October 19, 2017 | By Oliver Herzfeld, Chief Legal Officer, Beanstalk
An old quip that is widely misattributed to the famous movie producer Samuel Goldwyn states “a verbal contract isn't worth the paper it's written on.” The truth is, with only a few exceptions, oral agreements are legal, valid and binding. However, oral agreements present other difficulties and challenges apart from enforceability. A lawsuit recently commenced by the Estate of Thelonious Monk against North Coast Brewing Co. provides an excellent opportunity to explore some of the issues raised by oral agreements.
Thelonious Monk was a legendary jazz musician and pioneer of the bebop movement. Monk passed away in 1982 and his estate now owns Monk’s name, image and likeness. According to the complaint, some time prior to January 11, 2016, Monk’s son, as administrator of Monk’s estate, entered into an oral agreement granting North Coast a license to use Monk’s name, image and likeness for the limited purpose of marketing and distributing a Trappist style ale called "Brother Thelonious Belgian Style Abbey Ale" (i.e., word play referring to the monks of Trappist monasteries that produce real Trappist ale). The license was allegedly granted in exchange for North Coast’s agreement to donate a portion of the profits from the sale of the ale to the Thelonious Monk Institute of Jazz.
In addition to the ale, North Coast produces and sells other products that feature Monk’s name, image and likeness, including cups, hats, hoodies, iron-on patches, soap, t-shirts, tap handles, metal and neon signs, pins, playing cards, mouse pads, posters and food products. Monk’s estate denies granting a license to North Coast for any other such products.
Monk’s estate is claiming trademark infringement and violation of Monk’s right of publicity and is seeking an injunction to prohibit North Coast’s further sale of the ale and related merchandise, as well as unspecified monetary damages. North Coast has not responded to the complaint yet and has not ceased to sell its Monk-branded ale and other products.
One of the key problems in this dispute is not the enforceability of the oral agreement, but what the parties agreed to in the first place. Did the parties agree to a license that is terminable at any time upon written notice by Monk’s estate? Did the parties agree to a specific agreement duration that would prohibit early termination in the absence of a material breach by North Coast? The complaint is conspicuously silent on precisely what the parties agreed to and when. Nonetheless, a right to terminate at any time for convenience is not a usual or customary provision in a license agreement because licensees typically make an investment in the creation, manufacturing, marketing and sale of licensed products and would stand to suffer losses if required to stop abruptlFurther, under the U.S. Trademark Act, ownership of a trademark will be deemed abandoned if a licensor grants unrestricted use of its mark or otherwise fails to control the nature and quality of all products sold under a license (a so-called "naked license"). Consequently, if Monk’s estate granted a license to North Coast that did not include any provision for quality control, it would be exposed to the risk of losing its trademark rights in the Monk trademarks licensed to North Coast.
Finally, the trier of fact in this dispute will likely want to know how long has North Coast sold the related merchandise and when did Monk’s estate become aware of such products? Depending on the answers, North Coast may be able to counter the claims of trademark infringement by raising a defense of laches, which is an equitable doctrine that an infringer may assert when a trademark owner inexcusably “sleeps on its rights” and the delay prejudices the infringer.
This case is an important reminder to contracting parties to engage competent legal counsel to help prepare written agreements that properly clarify and memorialize the parties’ intent and avoid oral agreements that expose parties to "he said/she said" evidentiary battles over what was actually agreed to. And licensors should insist on the inclusion of key provisions in every license agreement, such as (i) a definition of “net sales” that royalties will be based on, including proper limits on discounts, rebates, returns, taxes, uncollectible accounts, commissions and costs incurred in manufacturing, selling, distributing and advertising licensed products; (ii) royalty rates, advance payments, minimum guaranteed royalties, limits on cross-collateralization, acceleration upon termination, minimum net sales, required reports and interest on late payments; (iii) records to be maintained, required statements and reports and audit rights; (iv) quality control obligations and testing, inspection and approval rights; (v) permitted distribution channels and territories, marketing requirements, seconds and disposal obligations; (vi) intellectual property protection, registrations, infringement and damages; (vii) warranties and indemnification covering product defects and other types of liability claims; (viii) a licensee obligation to maintain comprehensive insurance coverage to respond to claims involving the licensed products; (ix) term and termination conditions; and (x) sell-off requirements. Doing so will help licensors avoid getting trapped in a license without sufficient evidence to prove what was and was not agreed to.
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.
See original publication on Forbes: https://www.forbes.com/sites/oliverherzfeld/2017/10/19/thelonious-monk-and-the-perils-of-oral-agreements/#30ca9ccd305e