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Are we having a FUN(TASTIC) time yet?

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In general, any distribution agreement will include terms relating to the payment of fees, ownership of intellectual property, indemnities and warranties, dispute resolution and governing law. Before signing any distribution agreement, a business owner needs to seriously consider the risks and exposures each of these terms presents, and how any breach will impact on their business. Mason Sier Turnbull has assisted many businesses with such an assessment.

Funtastic Limited v MGA Entertainment (HK) Ltd

In January 2004, Funtastic Limited (“FUNTASTIC”) entered into a Distribution Agreement with MGA Entertainment Pty Ltd (“MGA”) for the exclusive distribution in Australia and New Zealand of “Bratz” dolls and related products manufactured by MGA. However, on 3 December 2008 a United States court found that Mattel Inc. (and not MGA) owned all rights, title and interest in or to the works, ideas and/or concepts of the “Bratz” branded products. As a result, on or around 12 August 2009, MGA indicated it would no longer supply any “Bratz” products to FUNTASTIC after 31 December 2009.

FUNTASTIC filed legal proceedings against MGA in relation to certain aspects of the Distribution Agreement. While a recent decision in the Federal Court relates only to an initial part of the dispute, it nonetheless highlights provisions in a distribution agreement that business owners should seriously consider, including:

What intellectual property warranties are included in your distribution agreements?

Under the Distribution Agreement, MGA warranted that the importation of any of the “Bratz” branded products, and its storage, distribution, promotion, advertising, marketing and sale by MGA did not constitute an infringement of any intellectual property rights invested in any third party. FUNTASTIC alleges that this warranty represents that the products will not infringe the intellectual property rights of any third parties, and that such representations were false and/or misleading and deceptive.

What fee arrangements are included in your distribution agreements? What happens if the agreement ends early (for any reason)?

FUNTASTIC has paid MGA an advance of $20 million for the term of the licence. FUNTASTIC seeks repayment of this amount.

What governing law and dispute resolution clauses are included in your distribution agreements? In what countries are the parties to the agreement based?

The laws of the State of Victoria govern the Distribution Agreement, and any dispute may only be brought in the Courts of the State of Victoria or the Federal Courts within Australia. However, MGA is based in Hong Kong so court documents needed to be served on MGA in Hong Kong, FUNTASTIC needed to apply to the Court for approval to serve the court documents on MGA outside of Australia. This involved an assessment by the Court of whether FUNTASTIC had established a prima facie case for service outside of Australia, and whether the claims fell within an approved parameter. While FUNTASTIC was ultimately granted leave to serve the court documents on MGA in Hong Kong, the decision highlights difficulties you may face in similar circumstances.

If your business involves the in-licence of third party products for distribution and sale to an end user, we strongly recommend you consider the risks and exposures associated with the terms of any distribution agreement, including those identified above. Mason Sier Turnbull has assisted many businesses with such an assessment. Please contact one of our Intellectual Property lawyers for further information.

Author: Noelene Treloar