Trademark licensing, unlike technology or patent licensing, can take many shapes and forms, depending on the commercial or business objectives of the licensor or the licensee. Fostering partnerships, expanding business operations and enhancing the market presence, among other things - all are on the platter of trademar...
Trademark licensing, unlike technology or patent licensing, can take many shapes and forms, depending on the commercial or business objectives of the licensor or the licensee. Fostering partnerships, expanding business operations and enhancing the market presence, among other things – all are on the platter of trademark licensing which one can avail by making the most of the resultant financial growth involved in this regard.
What is trademark licensing?
Trademark licensing, simplistically put, is nothing but a limited grant of a property right in a registered or an unregistered trademark in consideration of a royalty over the sales of products or services licensed under the trademark. Firstly, there is what we call the ‘classical trademark licensing’ or a manufacturing type license wherein the licensee manufactures products using the trademark licensed by the licensor. Other forms of the trademark licensing include merchandising, franchising, licensing of certification trademarks, brand placement in movies and so on and so forth.
Rationale for licensing trademarks
Trademark licensing could be hugely beneficial for both the licensor as well as the licensee. Trademark licensing, from a licensor perspective, is an effective business tool which could result in monetisation of valuable intellectual property, which is otherwise sitting idle. It also enables a licensor to expand its geographical reach and footprint by entering new territories and markets and this results in increase of revenues and profitability. It may also improve brand visibility. From a licensee perspective, trademark licensing is important as it gives the licensee a jumpstart over its competitors by giving the licensee an opportunity to associate with a well recognised and a proven brand. As, whether to license a brand is purely a commercial or a business decision, based on the commercial or business objectives sought to be achieved, it is critical that, apart from the legal nitty-gritty, lawyers representing both sides have to be alive to the business and commercial realities before drafting a license agreement or before entering a licensing negotiation.
Why is Quality Control important?
Quality Control provisions are fundamental to any trademark license agreement. A trademark acts as an indicator of source or origin of a product and thereby impliedly makes a reference to the quality, reputation or goodwill which the trademark enjoys. It is, therefore, critical that a trademark owner exercises quality control over the products and services offered under the trademark. Otherwise, there is a strong likelihood that the consumers will be misled and the trademark will cease to perform its most important function which is to act as an indication of source or origin of a product, and will cease to have utility as an informational device. A trademark license sans ‘quality control’ provisions is commonly referred to as a ‘naked license’ and such ‘naked licenses’ over a period of time will lead to erosion of the distinctiveness of the trademark and may ultimately result in abandonment of a trademark.
It is therefore advisable to include a provision in the trademark license agreement which mandates a licensee to use the mark strictly in conformity with the Brand Usage Guidelines of the licensor. Such Brand Usage Guidelines should be annexed to the license agreement and should contain detailed guidelines on product specifications, quality assurance and manner of deployment of the mark which may include size, typography, and choice of color, if any. Quality Control provisions should be designed to ensure that any products or services offered under the licensed trademark are of a quality that is at least equal to, if not better than, any existing products or services offered by the licensor. Along with quality control provisions, a licensor could also consider incorporating a clause which gives the licensors and its representatives the right to inspect, audit and monitor the ‘use’ of the trademark by the licensee. Licensor could also consider incorporating a ‘prior approval’ mechanism in the license agreement which mandates a licensee to seek prior approval of the licensor before trademark is used on the products or corporate stationery of the licensee.
Should a trademark license agreement be recorded with the Trade Marks Registry (TMR)?
Under the Trade Marks Act, 1999, a trademark license agreement need not be registered with the TMR. However, if the parties to a trademark license agreement intend that a ‘registered user’ right be created in favour of the licensee, the Trade Marks Act mandates that the proprietor and the proposed registered user shall jointly apply to the TMR for creating such a ‘registered user’ right and such a Registered User Agreement will have to be filed or registered with the TMR.
While, the licensees may be inclined to have a ‘registered user’ right in their favour, as it gives public notice of their interest in the trademark, they have to be careful as it is a double edged sword. While, absent a contract to the contrary, a ‘registered user’ may institute infringement proceedings in its own name which clearly benefits the licensee. Under the Trade Marks Act, the TMR has sweeping powers to either suo moto or on an application made by a third party, vary or cancel the registration of the ‘registered user’ inter alia on the ground that the registered user has failed to use the mark in accordance with the provisions of license agreement or has failed to enforce the quality provisions under the license agreement.
Other key clauses in a trademark license agreement
1. Grant: The grant clause is one of the most important clauses of the trademark license agreement as this clause really determines the precise nature of the property rights being granted by the licensor, beyond which the licensee cannot operate. Therefore, it is important that this clause clearly specifies the trademarks to be licensed, the exclusive or non-exclusive nature of the license, the geographical territory within which the license will operate, the duration and the area of activity or field of business for which the license has been granted.
2. Royalty and net sales: Though royalty in terms of percentage on ‘net sales’ to be charged as a consideration, for the license is purely a business or commercial decision, the amount of royalty paid to the licensor depends on the definition of the term ‘net sales’. Therefore, this definition assumes a great importance in any licensing contract. Typically, ‘net sales’ are calculated after deducting applicable taxes, returns, discounts, etc from gross sales. Nonetheless, it is important that both parties pay attention to the items to be deducted so as to avoid any surprises in future.
3. Indemnity: From a licensee perspective it is critical that its ‘use’ of the trademark licensed from the licensor does not result in infringement of any third party intellectual property rights, and therefore, apart from the standard representations and warranties regarding ownership and title taken from the licensor, it is critical that the licensee backs it up with an indemnity. From a licensor perspective, it is important that the licensee indemnifies the licensee for any loss of reputation or goodwill resulting from the use of the mark in contravention of the Brand Usage Guidelines or other quality control provisions.
4. Termination: The Licensor should ensure during negotiations that it gets a broad termination right to terminate the license agreement which should cover not only the use of the trademark beyond the ‘grant’ clause or for non payment of royalty but also use of the trademark in contravention to the Brand Usage Guidelines and other quality control provisions. As the licensee has made a huge investment in the business, it is critical from the licensee perspective to restrict the termination right of the licensor to only ‘material breaches’ and preferably limit ‘material breach’ to specific examples laid down in the license agreement. It is also critical that the licensee negotiates a sufficient “sell off” period to sell off any licensed inventory, pursuant to termination of the license agreement.
Trademark licensing is a difficult and complex issue, which involves numerous legal clauses. In this limited canvass, we’ve touched upon only the basics of the subject.