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Preserving Brand Integrity: The Banes of Naked Licensing

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.  

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