SWATCH versus ICEWATCH: enforcing and terminating trademark co-existence agreements

The Federal Supreme Court recently ruled (4A_589/2011, 5th April 2012) on the appeal of Swatch Ltd, a leading Swiss watch and jewellery manufacturer, against the decision of the Berne Commercial Court to hold a trademark co-existence agreement between Swatch and TKS Ltd valid.

Swatch owns the prior Community trademark SWATCH claiming protection for, among other things, goods in Class 14. TKS Ltd owns a younger Community trademark, ICEWATCH, which also claims protection for goods in Class 14. Swatch opposed TKS's trademark application and the ICEWATCH mark was not registered until Swatch and TKS had concluded a trademark co-existence agreement in 2008. This agreement is governed by Swiss law and stipulates how TKS shall use its trademark. In particular, TKS undertook to use the trademark ICEWATCH only as a word and device mark where the terms 'ICE' and 'WATCH' are represented on two separate text lines.

After becoming aware of use of TKS’s trademark which Swatch believed violated the co-existence agreement, Swatch declared the termination of the co-existence agreement without notice in 2009. TKS, which had not been warned by Swatch regarding its trademark use before termination, formally disputed the termination. After TKS became aware of various oppositions by Swatch against new ICE-WATCH trademarks (word and device marks where the terms 'ICE' and 'WATCH' were represented on two separate text lines as agreed in the co-existence agreement), in 2010 it filed suit against Swatch before the Berne Commercial Court.

First instance decision
The court held that Swatch's notice of termination of the agreement was ineffective, and thus such agreement was valid. Furthermore, the court prohibited Swatch, under threat of criminal punishment, from filing oppositions against all pending and future trademark applications of TKS for ICE-WATCH trademarks complying with the co-existence agreement. In addition, the court ordered Swatch to withdraw 18 specified oppositions already filed against such trademarks.

Supreme Court decision
The Supreme Court partially approved Swatch’s appeal, revoked the commercial court’s decision and remanded the matter to the commercial court for reappraisal. The Supreme Court ruled as follows.

It affirmed TKS’s legal interest in a declaratory judgement with respect to its motions requiring the declaration of the ineffectiveness of Swatch’s notice of termination and the validity of the trademark co-existence agreement. It held that TKS had a major interest in clarifying the legal situation which would be insufficiently met if the court only assumed the validity or invalidity of the co-existence agreement in its considerations, and as a result allowed or disallowed TKS’s actions for performance. Rather, the existing legal uncertainty was removed only if the court decided on the validity of the co-existence agreement in the operative provisions of the judgment which become res judicata.

The Supreme Court further held that the obligations not to file oppositions and to withdraw specified oppositions ordered by the commercial court were not anti-suit injunctions. Swatch agreed to the worldwide use and registration of specific ICE-WATCH word and device marks by TKS in the trademark co-existence agreement. By doing so, Swatch committed to tolerate and not to impede the use and registration of such trademarks, respectively – that is, to refrain from any action which could interfere with the use and registration of such trademarks, particularly from filing oppositions against them. Swatch did not conclude a procedural agreement not to institute legal proceedings about a certain matter in dispute, in particular a specific trademark registration, or to institute legal proceedings about such matter only at a certain place of jurisdiction; rather, it accepted a substantive contractual obligation to tolerate and to cease and desist, respectively. As the Supreme Court qualified the obligation ordered by the commercial court as a substantive obligation to cease and desist, and not as an anti-suit injunction belonging to procedural law, it did not have to deal with the permissibility of anti-suit injunctions under Swiss law.

More generally, the Supreme Court held that as the commercial court was internationally competent to decide on claims arising out of the trademark co-existence agreement which the parties intended to be applicable worldwide, it was also entitled to issue orders and prohibitions necessary for the cross-border enforcement of obligations to cease and desist, and even to threaten criminal punishment if such orders are not observed.

The Supreme Court qualified trademark co-existence agreements as synallagmatic innominate contracts intended to settle an existing or imminent conflict definitively and permanently. In order to fulfil this purpose, they must be non-redeemable in principle. The general rules on the termination of contracts for the performance of a continuing obligation, in particular the rules on the termination of such contracts for cause, apply to trademark co-existence agreements. Good cause is usually assumed for serious breaches of contract. However, less serious breaches of contract can also make the continuation of the contract unbearable for the other party if they occur repeatedly and in spite of warnings.

If good cause exists it is possible to terminate the contract immediately. The right to terminate does not depend on the fulfilment of additional requirements. In particular, the terminating party is not obliged to set a deadline for subsequent performance in the sense of Article 107 of the Code of Obligations before termination.

It is at the discretion of the court to decide whether good cause exists on an individual basis. Discretionary decisions are reviewed freely by the Supreme Court, but that court exercises restraint and intervenes only if the cantonal court misuses its discretion. In the case at hand, the Supreme Court supported the opinion of the commercial court, qualifying most of TKS’s actions as minor breaches of contract. However, with regard to the use of the domain name (represented on one text line) the Supreme Court held that the commercial court had wrongly negated a breach of contract. Given the discretion of the commercial court in answering the question of whether good cause exists, the Supreme Court remanded the matter to the commercial court, which will have to decide whether all the breaches of contract taken together constitute good cause for the termination of the trademark co-existence agreement.

As remand of the matter is necessary only if the termination of the co-existence agreement is invalid independent of the existence of good cause, the Supreme Court also had to examine whether TKS had implicitly accepted Swatch’s notice of termination. The court denied this, holding that an ineffective notice of termination for lack of good cause can lead to the termination of the contract only if it results in the conclusion of an agreement to terminate the contract according to Article 115 of the Code of Obligations by reinterpreting it into an offer to terminate the contract and by assessing the behaviour of the other party as acceptance of such offer. Even if an agreement to terminate the contract can be concluded implicitly, the intention to waive finally all contractual claims must be expressed clearly. The latter is rarely assumed by the Supreme Court.

The Supreme Court refused to assume the immediate effectiveness of a disputed notice of termination for trademark co-existence agreements. Finally, the court held that an ineffective termination without notice cannot be converted into a statutory notice of termination unless the termination was designated as termination without notice by mistake, which was not the case here. The court again stressed that, moreover, trademark co-existence agreements are non-redeemable in principle.

This is an Insight article, written by a selected partner as part of IAM's co-published content. Read more on Insight

Unlock unlimited access to all IAM content