This quality identification functionality of a trademark does not predicate superiority or excellence but rather uniformity and continuity of quality sufficient to sustain consumer reliance and to avoid market confusion as to the source of the goods.
Introduction
This article seeks to implore and study the concept of naked licensing of trade mark law. The “naked licensing defence” is a commonly adopted defence, adopted by the licensees in a trade mark infringement suit brought about by the licensors. The genesis of the defence arises from a fundamental feature of a trade mark, i.e., the ability of a trade mark to act as a “source identifier”. The naked licensing defence is a defence taken by licensees or a user that the licensor and proprietor of a trade mark cannot bring about an action for infringement on account of the fact that the licensor, by granting a bare or naked licence without any quality control supervision or provision, has ensured that his trade mark no longer acts as a source identifier and ceases to be a valid trade mark. It is considered to be a form of involuntary abandonment. This defence has been accepted by the courts in the United States of America and, to some extent, has been adopted by the courts in UK and in India. This article seeks to dissect and analyse the doctrinal underpinnings of the naked licensing defence and the authors attempt to analyse and see if this defence can be accommodated within the Indian legislative framework.
Fundamentally, a trade mark serves as distinctive indicator in the course of trade, the basic function of it is not only to distinguish between goods and services of one proprietor from those of others, but an assurance that goods and services marketed under the same mark conform to a consistent and predictable standard. This quality identification functionality of a trade mark does not predicate superiority or excellence but rather uniformity and continuity of quality sufficient to sustain consumer reliance and to avoid market confusion as to the source of the goods. This obviously requires the proprietor to exercise certain quality control measures while granting licences to use the trade mark.1 There is indeed a general duty cast upon trade mark owners to exercise adequate quality control over the licensee. It is in this setting that the doctrine of naked licensing assumes practical significance.
The doctrine of naked licensing is one of the most key and significant defences a party can have to an action for infringement of a registered mark. At its core, a “naked licence” or “bare licence” is considered to be a form of “involuntary abandonment” and refers to a trade mark licensing arrangement where the proprietor grants permission to use the mark without exercising adequate quality control over the goods or services sold under that mark. The best exposition of this is in the decision of the 9th Circuit Court in the United States of America in Barcamerica International USA Trust v. Tyfield Imports, Inc.2 The facts in Barcamerica were that a registered proprietor the trade mark “DA VINCI” for wines and they had licensed their trade mark in favour of the Renaissance Vineyards. The agreements for licence did not contain any quality to be maintained by the licensee and it did not have any control over the quality of the wine manufactured. An infringement action was initiated against an importer and producer of “DA VINCI” wines from Italy. The action for infringement was dismissed on the ground that there was naked licensing which made the mark “inherently deceptive” and amounted to involuntarily abandonment of the trade mark. The finding on naked licensing was based on the absence of quality control either present or exercised. The sequitur was that the trade mark is no longer a reliable indicator of consistent source and quality to consumers.
From this, one could imagine the undesirable consequences that may unravel for consumers who, are under the genuine assumption of an implicit assurance that products emanating from the licensee are of the same quality as those emanating from the licensor. As a consequence, the licensor stands at the risk of potential abandonment or forfeiture of its rights to the trade mark in question, as they simply failed to indicate the origin of goods and the assured quality of the products or services thereunder.
The traditional view, rooted in American jurisprudence, holds that naked licensing can result in abandonment of trade mark rights because it severs the connection between the mark and its source, potentially deceiving consumers about the origin and quality of goods. The consequence of the aforesaid is that the trade mark itself has become inherently deceptive and there has been an involuntary abandonment by the proprietor. The question or test to determine naked licensing was broadly based on an analysis of the licensing agreement to determine if the agreement itself contained any clauses for quality control and/or inspection3, but the absence of such provisions per se may not be determinative of naked licensing and it would still be permissible for the licensor to show that actual control was exercised.4 The purpose of quality control requirement is to prevent public deception that would ensue from variant quality standards under the same mark or dress.5
However, the evolution of modern business practices including diverse and extensive franchising, character merchandising, etc. necessitates a revisit to this doctrine and the tests employed to determine the same. The question is, can the defence of naked licensing protect the alleged infringer in every situation? Would the mere absence of contractual clauses or documentary evidence of quality control per se lead to an inference of naked licensing even in cases where no depreciable loss of quality was established? Can we locate and apply this doctrine within the Indian legislative framework?
These are some of the core questions the authors seek to answer in this article.
Doctrinal evolution of the principle of “naked licensing” in the United States of America
The doctrine of naked licensing was primarily developed in the courts of USA. One of the early cases that discussed the effects of naked licensing is El Du Pont de Nemours & Co. v. Celanese Corporation of America6 wherein the court opined that lack of quality control measures by the licensor could potentially lead to cancellation of the registration of the mark itself, however, the court did not insist upon an exhaustive or continuous supervision, instead, examined whether the licensor retained sufficient control to ensure the nature and quality of goods remained consistent with the mark’s reputation. It was one such case where there was in fact an agreement to such a measure in place and thus the court ruled against abandonment of the mark by the proprietor.
The next major case study is Dawn Donut Co. v. Hart’s Food Stores, Inc.7. The plaintiff Dawn Donut Co., a Michigan corporation, owned the registered trade mark “DAWN” for doughnuts and bakery products since 1927. The Company operated a licensing system whereby independent bakers were licensed to use the trade mark, recipes, and production methods. Licensees were required to purchase ingredients from Dawn Donut. However, Dawn Donut had no licensees or business operations in the Rochester, New York area. The defendant, operating retail grocery stores in Rochester, began using the name “Dawn” for its doughnuts and bakery products in 1951. Dawn Donut then filed suit. The 2nd Circuit held that without business presence in Rochester or likelihood of expansion there, no injunction was warranted. Interestingly, the court established that trade mark licensors must exercise quality control over licensees, articulating the “naked licensing” doctrine that licensing without adequate quality control may constitute abandonment.
