We are pleased to bring to you a guest post by Naman Keswani on the concept of naked licensing within trademarks law. Naman is a fourth-year student at the Hidayatullah National Law University, Raipur who has a keen interest in Intellectual Property Law, especially Trademark Law.
The Conundrum of Naked Licensing
The basic function of a trademark is not only to distinguish between the goods or services of one proprietor from those of others but also to ensure a certain level of quality on all the goods bearing the same trademark. This is known as the quality function of a trademark. It is pertinent to note that the quality function does not require the quality of the goods to be of supreme quality. Rather, it implies that the quality of goods bearing the same trademark consists of the same level of quality. Thus, in a license, it is the obligation of the proprietor that the goods manufactured by the licensee are consistent with the goods manufactured by the proprietor, so as to ensure there is no market confusion as to the source of goods. This requires the proprietor to exercise quality control measures while granting licenses to use the trademark, as a deviance in the quality would cause confusion.
A naked license is a situation where a license is granted by the proprietor wherein the proprietor has no quality control measures over the licensee. Such licenses are barred by law and the implications of granting a naked license in favour of any licensee can extend up to the revocation or cancellation of the monopolistic rights granted to the proprietor.
Historical Background of Naked Licensing
The concept of naked licensing under the trademark law finds its roots in the precedential law of the US. The rationale behind the abandonment of rights by granting naked licenses under US law is that naked licenses are inherently deceptive, as an uncontrolled trademark license may allow the licensee to change the quality of the products, resulting in the failure of the quality function of the trademark. Thus, a naked license is considered abandonment as the licensor fails to fulfil his duty to protect his mark’s reputation.
In El Du Pont De Nemours & Co. v. Celanese Corporation of America [167 F. 2nd 484, 489 (3rd Cir. 1949)] (considered as one of the first cases where the Court explained the concept of naked licenses) the Court explained that the lack of quality control measures could lead to cancellation of the registration of the mark, however here the agreement had such a measure in place and thus ruled against the abandonment of the mark by the proprietor.
In another case- Freecyclesunnyvale v. Freecycle Network [626 F.3d 509], the Respondent had granted a license to the Appellant without any quality control measures. The Appellant was allowed to use it as a defence to prove non-infringement of the marks, as the Court held that neither any quality control measures were stipulated in the license agreement, nor did the licensor exercise any actual control over the licensee, which amounted to a naked licence, and thus the abandonment of rights.
The Indian Scenario
As regards to the provisions on naked licensing, the Trade Marks Act, 1999 does not provide any explicit provisions prohibiting the concept of naked licenses nor does India have a strong mechanism to ensure quality control between the goods of the proprietor and the licensee. Sure, Section 49 and Section 50 provide certain conditions wherein the proprietor is under the obligation to keep a quality check on the licensee. For instance, Section 49(1)(b)(i) of the Act provides that whenever any person has to be registered as a registered user of a mark (not being the original proprietor), the registered proprietor has to provide an affidavit along with the application explicitly stating, among other things, the degree of control over such permitted use. Further, Section 50(1)(d) of the Act provides that the registration of a registered user may be cancelled by the Registrar on an application by any person, on the ground that any stipulation in the agreement regarding the quality check, is either not enforced or not been complied with. However, these provisions will be applicable only when the licensee is registered as a registered user u/s 49, which is not mandatory in India. Furthermore, these provisions only provide that the registration as a registered user shall be cancelled by the Registrar of Trade Marks, and not the registration of the mark itself, unlike the situation in the USA, where the mark is deemed abandoned.
The Dichotomy of Registered and Unregistered Permitted Users
Under the Act, a permitted use may or may not be registered. This raises an important question – why does the Indian law allow a dichotomy between a registered permitted user and an unregistered permitted user? The answer to this question can be found under Sections 52 and 53. Section 52 provides that a registered user may take action for infringement of the trademark in his own name as if he were the registered proprietor of the mark. Further, Section 53 provides that an unregistered permitted user cannot take action for infringement.
The Take of the Indian Courts
The Indian Courts, on various occasions, have highlighted the importance of quality control measures in license agreements. In Schott Glass India Pvt. Ltd. v. Competition Commission of India [ Comp AT 1], the Competition Appellate Tribunal held that the function of a trademark is to inform the purchaser about the origin of the goods to assure the consumer a predictable quality with respect to the goods bearing the identical trade mark. Thus, without quality control over the licensees, a proprietor would not be able to assure predictable quality.
