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Licensing of Trademarks

The law governing the licensing of trademarks and registration of the registered users has been substantially modified, as compared to the law in the 1958 Act. There is a complete change in the approach, in keeping with the modern trend of business. The change in the law is also influenced by developments concerning similar laws in the EEC, UK and as a result of TRIPS agreement.

The definition of “permitted use” has been modified to mean the use of the registered trademark not only by the registered user but also by an unregistered licensee by a written agreement of the registered proprietor.

History relating to “licensing of trademarks”

The provision regarding licensing of trademarks in favour of registered users was introduced for the first time in the United Kingdom by the Trademarks Act, 1938. This was on the recommendation of the Goschen Committee which suggested the relaxation of the common law principle that there could be no separation or splitting up between the proprietorship of the mark and the trade origin of the goods bearing such mark. That Committee recognized that though the trends of modern business required a relaxation of the common law rule, steps should be taken to guard against trafficking marks.

At common law, licensing of a trademark registration in Chennai by its proprietor for use in connection with goods other than those of the proprietor was not allowed on the ground that such licensing would inevitably result in deception of the public. The UK Act of 1905 did not provide for the licensing of a registered trademark. Evidence was given before the Goschen Committee to the effect that in the circumstances of modern industry it was desirable in some cases that certain persons associated with the proprietor of a registered trademark should be allowed to use his mark in trade, and that proprietors of trademarks were severely hampered by the fact that under the then existing law such use would render the mark invalid on the ground that it no longer distinguished the goods of the proprietor of the mark.

Trafficking in trademarks

Under the earlier law, it was provided that an application for registration of registered user was not to be entertained where such registration would tend to facilitate “trafficking” in trademark. The 1958 Act did not define the term “trafficking”. However the term came to be judicially interpreted as “conveying the notion of dealing in a trademark primarily as a commodity in its own right and not primarily for the purpose of identifying or promoting merchandise in which the proprietor of the mark is interested. If there is no real trade connection between the proprietor of the mark and the licensee or his goods, there is room for the conclusion that the grant of the licence is a trafficking in the mark.

“Trafficking in trademarks” is one of the anxious concerns of the Trademark Law. It is one of the major concerns of the Trademarks Act not to permit trafficking in trademarks not only in the interests of the persons directly affected but also for the larger interests of the public and the purity of the Trademarks Register in such public interest. The whole doctrine of “Trafficking in Trademarks is therefore a guard against unauthorized, spurious and miscellaneous user of a trademark by a person or authority or institution other than the registered proprietor thereof.

Character merchandising

The expression character merchandising came to be used to signify exploitation of a well-known invented name, whereby the author or promoter of the name licenses or purports to license its use on the goods of traders who have no other connection with the licencor. If the invented name is a registered trademark of the licencor in respect of certain classes of goods, the licencor may wish to protect this position by obtaining trademark registration in Coimbatore in respect of the goods of the licensee. The question in this case was whether, on the facts of the case, applications for the registration of the trademark “HOLLIE HOBBIE” in respect of the goods of certain licensees were properly refused by the registrar on the ground that registration would tend to facilitate trafficking in a trademark contrary to sub-section (6) of section 28 of the UK Trademarks Act, 1938.

An author playwright or film-script writer can acquire a right of property in a fictional character which is his brain child. A film producer who has a licence to use the story of script creating a fictional character can build up a goodwill which may be protected in a passing off action even though he may not be owner of the copyright.

To enable the proprietor of a trademark who has got it registered on the ground that he intends to use the trademark to avail himself of the fiction created by section 48(2), he must have had in mind at the date of his application for registration some person to whom he intends to allow the use of the trademark as a registered user. This would eliminate all chances of trafficking in a trademark. If an applicant-for trademark registration did not have at the date of his application for registration a particular registered user in view, he cannot be said to have had a bona fide intention to use the trademark and in such an event he cannot resist application made under clause (a) of section 46(1) of the 1958 Act.

Modern trend

Typically, trademark licensing is an authorization by the proprietor granted to another person the right to use his trademark, either on an exclusive or non-exclusive basis. In the domestic trade, this usually occurs when the owner of the mark licences the use of his trademark to subsidiaries, or to independent manufacturers, in order to meet a large demand for the products bearing such mark which he is not in a position to meet through his own operations; or when he finds it profitable, in exchange for a license fee or royalty, to have the goods manufactured by others. In international trade, licensing is in the present day much more extensive and it has now become almost an indispensable tool of business organization on an international level.”

“The use of a registered trademark can be permitted to a registered user in accordance with the provisions of the Act and for that purpose the registered proprietor has to enter into an agreement with the proposed registered user. The use of the trademark can also be permitted de hors the provisions of the Act by grant of licence by the registered proprietor to the proposed user. Such a licence is governed by common law.”

Franchising arrangements

The franchising arrangement is broader in scope than simple licensing of trademarks. Although different definitions could be proposed, franchising may be described as an arrangement whereby one person (the franchiser), who has developed a system for conducting a particular business, allows another person (the franchisee) to use that system in accordance with the prescriptions of the franchiser, in exchange for a consideration. The relationship is a continuing one, as the franchisee operates in accordance with standards and practices established and monitored by the franchiser and with his continuing assistance and support.

