ike it or not, the Kardashian clan has brought many cultural influences to the 21st century, but, for most, a lesson in bright-line legal rules does not come to mind. But the queens of reality TV are full of surprises. A recent court case of theirs served as a reminder of the old idiom “you can’t have your cake and eat it too,” or in contract law parlance, you cannot allow a contract to terminate yet still enjoy its benefits.
On August 23, 2016, the U.S. District Court for the Central District of California granted a motion for a preliminary injunction in favor of the Kardashians in the case of 2Die4Kourt, et al. v. Hillair Capital Management, LLC, prohibiting the defendant’s ongoing infringement of certain trademarks owned by the Kardashians.The dispute began over a trademark license agreement entered into between the parties, whereby the licensee (defendant Hillair) was permitted to use the Kardashians’ trademarks, names, images, and likenesses in connection with the branding of certain cosmetics products. In return for the right to brand the products, the Kardashians were to be paid royalties. The contract provided that, in the event Hillair failed to pay royalties under the license agreement, the Kardashians had the right to terminate the agreement after giving the licensee a ten-day opportunity to cure their breach.
After a convoluted factual history befitting of a reality show – during which there was a failed product launch, a bankruptcy, multiple lawsuits, and no royalties for the Kardashians – it became clear that the Kardashians’ relationship with Hillair was not working out. Consequently, in July of 2016 attorneys for the Kardashians sent a notice of breach to Hillair for failure to pay royalties and notifying the licensee that it had 10 days to cure its breach (i.e., to make the royalty payments). In response, Hillair stated, in an ill-fated letter from its attorneys, that no royalties were due and that it had no intention of paying any monies to the Kardashians because the Kardashians were in breach.
Shortly thereafter, the Kardashians discovered that Hillair was actually planning to release a new line of cosmetics products bearing the Kardashian brand, purportedly under the terms of the license agreement. The Kardashians immediately filed a federal complaint and a week later asked the court to enjoin the Licensee’s release of the product line.
The court’s opinion granting the preliminary injunction rested on a basic tenet of contract law: one cannot allow a contract to terminate yet still enjoy its benefits. Once Hillair refused to pay any royalties under the license agreement, the contract was effectively terminated, after which time the former licensee had no further right to use the Kardashian brand on its products.
Hillair’s main defense in the case was that the Kardashians had also breached the license agreement by failing to perform their obligations, but the court rejected the defendant’s position, expounding on a sometimes overlooked aspect of contract remedies: “When one party to a contract feels that the other contracting party has breached its agreement, the non-breaching party may either stop performance and assume the contract is avoided or continue its performance and sue for damages. However, under no circumstances may the non-breaching party stop performance and continue to take advantage of the contract’s benefits.” Specifically, in the case of trademark licenses, if a licensee like Hillair believes that a licensor like the Kardashians are in breach, it can “consider the contract terminated and stop performance” (i.e. stop paying royalties) or it can “continue making royalty payments under the license agreement, continue using the trademarks, and then sue for damages,” but “the licensee cannot both stop paying royalties but nevertheless continue using the trademark.”
By refusing to make royalty payments under the License Agreement, Hillair forfeited its right to continue enjoying the benefits of the license. Hillair made its choice of remedy—to stop paying royalties. To allow Hillair to continue using the Kardashian trademarks would have effectively given it a double remedy for the purported breach, which the court prevented by enjoining its further use of the trademarks. In contract disputes such as this one, it is important to remember that remedies for alleged breaches are in the alternative, and overreaching by treating a disjunctive remedy as a conjunctive remedy can lead to very unfavorable results—you can’t have your cake and eat it too.
Filed in: Legal Blog
October 11, 2016