Share purchase agreements and restrictive covenants

The recent decision by the High Court in Millen v Karen Millen Fashions Ltd & Anor [2016] should be a warning to anyone looking to sell a business with a brand name that includes their own name as part of that brand. In this case, the court has given careful consideration to restrictive covenants given by the sellers in a share purchase agreement.

Background

Sellers will commonly give restrictive covenants in a share purchase agreement preventing them from setting up a competing business after completion, and from poaching staff and customers. These restrictions would usually last for two to three years after completion. The scope and duration of these restrictions is often one of the big negotiating points in a sale process.

Alongside these restrictions, sellers will also often agree not to use the business’s trade names. This restriction is usually not limited in time on the basis that the seller has sold the name and should have no further right to use it. However, that can be more problematic if the trade name is actually the name of an individual.

The facts

The brand Karen Millen was developed out of a partnership begun between Karen Millen and Kevin Stanford in 1983. In 2004, they entered into a share purchase agreement to sell the Karen Millen group to an Icelandic consortium. Under that agreement, Ms Millen agreed not to use any of the group’s intellectual property rights in the course of any business and not to use the name Karen Millen or any other name confusingly similar with it in a business that was similar to or competed with the group. These are reasonably common forms of restrictions.

Several years later, Ms Millen attempted to use her full name in relation to a new homewares venture (an area which, unlike other similar brands, the Karen Millen group had not moved into). She also wanted to launch a new clothing business just using the name “Karen” on its own. This led to a number of rounds of litigation, some of which settled and ultimately this case dealing specifically with whether Ms Millen should be allowed to register certain trademarks in the US and China.

The case raised questions of whether the agreement protected the intellectual property rights only as used by the business at the date of the agreement or whether it caught also the use of such rights as the business had developed since. In particular, was the agreement effective to protect the brand from an extension into a wider lifestyle brand, rather than just clothes? Ultimately the decision, as is always the case, turned on the precise drafting of the agreement and the court concluded that effectively the purchaser had bought the worldwide rights to the Karen Millen name. Ms Millen would not be allowed to use the Karen Millen name in the homewares business and was not successful in getting a declaration that she should be allowed to launch a clothing brand under the name “Karen” alone either.

Comment

The case highlights, as ever, the importance of carefully drafting and negotiating share purchase agreements, being as clear as possible on what the parties have the right to do in the future and exactly what rights are being sold. Is the seller selling the entire right to use the name worldwide and forever, or would the transaction be better structured as a licence to use the name in a particular sector or geographic area, albeit that that will of course have an impact on the price that any buyer is prepared to pay?

The case also highlights, again, the importance of giving proper consideration to the common “boilerplate” provisions of agreements which often slip through without much thought. And finally, it highlights the inherent difficulty for designers who use their own names in developing their brands – had Ms Millen created the brand without using her own name, it is unlikely any of these problems would have arisen.