Caveat Emptor: Lessons from Volkswagen's Lemon Purchase Terence Lau University of Dayton, [email protected]
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University of Dayton eCommons Management and Marketing Faculty Publications Department of Management and Marketing 1-1-2003 Caveat Emptor: Lessons from Volkswagen's Lemon Purchase Terence Lau University of Dayton, [email protected] Follow this and additional works at: https://ecommons.udayton.edu/mgt_fac_pub Part of the Business Commons, Economics Commons, and the Law Commons eCommons Citation Lau, Terence, "Caveat Emptor: Lessons from Volkswagen's Lemon Purchase" (2003). Management and Marketing Faculty Publications. 60. https://ecommons.udayton.edu/mgt_fac_pub/60 This Article is brought to you for free and open access by the Department of Management and Marketing at eCommons. It has been accepted for inclusion in Management and Marketing Faculty Publications by an authorized administrator of eCommons. For more information, please contact [email protected], [email protected]. CAVEAT EMPTOR: LESSONS FROM VOLKSWAGEN’S LEMON PURCHASE T E R E N C E J . L A U Claudius, the news that Rolls-Royce (and its Terence J. Lau is an assistant professor of INTRODUCTION sister Bentley) was being sold to German Business Law at the University of Dayton. automaker Volkswagen AG in 1998 and that He is the former in-house counsel to In the spring of 1998, German automobile arch-rival BMW would own the trademark Ford Motor Company, specializing in manufacturer Volkswagen AG paid almost to Rolls-Royce starting in 2003 was greeted international trade and transactions $1 billion for Rolls Royce but did not with derision and despair in Great Britain. practice, and former director of ASEAN acquire the Rolls Royce trademark, which The end result, however, was far from pre- Governmental Affairs, Ford Operations was ultimately sold to rival BMW for a mere ordained. Sloppy negotiating, abysmal due Thailand. $65 million. The story of Volkswagen’s diligence, and a rush to “get the deal done” led botched acquisition is a reminder of the to the incestuous relationship between BMW This article is an adaptation of text importance of careful due diligence when and Volkswagen, and the “children” of that prepared for remarks by the author at the engaged in international acquisitions. relationship: Rolls-Royce and Bentley. University of Dayton School of Law Fifth In Part I of this Article, Volkswagen’s To understand the convoluted history of Annual Licensing Intellectual Property steps (and mis-steps) are retraced and the Rolls-Royce/Bentley saga, it is important Seminar, March 20-21, 2003. solutions are offered for counsel engaged to trace the historical route the entities in international transactions with the hope involved took. Since 1904, when Henry provides a brief introduction to that control 3 that the practitioner with little experience Royce met Charles Rolls, Rolls-Royce has regime. Penalties for violations are stiff and represented the very best in British motoring in this area can avoid similarly embarrassing potentially ruinous, and enforcement is at an 1 and has set the world standard for vehicles and costly errors. all-time high due to security concerns. This For many small to medium-sized that catered to the ultra-rich. In 1931, Rolls- is information that all international counsel 4 companies, the task of expanding Royce purchased Bentley, and, thus, began a should be aware of, not just experts in the fruitful and prosperous relationship that saw internationally is a daunting proposition. field. In addition to the business equation, Rolls-Royce cater to the ultra high-end luxury the prospect of establishing a foreign market while Bentley (which often were subsidiary or forming a joint venture with a I. AN ACQUISITION GOES Rolls-Royce vehicles thinly disguised, i.e., no flying lady, formally known as the “Sprit of local partner is simply beyond the resource AWRY – WHERE WERE capabilities of many domestic enterprises. Ecstasy”) catered to the “sporty” end of the THE RADEMARK ICENSE Licensing is therefore an affordable and T L same niche market. Meanwhile, during the efficient way for companies to expand ATTORNEYS? Second World War, Rolls-Royce focused its overseas. Licensing comes in many attention on manufacturing aircraft engines, permutations and sizes but is essentially a Within a month, a venture that continued successfully after contract not to sue, by the licensor, as long Ere the salt of most unrighteous tears the war. In 1971, after financial difficulties as certain conditions are met. In addition Had left the flushing in her galled eyes, with product development of a jet engine to due diligence, therefore, international She married. O, most wicked speed, to post designed for use on commercial airliners, corporate counsel should be aware of With such dexterity to incestuous sheets! the entire company (then Rolls-Royce PLC) -- Hamlet (1.2.153-157)2 went into receivership, and the