The franchising arrangement therefore relates to a system, which the franchiser allows-or licenses-the franchisee to exploit. This may be referred to as the franchised system, or simply “the system”. The franchised system is a package comprising intellectual property rights relating to one or more marks, trade names, industrial designs, inventions and works protected by copyright, together with relevant know-how and trade secrets, to be exploited for the sale of goods or the provision of services to end users.

Trademarks and quality assurance

The need to distinguish the business source of goods is as old as trading itself. A maker of goods seeks to acquire and maintain a reputation for the quality of his goods, thereby encouraging customers to prefer his goods to those of his competitors. So he places a recognizable mark on his goods to distinguish them from the goods of others. It is in the public interest that he should be able to do so, and that he should be able to prevent others from using his chosen mark. The ability to apply a mark to goods encourages makers of goods to set and maintain quality standards. It enables customers to make an informed choice between different goods available in the market. Although the use of trademarks is founded on customers” concern about the quality of goods on offer, a trademark does not itself amount to a representation of quality. Rather it indicates that the goods are of the standard which the proprietor is content to distribute “under his banner”.

Coming to the question of “bare licensing”, the court observed “the wider interpretation, according to which the source may be either the proprietor or an exclusive licensee, would not be at variance with customer’s perceptions. Customers are well used to the practice of licensing of trademarks. When they see goods to which a mark has been affixed, they understand that the goods have been produced either by the owner of the mark or by someone else acting with his consent… Customers are not to be taken to rely on the protection supposedly offered by a legal requirement that the proprietor must always retain and exercise an inherently imprecise degree of control over the licensee’s activities.

Practical implications

The mere fact that, during the period of licence, some customers may associate the trademark with the exclusive licensee does not mean that it has become deceptive or that it lacks distinctiveness. During the licence period the goods come from only one source, namely the licensee, and the mark is distinctive of that source.

“The position after the licence has ended is different. Then the right to use the mark reverts to the proprietor of the mark. He can then apply the mark to his goods. The position is, indeed comparable to the position which arises when a trademark is assigned without any assignment of the assignor’s business. Whether this change in the person entitled to use the mark gives rise to deception will depend primarily on what then happens to the erstwhile licensee’s business. If the former licensee causes to carry on the business in which he used the mark, no question of deception due to lack of distinctiveness will normally arise. Henceforward the mark will be distinctive of one source, namely the proprietor of the mark. This will be a different source from the source during the licence period, but this change in the source is not itself inherently deceptive. Such a change occurs whenever a trademark changes hands.”

Licensing of unregistered trademarks

The law recognizes the common law rights of the trademark owner in respect of an unregistered trademark to take action against any person for passing off goods as the goods of another person or as services provided by another person or the remedies thereof (See section 27). The law governing assignment of unregistered trademarks has also been substantially altered by the new Act, to allow unregistered trademark to be assigned or transmitted with or without the goodwill of the business concerned (Section 39). The expression “permitted use” has also been redefined to explicitly include a common law licence of an unregistered user of a registered trademark (Section 2(1)(r)).

It is to be noted that even before the reform of the Trademarks law in India through the 1999 legislation, it was clear that “use of a mark by a proprietor through a common law licensee may very well suffice…Under no principle or precedent can it be held that at common law use by the licensee of an unregistered trademark is not use by the licencor or that such use will invalidate a passing off action or disentitle the licencor to protection of his trademark. Indeed, now section 48(2) of the new law enacts broadly that “the permitted use of a trademark shall be deemed to be use by the proprietor thereof”-the term “permitted use” covering both registered and unregistered users, as per section 2(1)(r). )

“Permitted use” deemed to be use by the proprietor

Sub-section (2) enacts that the permitted use of the trademark, which includes use by a registered user as well as by an unregistered licensee, shall be deemed to be use by the proprietor thereof. It further enacts that such use shall be deemed not to be use by a person other than the proprietor for the purposes of section 47 (removal on the ground of non-use) or for any other purpose for which such use is material under this Act or any other law. In the case of a common law license as envisaged in section 2(1)(r)(ii), the licensee’s use is by consent of a registered proprietor in a written agreement. Having regard to the essential function of a trademark which is to give “to the consumer or ultimate user a guarantee of the identity of the origin of the marked product by enabling him to distinguish, without any possible confusion, that product from others of a different provenance. For a trademark to perform this function it must offer a guarantee that all the goods bearing it have originated under the control of single undertaking which is responsible for their quality.

Termination of licensing agreement

The trademark representing the goodwill of the owners’ business is an invaluable asset of industrial property. The proprietor is expected to exercise due control over the manner in which the trademark is used by the permitted user to protect his own reputation. Section 49 prescribes the procedure for trademark registration in Cochin of licensee as a registered user of the trademark and provides that the application for registration as registered user shall be accompanied by an agreement in writing entered into between the registered proprietor and the proposed user, giving particulars of the licensing arrangement. The agreement may also provide conditions in which the arrangement may be terminated.