Naked Licensing Of Trademarks: An Outlook Into The Legal Disposition Existent In India And The US

27th June, 2022 - 8:03 am Categories: Trademark 0 Comments

The term “licensing” entails a form of permission or sanction given by the owner to another party to use the property of the owner, provided the conditions imposed on the usage of the property is duly followed. The concept has seen its extension in the field of Intellectual Property Rights, especially in the practise of Trademarks.

Trademark Licensing allows the licensor (owner of the mark) to authorise the use of their trademark to the licensee (proposed user of the mark), wherein the licensee is required to comply with the terms and conditions placed over the sales of goods or services licensed under the said trademark. In conformance to this, “Naked Licensing” involves the licensor allowing the licensee to use the trademark without amalgamating and/or enforcing any provision of quality control in the license agreement. “Bare licensing” and “licensing in gross” are other connotations used to refer to this concept.

In summarization, it is a legal document where a trademark owner grants license to his trademark to another party without maintaining or imposing adequate quality control over the use of the trademarks. It therefore becomes an implied fact that lack of sufficient quality control clauses would lead to the eventual death of the trademark. In addition, failure to properly govern the activities of the licensee can lead to the cancellation of the mark and would serve as an advantage to the infringer if the matter is brought before the court.

Conceptualization of Naked Licensing:

Naked Licensing as a phenomenon saw its inception in the US Courts with the motive to protect consumers who are under the notion that a product or service under a particular brand would entail certain quality inherently. As a trademark owner, it becomes one’s duty to exercise control over the quality of goods or services provided by the licensee. Another crucial role in the notion of naked licensing was played by the article “The Rational Basis of Trademark Protection” (Harvard Law Review, 1927) by Frank Schechter, wherein the author put forth the idea that trademarks were no longer merely indicators of origin but an impersonal and anonymous guarantee of satisfaction.

Provisions governing Naked Licensing of Trademarks in India:

In India, trademark licensing is addressed through the Trademarks Act, 1999 wherein use of a trademark by a registered user and that of a permitted user is recognized. However, the act does not explicitly mention the phrase “naked licensing” and instead focusses on quality control. Nevertheless, the act does consist of certain provisions through which the concept of naked licensing can be construed. Section 2(1)(r)(ii)(c) and (d) states that there must be some form of written agreement entered between the proprietor and the licensee, and that the licensee is required to comply with all the conditions mentioned in the said agreement.  The section has seen its illustration in the cases of Cycle Corporation of India Ltd. v. T.I. Raleigh Indistries Pvt. Ltd. and Ors, and Gujarat Bottling Co. Ltd. v. Coca Cola Co., in which the court propounded that failure of registration of a licensee as a “registered user” does not take away the rights of the proprietor in his trademarks.

In furtherance to this, Section 49 (1)(b)(i) of the Trademarks Act, states that in an application where a registration of a user is involved, there must be an affidavit that details the relationship of the proprietor and the user, and that it should elaborate on the degree of control over the use of goods or services.

The aforementioned provisions indirectly infer to naked licensing and checks the quality control aspect involved while licensing a particular trademark. Quality control as a factor in maintaining the distinctive character of a mark has judicial recognition in India. For example, in the case of Coin Holdings Ltd. and Anr. v. Trans Tyres (India) Pvt. Ltd. and Anr., the court held that there are various dimensions in which control can be exercised or presumed. In certain instances, the existing relationship between that of the licensor and the licensee would inherently imply the degree of control. The licensor can stipulate that the licensee must manufacture goods in accordance to the specification and standards that the licensor prescribes, and can reserve the right to inspect the methods and goods of the licensee.

Hence, it can be inferred that quality control is a factor used to determine degree of control but the significance of it has been diluted in the case of naked licensing. The act does not provide for “degree of control”, and sparing very few judicial pronouncements, much acumen is not available with regard to this matter.

The legal standing and afore-mentioned cases highlight the necessity for due diligence, control imposed in actuality over quality and other aspects, and remedial steps that the licensor must undertake.

Provisions governing Naked Licensing of Trademarks in the United States:

In the United States, the doctrine of naked licensing is justified as a manner of consumer protection. If a trademark owner fails to monitor licensees, the consumers would eventually end up purchasing goods of lower standards than anticipated. The doctrine forbids licensing unless the licensor polices over the activities of the licensee. As failure to supervise the mark could potentially result in the cancellation of the mark, the fear of forfeiture would make the trademark owners hesitant to license the mark for blurring uses.

There are unique circumstance that arise wherein marks in certain circumstances are deemed to be abandoned by the owner. The Courts in this regard, have continually propounded that the presence of quality control provisions would determine if a case for abandonment has been made involving licensing of the marks. In the case of El Du Pont De Nemours & Co v. Celanese Corporation of America, as early as 1948, the court held that the licensed agreement contained vivid quality control provisions, including provisions of enforcement. In addition, the agreement contained provisions where the licensee acknowledged the validity of licensor’s rights and that it would not do anything to infringe these rights. The licensee had potentially violated the terms of the agreement by not stating the licensor’s name in few instances of advertising of the licensed product, these instances does not indicate the licensor had abandoned the usage of his own trademark. Through this judgment it can be deduced that emphasis was placed by the court on the cumulative reading of facts and circumstances than the letter of license agreement in question.

In the case of Tumbledus Inc. v. Cranmer, the US Court of Appeals examined the claim of abandonment of the trademark through naked licensing as a defence for infringement of the license agreement. The licensor had maintained records in an informal manner and failed to maintain contact with all the licensees. The court after due examination of the facts concluded that there was no concrete proof to establish that the licensor had abandoned their mark. Further reiteration of the afore-mentioned case was placed in the case of Anthony Banas v. Patsy’s Italian Restaurant Inc.

In Freecycle Sunnyvale v. Freecycle Network, the brief set of facts connoted that there was a lack of licenses, lack of control over the licensees, lack of working relationship between the licensor and licensees and an inability to terminate the licenses if the licenses used are in contravention to the terms and conditions put forth by the licensor. The Court eventually held that in such a case, naked licensing can be granted in such a case.

In the US, the Courts do not tilt one way or the other with regards to naked licensing. The Courts have instead placed reliance on the letter and the spirit of the agreements in close conjunction with the working of these agreements in arriving at their decisions.

Conclusion and Suggestions:

With the ever growing business frenzy and constant use of intellectual creations and resources, the licensor tends to lose track of their obligations in a license agreement. These obligations would be foreshadowed if the obligations of the licensee is brought forth, But with the increase in consumer base and incomes, licensing would serve as an indispensable aspect for companies that seek expansion.

For trademark cancellation to emerge as a legal standing recourse for naked licensing, provisions are required to implement the cancellation of trademark to the public, through channels like advertisements. Mandatory public declarations of cancellation of the mark could be implemented on the licensor, wherein the non-compliance could lead to imposition of a fine. Agreed that such invalidations would affect the business of the proprietor in an irreparable manner, but the best interests of the consumers should be of foremost concern when it comes to intellectual property rights.

In addition, general guidelines can be placed by courts for quality control, with regard to the times and circumstances of testing, and to quantify a degree of uniformity in all cases.

Author: Haritha Dhinakaran, a student of Symbiosis Law School (Pune), currently doing internship  at Khurana & Khurana, Advocates and IP Attorney, in case of any queries please contact/write back to us via email chhavi@khuranaandkhurana.com.