On August 5, 2024, the Intellectual Property and Commercial Court (hereinafter the "IP Court") issued its Civil Judgment No. 112-Min-Shang-Su-Zi-54, which analyzes and assesses whether a licensor can terminate a license agreement on the grounds that the licensee has exceeded the scope of the license. This judgment is worth noting.

 

The factual background of this case is that the Parties entered into a license agreement, under which the Defendant was appointed as the exclusive distributor for the Plaintiff, to provide films and television programs, made by a U.S. corporation, to hotel operators in Taiwan, as well as to manage trademark rights of such U.S. corporation (hereinafter the "Disputed License Agreement"). The parties also agreed to use the Authorized Film List provided by the Plaintiff (hereinafter the "Authorized Film List") as the scope of the license.

 

Upon the Plaintiff's further investigation, the Plaintiff discovered that some films the Defendant supplied to the hotel operators were not included on the Authorized Film List, and such action clearly exceeds the scope of license agreed to in the Disputed License Agreement. Thus, the Plaintiff claims that the Defendant failed to fully perform under the Disputed License Agreement, and thus the provisions of Article 227, Paragraph 1 of the Civil Code, which are applicable to Article 256 of the Civil Code, should be analogously applied to terminate the Disputed License Agreement. However, the Defendant denies such claim, and the Plaintiff has therefore filed the present lawsuit.

 

Considering the Plaintiff's claims, the IP Court first examined the nature of the Disputed License Agreement and determined that the Disputed License Agreement is an agreement between the Parties in which the Plaintiff would provide the films listed in the Authorized Film List to the Defendant for use within the ten-year term of the agreement. Thus, the IP Court concluded that the Disputed License Agreement qualifies as a continuing supply agreement, as defined by the Supreme Court, which is an agreement in which one party continuously provides the agreed-upon goods to the other party over a fixed or indefinite period, with the receiving party paying a price for the goods.

 

The IP Court further elaborated that a continuing agreement with a definite term should not be subject to the risk that the parties would be bound permanently, since such agreement has a clear expiration date. However, if, during the term of the agreement, one party fails to fulfill its obligations, the other party may feel that they have been unjustly wronged, particularly since the Civil Code does not explicitly provide for the non-violating party to terminate the agreement on such basis. As such, to address the aforementioned situations, the Supreme Court accordingly acknowledged that the creditor shall be entitled to invoke the provisions on non-performance of obligations by analogy to terminate the contractual relationship. Thus, the core issue in determining whether the Plaintiff is entitled to terminate the Disputed License Agreement is whether the Defendant has failed to perform its obligations under this Disputed License Agreement.

 

After deliberation, the IP Court found that the Defendant did exceed the scope of the Disputed License Agreement. However, the IP Court held that according to the terms of the Disputed License Agreement, the Defendant's "obligation to perform" is to pay a certain percentage of the hotel's revenue to the Plaintiff since the Disputed License Agreement stipulates that the licensor (i.e., the Plaintiff) must provide the licensee (i.e., the Defendant) with a list of authorized films, and there are no additional provisions. In other words, the Disputed License Agreement only requires the Plaintiff to provide the Defendant with a list of authorized films but does not prohibit the Defendant from independently downloading films outside the scope of the authorized list and offering them to the hotel operators. Thus, the Defendant's behavior does not constitute a failure to perform its obligations under the Disputed License Agreement, and the IP Court ultimately dismissed the Plaintiff’s case.

 

The performance obligation refers to the parties' act of fulfilling the content of the debt. Whether the debtors have fulfilled their obligation in accordance with the intent of the debt should be determined based on the mutual agreement that established the debtor-creditor relationship. When the licensee exceeds the scope of the license, the question of whether the licensor is entitled to invoke the provisions on non-performance of obligations by analogy to unilaterally terminate the license agreement hinges on whether compliance with the license scope is part of the performance obligations under the agreement. Thus, when drafting or negotiating a license agreement, it is advisable to clearly specify the licensee's obligation to adhere to the scope of the license within the agreement, in order to reflect the parties' mutual intent regarding their contractual performance obligations. Furthermore, to protect the licensor's rights by strengthening the licensor's entitlement to unilaterally terminate the agreement in the event of the licensee exceeding the scope of license, it is worth considering to explicitly state in the agreement that the licensee's actions outside the scope of the license constitute grounds for the licensor to directly terminate the agreement.