Properly negotiated and drafted contracts are critical to building and maintaining the value of a company. When a contract isn’t written carefully by a qualified professional, the contracting parties may discover that what they intended to agree to is not what they actually agreed to. This is especially true with intellectual property, such as a licensing agreement for a trademark.

Business owners who are entering into trademark licensing agreements must clearly describe the rights and obligations of the parties involved in the contract to avoid future misunderstandings. Unfortunately, template agreements or form contracts will lack a comprehensive accounting of such matters.

The dangers of relying on haphazard contract construction is highlighted by a recent decision by the U.S. Court of Appeals for the Eleventh Circuit, which involves a cosmetics trademark, a lawsuit, and a very high-profile party.

It Always Starts Out Simple

The case that would become Kroma Makeup EU, LLC v. Boldface Licensing + Branding, Inc., began as a simple agreement for the use of a registered trademark. The owner of the trademark, By Lee Tillett, Inc. (“Tillet”), entered into an exclusive licensing agreement with Kroma Makeup EU, LLC (Kroma EU), to import, sell, and distribute products with the KROMA mark in Europe. Tillett, though, retained ownership of the mark and the right to use it in the U.S.

Importantly, the agreement also gave Tillett both the right and responsibility to enforce the mark against infringers. If Tillett failed to fulfill this contractual obligation, it would be liable to Kroma EU for damages. 

Keeping Up with the Kardashians

The situation was fine until the Kardashian Sisters (yes, those Kardashians) started endorsing a line of cosmetics called “Khroma Beauty,” sold and manufactured by Boldface Licensing + Branding, Inc. (“Boldface”). Despite the fact that the U.S. Patent and Trademark Office had denied Boldface’s previous attempt to register either the KHROMA or KARDASHIAN KHROMA mark due to a likely confusion with the KROMA mark, the Kardashians claimed they had no prior personal knowledge of the KROMA trademark and only learned of its existence later from a story on the entertainment website TMZ.

Litigation ensued in a California federal district court between Tillett and Boldface, with Boldface seeking a declaratory judgment that it did not infringe on the KROMA mark and Tillett filing a counterclaim. In the end, the California district court granted Tillett’s motion, Boldface was prohibited from using “Khroma Beauty,” which subsequently was rebranded as “Kardashian Beauty,” and the parties settled the dispute. Kroma EU, however, was not a party to the California lawsuit and didn’t receive a share of the settlement recovery from Tillett.

Welcome to The Sunshine State

After the settlement, Kroma EU filed an additional action in the Middle District of Florida against the Kardashians and Boldface to enforce its rights under common law trademark infringement and the Lanham Act. Kroma EU also named Tillett in the suit, but a compulsory arbitration clause in the licensing agreement has put that on hold.

The California judgment had made clear the Kardashians had infringed on the KROMA trademark that Kroma EU had been licensed to use. But the Florida court held that the licensing agreement between Kroma EU and Tillett gave the latter the exclusive right to enforce the mark. As such, since Kroma EU lacked the contractual authority to bring an enforcement action against Boldface, the court concluded that it also lacked standing to pursue the infringement action in its own capacity.

The Eleventh Circuit Ruling

Kroma EU appealed the decision, but the Eleventh Circuit Court of Appeals (located in Atlanta, GA) affirmed the lower court’s decision. As both court opinions state, “the licensee’s right to sue to protect the mark largely depends on the rights granted to the licensee in the licensing agreement.”

The appeals court focused on the plain language of the licensing agreement to demonstrate that the intent of the contract was for Tillett to retain all ownership rights. Further, a certain provision of the agreement vested Kroma EU with the obligation to “inform [Tillett] of any illegal use of the trademark,” prompting Tillett to file suit against the infringer.

Based on these facts, the lower court ruled—and the appeals court affirmed—that the licensing agreement did not give Kroma EU sufficient rights to sue under the Lanham Act.

Never Trust a Form Contract

The key takeaway from this case for companies with trademark licensing agreements or who may be contemplating such an agreement is that the parties should take great caution to ensure that they understand the consequences of each provision in the agreement. Do not assume that because the situation is not applicable right now that it won’t ever be important—e.g. many companies probably wish they hadn’t ignored the wording of their force majeure clauses back in 2019.

In addition, because each business relationship is unique, fill-in-the-blank licensing agreements cannot adequately protect the parties’ rights. Many boilerplate clauses that seem innocuous at first can present severe pitfalls if not properly contextualized to your circumstances.

Key Provisions of Trademark Licensing Agreements

Trademark agreements, for example, contain a number of clauses and provisions that deserve special attention, review, and negotiation. Following on the Kroma case above, the “grant clause” is especially key to license arrangements. It identifies and defines the scope of the legal rights to be given to the licensee and makes the critical distinction of whether a license agreement is exclusive or non-exclusive. Parties should also pay close attention to these other significant issues: