Trademark licensing, in simple terms can be defined as the limited grant of right to use that trademark on mutually agreed terms and conditions. Further, trademark licensing can be categorized under various heads like Simple License or a manufacturing license where a licensee gets the right to manufacture products or provide services as licensed by the licensor. The other types of licenses can be Merchandising license, Franchising etc. “Quality control” is a special feature present exclusively with Trademark licensing and not with any other kind of Intellectual Property licensing. The owners of other Intellectual Properties like Copyright, Patents, Trade Secrets etc are not required to enforce Quality Control provisions under their licenses.
The concept of Quality Control has been justified by both moral and statutory perspectives. The theory puts the licensor under a requirement to control the quality of goods produced or services provided by the licensee. Whenever, there is a contract of licensing without any provisions as to Quality Control mechanism, such a licensing in legal parlance is called “NAKED LICENSING”. It is not required that the licensee must meet high standards of quality for goods and services but the quality must be “equal” to the quality of goods and services of the licensor. At present, the extent of quality control depends and varies according to the licensing contract, the reputation, pre–established commercial standards of the mark and the economically justified needs of the parties.
Origin of “Quality Control” theory
Prior to the advancement and technical development of the market and amendment of the Act, self owned or proprietorship was the basic norm. The basic function of a trademark was to depict its source of origin to the consumers and the consumers relied on the trademark for ensuring that they are emanating from a single trustworthy source. Therefore it was believed that licensing of a trademark to another source would indicate to the fact that they are emerging from multiple sources which would mislead and confuse the public and hence licensing was not permitted.
With the passage of time, it was realized that a trademark not only indicates the source of origin of a mark but is also related with certain quality expectations of the consumers. This resulted in the development of law related to trademark and a trademark was now seen as to depict and associate the goods with some uniform quality standards apart from its capability to indicate its source of origin. With the emergence of this “quality theory”, trademark licensing was now no more a phenomenon which was alien to the trademark ideology. Now, the trademark licensing was permissible but with certain provisions as to regulation of quality standards of the licensee.
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Therefore, we can say that initially the concept of trademark licensing was acceptable only with the conditions and provisions for quality control.
Naked licensing or Quality Control
It is often argued that the concept of “QUALITY CONTROL” operates as a restraint on the rights of the bonafide licensee and gives the licensor the right to unnecessarily interfere with the interests of the licensee. There have been various instances on which the idea of “naked licensing” has been defended by people on grounds of transparency and independence of the licensee. To discuss this issue in more detail, firstly, we should be aware of the need of Quality Control and the rationale behind it. Following are certain points which elaborate the relevance of Quality Control provisions in a better way-
- STATUTORY REQUIREMENTS – Under the provisions of The Trademarks Act, 19991, a proprietor is required to disclose the particulars showing the degree of control by the proprietor over the permitted use which his relationship with the “registered user” will confer. This is a mandatory requirement for registration of a “registered user”. However, the Act nowhere specifies what constitutes the degree of control but it has made it clear that the licensing contract cannot be silent and there has to be some regulations on the right of the licensee by the licensor.
- PUBLIC INTEREST – The main idea behind the concept of quality control is that in its absence there can be variance in the quality of products and services of the same mark. For instance, A person visiting the restaurant “HALDIRAMS” in North India expects the same quality of products and services when he visits the same restaurant in South India. Therefore, there has to be certain level of quality standards which the licensee also is required to meet. This is for the benefit of the public in large as the variance of quality may result in deception and confusion among the public.
- INTEREST OF THE PARTIES - Both the licensor and licensee has a mutual interest of protecting the reputation and goodwill of the trademark. The consumers relate with the trademark through the quality of products and services provided under it. This reliance placed by the consumers builds up the reputation of a mark and any 1 Section 49 (1) (b) of the Trademarks Act, 1999. degradation in quality of services provided may harm the stature and repute associated with the mark.
- PROTECTING THE MARK FROM OTHER PARTIES - Under the Trademarks Act, 1999 the Registrar can suo motu or on an application by any other person cancel the registration of license if he is satisfied that the provisions of quality control stipulated in the licensing contact have not been complied with2. Therefore, any rival party can take benefit of this provision and take an action against the Proprietor which may not only result in cancelling of the license but may prove to be a great harm to the prestige and reputation of the mark as well.
- PREVENTS MISUSE OF ONE’S MARK - “Uncontrolled or ‘naked’ licensing may result in the Trade Mark ceasing to function as a symbol of quality and controlled source whereby it may appear that the Trade Mark owner has abandoned the Mark and he may be stopped from asserting his rights to the Trade Mark.”3 Therefore, allowing uncontrolled or “naked” use of the trademark may be taken as allowing the misuse of one’s mark.
Drawbacks of Quality Control
- Encourages competitors to challenge - The provisions given in the Trademarks Act regarding “Quality Control” can be misused by the competitors and they can always take advantage of the law and challenge the validity of the license on grounds of lack of compliance of quality control by the proprietor.
- A defense for infringers- Whenever there is an infringement proceeding initiated by the licensing company going on, the infringers can always take the plea that the quality control provisions have not been complied with and this could turn the direction of the case.
In the above discussion, we have seen both the advantages and disadvantages of Quality Control Provisions. Although, there can be certain arguments and drawbacks involved with the “Quality Control” mechanism, yet the degree of risk is much lesser than
that associated with naked licensing. A landmark case on the point is Eva’s Bridal Ltd. v. Halanick Enterprises, Inc.4 In the present case, the infringement proceedings initiated by the licensor was cancelled and his mark was declared abandoned by the court on the grounds of working under a naked license.
Quality Control is a part of the Indian Trademark law not only through its express provisions under Section 49 and Section 50 but is also implicit within the meanings of section 9 and 57 as well. “Quality” cannot be severed from a trademark as it plays the lead role in building its repute and goodwill. There should not be any variance in quality of products available under the same mark. Hence it can be concluded that “QUALITY CONTROL” should always be preferred over Naked Licensing.