 50% of Merck's costs as an interim payment, Nugee J made the following observations:

* in general, it was a salutary principle that those who lost discrete aspects of complex litigation should pay for the discrete applications or hearings which they lost, and should do so when they lost them rather than leaving the costs to be swept up at trial.

* there was no advantage in considering what costs order might have been made in relation to the proper law issue if it had been tried as part of the main trial.

* if Merck's claim ultimately failed, the relevant costs need not have been incurred, but it could equally be said that the costs would not have been incurred at all if MSD had not pleaded that the proper law was New Jersey law.

* neither party had been unrealistic or unreasonable in contending for alternative governing laws -- but that of itself was no reason for not applying the general rule that the unsuccessful party should pay the costs: the mere fact that a reasonable argument with realistic prospects was advanced did not justify departing from the usual consequences if the argument failed.

The IPKat, who thanks Bird & Bird's Peter Brownlow for drawing his attention to the latest round of this litigation, will be watching for further developments, which he will bring to you when he can.

Merpel still thinks MERCK is a dull and unattractive-sounding name, being for English speakers a homophone of murk, and would love to advise one or both of the warring factions to choose a bright new one.

Bird & Bird's summary of this decision here

Bran New Jersey here and here