Keeping the Eminence Safe Through Naked Licensing

Introduction

A trademark helps a consumer obtain goods and services of a certain quality and reduces their confusion related to the goods and services. The importance of the quality of the items offered under a brand has increased with the emergence of trademark licensing as a method to maximize use of the trademark. A trademark license is a legal document that allows the use of a trademark under certain restrictions in exchange for a royalty on sales of goods and services that is covered by the license. Both the licensor and the licensee gain from licensing. While a licensee gains advantages from advanced technology to make better-quality items or a recognized trademark to better sell his product, a licensor can grow his company operations, which ultimately aids him in building a strong brand name.

The most crucial element of a trademark licensing is the licensing agreement since it specifies how the brand will be used going forward. To protect the trademark’s uniqueness, the agreement should include stipulations relating to quality control. In this context, the phrase “Naked Licensing” refers to a legal phenomenon when a trademark owner licenses his trademark to a third party without exercising necessary quality control and standard over the licensee’s use of the trademarks. Thus, a trademark loses out due to a license’s lack of quality control measures. When a customer purchases a product from a specific brand, he or she feels confident in the product’s quality because they believe that since they are purchasing from the desired brand, they will receive the desired quality. This is where the significance of expertly creating a license agreement enters the picture. If the problem is brought before a court, failing to monitor the licensee’s activities could lead to the cancellation of the mark and provide the infringer an unfair advantage[1].

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History and Background

The “Naked Licensing” theory was created by US courts to safeguard customers who think that since they purchase a good or service under a particular brand, they will thereafter obtain a particular quality connected with the trademark[2]. It is the responsibility of the trademark owner to exert some degree of control on the caliber of the goods or services offered by its licensee in order to prevent consumers from becoming confused. If there is evidence of naked licensing, the trademark may be deleted from the registration.

A license’s structure

Every trademark licensing agreement must include quality control procedures since trademarks serve commercial reasons and guarantee that the goods and services sold under a given mark will be of a certain standard of quality. In order to prevent the trademark from being cancelled, the licensor typically includes a specific clause relating to the quality control system and restrictions on the use of the licensed trademark and the goods and services covered by the mark.

Indian Case Study

The requirement relating to quality control is particularly included in the Indian Trade Marks Act, 1999. The term “naked licensing” is not mentioned specifically in the Trade Marks Act of 1999. However, there are only a few clauses in India’s Trade Mark Act, 1999, from which we might infer the idea of naked licensing:

It is stated in Section 49(1)(b)(i) that

When it is suggested that someone be registered as a registered user of a trade mark, the registered proprietor and the prospective registered user shall jointly apply in writing to the Registrar in the specified way, and every such application shall be accompanied by—-

An affidavit…

describing the relationship between the registered proprietor and the proposed registered user, whether it is current or proposed, including information about the level of control the registered proprietor will have over the permitted use that relationship will confer, as well as whether it is a condition of their relationship that the proposed registered user be the only registered user or that there be any other restrictions as to who may be registered as a registered user.

Additionally, the Act’s Section 50(1)(d) provides that

“Without limiting the provisions of section 57, a person’s registration as a registered user—“

Any provision in the agreement between the registered proprietor and the registered user regarding the quality of the goods or services in relation to which the trademark is to be used may be cancelled by the Registrar either on his own initiative or upon the application in writing in the prescribed manner by any person.

The aforementioned clauses, which are also referred to as clauses relating to the “naked licensing,” are perfectly positioned to examine the quality control component involved in the licensing of a trademark. The various courts in India have acknowledged quality control as a component of preserving a mark’s distinctive character based on the aforementioned rules.

Justifications for the Ban on Naked Licenses

Trademarks are used to let customers know where a product comes from. Customers depend on them when making purchases because they believe a business that uses a particular mark on its goods will uphold the standards connected with the mark. When consumers notice a logo or other distinguishing mark on a product, they build an awareness of the quality they may anticipate. As a result, while trademark law defends the rights holders in particular marks, it also shields consumers from making poor choices based on inadequate or misleading information.

A consumer would probably think that the items made by the licensee would satisfy the standards of the trademark owner if the trademark owner licenses its trademark to a business that produces comparable but inferior products. If they bought the licensee’s items, they would be unpleasantly surprised because they wouldn’t live up to their expectations. (In certain situations, they might even experience negative health effects.)

Failure to keep an eye on how your trademark is being used leads to a decline in its market value. It is now meaningless in relation to the connected products. Occasionally, this is referred to as the “abandonment” of a trademark. Trademark owners typically include a clause in licence agreements requiring the licensee to deliver samples of goods marketed under the trademark to the trademark owner on a regular basis in order to avoid an abandonment issue.

Trademark cancellation based on bare licenses

A federal appellate court invalidated a wine company’s trademark rights after it failed to keep track of the business it had licensed its trademark to. In another instance ruled by a separate federal appellate court, a bridal shop that licensed its trademark to multiple other organizations without keeping track of them lost trademark protection. This was a family-owned business, and small business owners can learn from the fact that it might not have had the means to successfully oversee numerous licensees. In general, a court will determine that a trademark has been abandoned because it is a naked license if the trademark owner fails to exert control over a licensee or does not include supervision in the licensing agreement.

You should get reports on the kinds of goods being sold with your brand from the company to which you have licensed your trademark in addition to samples from them. To make sure that the trademark use complies with the requirements attached to it, you should be aware of and approve of its nature.

Conclusion

The owner of a trademark has the sole right to use the mark in connection with products and services. At the same time, the owner of the trademark should keep an eye on it to make sure the licensee is delivering products and services up to the standards he has set. A trademark owner is therefore the trademark’s watch dog.

Since the cornerstone of trademark law is to maintain the consistency in meeting consumer expectations for the brand, the proprietor’s responsibility is not to ensure high quality of goods but rather that the products are of consistent quality.

Author: Niyati Vishwakarma, in case of any queries please contact/write back to us via email to [email protected] or at IIPRD. 

Reference

1. Omega Nutrition v. Spectrum Marketing (1991)756 (Suppl.) 435
2. Eurotech Inc., et.al. v. Cosmos Europian Travels (Decided on 24 July 2002
3. 289 F.3d 589-598(9th Cir. 2002)
4. 181(2011) DLT577
5. https://www.mondaq.com/india/trademark/586398/naked-licensing-safeguarding-the-eminence
6. https://www.remfry.com/wp-content/uploads/2017/11/naked-licensing-ip-value-2013.pdf
7. https://corpbiz.io/learning/what-is-naked-licensing-in-trademark/