Cultivate 10

Bag tag (licence) agreements

Things to know under German Law

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Publication February 2016

The research and development relating to plant varieties is expensive and time consuming but, once created, a plant of a certain variety is inexpensive to duplicate. The producer of a plant variety right (a breeding company or breeder) will hold intellectual property rights over a plant variety it has created. Protecting those rights, in particular in relation to the “end users” (mostly farmers) of the seeds of the plant variety, is very important to the breeders to ensure that production of a plant variety is economically viable.

Seeds are purchased by the farmers (or other end users) from a supplier, or the last supplier in a chain, through a seed purchase agreement, which will not typically impose restrictions on the purchaser in respect of the use of the plant variety rights.

Breeding companies may try and impose such restrictions on the purchaser by seeking to create a direct relationship with the purchaser. The breeder may attach a tag on the seed packaging (the seed bag) that contains the breeder’s terms and conditions and seeks to apply them to the purchaser by stating that they are accepted when the purchaser opens the bag; this is known as a “bag tag”. However, while this appears to be a simple and practical solution, use of bag tags can be legally complex, as this article discusses in the context of their use and the protection of intellectual property rights over plant varieties in Germany.

What is the purpose of a bag tag?

Under German law, the protection of plant varieties is provided for in the German Plant Variety Protection Act (Sortenschutzgesetz) of 1985 (the Act) and in the European Regulation No. 2100/94 of 1994 on community plant variety rights.

Under the Act, the breeder is exclusively entitled to reproduce seeds from the plant variety it has created. However, there is a “seed saving exemption” that allows farmers to reproduce seeds from their own harvests by replanting such seeds on their own farms (producing seed from seed). Farmers relying on this exemption (subject to certain exceptions for small farmers) are required to pay an appropriate compensation and disclose all necessary information on the extent of the reproduction to the breeder. These compensation and information requirements are further considered below.

Farmers and other end users are afforded additional flexibility to use rights to plant varieties under the “principle of exhaustion”, which provides that protection over plant variety rights will stop applying to a specific plant, part of a plant or plant material once it has been put on the market by the breeder or with the breeder’s approval.

The combined impact of the seed savings exemption and the principle of exhaustion is that no licence is required for farmers to make use of (the rights in) a plant variety – the bag tag is therefore not considered to be a licence, but an agreement that seeks to govern and restrict the use of the seeds, in particular by restricting the purchaser’s statutory rights.

Can a bag tag agreement be enforced?

However, a breeder’s ability to enforce such restrictions depends on whether the bag tag creates a valid contract between the breeder and the end user of the seeds. For such a contract to be formed, the opening of the bag by the purchaser would need to constitute acceptance of terms and conditions of the bag tag agreement, including the restrictions on the use of the seeds. Such acceptance would take place after the purchaser has acquired the seeds, with unrestricted rights of use, from the supplier. Therefore, whether a contract is formed is uncertain, with the most likely conclusion being that a purchaser (or any objective third party) would lack understanding of the implications of opening the bag, meaning that the test for acceptance would not be satisfied and the bag tag agreement would not be considered to be validly formed.

For breeders to ensure that enforceable terms are imposed on the purchasers, these would need to be contained in, or incorporated into, the seed purchase agreement entered into between the purchaser and the supplier of the seeds and, where relevant, replicated in each agreement down the supply chain. The requirement of such incorporation challenges the simplicity of the bag tag concept.

Limitations and restrictions

In addition, even if a bag tag agreement is enforceable, there are requirements and limitations under German statutory law that apply to the content of the terms and conditions of the bag tag agreement.

The language in which the terms are provided is prescribed – the general view is that English will be sufficient but this is not certain where the negotiations and correspondence have been concluded in German.

Any terms that are ‘so unusual and surprising that the other party could not have foreseen them’ or that (against good faith) inappropriately disadvantage the other party will not be held valid. Whether a party is inappropriately disadvantaged will be determined by the courts on a case by case basis. In general, in case rights having been acquired unrestrictedly are subsequently being restricted, it is more likely than not that a court may deem a party to be inappropriately disadvantaged.

Probably of most interest to breeding companies is that the exclusion of the seed savings exemption (a statutory right) in a bag tag agreement is highly unlikely to be upheld by the courts. However, stipulation of the compensation payable and the information to be provided by the purchaser under the seed savings exemption is more likely to be upheld and could provide some protection for breeders (other than against small farmers to whom an exception from the compensation provisions apply).

In addition, the generally accepted view is that exclusions or restrictions on the export of seeds to countries where plant variety rights are not protected is legitimate and likely to be permissible.

The governing law of a bag tag agreement may also be open to dispute, particularly in cross border transactions (although this is less of a concern within the European Union), which may impact on a breeder’s ability to create a standardised bag tag agreement for use globally, particularly as the legal regimes for intellectual property rights on plant varieties vary from jurisdiction to jurisdiction.

Benefits of a bag tag – the seed saving exemption

With such legal uncertainties, it would be easy to conclude that bag tags are of little benefit to breeding companies. However, aside from seeking to establish a contractual relationship, a bag tag will notify the purchaser that the seed contained in the bag is subject to a plant variety right, which may assist the breeder in successfully raising (i) information and compensation claims and / or (ii) damage claims against the purchaser in relation to the breeder’s rights under the seed saving exemption.

A well drafted bag tag should allow the breeder to request information and enforce its compensation claims for the previous three years even if no prior claims have been raised during that period.

As the seed saving exemption only applies where appropriate compensation is paid, a breeder may seek damages from a purchaser who infringes its rights by seeking to rely on the seed saving exemption in circumstances where no compensation has been paid. Damage claims will only be successful if the purchaser knew that plant variety rights were being infringed, and a bag tag can provide useful evidence of this knowledge.

Conclusion

Using a bag tag is not as simple and practical as it first appears, and there are more legal uncertainties attached to it than certainties created. However, a properly drafted bag tag will serve the purpose of notifying a purchaser of the breeder’s statutory rights. So breeders should hurry to prepare their bag tags.

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