Preserving Brand Integrity: The Banes Of Naked Licensing – Trademark

The goodwill and reputation of a brand is built, in large
measure, on the quality of the goods and services in relation to
which it is used. Therefore, any licenses granted around the brand
must be granted with thought and caution. A trade mark acts as the
source identifier for a brand, and is the cornerstone of its
reputation in the market. Therefore, it is imperative that a trade
mark maintains its distinctiveness which can only be done by
ensuring that the products do not lose their quality. While
licensing agreements may seem like run of the mill contracts, a lot
is at stake for brand owners if caution is not exercised.

Quality control is pivotal in license agreements. A naked
license is one under which a licensor risks use of its trade mark
by a licensee without incorporating proper quality control
measures. Such licences may allow licensees to use the trade marks
in relation to goods/services which are lacking in quality or do
not resonate with the brand owner’s values. As such, this may
lead to consumer confusion and blurring and tarnishment of the
trade mark.

The Trade Marks Act, 1999 (“Act”) recognizes use of a
trade mark by person(s) other than the registered proprietor, so
long as such use is authorized. While the Act does not expressly
encapsulate the concept of naked licensing, it does address the
quality control measures to be exercised by a registered
proprietor.

In the provision detailing the requirements for an application
for registration of a registered user, i.e., a person authorized by
the registered proprietor to use the trade mark, the application is
required to be accompanied by an affidavit, which includes details
about the relationship between the registered proprietor and
registered user, specifically statements outlining the extent of
control that the registered proprietor would continue to have. The
application is also required to include a statement regarding the
conditions or restrictions, if any, proposed with respect to the
characteristics of the goods/services, to the mode or place of
permitted use, etc.

The Act also includes a provision empowering registered
proprietors to cancel the registration of a person as a registered
user if they are found to not comply with the quality control
measures set out in the licensing agreement.

Indian Courts have also, on various occasions, highlighted the
importance of quality control measures while licensing intellectual
property. The Delhi High Court, in Rob Mathys India Pvt. Ltd. v.
Synthes Ag Chur opined on the importance of quality control in the
maintenance of the distinctiveness of a trade mark, and noted that
lack of control may lead to complete loss of distinctiveness.

The importance of ensuring quality control was also discussed in
detail in the case of Double Coin Holding Ltd. v Trans Tyres
(India) Pvt Ltd and Anr., where it was held that “goodwill in
a brand does not come to be created only on account of its
promotion and advertising. The primary reason for a trademark
acquiring goodwill in the market is the quality of the product,
which is sold under that name. If a product is of inferior quality,
no amount of advertisement and promotion can build the brand under
which the product is sold. Of course, the brand building and
promotion supplements the efforts of the manufacturer, who is
primarily responsible for maintaining quality of the
product.”

In the case of UTO Nederlands BV v. Tilaknagar Industries Ltd.,
the defendant had contended that the licensing agreement entered
into between the parties was a bare license. The court, however,
while finding that the license was not a bare license held that
“it is reasonable to presume that parties who seek and obtain
a license to use a trademark, acknowledge the reputation and
goodwill attached thereto. If the products sold under the said mark
had no goodwill and reputation in India, a party would not
negotiate a license to use the same on…onerous terms and
conditions. I would readily infer therefore that the defendant was
aware of the reputation and goodwill attached to the said
trademarks and therefore, sought and obtained a license to use the
same in India…”

Trademark licensing agreements enable businesses to expand into
new areas and collaborate with experts in these fields to expand
their brand’s reach. However, businesses should, especially
while licensing their brands, in the Indian landscape, examine the
quality control clauses in the agreements. Specifying the
goods/services in relation to which the mark is being licensed,
restrictions regarding modification, and randomized quality testing
are some of the safeguards against the perils of unintentional
naked licensing.

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.