Naked Licensing and Quality Control

Trademark licensing is the process of authorizing a Registered user to use the trademark of the Registered Proprietor for a specified period of time and on mutually agreed terms laid down in the licence agreement. Naked licensing refers to the concept whereby the licensor allows the use of its trademark by a licensee without including quality control provisions and/or enforcing such provisions in the licence agreement. “Merely the provision for payment of royalty in the contract without any clause to quality control would turn the licence into a naked licence.”[1] Such type of licensing may have an impact on the proprietary rights vested in a trademark that is licensed resulting in improper enforcement and at times relinquishment or abandonment of rights. The trademark owner when applying such a concept loses the right to approve the said use of the mark in connection with the licensee’s goods or services.

In Barcamerica International USA Trust v. Tyfield Importers Inc[2], it was held that the

uncontrolled or naked licensing may result in the trademark ceasing to function as a symbol of quality and controlled source. “Consequently, where the licensor fails to exercise adequate quality control over the licensee, a court may find that the trademark owner has abandoned the trademark, in which case the owner would be stopped from asserting rights to the trademark.”

Naked licensing is a theory against the public interest that can cause confusion and deception amongst the public. The absence of the set quality by the registered user hampers the goodwill and repute of the mark/brand under which the goods and services belonging to the registered proprietor are manufactured/rendered. This theory pulls down the well-known status of the mark of the registered proprietor due to the inferior quality of goods and services produced/rendered. McCarthy has described the importance of Quality Control because “the consumer assumes that products sold under the same trademark will be of equal quality regardless of the actual physical source or producer of goods.”[3]

QUALITY CONTROL IN INDIA

Under the Trade Marks Act, 1999[4] licensing of registered trademarks is permitted by registered third persons and also by unregistered third parties having a written agreement for that purpose with the registered proprietor of the trademark.[5]

Before the enactment of the Trade Marks Act, 1999, the Indian judiciary had passed orders permitting use by the common laws and to accrue to the advantage of the registered proprietor. The basis behind such decisions was to consider all factors evolving around a trademark, ranging from the relationship between the licensor and licensee and the permitted use of the licensed trademark.

In the case of Gujarat Bottling Co. Ltd and Ors. v. Coca Cola Company and Ors.[6] the Supreme Court held that the licence of a trademark without the registration of the licensee would be governed by common law. It was also held that “an unregistered licensee could validly use the trademark on the fulfilment of the three conditions of not causing confusion or deception to the public; not destroying the distinctiveness of the trademark in the public; and maintaining a connection between the proprietor and the goods under the mark.”[7]

Currently, under the Trade Marks Act, 1999, the registration of grant as a registered user is subject to proper control check by the registered proprietor over the use of the mark by the registered user. This exercise of maintaining a quality control provision is necessary to be incorporated in the licence contract and absence of such provision will result in a refusal of the contract by the Registrar.

Section 49(1)(b)(i) of the Act, entails that the licensor must furnish an affidavit “indicating 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….”[8]

Recently, in the case of UTO Nederland BV v. Tilaknagar Industries Ltd.[9] the Bombay High Court, delivered an instructive judgment on the concepts of quality control and licensing. The Court while examining the words ‘cede’ and ‘revert’ in a contractual document referred to licensing as a complete transfer of trademark rights and held that it is a reasonable to presume that parties which seek to obtain a licence to use a trademark acknowledge the reputation and goodwill attached thereto. The Court eventually found that the plaintiff had in fact abandoned its rights after examining all facts and circumstances and subsequent agreements in the case including the absence of quality control.

The term ‘degree of control’ is nowhere defined in the Act, but the language of Section 49(1)(b)(i) implies the mandatory prescription about quality control is to be added by the licensor over the use of the mark by the licensee[10] and like any other clause or provision in a contract, this quality control provision should be definite and unambiguous. Furthermore, the scope of quality control varies according to the licensing contract, the goodwill and reputation, well-known status of the mark and economic wants of the parties. Thus, the Indian trademark law does not allow the registered proprietor to exercise naked licensing and gives the Registrar powers to change or cancel the registration of person as registered user.[11]

CONCLUSION

Trademark licensing agreements enable businesses to expand into new horizons and enter new markets by connecting with multiple registered users. It is imperative that when enforcing such licence agreements, the trademark owners include adequate quality control provisions to control the reputation of their brand name. The goods or services hailing from the registered user must be duly supervised and inspected by the trademark owners to maintain the status quo of their brand. Quality control plays a quintessential role in representing the standing of the brand associated with the business and its reputation. Therefore, the brand owners are solely responsible for controlling the third-party production, manufacture, or distribution done for their brand.

[1] Ritz Associates v Ritz-Carlton Co 134 USPQ 86 (SDNY 1962)

[2] Hoffman Ivan, ‘Naked’ licensing of trademarks, http://www.ivanhoffman.com/naked.html

[3] J. Thomas McCarthy, Trademarks and Unfair Competition

[4] Act 47 of 1999.

[5] Section 2(1)(r) of the Trade Marks Act, 1999

[6] Gujarat Bottling Co. Ltd and Ors. v. Coca Cola Company and Ors., AIR 1995 SC 2372

[7] Ibid.

[8] Section 49(1)(b)(i) of Trade Marks Act, 1999

[9] UTO Nederland BV v. Tilaknagar Industries Ltd; 2012 (49) PTC 249 (Bom)

[10] Section 50(1)(c)(i) and (ii) of the Trade Marks Act, 1999.

[11] Section 50(1)(d) of the Trade Marks Act, 1999.

The article was originally published on www.lexology.com on May 21, 2020 and can be accessed here.