7th Circuit Case Should Serve As A Reminder To Business Attorneys

Recently the 7th Circuit in Sunstar, Inc. v. Alberto-Culver Company provided a reminder to attorneys engaging in a business transaction between domestic and a foreign parties. Stated plainly, the 7th Circuit reminded business attorneys that if a term is included in a transaction document – especially if that term is a foreign word – be sure you understand what it means. This case presented the question of how a foreign legal term included in a trademark license agreement should be interpreted where the choice of law for such agreement was Illinois state law.

In 1980, Alberto-Culver, a major producer of skin and hair care products, including the “Alberto V05” line of products, entered into a license agreement with Sunstar to license a number of trademarks, including the Alberto V05 mark, to Sunstar for 99 years. The license agreement contained the provision which stated that if at any time during the term of the agreement the licensor had a “reasonable ground” for thinking that Sunstar had committed an act that created a “danger to the value or validity of licensor’s ownership and title in the licensed trademarks” Sunstar would have to cease use of the trademarks in question until the licensor “reasonably determined” that the danger had passed. In the event of an actual breach of the license agreement by Sunstar, the license was to be rescinded and the marks returned to Alberto-Culver.

Additionally, the license agreement refers to the license granted to Sunstar as a senyoshiyoken, which in English means “exclusive use rights.” According to Japanese trademark law, the holder of a senyoshiyoken not only has an exclusive right to use the licensed trademarks within the geographical scope of the license but, holds other rights and privileges such as the right to sue infringers of the trademarks in its own name. Under Japanese trademark law, the holder of a senyoshiyoken is treated, in certain circumstances, as if they were the trademark owner.

In 1999 Sunstar began using a variant of the Alberto-Culver’s V05 mark. Sunstar described it as a “modernized” version of the licensed trademark. Alberto-Culver refused to amend the license agreement to permit Sunstar to use the modernized version and considered such use a breach of the license agreement. Sunstar filed suit seeking a declaration that Sunstar’s use of the modernized version of the mark was permitted by the license and as a holder of a senyoshiyoken.

At the District Court, Albert-Culver took the position that the parties used the term “senyoshiyoken” merely to indicate that Sunstar could register the license with the Japanese trademark office and that the term did not confer on Sunstar the rights that a senyoshiyoken confers on a holder under the Japanese law. The District Court agreed and refused to instruct the jury on the legal meaning of the Japanese term.

On appeal, the 7th Circuit found fault with the District Court and stated that it could not find any basis for the proposition that the term senyoshiyoken should be defined as suggested by Alberto-Culver. The court noted that when parties to a contract, especially sophisticated parties, use a technical term there is a presumption that they are using it in its technical sense. Where a technical term also happens to be a foreign term the presumption is that it is used in its foreign technical sense. Here, the 7th Circuit noted that the parties were using a foreign technical legal term, and despite that the contract calls for Illinois law to govern, the meaning of senyoshiyoken is to be determined under Japanese trademark law. (The court noted that the parties certainly could not have meant that the meaning of senyoshiyoken would be decided under Illinois law as the word has no meaning under Illinois law.)

Accordingly, the court turned to Japanese trademark law to determine whether the holder of a senyoshiyoken is permitted to use variants of the license the trademark. After reviewing various scholarly articles on Japanese trademark law, the court determined that as a holder of a senyoshiyoken, the Japanese rule of law would allow the type of changes that Sunstar sought to make to the licensed trademarks. Under Japanese trademark law (as well as under U.S. trademark law) the change Sunstar sought to make, notably a change in the trademark typeface, is not considered a material alteration of the original trademark. The court further explained that the longer the term of the license, the less plausible it is to assume that, in the absence of an express prohibition, the license was forbidden to make small changes to the licensed trademark. Here, the court noted that the license was for 99 years and changes in language, typeface, marketing methods, and trademark styles would be likely and would require the modification to the wording or appearance of the licensed mark in order to enable the branded product to be marketed effectively.

Although in this case both U.S. and Japanese law were the same, the 7th Circuit’s holding would allow for a situation where a foreign legal term, interpreted pursuant to the laws of its home nation, could result in a determination that would otherwise not occur under U.S. law. Thus, where foreign counsel insists on the inclusion of a foreign legal term U.S. counsel should be certain how that term will affect the transaction under the laws of the foreign nation.