No Bare Bones: Averting the Naked Licensing Threat for Indian Food Brands

Introduction: The Silent Saboteur of Brands

Imagine your favorite Indian food brand, perhaps a beloved snack, a trusted spice mix, or a popular restaurant chain. You choose it because you expect a certain taste, a certain quality, every single time. This consistent experience builds trust, making that brand a part of your life. But what if that promise is broken, not by the original maker, but by someone else using their name? This is the silent danger of 'naked licensing', a hidden threat that can unravel years of brand building.

Naked licensing happens when a brand owner lets someone else use their trademark, their logo, their name, without keeping a close eye on the quality of what's being sold. It's like handing over your secret family recipe without checking if the new chef is following up on it. The result? Inconsistent products, confused customers, and a brand that loses its shine. For the brand owner, the stakes are incredibly high: they could lose their trademark rights entirely, see their brand diluted, and face serious legal and financial trouble.

Ensuring quality control is a shield that protects your brand's unique identity and reputation. Without active monitoring and clear records of quality checks, a brand risks losing its trademark in court, accused of 'naked licensing'. This article explores how Indian food brands can navigate this unseen threat in today's dynamic market.

 

The Law's Watchful Eye

While India's legal system doesn't explicitly use the term "naked licensing", the principles of quality control in trademark licensing are implicitly recognized and enforced through the Trademarks Act, 1999, and the Indian Contract Act, 1872. Indian trademark law mandates licensor supervision over the quality of licensed goods or services to prevent the mark from losing its distinctiveness or becoming deceptive.

The Trademarks Act, 1999, addresses quality control, particularly for registered users. Section 49(1)(b)(i)^[1] requires an affidavit stating the "degree of control" over permitted use, and Section 50(1)(d)^[2] allows cancellation of registered user status if quality stipulations are not enforced. However, registration as a user is not mandatory, and these provisions only affect the user's status, not the trademark's registration itself.

For unregistered permitted users, the Supreme Court in Gujarat Bottling Co. Ltd. v. Coca Cola Co.^[3] played a pivotal role. In this case, the Court held that unregistered permitted users would be governed by common law, and the conditions for granting such licenses would be the same as those imposed on a registered user. This ruling was crucial to address the potential for naked licenses arising from common law licenses, given that formal registration as a registered user is not mandatory in India. The underlying rationale was to ensure that quality control is maintained even for unregistered uses to prevent consumer confusion regarding the source and quality of goods. Similarly, the Bombay High Court in Malhotra International Pvt. Ltd. v. Vidyut Metallics Ltd.^[4] reinforced this principle, holding that for a common law license to be established, the licensor must actively ensure quality checks on the licensees. This emphasizes that actual quality control is essential, regardless of formal registration, to maintain the mark's distinctiveness and prevent it from being deemed abandoned.

Indian courts consistently emphasize actual quality control. In Schott Glass India Pvt. Ltd. v. Competition Commission of India^[5], the Competition Appellate Tribunal affirmed that a trademark's fundamental function is to inform purchasers about the origin of goods and to assure consumers a predictable quality with respect to the goods bearing the identical trademark. The Tribunal concluded that without effective quality control over licensees, a proprietor would be unable to assure this predictable quality, thereby undermining the very purpose of the trademark. While specific contractual clauses aren't always necessary, as seen in Rob Mathys India Private Limited v. Synthes Ag Chur^[6], where the court held that in situations like a holding-subsidiary relationship, the inherent relationship itself might imply a sufficient level of control, actual control remains paramount. The law's focus is on the real-world exercise of control over quality, not just its presence in a written agreement. This was further underscored in the UTO Nederlands B.V. v. Tilaknagar Industries^[7] case, which involved the "MANSION HOUSE" and "SAVOY CLUB" marks for alcoholic beverages. Despite a contractual clause stating the licensee would act "under the technical advice," the Bombay High Court found that these quality control measures were not enforced in reality. The court also noted the plaintiff's acquiescence to the defendant's use through another arrangement, ultimately holding that the plaintiff had abandoned its rights due to the absence of actual, diligent quality control. This case serves as a strong reminder that contractual stipulations alone are insufficient; active enforcement is critical.

The likelihood of confusion is a key criterion for trademark registration and rectification in India. Under Section 57^[8] of the Trademarks Act, a mark causing public confusion due to inconsistent quality (violating Section 9(2)(a)^[9], which deals with marks likely to deceive the public) could be removed from the Register. This was affirmed by the Supreme Court in Khoday Distilleries Ltd. v. Scotch Whiskey Association^[10], where it was held that confusion is the principal criterion for determining applications for both registrations and rectification. This ruling directly links the concept of naked licensing—which inherently leads to confusion due to quality divergence—to the registrability and continued validity of a trademark in India.

The Stakes are Higher: Food on the Line

For Indian food brands, a trademark isn't just a logo; it's a sacred promise of taste, safety, and reliability. Every time you pick up a packet of chips or order a dish, you expect that promise to be met. Keeping this promise consistent is vital for customer loyalty and for the trademark to truly work as a quality badge. Think about perishable goods, fresh produce, dairy, meat. Any slip in quality control can have immediate and severe consequences, directly affecting how safe and good customers perceive the product to be. This quickly erodes the brand's unique identity and risks its trademark being diluted or even lost.

