PRECISE CONTRACT LANGUAGE--AGAIN

IVAN HOFFMAN, B.A., J.D.


        I have written many times about the need for precision in language when drafting contracts (see as but one example, “Precise Contract Language.”).  Agreements should be drafted in such a manner so that, as much as possible, there is no room for any interpretation of the agreement in any manner other than as the attorney drafting the agreement on behalf of her or his client intended.   Precise contract language is in the best interests of all parties to the agreement since it is the vagaries and uncertainties of language that create the fertile ground for disagreement and, in the worst case scenario, time- and money-consuming litigation with all the attendant risk of an uncertain legal outcome to seek to rectify what might have been easily and less expensively rectified with careful drafting.

        A case dealing with trademark abandonment and the interpretation of a non-compete clause serves to yet again point out the above issues.    In Vais Arms, Inc. vs. George Vais, the Fifth Circuit Court of Appeals was called upon to decide if the defendant had abandoned his claimed trademark rights and whether or not a non-compete provision was valid under Texas law.

        This is a summation of the facts:

        George Vais had developed a successful business manufacturing and selling muzzle brakes for firearms under the name “Vais Arms” and sold such muzzle brakes throughout the United States and in some parts of the rest of the world.  Mr. Vais however developed an allergy to some of the chemicals used in the manufacturing process and decided to return to his native Greece to seek to cure his condition.  He entered into a written Bill of Sale with George Bartlett to take over the business and Mr. Bartlett established Vais Arms, Inc. as a corporation to do so.  The Bill of Sale contained an attachment that read as follows:

George Vais agrees to the following:

A. To get a trade name patent for Vais Arms, Inc. and include it in the sale of assets.

The parties also entered into a non-compete agreement that read in part:
Non-Compete Covenant. For a period of 10 years after the effective date of this Agreement, George Vais Arms will not directly or indirectly engage in any business that competes with Vais Arms, Inc.. This covenant shall apply to the geographical area that includes all U.S. states and countries which are included in the current customer bases.
        Plaintiff commenced the business and Mr. Vais traveled to Greece but after Mr. Vais’ condition improved, he returned from Greece and began to manufacture and sell muzzle brakes under his name, Vais, as the trademark for the product.   Upon hearing of this, the plaintiff filed a federal registration for “Vais” and the defendant filed an opposition to the said registration.  In addition, the within litigation was filed by the plaintiff.   As a result of a series of legal proceedings in the trial court, the said trial court granted a summary judgment in favor of plaintiff on all claims and the within appeal followed.  (Are you keeping track of the expenses so far?)   This article will not deal with the various procedural issues both at trial and on appeal since they are not germane to the topic of this article.

Trademark Abandonment

        The Court ruled that Mr. Vais had waived his rights to argue on appeal that he had not abandoned his rights to his trademark but the Court stated, in a footnote, that such an argument would have been rejected by the Court under any circumstances.

We observe, however, that had George preserved this issue for appeal, we would rule against him. A surname is classified as a descriptive word mark. See Perini Corp. v. Perini Constr., Inc., 915 F.2d 121, 124 (4th Cir. 1990). As such, “one who claims federal trademark rights in a [surname] must prove that the name has acquired a secondary meaning.” Id. at 125; see also Chevron Chem. Co. v. Voluntary Purchasing Groups, Inc., 659 F.2d 695, 702 (5th Cir. 1981). “[A s]econdary meaning exists if in fact a substantial number of present or prospective customers understand the designation when used in connection with a business to refer to a particular person or business enterprise.” Perini, 915 F.2d at 125 (quoting Food Fair Stores, Inc. v. Lakeland Grocery Corp., 301 F.2d 156, 160-61 (4th Cir. 1962)). Once it is established that a surname has acquired a secondary meaning, however, it “becomes a trade name or service mark subject to the rule of priority in order to prevent deception of the public,” and accordingly is susceptible of abandonment. John R. Thompson Co. v. Holloway, 366 F.2d 108, 113 (5th Cir. 1966)(“a man has no absolute right to use his own name, even honestly, as the name of his merchandise or his business”).
        The Court said:
Under the Lanham Act, a mark is deemed “abandoned” [w]hen its use has been discontinued with intent not to resume such use. Intent not to resume may be inferred from circumstances. Nonuse for two consecutive years shall be prima facie evidence of abandonment. “Use” of a mark means the bona fide use of that mark made in the ordinary course of trade, and not made merely to reserve a right in a mark. [footnote omitted]

The party asserting abandonment must establish that the owner of the mark both (1) discontinued use of the mark and (2) intended not to resume its use. The burden of proof is on the party claiming abandonment.

        [EDITORIAL NOTE: the current statute, 15 USC section 1127, reads “3 consecutive years.”]

        There was evidence produced by the plaintiff as to the alleged intent of Mr. Vais to abandon the mark and the defendant produced his own declaration to the effect that he did not intend to abandon the mark.  However, for the purposes of the within article, the question of Mr. Vais’ intent as described above, also turned on the vagaries of the contract, both in language as well as the intention of the parties in regard to a strike out of the relevant provision:

George Vais agrees to the following:

A. To get a trade name patent for Vais Arms, Inc. and include it in the sale of assets.

        [The Court and the trial court interpreted the imprecise language above to mean a reference to a trademark and the Court inserted “[sic]” after the word “patent”.]

