Restrictive covenants - Millen v Karen Millen Fashions Ltd & Anor [2016]

What is the scope of restrictive covenants given by a seller of a business?

The facts

In 2004, Karen Millen Holdings Limited (KMHL), the holding company of the Karen Millen group, was sold to an Icelandic consortium. The share purchase agreement (SPA) included the following restrictive covenants:

• not to use, or attempt to use, in the course of any business any of the KMHL intellectual property rights

• not to carry out any act, or omit to do any act, which would adversely affect any group member’s concession or other similar arrangement with any third party (including department stores), where that effect could reasonably have been avoided by virtue of the party in question acting differently

• not to use the name "Karen Millen" or any other name confusingly similar (including names which use "KM" or "K.Millen" as a prefix or suffx) in any connection with any business which is similar to or competes with the business of the KMHL Group.

In October 2014, Karen Millen applied to the High Court for declarations that certain activities, including the use of the business names "Karen Millen" for homewares and "Karen" for goods or services in the US and China would not breach the restrictive covenants in the SPA. KMHL counterclaimed seeking an injunction to prevent Karen Millen from doing or omitting to do any act which had the effect of damaging their concessions or other similar arrangements (as prohibited by the restrictive covenants).

The decision

Karen Millen argued that the IP rights of KMHL were those held at the time of the agreement in 2004 when its geographical goodwill had been more limited, and therefore her proposed businesses could not be deemed to be confusingly similar. KMHL argued that goodwill was changeable and had to be assessed at the time Karen Millen brought her claim, so that it included the KMHL’s subsequent establishment in the US and China.

In determining whether the competing businesses would cause confusion detrimental to the goodwill in the "Karen Millen" mark, the Court found that the two limbs of the clause (similar or competing business; confusing similarity) had to be considered together and in light of the surrounding circumstances. The clause looked not at the goodwill at the date of the SPA, but at the goodwill as at the date of Karen Millen’s proposed acts (by which time the KMHL’s business was established in China and far more established in the US than it had been in 2004). In the Judge’s view, many of Karen Millen’s proposed acts would constitute a breach of the restrictive covenants.

Why is this important?

The Court considered the alleged breach in relation to the state of the business at the date of the claim as opposed to at the date of the SPA. This demonstrates the importance of considering the target’s potential expansion when drafting restrictive covenants.

Any practical tips?

Consider expressly stating within the provisions whether the restrictive covenants are to be assessed by reference to: (1) the business as at the date of the agreement; or (2) specific territories or planned future expansion; or (3) to the business (in whatever its then form) at the date of the proposed activities.