Does a licensee infringe its licensor's trademarks by discussing the termination of the licence agreement in arbitration proceedings? In a judgment of 23rd July 2012 the Alicante Provincial Court, acting as the Community Trademark Court of Appeal, said yes.

Facts
Spanish company Licensing Projects, SL was the Spanish licensee of Pirelli and was authorised to manufacture and market shoes under certain PIRELLI trademarks (protected as Community trademarks at the Office for Harmonsation in the Internal Market) pursuant to a licence agreement of December 2001(amended in 2005), with a termination date of March 2013.

The referred agreement was governed by Italian law. The parties had also agreed that any disputes would be resolved through international arbitration before the International Chamber of Commerce (ICC) in Paris.

The agreement expressly provided that the licensor could unilaterally terminate it with immediate effect by simply sending the licensee written notice informing it of such termination. Similarly, the agreement set forth the duty to cease using the licensed trademarks immediately from the moment of such resolution. Such possibility is expressly provided for by the Italian Civil Code.

In accordance with this and due to reasons set out in the existing licence agreement, in 2007 the holder of the PIRELLI trademarks decided to terminate the agreement with its Spanish licensee, alleging severe contractual breaches.

As the licensee did not accept termination, Pirelli initiated arbitration proceedings before the ICC, as foreseen in the contract, which its licensee opposed. In October 2009 the ICC confirmed the contract termination, although the award was subsequently annulled by the Paris Tribunal de Grande Instance due to procedural defects. The decision to annul the award was also appealed by PirelliI.

Additionally, in July 2007 the Barcelona Commercial Court declared the licensee to be insolvent (Pirelli was named a creditor for unpaid royalties in the proceedings).

The licensee imported products manufactured in China under the PIRELLI trademark. The holder of the Italian trademark filed a claim before the Alicante Community Trademark Court No 1 for:

• Interlocutory preliminary measures.
• A declaration of infringement of Community trademark registrations against its former licensee, Licensing Projects.

Key issues
During the proceedings, the parties discussed several issues which are of great interest to the holders of Community trademark registrations whose rights are exploited under a licence agreement within the European Union. The Spanish Community trademark courts are competent, with pan-European effect, in cases where neither the plaintiff nor the defendant is domiciled or established in the territory of a member state.

The matter was decided by:

• A court order issued by the Alicante Community Trademark Court No 1 on 18th July 2011, which ordered interlocutory preliminary measures.
• The first instance judgment rendered on 1st March 2012.
• The latest decision issued by the Community Trademark Court of Appeal (23rd July 2012). This judgment has been appealed before the Supreme Court by Licensing Projects.

Immediate effect of unilateral contractual termination through notice by licensor
One of the most controversial issues arising from the proceedings was the automatic/immediate effect of the unilateral termination of the licence agreement when the party whose breach led to the termination opposes such action and requests the maintenance of the contractual relationship.

In the case at hand, the opposing party cited Spanish case law to argue that in cases where a licensee denies the existence of fair cause for termination, the licensor is obliged to maintain the licensee in its position insofar as a decision of the court or an arbitrator considers the unilateral termination to be legal.

The first instance court held that although the contract was subject to Italian law and the parties had not requested the application of foreign law, Spanish law provides that unilateral termination due to the licensee’s breach has immediate effect as of the notice of the licensor’s decision to terminate; there is no need to wait for a judicial resolution or an arbitral award confirming the legality of the termination. The court based the immediate effect of the licensor’s unilateral termination on:

• The special nature of the agreement based on confidence in the licensee.
• The need to safeguard the goodwill associated with the licensor’s trademarks.
• Article 22 of the EU Community Trademark Regulation.
• The irreparable harm that the trademark could suffer as a consequence of the maintenance of the licence agreement during termination proceedings in regard to financially reparable damage that the licensee could suffer as a consequence of the termination if a court finally considered the termination to be illegal.

Similarly, the appeal court judgment declared Italian law to be applicable, although it understood that its proof resulted from the ICC award and the clauses contained in the licence agreement. Thus, it accepted the automatic effect of the contractual termination as a result of the application of Italian law. The appeal court also found that Article 22 of the Community Trademark Regulation allows the licensor to file a trademark infringement claim against its licensee in certain cases, even if the licence agreement has not been duly terminated.

Impact of pending arbitration proceedings
The first instance court considered that there was no pending judicial decision or claim preclusion with respect to the ICC arbitration proceedings, given that in the proceedings carried out before the Community trademark courts, the plaintiff did not request execution of the ICC arbitral award, but rather brought a trademark infringement action.
The appeal court considered that the annulment of the arbitration award confirming the legality of the licence agreement termination did not prevent the admission of trademark infringement actions if such termination was based on Article 22 of the Community Trademark Regulation.