In 2019 the new EU Trademarks Directive (2015/2436/EC) was implemented in the United Kingdom. As part of this implementation, numerous changes were made to the licensing provisions of the Trademarks Act 1994. This article sets out the changes which are most significant for franchisors.

Limited direct enforcement rights for non-exclusive licensees

Under the new rules, non-exclusive licensees can bring a trademark infringement action only if:

  • the trademark owner consents; and
  • the licence agreement does not exclude such right.

Trademark owners should, therefore, not only be aware of their right to refuse consent for a direct enforcement action by a non-exclusive licensee, but also consider whether their trademark licences should expressly exclude the licensee's right to bring such an action.

Enhanced direct enforcement rights for exclusive licensees

Under the new rules, exclusive licensees can also bring a trademark infringement action if:

  • the trademark owner consents; and
  • the licence agreement does not exclude such right.

However, exclusive licensees also have the right to:

  • require a registered trademark owner to bring infringement proceedings in respect of any matter which affects the licensee's interests; and
  • take action against an infringer in its own name if the trademark owner has refused to take action itself or has failed to do so within two months of the exclusive licensee's request for it to do so.

Previously, these rights extended to both non-exclusive and exclusive licensees but could be removed by contract. Now, the rights extend only to exclusive licensees. In addition, it is no longer possible for exclusive licensees to contract out of these rights.

As a result of these key changes, trademark owners should give careful consideration to the types of licence that they grant and whether they should be granting exclusive trademark rights at all. A non-exclusive licensee can no longer require a trademark owner to bring proceedings and can bring proceedings in its own name only with the owner's consent. An exclusive licensee, on the other hand, can require the trademark owner to bring proceedings and bring proceedings in its own name (without the owner's consent) if the owner refuses or fails to take action within the specified time, regardless of what is set out in the licence agreement.

Franchisors should ensure that the licensing of their IP rights is dealt with separately in the franchise agreement and granted on a non-exclusive basis. IP licensing should not, for example, be included in the terms relating to the grant of territorial rights, particularly where those territorial rights are being granted exclusively to a franchisee.

Direct licensee intervention in infringement proceedings

Where a registered trademark owner brings infringement proceedings, a licensee (whether exclusive or non-exclusive) which has suffered loss as a result of the infringement is now entitled to become a party to those proceedings in order to seek compensation for its loss directly. This new right cannot be excluded by contract. Previously, licensees had no right to join infringement proceedings but had to rely on the court taking into account any loss that they had suffered (or were likely to suffer) and ordering the trademark owner to hold on the licensee's behalf any damages recovered in respect of that loss.

This is an important new right for licensees, particularly where an infringement may have a significantly greater impact on a licensee than the trademark owner itself. However, it is important to bear in mind the costs associated with being a party to legal proceedings. A licensee still has the option not to intervene directly but to rely on the court to take into account its loss in any damages awarded and to order the trademark owner to hold damages on its behalf. Thus, licensees should weigh up the benefit of being a party to any litigation against the cost of such direct involvement.

New statutory enforcement rights for licensors

Registered trademark owners now have a statutory right to take legal action against any licensee (whether exclusive or non-exclusive) that fails to comply with any of the terms of the licence relating to:

  • its duration;
  • the way the trademark may be used;
  • the goods or services covered by the licence;
  • the geographic area in which the trademark may be used; or
  • the quality of the relevant goods or services.

This new right is in addition to any contractual right that the licensor might have to sue a licensee for breach of the terms of the licence and applies to any breach committed on or after 14 January 2019, irrespective of the date on which the licence was granted.

Obligation to transfer registered trademarks on transfer of business

In addition to the changes to enforcement rights highlighted above, franchisors should note one further change introduced by the implementation of the EU Trademarks Directive into UK law.

The new rules provide that a contractual obligation to transfer a business will be taken to include an obligation to transfer any registered trademark, except where there is express agreement to the contrary or it is clear in all of the circumstances that this presumption should not apply.

As yet, there is no guidance on the precise scope of this new rule and how it will apply in practice. While it is generally accepted that it will apply only to registered trademarks that are both owned by a transferor and relevant to the business being transferred, uncertainty still surrounds its application. For example, how would the rule apply to the sale of one business by a seller which operates multiple businesses using the relevant trademarks, or to the sale of part of a wider business to which the relevant trademarks relate? Which registered trademarks would be included in the obligation to transfer in these circumstances?

Given the uncertainty surrounding the scope of this obligation, companies transferring a business must ensure that the relevant transfer agreement:

  • identifies all of the trademarks that it owns and that are relevant to the business being transferred; and
  • specifies which of those trademarks will be assigned as part of the transfer and which are to be retained by the transferor.

Failure to do so could lead to unanticipated and unwelcome consequences.