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Trademark Licensing - Indian Context

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:
  1. 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.
     
  2. In 2009 the Department of Industrial Policy and Promotion (part of the Ministry of Commerce and Industry) allowed the automatic payment of royalties[1] for use of a trademark or brand name without any restriction on the amount.

    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[2] where no technology transfer was involved.
    • Different ways of Trade Mark Licensing
    • Franchising
    • Merchandising
    • Brand Extension
    • Co-branding
    • Component or ingredient branding
    • Standards

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 reputation.

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 the market.

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 property.

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:
  1. The grant clause that includes the nature of property, trademark valuation[3] the trademarks licensed, geographical territory, term of the agreement etc. should be clearly laid down;
  2. Consideration in form of royalty[4] and the percentage to be paid should be put down;
  3. Grounds on which the licensor can terminate[5] the agreement should be broadly included.

License recordation

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 TM-28)

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 satisfied.

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 infringement.

Summary
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.

End-Notes:

  1. 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.
  2. The maximum ceiling of USD 2 Million as the permissible limit of remittance under current account transaction is USD 2 Million.
  3. Valuation of Trademark can be arrived by:
    1. cost method;
    2. income method; &
    3. the marketing method.
  4. 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.
  5. Termination by Licensor
    1. Failure to pay royalties
    2. Quality Control issues
    3. Bankruptcy

Termination by Licensee:
Failure to abide by the obligation stipulated in the License Agreement

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