Trademark Licensing in India

One of the drastic turnarounds caused by the introduction of the new Trade Marks Act, 1999, repealing the old Trade Marks Act, 1958 was broadening the definition of the phrase ‘permitted use’. In the new Act, the use of a registered Trade Mark is now permitted not only by the registered user, but also by a third person who is permitted to use the captioned registered Trade Mark with the consent of the registered user. A license agreement would be signed between the registered user and the third party. The clauses would mainly include granting of rights, royalty payment, duties and obligations of both the parties, arbitration/mediation clauses, termination and its consequences, to name a few. This practice is called Licensing which is treated as a part and parcel of any business these days.

The Trademarks Act does not mention the term ‘License’ but the concept under the Act is mentioned as that of a ‘Registered User’.

The advantage of Licensing is that it widens the scope of the product that the Trade Mark covers and extends its growth in terms of value and reputation. It is a win-win situation for both the proprietor of the Trade Mark who has already established himself in the business arena (the licenser) and for the person who might be just a start-up company (licensee).

But the main flaw in licensing would be that the licensee may end up exploiting the Trade Mark more successfully and effectively than the licensor and may receive better returns. It would be a huge backlash on the licensor if he ends up losing his customers too. Also, there is a huge risk of unauthorized usage of the Trade Mark once it is licensed.

The main difference between patent licensing and Trade Mark licensing is that a patent holder can solely license his invention as a patent whereas under the Trade Mark law, a Trade Mark cannot be used solely for the purpose of licensing.

In Gujarat Bottling Co. v Coca-Cola Co. (1996) PTC 89, it was held that so far as a connection in the course of trade with the Trade Mark continues to exist between the goods and the proprietor of the mark, licensing of Trade Marks, registered or unregistered may be permitted.

When it comes to goodwill of the Trade Mark, it would always belong to the licensor since he is the original proprietor of the Trade Mark. The trade connection between the licensor and the goods of the Mark and the accruing goodwill attached to it, can be maintained by him (the licensor) by measures such as quality control. In the case of Barcamerica International USA Trust v. Ty-field Importers Inc., (289 F.3d 589 (9th Cir. 2002) the licensor failed to exercise quality adequate control over the licensee. This means that the licensor used the Trade Mark as a commodity without established a direct trade connection between the goods and himself. In such scenarios, the licensee may be able to challenge the rights of the licensor. In the above mentioned case, the Court held that uncontrolled or ‘naked’ licensing may result in the Trade Mark ceasing to function as a symbol of quality and controlled source whereby it may appear that the Trade Mark owner has abandoned the Mark and he may be stopped from asserting his rights to the Trade Mark.

When it comes to determining what exactly constitutes ‘quality control’, McCarthy in his book ‘Trademark and Unfair Competition’ has observed that under the understanding of the quality theory, the consumer assumes that products sold under the same trademark will be of equal quantity regardless of the actual physical source or producer of the goods. This means, as per the expectations of the potential consumer, the legal form of ownership and control of a Trade Mark should not affect the final produced goods or service. Hence, whatever be the form of quality control exercised by the registered proprietor over the use of the Mark by the registered user, the provision of the quality control and the expectations to provide the same, must be written in an agreement (which is between the licensor and the licensee) as one of the stipulated conditions.

Further, a plethora of judicial decisions have laid down certain findings on how to diligently conclude whether quality control has been exercised or not. Various factors such as an effective audit mechanism, training of personnel, right to inspection, financial and managerial controls, provisions of samples, and most importantly, the nature of the relationship between the licensor and licensee have been marked out.

However, the Act is unclear on several issues. In a case where the Registrar cancels the registration of a Trade Mark which has already been licensed, the licensee would bear the brunt of it too. This loophole can be avoided if the clauses in the License Agreement are drafted accordingly.

Coming to the difference between assignment and license, assignment essentially means selling the complete ownership of the Trade Mark, whereas licensing would merely mean renting of the Trade Mark. In ordinary parlance, assignment is a form of permanent transfer, while license is a temporary transfer. Assignment can be made wholly or partly; license gives right for a specific period of time. Assignments are not revocable in nature, while licenses can be revoked.

One would think that when it comes to regulation of Trade Mark license agreements and keep a check and control over them, competition law would play a major role in it. But Section 3(5) of the Competition Act excludes ‘licensing agreements’ with respect to IPRs from the purview of regulating anti-competitive agreements. This exception is only with respect to IPRs because it is solely said to be a creative and innovative field.

It would mean that the provisions in the Act relevant to anti-competition agreements will not restrict the right of any person to impose such reasonable conditions as may be necessary for protecting his rights granted to him under any IPR statute. Although, licensing agreements that are unreasonable i.e. if they affect the prices, production and manufacture of goods adversely in the market, they are protected under the Competition Act. This stipulation deems to be very ambiguous since it would mean that agreements which are only appear unreasonable per SE would be under scrutiny by the Competition Commission of India, and not all the agreements.

Instead of banking on competition law to provide legal recourse for Trade Mark licensing agreements, there is a need for certain amendments in the Trade Mark Law itself to first acknowledge the existence of a license and then elaborate on it deeply. Only then, can a Trade Mark be economically exploited for the betterment of the corporate society.

About the Author: Ms. Madhuri Iyer, Trade Mark Attorney at Khurana & Khurana and can be reached at: [email protected]