Russia’s highest commercial court, the Supreme Arbitrazh Court, recently ruled that where a franchisor with a Russian-registered trademark grants a franchisee an exclusive licence to use that trademark within a defined territory, the exclusive licence does not, by itself, prohibit the franchisor from also using its trademark in that territory.
Facts
The dispute arose from a franchise agreement that granted a franchisee an exclusive licence to use the trademark PYATEROCHKA, which is registered in Russia as a brand name for a chain of supermarkets, in a designated territory. The agreement did not explicitly prohibit the franchisor from using its own mark in the territory; nor did it explicitly permit such use.
Several years into the agreement, the franchisor decided to establish some company-owned stores in the franchisee’s territory. Apparently in a naive attempt to circumvent the trademark exclusivity issue, the franchisor added a plus-sign to its mark and began opening stores under the name Pyaterochka+. This resulted in a costly dispute involving an administrative tribunal, a court trial and three levels of appeal.
Lower court rulings
The franchisee filed an initial administrative complaint with the Federal Anti-monopoly Service (FAS), claiming unfair competition and a host of related claims. The FAS held in the franchisee’s favour, finding that the franchisor had engaged in unfair competition (as defined in Articles 14(1) and (2) of the Law on the Protection of Competition). This finding was based in part on the idea that the exclusive trademark licence granted pursuant to the franchise agreement effectively constituted a trademark assignment for the validity period of the franchise agreement so that the franchisor could not use its own trademark in the franchisee’s territory during such period. The FAS also held that that the franchisor, being a competitor of the franchisee, had an unfair advantage because the franchisee was required to pay royalties to the franchisor. Finally, the FAS held that the franchisor’s entry into the franchisee’s territory, using a similar trademark, created confusion in the minds of consumers and contractors. The FAS ordered the franchisor to stop using its trademark in the territory.
The franchisor disagreed and took the case to trial before a commercial court, which upheld the FAS’s decision. The franchisor appealed. The court of appeals reversed the court ruling, finding that the franchise agreement merely prohibited the franchisor from granting franchise rights to another franchisee within the franchisee’s territory, but did not prohibit the franchisor itself from using its own mark in the territory in question. The court of appeals vacated the findings of unfair competition. The franchisee then appealed.
The second-level appellate court reversed again, upholding the original FAS ruling and reinstating the decision of the lower court, for the same reasons stated by the lower court. After this series of contradictory rulings, the dispute arrived at the Supreme Arbitrazh Court, which accepted the case.
Supreme Arbitrazh Court ruling
The Supreme Arbitrazh Court upheld the franchisor’s position. It ruled that an exclusive trademark licence is not the functional equivalent of a trademark assignment. Merely granting a licence to a franchisee - even on an exclusive basis - for use of a mark in a particular territory does not mean that the mark’s owner has renounced its right to use the mark in that territory. Although the ruling is significant for being the first to be issued on this subject by the highest commercial court, it does not represent new legal doctrine. The court noted that Article 1033 of the Civil Code specifically permits the parties to a franchise agreement to include a clause that prohibits the franchisor from using its mark in the franchisee’s territory during the term of the franchise. Since the law specifically allows for such a restriction, but the franchise agreement in question did not include it, the court concluded that no such restriction applied.
As a result, the court ruled that a trademark owner, despite having granted an exclusive trademark licence to a franchisee for a particular territory, may use its trademark in that same territory without being liable for unfair competition as a result of such use.
Comment
This decision should not alarm franchisees. It will be significant mainly where a franchisor is unhappy that a franchisee with an exclusive territorial licence has not expanded more rapidly into the territory, and where the franchisor wishes to take the lead in the expansion by opening company-owned stores. This situation need not involve a breach of the franchise agreement - the franchisee may be under no obligation to expand or may even believe that expansion would be profitable, but may be unable to take such a step. Where such a situation arises, the Supreme Arbitrazh Court has effectively allowed the trademark owner to use its own trademark to expand into the franchisee’s territory. If franchisors or franchisees wish to avoid such a situation, they are free to negotiate first-refusal rights for any new locations or a provision that prohibits the franchisor from using its mark in the exclusive territory during the term of the franchise agreement.
Natalya Babenkova