Concept of Licensing of Trademarks

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The provision regarding licensing of trademarks in favor 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 through the trends of modern business required a relaxation of the common law rule, steps should be taken to guard against trafficking marks.

Typically, trademarks licensing is an authorization by the proprietor granted to another person the right to use his trademark registration , either on an exclusive or non-exclusive basis. In the domestic trade, this usually occurs when the owner of the trademark licensing the use of his trademark to subsidiaries, or to independent manufacturers in order to meet a large demand for the product bearing such mark which he is not in a position to meet through his 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 id the present day much more extensive and it has now become almost an indispensable tool for 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 the provisions of the Act by grant of license by the registered proprietor to the proposed user. Such a license is governed by the Common Law.

The question whether the use of a trademark by a license under a bar license is objectionable as inherently likely to deceive, was considered by the House of Lords. It denotes that goods bearing the mark come from one business source: the goods of one undertaking, but what does the mark denote about the source? Must the source be the proprietor of the trademark or is the business source the person who is for the time being entitled to use the mark, whether as proprietor or exclusively license. The commercial background has changed greatly since 1938.

The use of the trademark by the licensee is based on the consent by the way of the written agreement by the owner. The respondent was permitted to form a private company and use the name “Baker” as part of its corporate name. One of the conditions was that in the event of Baker holding less than 40% of the paid up equity capital, the licensee company will not be entitled to retain the word as part of corporate name. Where the appellants sold their share, the respondent was asked to stop use of the name. In the suit, single judge granted injunction restraining the respondent from using the name. However, the Division Bench vacated the injunction on the ground of some illegality in the enforcement of the agreement. It was held by the Supreme Court  that if the agreement was unenforceable, the entire agreement was unenforceable and the respondent had no right to use the name ‘Baker’.

Franchising Arrangements

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The franchising arrangement is broader in scope than simple licensing of trademarks. Although different definitions could be proposed , franchising may be described as an agreement 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 agreement therefore relates to a system, which the franchiser allows or licenses the franchisee to exploit. This may be referred to as the franchised system is a package comprising intellectual property rights relating to one or more marks, trade names , industrial designs, inventions and the works protected by the 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 of licensing

The grant of a bare licensing by a trademark proprietor is objectionable as inherently liable to deceive potential customers; reference may be, made to the case. 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, ability to apply a mark to goods encourages makers of goods to set and maintain quality standards. It enables customers concern about the quality of goods on offer, a trademark does not itself amount to a representation of the quality. With changes in trade, a trademark can “fairly be held  to be” only a representation that the goods were manufactured in the course of the business using the mark, without any representation as to “the persons by whom that business was being carried on”.

Practical implications of licensing

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Coming to the question of “bare licensing”, the court observed “the wider interpretation, according to which the source may be the proprietor or an exclusive licensee, would not be variance with customers 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 trademark registration 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 that the proprietor must always retain and exercise an inherently imprecise degree of control over the licensee’s activities. The mere fact that, during the period of licensing, some customers may associate the trademark registration with the exclusive licensee does not mean that it has become deceptive or that it lacks distinctiveness. During the license period the goods come from only one source , namely the licensee, and the mark is distinctive of that source.

Trafficking in Trademark Licensing

Under the earlier law, it was provided that an application for trademark registration of registered user was not to be entertained where such trademark registration would tend to facilitate “trafficking” in the 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 trademark 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 conclusive that the grant of the licensing is a trafficking in a mark.

Licensing of unregistered trademark

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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. The law governing assignment of 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 license of an unregistered user of a registered trademark. It is to be noted that even before the reform of the Trademarks law in India through the 1999 legislation, it is 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 be invalidate a passing off action or dis entitle the licencor to protection of the 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). The new law governing licensing of trademarks (section 48-55) is liberal in its entire approach, simplifying them by effecting necessary changes in the various provisions of the 1958 Act. It recognizes that “licensing of the trademark is an important industrial property right” and as such “the procedure for trademark registration should be made simple to encourage such trademark registration”. The creation of a license is an offer by the proprietor to another to use the mark as a licensee and that other to accept the license. A licensing does not come into existence by merely the use of the trademark. If it were so, actions for infringement and passing off would not exist for the cause of action in a suit for infringement or passing off is the unauthorized use of a trademark by the defendant”. Section 48, therefore enacts that the person other than the registered proprietor may be registered as a registered user thereof in respect of any or all of the goods or services in respect of which trademark registration is held.

Permitted use of trademark licensing

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Sub-section (2) enacts that the permitted use of a 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 other purpose for which such use is material under this Act or any other law. In case of a common law licensing as envisaged in Section 2(1)(r), the licensing’ s use  is by consent of a registered proprietor in a written agreements of Trademark registration.

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