In layman’s term, a “licence” is a licence granted by an owner to a proposed user to use the owner’s property, subject to any usage restrictions specified. Through trademark licencing, the licensor (owner of the mark) can provide permission to the licensee (proposed user of the mark) to use their trademark, with the licensee being obligated to abide by any terms and restrictions imposed on the sale of goods or services licenced under the said brand. Accordingly, “Naked Licencing” is the practise of the licensor granting the licensee permission to use the trademark without including and/or enforcing any quality control clause in the licence agreement.
In the area of trademark law, this article aims to provide a clearer understanding of the practise of naked licencing. The report charts the evolution of trademark licencing in India and compares it to the notion of licencing quality control. It outlines the legal and legislative status of the quality control clauses related to trademark licencing in India.
What is meaning of trademark and trademark licensing?
TRIPS states that a trademark can be any indication, or group of marks, that can be used to differentiate one company’s goods or services from those of other companies. These signs, namely words, including human names, letters, numbers, figurative components, colour combinations, and any combination of these signs, are eligible for trademark registration. The definition of “trademark” is found in Section 2 (bz) of the Trademark Act of 1999. It refers to a mark that may differentiate the goods or services from one person to another and is visually portrayed. The packing or the form of the items may be the cause. A trademark might be an identifiable symbol, design, phrase, name, logo, or abbreviation. To prevent misunderstanding in the marketplace, a trademark should be distinct in the mind of a customer.
- Trademark licensing
Is a registered trademark being exploited for a profit by third parties? Yes, A trademark owner may share or transfer his rights and may grant a third party a licence to use or exploit the brand. The trademark owner must enter into a contract with the party with whom he wishes to share his rights in order to transfer some of those rights. Therefore, a trademark licencing agreement is a contract in which the owner of a trademark authorises another party to use the owner’s brand in connection with particular goods or services. An effective and affordable method for a trademark owner to increase the usage and public knowledge of their trademark is through trademark licencing. When a trademark is licenced, the rights to it remain with the original owner, but some limited rights, such as the right to use the trademark and sell products, are granted to a third party. The registered proprietor is the exclusive owner; throughout the term of the agreement, the licensee has no right to assert ownership. Indian law prohibits trademark sub-licensing, despite the fact that trademark licencing has been significantly liberalised in India. It would be necessary for the registered user and the third party to execute a licence agreement. The sections principally cover the payment of royalties, the parties’ rights and obligations, and the termination clause and its repercussions.
Plant breeders and Merchandising partnerships are two frequent examples of trademark licencing. The Trademark Act of 1999 makes no mention of the words “licence” or “licencing.” Licensees are referred to as Registered users. The brand Act of 1999’s Section 2(1)(r) defines “Permitted use” as the use of a registered brand by a registered user with the registered proprietor’s permission. The Act’s Sections 48 to 55 set forth the rules for trademark licencing. Users who are registered are covered under Section 48.
Origin and Background of the Concept
Trademark licencing is the act of a registered trademark owner giving permission to a third party to use and exploit his brand in accordance with predetermined terms and conditions. On both a national and international scale, trademark licencing has come to be seen as an essential tool for company organisation. The trademark owner can quickly and easily extend his company globally by licencing. The licensor accepts ownership of the mark and the licensee’s use of it in exchange for a cut of the profits. It is referred to as “naked licencing” when the licence agreement excludes quality control over the licensee.
The “Naked Licencing” theory was created by US courts to safeguard customers who think that because they purchase a something or service under a certain brand, they would automatically obtain all of the qualities connected with the trademark. It is the responsibility of the trademark owner to exert some degree of control on the calibre of the goods or services offered by its licensee in order to prevent consumers from becoming confused. If there is evidence of naked licencing, the trademark may be deleted from the registration. The Harvard Law Review article “The Rational Basis of Trademark Protection” by Frank Schechter, which advanced the notion that trademarks were no longer merely indicators of origin but an impersonal and anonymous guarantee of satisfaction, also played a significant role in the idea of naked licencing. The Harvard Law Review article “The Rational Basis of Trademark Protection” by Frank Schechter, which advanced the notion that trademarks were no longer merely indicators of origin but an impersonal and anonymous guarantee of satisfaction, also played a significant role in the idea of naked licencing.
The structure of a license
Every trademark licencing agreement must include quality control procedures since trademarks serve commercial reasons and guarantee that the goods and services sold under a certain mark will be of a certain standard of quality. In order to prevent the trademark from being cancelled, the licensor typically inserts a particular clause relating to the quality control system and restrictions on the use of the licenced trademark and the goods and services covered by the mark.
The Barcamerica trademark was invalidated in Barcamerica International USA Trust v. Tyfield Imports, Inc. on the grounds of naked licencing, and the court found that:
Remember that ‘quality control’ does not necessarily imply that the licenced goods or services must be of ‘high’ quality; rather, it only means that they must be of equal quality, whether that quality is high, low, or moderate. The key is that consumers have a right to expect consistency and predictability in the type and quality of products and services supplied under the mark at all authorised locations.