However, it is not always necessary to provide specific quality control measures in the license agreements. It was held in Rob Mathys India Private Limited v. Synthes Ag Chur [(1997) 17 PTC 669] that in various situations, the relationship between the licensor and the licensee itself implies sufficient level of control. In such cases (such as a holding-subsidiary relationship), the absence of quality control measures would not be deemed as a naked license. The law is not concerned with stipulations of quality control in any agreement, rather it mandates actual control over the quality of goods manufactured by the licensee.
Further, in UTO Nederlands B.V. v. Tilaknagar Industries [(2012) 49 PTC 249], the marks in question before the Bombay High Court were “MANSION HOUSE” and “SAVOY CLUB” for the sale of alcoholic beverages such as whisky, rum, gin etc. The parties entered into three arrangements, the first being a license through which the licensor was supposed to supply the raw material for the production of alcoholic beverages, the second arrangement was an assignment through which the marks were transferred so as to defend UTO from any legal consequences, and the third arrangement was regarding the revival of the license, which was held to merely state the quantities and did not stipulate the contractual relationship between the parties. The license agreement (first arrangement) had a clause stating that the licensee shall act “under the technical advice of B.V. Utomi Holding”. This was argued to be a quality control measure by the Plaintiff. However, the Court analysed the evidence provided by the Plaintiff in the favour of the quality control measures and held that such measures were not enforced in sooth. Moreover, the Plaintiff acquiesced to the use of the marks by the Defendant through the second arrangement and hence was not entitled to the protection of the mark.
Thus, the position of law in cases of use as a registered user is clear, as provided under Sections 49 and 50. However, since such registration is not mandatory, and most of the licenses are granted as common law licenses, the issue of naked licenses might also arise in such licenses. To cater to this problem, the Hon’ble Supreme Court, in Gujarat Bottling Co. Ltd. v. Coca Cola Co. [(1995) 5 SCC 545], held that the unregistered permitted users would be governed by common law, and the conditions to grant such licenses would be the same as those imposed on a registered user. Moreover, the Bombay High Court, in Malhotra International Pvt. Ltd. v. Vidyut Metallics Ltd. [(1998) 1 Bom CR 351], held that to establish that a license is a common law license, it is necessary that the licenser ensures quality check on the licensees.
Implications of Naked Licensing in India
It does not matter whether the license is registered or not, and the licensor has to keep quality control over the licensee. The need for such measures to be taken by the licensor arises out of one of the principles of trademarks law – avoiding confusion amongst the consumers, which also drives Sections 9 and 11 of the Act, under which the Registrar may refuse the registration of a mark if it is likely to deceive the public. Thus, it can be stated that the likelihood of confusion governs the registrability of a mark. But does it also govern the cancellation of any mark?
Section 57 deals with the rectification of the Register. It provides that the Registrar or the High Court, on an application made by an aggrieved party or on its own motion (limited to High Court), can rectify or cancel the mark.. The provision does not explicitly provide for the likelihood of confusion to be a ground for cancellation. However, in Khoday Distilleries Ltd. v. Scotch Whiskey Association [(2008) 10 SCC 723], it was held that confusion is the principal criterion for determining applications for both registrations as also for rectification.
A naked license may prove to be detrimental to the distinctive character of a trademark, by causing confusion amongst the consumers through divergence in the quality of a good. This would eventually lead to a situation wherein the mark is in contravention with the provisions of law. A collective reading of Section 9(2)(a) and Section 57 of the Act would make such a mark liable to be removed from the Register. Although there are no such cases yet, but no provision would come to the aid of the proprietor if a pleading to the effect of cancellation of the mark is made by an aggrieved party, and such a mark may be considered as inherently deceptive, as is the case in the USA. Thus, if a license is examined to be a naked license and the party aggrieved proves confusion due to such license, the Courts may analyse the same to be violative of Section 9(2)(a) and may order for cancellation of such mark under Section 57. However, given that no such cases have reached the Court yet, the threshold of confusion set by the Court may be very high.