India: Naked Licensing: Safeguarding The Eminence

Last Updated: 18 April 2017
Article by Himanshu Sharma

Most Read Contributor in India, July 2017

Introduction

A trademark prevents confusion in mind of consumer as to goods and services and facilitates to a consumer in getting level of quality of goods and service. The emergence of the licensing of the trademark as a mode to maximize the use of the trademark has also provided the importance to quality aspect of the goods provided under a brand. Trade mark licensing is a legal document which grants an authorized use of trademark in accordance with terms and condition in consideration of royalty over the sales of products or services licensed under the trademark. Trademark Licensing is beneficial to both licensor and licensee. On the one hand, a licensor can expand his business operations which ultimately helps him to achieve brand recognition where as a licensee derives benefits from super technology to produce better quality products, or established trademark to market his product in a better way.

The licensing agreement is the most important part of a trademark licensing as it defines the future use of the trademark after the licensing. The agreement should contain the clauses related to the quality control in order to safeguard the distinctivity of the trademark. In this reference the term "Naked Licensing" is a legal phenomenon, which denotes a condition where Trademark owner license his trademark to another party, but fails to maintain adequate quality control and standard over the use of trademarks by the licensee. Lack of quality control measure in a license thus leads to the death of a trademark. Whenever a consumer buys a product belonging to a particular brand, he feels secure towards the quality of the product as he presume that he is buying a product of the desired brand therefore he will get the desired quality. This is where the importance of drafting an impeccable license agreement comes in into the picture. Failure to supervise the activities of licensee can result in cancellation of the mark and may result in undue advantage to the infringer if the matter is brought before a court.8

Origin and Background of the Concept:

The doctrine of "Naked Licensing" was developed by the US courts in order to protect consumers who believe that because they buy a product or service under a certain brand hence they would receive a certain quality associated with the trademark.9 In order to protect consumers from getting confused, it is the duty of the trademark owner to exercise a certain modicum of control over the quality of the goods or services provided by its licensee. A finding of naked licensing may result in the removal of trademark from the registry.

The structure of a license:

It is necessary, in context of trademark licensing that every agreement should posses quality control measures because trademark serves the commercial purposes and ensures that the goods/ services under a particular mark will be of consistent quality. Usually, licensor includes the specific provision related to the quality control mechanism and

restriction on use of the licensed trademark and goods and services covered by mark in order to protect the trademark from cancellation.

In Barcamerica International USA Trust v. Tyfield Imports, Inc10., Court cancelled the Barcamerica trademark, on ground of naked licensing and held that:

"It is important to keep in mind that 'quality control' does not necessarily mean that the licensed goods or services must be of "high" quality, but merely of equal quality, whether that quality is high, low or middle. The point is that the customers are entitled to assume that the nature and quality of goods and services sold under the mark at all licensed outlets will be consistent and predictable."

The concept of naked licensing is not only recognized by the US courts but the specific provisions related to the quality control in case of licensing of a trademark are included in the Trade Marks Act, 1999 of India also. We can now drive our attention towards the Indian scenario in this respect.

Indian Scenario

The Indian Trade Marks Act, 1999 specifically contains the provision related to the quality control. The Trade Marks Act, 1999 does not expressly mention "naked licensing". But there are few provisions in the India's Trade Mark Act, 1999 through which we can deduce the concept of naked licensing:

Section 49(1)(b)(i) provides that:

"Where it is proposed that a person should be registered as a registered user of a trade mark,

the registered proprietor and the proposed registered user shall jointly apply in writing to the Registrar in the prescribed manner, and every such application shall be accompanied by----

  1. ....
  2. An affidavit....
    1. giving particulars of the relationship, existing or proposed, between the registered proprietor and the proposed registered user, including particulars showing the degree of control by the proprietor over the permitted use which their relationship will confer and whether it is a term of their relationship that the proposed registered user shall be the sole registered user or that there shall be any other restrictions as to persons for whose registration as registered users application may be made"

And Section 50(1) (d) of the Act, which states that:

  1. "Without prejudice to the provisions of section 57, the registration of a person as registered user---
    1. ...
    2. ...
    3. ...
    4. may be cancelled by the Registrar on his own motion or on the application in writing in the prescribed manner by any person, on the ground that any stipulation 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 is either not being enforced or is not being compiled with"

The foregoing provisions are well placed to check the quality control aspect involved in the licensing of a trademark, which in other words can also be termed as provisions related to the naked licensing. The quality control as an aspect of maintaining the distinct character of a mark on the basis of the above discussed provisions is also recognized by the various courts in India. For instance, in Double Coin Holdings Ltd. and Anr Vs Trans Tyres (India) Pvt. Ltd. and Anr.11 the Delhi High Court observed that: "The presumption of law is that the ownership of the trade mark vests in the manufacturer who puts the mark on the product and the onus to displace this legal presumption is on the importer/distributor....Goodwill in a brand does not come to be created only on account of its promotion and advertising. The primary reason for a trade mark acquiring goodwill in the market is the quality of the product, which is sold under that name."

As far as the meaning of "degree of control" is concerned, it is not provided under the Act and therefore recourse to the judicial pronouncement on the said aspect has to be made. In this context, a reference can made to a Delhi High Court decision in Rob Mathys India Pvt. Ltd Vs. Synthes Ag Chur12 where court held that "Control may be exercised or presumed to be exercised in various ways. In some cases, the very relationship between the licenser and the licensee will imply sufficient degree of control for example, where the licenser stipulates that the licensee should manufacture the goods only in accordance with the specifications and the standards of quality prescribed by the licenser, or reserves the right to inspect the goods and methods of manufacture of the licensee. Lack of adequate control or lessening of control over a period of time would be fatal to the distinctiveness of a trade mark."

Thus it is clear that quality control is only an aspect of degree of control, but its significance cannot be diluted in any means. If the proprietor imposes a condition as to "quality control" in license agreement, it can be a ground for licensor to escape from naked licensing. Trade Mark Act, 1999, also gives power to Registrar to suo motu cancel the mark if any terms of the agreement is not fulfilled or complied with.13

In Gujarat Bottling Co Ltd v. Coca Cola co14 the hon'ble Supreme Court observed that "it is permissible for the registered proprietor of a trade mark to permit a person to use his registered trade mark... provided (i) the licensing does not result in causing confusion or deception among the public; (ii) it does not destroy the distinctiveness of the trade mark... (iii) a connection in the course of trade consistent with the definition of trade mark continues to exist between the goods and the proprietor of the mark..." Thus it is necessary that the licensor should continue to hold the upper hand when it comes to the quality control measures. The lack of consistent quality of goods and services can lead to death of a trademark.

Conclusion

Trademark owner enjoys the exclusive right to the use of the trade mark in relation to goods and services. At the same time trademark owner should monitor his trademark and ensure that licensee is providing goods and services in a manner consistent with the standard of quality laid down by him. Thus a trademark owner is the watch dog of its trademark. However duty of

proprietor is not to ensure high quality of goods but to ensure that the products are of consistent quality, as the touchstone of trademark law is to ensure the consistency in meeting consumer's expectation for the brand.

Footnotes

8 In this context see Omega Nutrition v. Spectrum Marketing (1991)756 (Suppl.) 435.

9 There are few decisions given by courts in United States that expressly dealt with the concept of "naked licensing" like Eurotech Inc., et.al. v. Cosmos Europian Travels (Decided on 24 July 2002) Citation n/a.

10 289 F.3d 589-598(9th Cir. 2002)

1 181(2011)DLT577

12 1997-(SUP)-ARBLR -0218 -DEL

13 Section 50(1)(d)

14 AIR1995SC2372

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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