In addition to being acknowledged by US courts, the Trade Marks Act, 1999 of India also has particular requirements relating to quality control in the context of licencing a trademark. We may now turn our focus to the Indian situation in this regard.
Provisions governing Naked Licensing of Trademarks in India
The Trademarks Act, of 1999, which addresses trademark licencing in India, recognises the use of a brand by a registered user and that of an allowed user. However, the statute focuses on quality control rather than using the word “naked licencing” specifically. However, the Act does contain a few clauses that can be used to interpret the idea of naked licencing. According to Section 2(1)(r)(ii)(c) and (d), the licensee and the proprietor must engage in a written agreement in some form, and the licensee must abide by all the terms of that agreement. In the cases of Gujarat Bottling Co. Ltd. v. Coca-Cola Co. and Cycle Corporation of India Ltd. v. T.I. Raleigh Industries Pvt. Ltd. & Ors, the court ruled that the failure of a licensee to register as a “registered user” does not affect the rights given to the proprietor in his registered trademarks.
In furtherance to this, Section 49 (1)(b)(i) of the Trademarks Act of 1999, talks about the application, and it says that where there is a registration of a user is involved, there must be an affidavit that details the relationship of the proprietor and the user, and that it should also elaborate on the degree of control over the use of goods or services.
The provisions as mentioned above indirectly relate to naked licensing and the quality control factor involved while licensing a particular trademark. Quality control as a factor in maintaining the distinctive character of a mark has been recognised judicially in India. The apex court in the case of, Coin Holdings Ltd. & Anr. v. Trans Tyres (India) Pvt. Ltd. & Anr, concluded that control can be exercised or imputed in a variety of ways. In some circumstances, the degree of control might be implied by the nature of the existing relationship between the licensor and the licensee. The licensor may require the licensee to produce items in compliance with the specifications and standards set out by the licensor, and may reserve the right to inspect the licensee’s processes and products.
Thus, it can be concluded that quality control is a factor used to define the degree of control, but in the situation of naked licencing, its importance has been diminished. The term “degree of control” is not mentioned in the Act, and aside from a relatively small number of court rulings, little expertise is available in this area.
The legal position and the aforementioned instances underline the need to do due diligence, the need for genuine control to be exerted over quality and other factors, and the licensor’s obligation to take corrective action.
Consequences of naked licensing
It is clear that naked licensing has the potential to mislead consumers as to the quality of the product and hurt the goodwill and market standing of licensors in the market. It is thus essential to look into the legal consequences of undertaking such practices, and how the courts and legislature have dealt with mitigating the impacts of inadequate quality control.
Because of this, the law includes protections for registered users. For example, Section 50 of the Trade Marks Act, 1999 allows the Registrar to cancel a registered user’s registration on his own initiative or in response to a written request from a third party if a condition relating to the calibre of goods or services produced in connection with the trademark is either met or not met. The existence of control provisions is listed as a need for registration as an R.U. in Section 49(1)(b)(i). Section 57, allows for the cancellation or modification of a trademark registration upon application by any person who is dissatisfied on the basis of any violation or failure to comply with a condition entered on the register in relation thereto, which would implicitly include a quality control provision. In the case of a registered user, the solution is relatively simple. It is essential to highlight that there are no protections for licensees who are not registered.
In Rob Mathys India Pvt. Ltd. v. Synthes Ag Chur, the Delhi High Court (Court) stated that conditions of control are sufficient to maintain the connection in the course of trade between the trademark owner and the goods in relation to which the licensee is using the trademark. The Court said that a trademark’s uniqueness would be fatally undermined by insufficient control or a gradual loss of control. A trademark’s loss of distinctiveness qualifies for trademark cancellation under the Act. Section 57 of the Act lists the grounds for cancelling a trademark registration. The trademark still needs to be included on the registry, which is one of the defences. This justification allows for cancellation because the mark lacks any distinguishing qualities and cannot continue to be registered in accordance with Section 9 of the Trademark Act.
Measures to prevent naked licensing
Businesses should carefully consider and implement quality control procedures like those outlined below in order to prevent naked licencing:-
- A list of the products and services for which the trademark may be used. Use of the mark in connection with any other goods and/or services should be prohibited;
- Strict quality control procedures to ensure that the goods and services sold under the mark are of a high calibre;
- Prohibition of unapproved trademark morphing, editing, modification, and change;reserving the right to examine the quality of the products and services delivered using the trademark and the manner in which it is used;
- Prohibiting the licensee from using the same or similar marks both during the term of the licence and after it expires;
To conclude the foregoing discussion, the concept of naked licencing has a significant impact on proprietary rights in licensed trademarks. Under this concept, an individual with a trademark license can allow a licensee to use its trademark without putting quality control provisions. The licensor must frequently remember their responsibilities under a licence agreement due to the ever-expanding and ongoing usage of intellectual property and resources. But it should be the duty of the trademark owner to have an eye on the use of their trademark and ensure that the licensee is providing the goods or services as per the standard of quality laid down by them.
Read our Article: Trademark Licensing For Startups: How To Leverage Your Brand For Growth?