Indian food franchises, especially, face a tough battle in keeping standards uniform across their many outlets, which directly challenges the brand owner's ability to maintain trademark quality control. It's a common struggle: about 20% of food franchises face quality control issues in their early years. Add to this the complexity of supply chains, many partners, diverse products, and wide distribution, and you have a recipe for inconsistent quality, directly impacting the brand's promise.

The Indian food industry is also heavily regulated, with strict health and safety rules. Robust quality control isn't just good practice; it's essential to avoid hefty fines and legal trouble that could damage the brand's reputation and trademark validity. A particularly worrying trend is unlicensed food operations, often run from homes, which completely bypass health regulations. These pose serious public health risks and undermine any trademark they might use. If a brand owner fails to ensure their licensees follow these health and safety rules, it can lead to product recalls, fines, and severe reputational and financial damage, ultimately weakening or invalidating their trademark.

Beyond the immediate business and legal obstacles, inconsistent food quality has a wider societal impact. It risks public health and erodes consumer trust, not just in one brand, but potentially across an entire segment of the industry, leading to widespread trademark dilution. When a brand expands too quickly without scaling up its quality control, customer dissatisfaction can surge, leading to a significant loss of market share and the brand's valuable trademark equity.

Practical Steps to ensure quality control

To effectively safeguard their brand against the perils of naked licensing, Indian food brands must adopt a clear, proactive approach grounded in robust trademark law principles.

The foundational steps involve:

●      Crafting Robust Licensing Agreements: These agreements must be meticulously drafted, explicitly detailing comprehensive quality control provisions and the licensor's unequivocal right to enforce these standards. Such documentation serves as crucial legal evidence of control. This includes establishing precise quality benchmarks for ingredients, preparation methods, and product presentation. Furthermore, agreements should grant the licensor explicit rights to inspect and audit licensee operations, stipulate clear reporting requirements, and incorporate robust termination clauses for non-compliance, thereby ensuring accountability in upholding trademark integrity. 

●      Embrace Operational Excellence and Continuous Monitoring: Achieving and maintaining consistent quality, which is paramount for trademark validity, necessitates a strong foundation of operational rigor and ongoing oversight. Food brands must develop detailed Standard Operating Procedures (SOPs) that encompass every step of quality assurance, directly supporting the consistent quality promised by the trademark. This includes standardizing recipes with precise ingredient measurements, cooking times, and plating instructions to minimize variations across all locations, thereby ensuring the uniformity essential for trademark integrity. Implementing centralized SOP systems facilitates easy access and updates across multi-unit operations, enabling consistent application of trademark quality standards.

●      Prioritize Comprehensive Training: Licensees and their staff represent the brand's direct interface with consumers. Therefore, comprehensive training programs covering hygiene, food handling practices, and adherence to brand standards are indispensable. Leveraging digital platforms can facilitate the delivery of personalized content, technical documentation, and procedural guides, ensuring consistent understanding and adherence to quality protocols throughout the entire franchise network, thereby directly supporting the licensor's quality control obligations. 

●      Sustain Vigilant Oversight: Beyond technological solutions, consistent quality control necessitates regular audits, including mystery shopping programs, and physical inspections of licensee operations to ensure adherence to trademark standards. Actively soliciting and integrating customer feedback is crucial for identifying issues promptly, as consumer perception directly impacts trademark distinctiveness. Furthermore, meticulous documentation of all quality control efforts, including inspection reports and licensee correspondence, is essential for legal defense against naked licensing claims. 

●      Implement Robust Governance Structures: Effective governance is vital for enabling franchisors to fulfill their trademark quality control obligations. This involves centralizing procurement for critical ingredients to ensure consistent quality across the network, while allowing strategic flexibility for localized needs. Franchisors should establish proactive dispute resolution mechanisms and clear communication channels to address non-compliance swiftly, preventing escalation that could impact trademark validity. Cultivating a strong 'risk culture' throughout the organization, supported by clear communication, appropriate training, and robust risk management tools, demonstrates a systemic commitment to trademark quality control, with ultimate accountability residing with the board of directors. 

Conclusion

Naked licensing poses a significant and evolving threat to trademark integrity in India, risking brand abandonment and dilution. This is especially critical for the food industry due to product perishability, complex supply chains, and public health regulations. To safeguard trademarks, Indian food brands must prioritize robust licensing agreements, leverage technology for quality control, standardize operations, implement proactive monitoring, and foster collaborative governance. The future demands continuous vigilance and adaptive strategies from brand owners to protect trademark value and consumer trust in an increasingly complex landscape.

References:

^[1] §49(1)(b)(i), The Trade Marks Act, 1999, No. 47 of 1999, Acts of Parliament, 1999 (India).

^[2] §50(1)(d), The Trade Marks Act, 1999, No. 47 of 1999, Acts of Parliament, 1999 (India).

^[3] 1995 SCC (5) 545

^[4] 1998(1)BOMCR351

^[5] 2014 Comp AT 1

^[6] 1997 17 PTC 669

^[7] 2012 49 PTC 249

^[8] §57, The Trade Marks Act, 1999, No. 47 of 1999, Acts of Parliament, 1999 (India)

^[9] §9(2)(a), The Trade Marks Act, 1999, No. 47 of 1999, Acts of Parliament, 1999 (India).

^[10] 2008 10 SCC 723

Lawanya Khanna

Associate

lawanya.khanna@iprattorneys.com

Kanika Bansal

Associate 

kanika.bansal@iprattorneys.com