        The said provision was stricken from the attachment to the Bill of Sale and initialed by the plaintiff but the strike out was not dated and no further explanation was given within the 4 corners of the document.  Plaintiff argued that the only purpose of striking the provision was to relieve Mr. Vais of the obligation to obtain the registration and that the plaintiff was to assume that responsibility and that the provision was stricken after the agreement was signed.  Mr. Vais, on the other hand, claimed that the provision was stricken before the agreement was signed and thus signaled an intention on his part not to abandon the mark.

        The Court agreed with the trial court that there was no genuine issue of material fact presented and that the summary judgment as to the abandonment was proper.

Neither does Bartlett’s striking out of provision 1(A) in the Attachment raise a genuine issue of material fact as to the element of intent to abandon the mark. That provision referred to George’s duty to procure a “trade name patent” and to “include it in the sale of assets”; it says nothing about the actual transfer of the trade name itself. Neither does it make the transfer due at signing, only at some unidentified time in the future. Thus, even assuming that the provision was stricken at or prior to George’s signing the Bill of Sale, Bartlett’s act of striking it out does not convey an understanding on the part of either party that the VAIS mark was not being transferred along with the sale of the business’s other assets.
        The point here, for purposes of this article, is that not only was the language of the attachment to the Bill of Sale imprecise but the end result of such imprecision as well as the imprecision of  the deletion without explanation was to leave the matter vague, uncertain and thus to lead to the within litigation and appeal.  The results could have gone in any direction since the determination was left to parties other than the parties to the agreement i.e. to the trier of fact and the appellate court.

The Non-Compete Agreement

        The issue on appeal was limited to the reasonableness of the geographic limitation and in that regard, the imprecision in drafting played a key part in the litigation.

        Again the language read in part:

This covenant shall apply to the geographical area that includes all U.S. states and countries which are included in the current customer bases.
        The plaintiff agreed to a reformation of the language to be limited only to the “U.S. states,” meaning that the plaintiff was willing to modify the provisions to be so limited.  However, the defendant claimed that the entire geographic limitation was unenforceable.
Nevertheless, George contends that the entire geographic limitation is unenforceable as written because it does not define the term “current customer bases,” or, alternatively, that the phrase “current customer bases” is ambiguous and therefore a jury should determine its meaning.
        The Court disagreed and said:
Albeit the geographic limiter was inartfully drafted, a plain reading confirms beyond quibble that the phrase “current customer bases” modifies only the foreign “countries” aspect of the geographic coverage —— not the “U.S. states” portion. Thus, the covenant as drafted covered (1) “all United States” and (2) any foreign countries in which George had a “current customer base,” i.e. sales of muzzle brakes. By reforming the geographic limiter to cover only “U.S. states” in conformity with Vais Arms, Inc.’s voluntary abandonment of foreign coverage, the district court eliminated any potential interpretive issue with the modifier “current customer bases.”
        However, for the purposes of this article, the issue again is that the parties did not express themselves with precision in the agreement and left the matter to extensive and expensive litigation with an uncertain legal result since it was left to the trier of fact and the appellate court.  It could have gone in another direction.  Indeed, there was a concurrence and a dissent filed with the case from another Justice who stated in part"
I recognize that it is possible to have a valid non-compete clause; however, I would conclude that there is an ambiguity in this particular non-compete clause. A contract is ambiguous when its meaning is reasonably susceptible to more than one interpretation. Heritage Res. Inc. v. NationsBank, 939 S.W.2d 118, 121 (Tex. 1996). In this case, the agreement states that “[t]his covenant shall apply to the geographical area that includes all U.S. states and countries which are included in the current customer base.” The phrase “which are included in the current customer base” could be read to apply only to the word “countries”, or it could be read to apply to “all U.S. states and countries.” Because the phrase is susceptible to more than one reasonable interpretation, the issue should be remanded to the district court for an appropriate determination. See Exxon Corp. v. West Texas Gathering Co., 868 S.W.2d 299, 302 (Tex. 1993) (explaining that contract ambiguities are fact questions to be submitted to a jury).
Conclusion

        Let me quote from “Precise Contract Language:”

A contract should solve more problems than it creates and you never want to have any contract so vague and uncertain that it leads to litigation and, in the worst case scenario, a situation in which some other party, some trier of fact, be it judge or jury, is going to be able to interpret that which should have been expressly set forth in the agreement.  A contract should be clear and thorough, spending the extra few words to make it so complete that, as much as possible, no one can interpret it in any other way than the way the draftsperson intended.
Copyright © 2004 Ivan Hoffman.  All Rights Reserved.

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This article is not legal advice and is not intended as legal advice.  This article is intended to provide only general, non-specific legal information.  This article is not intended to cover all the issues related to the topic discussed.  The specific facts that apply to your matter may make the outcome different than would be anticipated by you.  This article is based on United States law.  You should consult with an attorney familiar with the issues and the laws of your country.  This article does not create any attorney client relationship and is not a solicitation.

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