Karhu Holding BV, the Dutch company that acquired intellectual property rights for the Finnish sports brand earlier this year (see SGI Europe No. 19-21+22 of June 27) on behalf of two U.S.-based sports industry executives, has become embroiled in a fierce legal dispute with the former owner of the trademark, Karhu International in Finland, and its sister company, Karhu Sporting Goods (KSG). As part of the bizarre bust-up, Helsinki police have opened a criminal investigation into suspected fraud, as the two parties have filed complaints against each other for alleged use of forged documents.

The Dutch holding company publicly announced on Aug. 15 that it was terminating a deal under which it was licensing the brand back to the Finnish company for certain products and markets because of what it described as “substantial and material breaches” of the agreement by KSG. Karhu Holding wants to keep ownership of the brand and use it mainly to push its footwear line worldwide.

One week later, on Aug. 22, the Finnish party said it had decided to cancel the entire sale of trademark rights to Karhu Holding and the related license and patent agreements – although this would have to be confirmed by an arbitrator, as at least one of the contracts contains a clause saying it cannot be rescinded. Angrily describing the case as a bad-faith attack by Karhu Holding to renege on part of its obligations, KSG said that it was denying all the charges and that it would hold Karhu Holding responsible for any damages.

Huub Valkenburg and Jay Duke, two seasoned sporting goods executives based in Boston who have worked for Reebok and Converse in the past, formed Karhu Holding in the Netherlands, with the backing of a wealthy Dutch investor, to buy nearly all the intellectual property rights for the Karhu brand. Those for Spain, Portugal and Andorra were excluded because they had been sold earlier to Oteros Sport. Valkenburg’s company in Boston already held licensing and distribution rights for Karhu footwear in North America, but he and his partner wanted to re-launch the Finnish brand on a much larger scale, concentrating on its athletic footwear.

According to Karhu Holding, the trademark deal was finalized on March 18 and paid for by the company in two installments, the second of which was made as scheduled toward the end of June.

In addition to the trademark agreement, Karhu Holding arranged at the same time a more complex deal for the use of patents on Karhu’s footwear technology, which are among its most valuable assets. Karhu Holding says the patents were transferred through a royalty-free, perpetual and irrevocable license issued by Karhu International to Karhu Holding – except in Scandinavia and Finland, where the Finns still own Karhu patents for ski boots, and where patents for some other items of footwear do not belong exclusively to Karhu Holding.

In turn, Karhu Holding agreed that KSG would hold a long-term license to manufacture and distribute Karhu athletic footwear in Scandinavia and Finland, as well as cross-country skis around the world. Valkenburg had no interest in Karhu’s equipment business, which includes a cross-country ski factory in the north of Finland and a licensing agreement with K2 in North America.

However, Karhu Holding managers said they were unsettled to hear in May that KSG had bought the pole business of Exel, in apparent conflict with the fact that Karhu had agreed to license the Karhu name for its own existing line of poles. They said they were even more upset to see that a company called Karhu GmbH had been established without their permission in Germany by Pertti Keskitalo, KSG’s chief executive, which was going to use Exel’s former operations and personnel in that country. The catalogs printed by Karhu GmbH apparently displayed Karhu branded athletic footwear, although there was no mention of this territory in KSG’s licensing deal for these products.

Karhu Holding issued a termination letter to KSG on July 24, citing four breaches of contract and putting an end to all licensing agreements, for athletic footwear as well as equipment. That same month, Valkenburg and his advisers even turned to the Finnish police, alleging that Keskitalo had used a forged document to misrepresent a significant licensing agreement signed by Karhu International prior to the sale of the trademark rights.

KSG is crying foul, denouncing what it calls a “deliberate act of malice and bad faith” by Karhu Holding, and stressing that it had not been given any opportunity for negotiation or clarification on the matter before the Dutch company made its public attack, violating certain confidentiality obligations.

Keskitalo stated that there was no breach of contract. An attorney for the Finnish side alleged that, by attempting to simply terminate its licensing agreement, Karhu Holding was trying to reduce the price of the overall package. Keskitalo also accused Karhu Holding of failing to make payments for use of some molds related to its patents.

Reacting to Karhu Holding’s fraud charges, Keskitalo countered by lodging a complaint with Helsinki police against Valkenburg and his Finnish attorney, Markus Rämö, on suspicions of fraud. The complaint was based on accusations by Keskitalo that the two had used false and misleading documents to register some of Karhu’s footwear patents before they had been effectively transferred. Helsinki police confirmed that this complaint had been integrated into its investigation, but unlike the accusations against Keskitalo, had not been passed on to the public prosecutor.

The contract between Karhu Holding, Karhu International and KSG is governed by Dutch law and disputes are to be handled through arbitration. Advised by Nauta Dutilh, Karhu Holding filed a request for arbitration on Aug. 18. KSG stated that it had done the same, although at the time of writing Karhu Holding had not received any notification of such a filing.

Unless there is a settlement, it could take several months to solve the issue, creating uncertainties for employees and clients. The dispute is most unwelcome for Valkenburg, who intended to quickly build up international distribution for Karhu footwear. On Aug. 21, just before KSG’s reply to his company’s charges, Valkenburg announced the selection of W.J. Sportswear as the exclusive distributor for Karhu athletic footwear and apparel in the Benelux countries. He subsequently said that he was scrambling to set up alternative distribution arrangements for these products in Scandinavia and Finland, following the termination of its licensing arrangement with KSG. He said meetings with suppliers and leading retailers in Finland had convinced him that he could continue to deliver and sell Karhu footwear there in spite of the stand-off with KSG.

Valkenburg, a gutsy executive who helped set up the subsidiaries of Reebok in Russia and India in the 1990s, wanted to re-launch the Karhu brand internationally in the running segment in 2009 and then in the outdoor market the following year, focusing on trail running and sandals. The development operations for Karhu’s footwear have already been moved to Boston and the company has retained the Dan Richard Design agency in New Hampshire to make better use of the patent for Karhu’s Fulcrum technology.