vehicle unique contracting issues that arise in 5 international intellectual property licenses. and aviation companies were separated. In Part II of this Article, recommendations When Will Shakespeare wrote Hamlet’s first Rolls-Royce Motor Cars Ltd., producing are offered on how to draft contract clauses soliloquy, he could not have foreseen a world both Rolls-Royce and Bentley vehicles, was for international licensing use. where his words would have significance for formed in 1973, and in 1980, was acquired by Finally, a discussion of licensing the breakup of one of the United Kingdom’s defense manufacturer Vickers PLC. During technology that is U.S. origin would not most venerable companies, Rolls-Royce. Just the 1971 receivership, however, Rolls-Royce be complete without a brief discussion as Hamlet despaired over his uncle’s murder PLC maintained ownership of the “Rolls- of the U.S. export control regime counsel of his father and his mother Gertrude’s Royce” trademarks and licensed the use of should be aware of. Part III of this Article subsequent marriage to the murderous the mark to Rolls-Royce Motor Cars Ltd. in a 1973 trademark license agreement. One of 3 CURRENTS WINTER 2004 the clauses in that agreement provided that included an ancillary deal to purchase Vickers’ Volkswagen, realized (or knew all along) while Rolls-Royce Motor Cars Ltd. would Cosworth engines subsidiary for an additional the trademark was worth more than the have the rights to manufacture Rolls-Royce $190 million.15 On June 5, 1998, Vickers assets and was not part of what Vickers and Bentley motor vehicles, Rolls-Royce shareholders agreed to the VW offer.16 PLC was selling, negotiated purchase of PLC would maintain exclusive control of the It seems axiomatic that in an acquisition the trademark from its rightful owner and Rolls-Royce mark in the event Rolls-Royce worth many hundreds of millions of dollars, longtime partner (one has to wonder if Motor Cars Ltd. (the licensee) was sold to a trademark attorneys would have been the sale of its aero engine joint venture foreign owner.6 integrated into the due diligence process in to Rolls Royce PLC in 2000 was part of By the late 1990’s, Rolls-Royce Motor order to identify the nature of the trademark the negotiations), and then delivered the Cars Ltd. had run into financial difficulties property owned by the target company. death blow to Volkswagen by cutting off and was having difficulty raising sufficient Arguably, in a company with storied past and supply of engines for critical products. The cash to invest in new product development. famous trademarks such as Rolls-Royce and end result: Volkswagen had paid almost The auto industry is notoriously unforgiving Bentley, the trademark is worth more than $800 million for a premium luxury car in terms of capital expenditure and absent the other assets purchased. It may also seem company but did not have the right to use high volume or high margins (preferably obvious that the transactional attorneys would its brand, had no engines, plunging sales, both), cash to invest in future product review material supply agreements prior to and inherited an ancient assembly plant and programs can be scarce. Meanwhile, Vickers closing to ensure the target company could cranky British workers. PLC, the motor company’s parent, was continue operating its business as it normally On July 28 that year, over a round of golf interested in pursuing strategic growth in would while the new owner integrated the at the Neuburg country club, Pischetsrieder marine, propulsion equipment, and turbine target into its own processes, which for an and Piech came to a compromise. components.7 Vickers, therefore, announced automobile company can take several years. Under the terms of a Memorandum of the sale of Rolls-Royce Motor Cars Ltd. in Alas, neither assumptions held true for Understanding, Volkswagen would retain 1997. Volkswagen’s acquisition team. the Bentley trademark, the factory in Crewe, At first blush, it may seem reasonable to a and its 2400 workers. BMW would own the buyer interested in the company to assume that The end result: Volkswagen had Rolls-Royce brand, but did not acquire the corporate entity held all the assets required any factories, employees, or other assets.20 to manufacture, distribute, and market Rolls- paid almost $800 million for a While BMW designed a new product and Royce and Bentley motor vehicles. On premium luxury car company built a factory in England (eventually built March 30, 1998, BMW announced a $560 in Goodwood), it would license the Rolls- million bid for Rolls-Royce Motor Cars Ltd.8 but did not have the right to Royce brand to Volkswagen until January BMW, then led by Bernd Pischetsrieder, had use its brand, had no engines, 1, 2003. It would also resume supply a long history with Rolls-Royce, both the plunging sales, and inherited of engines to Volkswagen to keep the aerospace engine company and the motor Rolls-Royce Silver Seraph in production.