Trade mark Licensing refers to the mode of transfer of rights wherein the actual
proprietary rights in the trademark vests with the trademark owner and only 'few
stipulated rights' to use the trademark is given to the third party.
In simple terms, the trademark owner authorizes third party to only use the
trademark (registered) in course of trade in consideration of royalty over the
sales of products or services licensed under the trademark without registering
the person as a 'registered user' and transferring the ownership.
Governing Law for Trademark Licensing
Trademark licensing in India is governed by the Trade Marks Act, 1999. Though
the term 'Licensing/ license' in nowhere mentioned in the Act, the statutory
provisions in the Act governing trade mark licensing in India refers to
provisions relating to registered users.
What facilitated development of Trade Mark Licensing in India
With the gradual change in approach towards Licensing in India, the concept has
begun to be accepted and now in fact has been encouraged as commercial
phenomenon in the law. However, the initiatives which helped Indian Government
to develop trademark licensing in India can be summarized as under:
- Amendment of the Trademarks Act in 2003:
It changed the definition of permitted use to include use of a
brand name with the consent of the brand owner by any party, provided that
this is through a written agreement.
This means that, use of the mark by a licensee will inure to the benefit of the
licensor without having to record formally the licensor as a 'registered user'
under the Trademark Act. Thus, such use by a licensee can also be used as a
defense against a nonuse cancellation action by a third party.
- In 2009 the Department of Industrial Policy and Promotion (part of the
Ministry of Commerce and Industry) allowed the automatic payment of
royalties for use of a trademark or brand name without any restriction on
This was a key liberalization move to attract foreign investment. Previously,
the maximum royalty payments allowed on the use of trademarks or brand names was
2% for exports and 1% for domestic sales where no technology transfer was
- Different ways of Trade Mark Licensing
- Brand Extension
- Component or ingredient branding
Why one should License a Trade Mark
Licensing presents an opportunity for the proprietor/ owner to leverage its
trademarks to create an additional revenue stream without having to invest in
infrastructure for manufacturing or marketing the product.
Licensing is an important mechanism in success of a trademark wherein, the brand
owner can reap the benefits of its brand's popularity to venture into
territories where it may not have a core presence or competencies.
From the Licensor view:
Licensing of Trademark
' widens the scope of the
product that, the Trademark covers and extends the growth in terms of value and
From the Licensee view:
Licensing gives a chance to Licensee to get associated
himself with a well reputed/ recognized trademark, having a goodwill in the
market, thereby giving an upper hand to Licensee on his competitors.
Licensing, being an effective business tool and strategy, is a win-win situation
for both the proprietor of Trade Mark, who have already built up a big market
for themselves and also for those licensee who want to build one.
Why Licensing of Trade Mark is required
Licensing of Trade mark is important, as the market is always in need of
reputed/recognized trademark, the usages of such trademark must be fulfilled by
obtaining rights to use the trademark by way of licensing, or otherwise persons
may be forced to 'pass-off' their goods/services under similar marks or even
pirate a trademark or put up counterfeit goods/services in the market.
Thus Licensing has begun to seen as a mean to prevent duplication of goods in
How Licensing of Patent & Trademark are different
Under the Patent regime, a Patent holder is at liberty to draw benefits of the
invention solely by licensing it. The Patent holder license its inventions and
earn revenue by way of obtaining royalty payment. In Patent, the inventors are
often motivated to assist in the process of generating licensable intellectual
Whereas, in Licensing of Trade Mark, the Licensing is permitted only as a normal
business operation and otherwise the law itself discourages development of a
trademark solely for the purpose of licensing.
It would be pertinent to mention here that, Trademarks are treated as source
indicators, which make an implied reference to quality and reputation. For this
reason, which is actually rooted to the very nature of trademark as an
intellectual property, licensing under trademarks requires relatively higher
supervision and control and is therefore legally regulated practice.
How Assignment & Licensing of Trademark is different
Assignment essentially means selling the complete ownership of the Trade Mark.
