Australian toy company sues Chinese supplier over warranty claim – big lessons for SMEs

Small businesses that buy goods from overseas and locally have been urged to pay close attention to a legal battle that has pitted listed Australian toy company Funtastic Limited against a former Chinese supplier which was found to have infringed the intellectual property of US toy giant Mattel.

Funtastic is suing US manufacturer MGA, which formerly supplied Funtastic with Bratz dolls. Funtastic paid MGA $20 million for the rights to import the dolls in Australia, which was an estimate of the potential sales of the dolls between 2007 and 2011.

But in 2008, a US court found MGA had infringed the copyright of toy giant Mattel in the creation of the Bratz range. Mattel was awarded $100 million in damages and MGA stopped supplying Funtastic with Bratz products in 2009.

Funtastic is suing MGA for repayment of its original $20 million advance on the grounds that the agreement between the two companies contained warranties whereby MGA promised that it would not use intellectual property rights of a third party. According to court documents, Funtastic argues that because of the US court case, “such representations were false and/or misleading or deceptive”.

Funtastic’s case returns to court on May 21, but intellectual property lawyer Trevor Choy, who has been following the case closely, says a lesson has already emerged about the importance of warranties and indemnities within contracts, particularly if you are a small company buying from a large company.

He says that while big companies will always use warranties when they are purchasing goods or services, it is often a different story when big companies are selling.

“What will happen is that bigger the company will conveniently leave it out and if you insist on putting in that clause, they may not want to do business with the smaller firm,” Choy says.

“It’s important that small businesses put up a bit of fight to get these clauses in without damaging the deal.”

Choy says that the clauses can be better than a money-back guarantee. As well as money paid to purchase a product, a company that has been wronged can claim damages for marketing costs, transportation costs and other selling costs.

“In the case of a $20 million contract, the indemnity could conceivable push that to $100 million.”

Choy says one way smaller companies can compromise with big suppliers without jeopardising their relationship is to insist on a warranty, but be prepared to give ground on the size of the indemnity, such that it is restricted to a money-back arrangement.

Smaller companies who are supplying to big businesses also need to be aware of warranties and indemnities they may be given as part of their contract, Choy warns, and realise that a $20,000 contract could carry with it a potential payout of $2 million if things go wrong.