A nutty case of trade dress

Kraft had been selling peanut butter in Australia for over eight decades and enjoyed a 65% share of a market worth $110 million in annual sales when the business was sold to Bega in 2017. Bega now accounts for about 80% of the total market, dominating the supermarket shelves.

The parties disputed who owned the distinctive design elements in the product packaging following the sale. This is what is generally referred to in Australian case law as ‘get up’, or in the US as ‘trade dress’, effectively acting as a trade mark to identify the manufacturer.

The ensuing case¹ highlights the perils of failing to protect all forms of intellectual property diligently, limitations in dealing with unregistered trade marks, and traps to beware of in international licensing arrangements, even between related companies.

The Kraft empire

Kraft started selling peanut butter in Australia in 1935 and established a factory in Port Melbourne for local manufacture in 1962. By 2007, an Australian entity from the Kraft group was selling peanut butter in packaging with a distinctive combination of design elements: transparent jars with yellow lids and yellow labels with a peanut-shaped device coloured either blue or red, signifying smooth or crunchy peanut butter respectively (Peanut Butter Trade Dress). Examples of its product packaging as sold up until 2016 are shown below.

In 2017, Bega Cheese Limited (Bega) acquired the peanut butter business of the Australian Kraft entity, with assets including recipes, machinery and the Port Melbourne factory where peanut butter had been manufactured since the 1960s, together with goodwill in the business. Bega started selling peanut butter under its ‘Bega’ trade mark using the Peanut Butter Trade Dress, depicted as follows:

Following the sale, another Kraft entity commenced production of peanut butter in Australia using a new formula and new facilities, in packaging that very closely resembled the Peanut Butter Trade Dress, with the tagline ‘Loved since 1935’:

Major supermarkets declined to stock the new Kraft peanut butter, citing likelihood of consumer confusion.

Who owns the trade dress?

A dispute arose between Bega and Kraft over who owned the rights in the Peanut Butter Trade Dress, which was not registered as a trade mark.

Kraft argued that its Australian entity could not have sold any rights in the Peanut Butter Trade Dress to Bega because:

• The Australian Kraft entity never owned any rights in the Peanut Butter Trade Dress to begin with, having merely licensed the Peanut Butter Trade Dress from a US Kraft entity; and
• Any goodwill in the Peanut Butter Trade Dress vested in the US Kraft entity, partly because the production, branding, distribution and sale of the peanut butter was ultimately under the US Kraft entity’s control.

Bega claimed it had acquired the rights in the Peanut Butter Trade Dress because:

• The Australian Kraft entity was not party to the trade mark agreements produced in evidence;
• As matter of Australian common law, rights in unregistered trade marks are an inseparable part of the goodwill in a business and can only be transferred by assigning the business as a whole; and
• The Australian Kraft entity therefore owned the rights in the Peanut Butter Trade Dress until it sold those rights, together with the peanut butter business and goodwill, to Bega.

Kraft produced evidence of an agreement by which ownership of the Peanut Butter Trade Dress had been purportedly assigned between two US Kraft entities. Even though the agreement was stated as being governed exclusively by New York law, the parties accepted that the questions relating to intellectual property rights created in Australia would be determined under Australian law.

Justice O’Callaghan concluded the assignment between Kraft entities was ineffective because, under Australian law, the rights in the Peanut Butter Trade Dress:

• Inured to the Australian Kraft entity and therefore could not be dealt with by other entities in the Kraft group; and
• In any event, could not be assigned separately from Kraft Australia’s peanut butter business.

The rights in the Peanut Butter Trade Dress were therefore found to be a part of the goodwill in Kraft Australia’s peanut butter business, and inseparably linked to that business.

Accordingly, Justice O’Callaghan found that when the Kraft Australia sold its peanut butter business and associated goodwill to Bega, that included the Peanut Butter Trade Dress. It also followed that Bega was entitled to take action to protect the goodwill in that business, by preventing use of the Peanut Butter Trade Dress by others, including Kraft.

Kraft was also found to have engaged in misleading or deceptive conduct, contrary to the Australian Consumer Law, in promoting its new peanut butter product as ‘Loved since 1935’, when this was not the case in relation to this product, and also tended to falsely indicate to consumers that Bega’s peanut butter was not the former Kraft product.

Implications

Kraft is appealing this decision, but, subject to any alternative views from the Full Court, this decision has a number of interesting implications.

The decision confirms that:

• Unregistered trade marks, including trade dress or get up that is not registered as a trade mark, form part of the goodwill of a business; and
• Goodwill cannot be licensed or assigned separate from the business itself.

It accordingly follows that rights in unregistered trade marks cannot be dealt with independent of underlying business, as they form part of the goodwill inextricably linked to that business. This will have significant implications in arrangements for:

• Restructuring ownership of brand assets;
• The sale of businesses, or of unregistered marks associated with them; and
• The licensing of unregistered brands.

The decision even calls into doubt whether an unregistered mark can in fact be validly licensed, as commercial agreements commonly purport to do. Such arrangements would typically see the licensee assign to the licensor the goodwill arising from use of the mark, but this decision suggests that this can only be achieved by assigning the underlying business as a whole.

These considerations become much simpler when dealing with registered trade marks, which the Trade Marks Act 1995 (Cth) expressly allows to be assigned and licensed, providing yet another reason for brand owners to seek registration of key brand elements. However, even then, the Federal Court’s other recent decisions make clear that trade mark applicants must be very careful to ensure that applications are filed in the name of the correct entity.

The case also highlights the need to consider intellectual property rights through the laws that apply where they arise. While the parties had purported to deal with the Peanut Butter Trade Dress under New York law, the nature and extent of those rights was dictated by the Australian law that applied where they arose. If striking arrangements dealing with intellectual property rights in multiple jurisdictions, a ‘one size fits all’ approach might not always be appropriate.

If nothing else, the lengths to which Kraft and Bega were willing to contest this case also serves as an example of the commercial value of strong and consistent branding of consumer products. These efforts appear set to continue, with Kraft seeking to appeal Justice O’Callaghan’s decision.

This article was written by Matthew Craven, Partner, Luke Dale, Partner, Daniel Kiley, Senior Associate and Scott La Rocca, Senior Associate.

¹ Kraft Foods Group Brands LLC v Bega Cheese Limited (No 8) [2019] FCA 593