In ordinary parlance, assignment is a form of permanent transfer and can be made
wholly or partly. Assignment are non-revocable in nature.
Whereas licensing would merely mean renting of the Trade Mark. Licensing of
Trademark is a temporary transfer ad gives right to Licensee for a specific
period of time.
Key elements of Licensing
One of the most relevant aspects of licensing involves quality control
over use of the licensed mark by a third party and the extent of such control.
The absence in the licensing agreement of quality control
provision can lead to
mitigation of the distinctive value attached to that particular mark.
As a result, not only the goodwill and reputation of a mark deteriorate, as the
goods so marked may become substandard over the period of time, but the owner
may lose ownership of the mark.
It would be pertinent to mention here that, the licensing agreement without
clarity on 'quality control' are termed as 'naked licenses.'
In addition to the quality control
clause, the below mentioned Clauses
must be factored in the Licensing Agreement:
- The grant clause that includes the nature of property, trademark
valuation the trademarks licensed, geographical territory, term of the
agreement etc. should be clearly laid down;
- Consideration in form of royalty and the percentage to be paid should
be put down;
- Grounds on which the licensor can terminate the agreement should be
A trademark is licensed by way of a License Agreement, as per the Trade Mark
Act, 1999, contrary to the requirement in case of Assignment, the registration
of license agreement with the Trademark Registrar of a trade mark is voluntary
and not compulsory.
In simple terms, recordation of the licensee as a registered user is not
mandatory as the definition of permitted use
has been widened to include use
made by an unregistered licensee.
However, such recordation, if at all desired, is possible only for registered
marks and by registered user. The licensing of unregistered marks is possible at
common law, although some aspects will be governed by the terms and conditions
entered by the parties through a written license agreement
Procedure for registering as a registered user
As mention above, registration of Licensing Agreement with the Trade Mark
Registrar is not mandatory for a particular trademark. In fact, the Indian
Trademarks Act, 1999 does not lay down an established procedure as it does in
case of assignment of trademark.
Nevertheless, the procedure to become a registered user of the trade mark is
laid down under Sections 48-54 of the Act. The user to become a registered user,
will have to make a joint application/request along with the Licensor to Trade
Mark Registrar within 6 months of entering into the licensing agreement (in Form
Once, the Registrar is satisfied with the application, he registers the proposed
registered licensee in respect of the goods or services as to which he is
It is prudent to mention here that, the sale of registered trademark by the
Licensor/proprietor shall automatically terminates the license.
Why be a Registered user
While both registered and unregistered users are permitted users, only a
registered user can initiate infringement proceedings against third parties
after giving due notice or he may join the licensor/proprietor in trademark
One cannot deny that, licensing of trademark has become a regular commercial
practice which enables the rights holder to extend the reach of its brand
through third party use without assigning any legal ownership rights to such
third party with fulfillment of certain conditions viz. 'quality control' or
such other mandatory terms as defined in License Agreement which needs to be
complied with as the trademark holder decides.
That said, to avoid any misunderstanding and ambiguity, the parties must be
clear about their expectations, which in turn requires a well-drafted and
negotiated agreement and local tax issues on royalty payments.
- Payment of Royalty of trade mark/brand shall be paid as a percentage of
net sales, viz. gross sales less agent's commission, transport cost,
including ocean freight, insurance, duties, taxes and other charges, and
cost of raw materials, parts, components imported from the foreign licensor
or its subsidiary/affiliated company.
- The maximum ceiling of USD 2 Million as the permissible limit of
remittance under current account transaction is USD 2 Million.
- Valuation of Trademark can be arrived by:
- cost method;
- income method; &
- the marketing method.
- The amount of royalty, in terms of percentage varies from product to
product, service to service and industry to industry. The royalty is usually
calculated on a defined base rate such as net-profit, net-sales, gross
profit or gross sales.
- Termination by Licensor
- Failure to pay royalties
- Quality Control issues
Termination by Licensee:
Failure to abide by the obligation stipulated in the