Both licensors and licensees can profit from licensing. Licensors can benefit economically while expanding their brand reputation. They can also reduce the risks of non-use cancellation claims against their registered marks. Meanwhile, the use of a ready-made mark and its goodwill can result in a stable revenue stream for licensees. However, behind these advantages are various risks, which both parties should preempt and monitor before signing a licence agreement.
Types of licence
China’s Trademark Law does not stipulate the types of trademark licence available. However, according to the Supreme People’s Court’s Interpretation of Several Issues Concerning the Application of Law in the Trial of Trademark Civil Disputes, there are three types of licensing – namely, exclusive licensing, sole licensing and general licensing.
Through exclusive licensing, the trademark owner permits the licensee to use the mark in connection with specific goods and services only within a prescribed period and region, and in the form of an agreement. Further, the agreement prohibits the trademark owner or any third party from using the registered mark. Where infringement occurs, the licensee can file suit in its own name.
Through sole licensing, the trademark owner permits the licensee to use the mark in connection with particular goods and services as specified in the agreement. The trademark owner can use the registered mark in accordance with the agreement, but cannot permit others to use it as well. In case of infringement, the trademark owner can file suit together with the licensee. When the trademark owner does not raise litigation or is negligent to prosecute, the licensee can file suit separately.
Through general licensing, the trademark owner permits a number of licensees to use its registered mark on specific goods or services within a prescribed period and region, and under an agreement, pursuant to which the trademark owner can freely use and permit others to use the registered mark. This kind of licence is most often used for franchising. When a trademark infringement occurs, the licensee has the right to file suit only if the trademark owner expressly authorises it.
Although the terms in each trademark licence differ and can be negotiated freely by the parties, both should consider the following issues before reaching an agreement, in order to protect their rights and avoid any future disputes.
The quality of a licensee’s products will directly affect the licensor and can result in the loss of reputation or value of the registered mark. Therefore, licensors must choose their partners carefully and examine the licensee’s qualifications and suitability. If there are issues with these, the agreement may be invalid.
In some industries, pursuant to state law, the licensee must provide approval documents for the provision of products or services (eg, documents from the Department of Health for the use of a trademark on drugs, medical nutrition food and drink, and baby food, or certification documents from the National Tobacco Administration Office for a trademark on cigarettes, cigars and packaged tobacco). If the licensee fails to comply with the relevant provisions, the licensor should think carefully before signing the licence agreement. It should also investigate the licensee’s production capacity, management level and product quality to ensure that it can provide products of the same quality standard as the licensor.
Quality control during the licence period is also a key concern for licensors.
According to Article 43 of the Trademark Law, a licensor must supervise the quality of the goods on which a licensee uses its registered mark. Quality control is not only the licensor’s legal obligation, but also serves to protect its rights and interests. The licensor must ensure that the licensee’s products meet its set standards and will not harm its brand value.
Licensors should clearly indicate the set quality standards in the licence agreement and avoid general terms such as “in accordance with the requirements for party A’s quality standard” in order to prevent disputes over the agreed use of the mark. Further, the licence agreement should clearly stipulate the supervision and inspection methods required to prevent any decline in quality standards. These methods can include:
- the regular and irregular dispatch of technical personnel for guidance, training or inspection; and
- the random inspection and sampling of products.
Quality standards should be monitored throughout the entire agreement period. Where an issue arises, the licensor should take decisive measures and, if necessary, terminate the licence agreement.
Finally, licensors must protect their trademark ownership rights. Licensees should be prohibited from registering and using trademarks that are similar to the licensed mark, in order to prevent dilution of its distinctiveness and reputation.
During the agreement period, licensees can develop their own brands for their own benefit. However, if a licensee registers or uses a trademark which is identical or similar to the licensed mark on similar or relevant goods or services, consumers may believe that the two marks are connected. When the licence agreement is terminated, such confusion and misrepresentation will have an adverse effect on the licensor’s brand. To avoid this risk, licensors should include the following terms in the licence agreement:
- The licensee cannot apply for or use any trademark that is a combination of other distinctive word or graphic elements and the licensed mark on any goods or services in the agreed territory without the licensor’s consent;
- The licensee cannot use and register a trademark that is similar to the licensed mark on any goods or services in the agreed territory without the licensor’s consent; and
- The licensee cannot apply for a trademark comprising the licensor’s trade name, product name, packaging design or advertising language without the licensor’s consent.
Before signing a licence agreement, the licensee should investigate both the licensor and the licensed trademark, to avoid any drawbacks that may render the agreement invalid.
Licensees should confirm that the licensed trademark is registered and that rights in the mark are stable. If the trademark is pending examination, it may be subject to rejection – in which case, the licensee should not sign the agreement. Even where the mark is registered, licensees should investigate any related cancellation or invalidation proceedings. These indicate that the rights in the mark are unstable and may be under dispute. In this case, the licensee should evaluate the possible risks for using the mark. Where a licence agreement is mandatory, the licensee should ensure that the agreement expressly provides that any losses following the ownership dispute will be borne by the licensor. In addition, if the licensed trademark is registered in China and requires exporting, the licensee should determine whether the mark has been registered in the exporting country.
Licensees should ensure the stability of the relevant trademark during the licence period through the following terms or limitations in the agreement:
- The licensed trademark cannot be transferred to others or, in case of transfer, the new licensee must use the mark under the terms of the original licence agreement;
- The licensor must handle any trademark renewals in sufficient time to ensure the continuity of the licensed mark; and
- The licensor must participate in the administrative process in a timely and active manner. Further, it will be liable for any breach of the agreement if the licensee’s rights are harmed as a result of the trademark becoming invalid. In case of infringement, the licensor must promptly defend its rights.
To ensure the exclusive or sole right to use a licensed mark, the licensee must devise a corresponding restrictive agreement that ensures that it is the only licensee in the predetermined territory and that prohibits third-party use of the mark.
Finally, according to Article 43 of the Trademark Law, if a licensor authorises another party to use its registered mark, it must submit the trademark licence to the China Trademark Office (CTMO) for its records. A trademark licence that is not recorded at the CTMO cannot be used against third-party disputes. Although recordation is not mandatory for a licence agreement to come into effect, the validity of the agreement will be limited if it is not recorded within three months from the date of signing. Failure to record the agreement within this period will mean that it is effective between the licensor and licensee only, and that it provides no defence against a third party using the mark in good faith. If the licensor has entered into licence agreements with a number of entities, any licensee that has not recorded its licence will have no defence against licensees that have recorded their licences and other bona fide third parties. Therefore, to guarantee the rights and interests in the use of a mark, licensees should specify in the licence agreement that the licensor will submit an application to record the licence with the CTMO within the specified period.
In addition to these tips, there are many other issues that licensors and licensees should also be aware of, including the responsibilities of both parties on the termination or expiration of the agreement and the consequences of breaching its terms.
This article first appeared in World Trademark Review. For further information please visit www.WorldTrademarkReview.com.