These judgments lay down the jurisprudential foundation behind the defence, but the next question is, what are the factors to establish naked licensing and what is the standard of proof to be met for the same.
As regards to the factors to be pleaded and proved, the legal principles were summarised and clarified, in Freecycle Sunnyvale v. Freecycle Network8 where the 9th Circuit addressed quality control in the context of a non-profit organisation’s trade mark. The court established that to avoid naked licensing, a licensor must demonstrate:
1. express contractual control over the licensee’s quality control measures,
2. actual control over the licensee’s quality control measures, or
3. reasonable reliance on the licensee’s quality control measures based on a close working relationship.
What is crucial is that in the case of Freecycle, relying upon other earlier precedents, it was noted that where the parties shared a close working relationship, even in the absence of a formal agreement quality control can be established. Relying upon the case of Barcamerica, certain examples of factors indicative of close working relationship were extracted:
1. a close working relationship for eight years;
2. a licensor who manufactured 90 per cent of the components sold by a licensee and with whom it had a 10-year association and knew of the licensee’s expertise;
3. siblings who were former business partners and enjoyed a 17-year business relationship; and
4. a licensor with a close working relationship with the licensee’s employees, and the pertinent agreement provided that the licence would terminate if certain employees ceased to be affiliated with the licensee.
Furthermore, the grant of an exclusive licence was also seen to be an indicator of abandonment as it could lead to scenarios where the source of the mark is identified with the licensee and not the proprietor of the mark.
In respect of standard of proof, it is fairly accepted and universal position that the evidentiary standard to prove naked licensing has to be a “stringent standard” because a finding of naked licence signals involuntary abandonment and forfeits protection.9
Therefore, a cursory tracing of the law as it developed in America would show that the “naked licensing” defence is based on sound jurisprudential reasoning. It is treated to be a form of “involuntary abandonment” and the defence, though codified in some States, applies even without express statutory codification as it is premised on the basis of the fundamental characteristics of a mark. The factors to establish naked licensing are fast evolving and there are evolving exceptions to the formal contractual requirements to establish lack of quality control measures. This is especially true in cases where the parties have had a “close working relationship”. This test could be the fulcrum to avoid unintended consequences of modern business arrangements.
Naked licensing defence in United Kingdom and India
The naked licensing defence has more or less been a successful import of the United States of America and other jurisdictions have, to some extent, accepted this doctrine. However, the authors wish to restrict this article to an analysis of the applicability of this doctrine in the UK and in India.
The naked licensing defence has gotten limited recognition in both jurisdictions. In respect of the United Kingdom, we need not venture past the decision of the House of Lords in Scadecor Developments AB v. Scadecor Marketing AV10. The House of Lords, while seemingly in agreement with the jurisprudential underpinnings of the theory of naked licenses, were not convinced that a naked licence per se is objectionable as inherently likely to deceive. The House of Lords were of the opinion that the “source indication” feature of a naked licence can be to indicate the source as not just the proprietor but any other person who for the time being is permitted to use the mark, whether it be the proprietor or the exclusive licensee. It was observed that the public is accustomed to the concept and use of licences and the people identify the mark as that of the proprietor or by someone else acting with his consent. Having observed thus, certain set of questions were framed by the House of Lords to the European Court of Justice for their opinion but it appears that the dispute was thereafter settled and no authoritative opinion on the reference questions were decided.
Therefore, it was held that the mere grant of a bare or naked licence would not per se be objectionable. The question as to whether after expiry of the licence period there could arise confusion of the source would have be seen on a case-by-case basis.
Thus, the courts in UK have accepted the doctrine only to a limited extent. It was expressly opined that a grant of naked licence by itself is not objectionable and the identification of the source can be either to that of the proprietor or any person authorised by him.
The position in India is slightly more nuanced. However, before adverting to the judicial authorities, is it even possible to adopt this doctrine within our judicial framework?
The Indian trade mark law has evolved significantly since 1975, with the Trade and Merchandise Marks Act, 1958 giving way to the Trade Marks Act, 1999. The 1999 Act liberalised licensing provisions, eliminating the mandatory “registered user” system and allowing greater flexibility in trade mark licensing arrangements. Moreover, abandonment has also been expressly recognised in the Trade Marks Act, 1999.
The section that comes close to abandonment is Section 47, Trade Marks Act, 1999. The provision is as follows:
47. Removal from register and imposition of limitations on ground of non-use.—(1) A registered trade mark may be taken off the register in respect of the goods or services in respect of which it is registered on application made in the prescribed manner to the Registrar or the High Court by any person aggrieved on the ground either—
(a) that the trade mark was registered without any bona fide intention on…
The statute contemplates grounds for rectification as follows:
1. Improper or Fraudulent Registration (Section 57).
2. Non-Use of Trademark (Section 47).
3. Clerical or Typographical Errors (Section 58).
4. Violation of Registration Conditions.
5. Conflicts with Earlier Rights or Public Interest Alteration Requirements (Section 59) .
However, the question of abandonment is only voluntary, i.e., abandonment through non-use. The question of involuntary abandonment is not found in the Act at all. However, the very definition of a trade mark under Section 2(zg) includes within it an implied condition that the trade mark must have the capability to indicate a connection in the course of trade between the goods and either the 1) proprietor, or 2) registered user of the mark. Therefore, the source identification feature is still essential even in our statute for a valid trade mark but interestingly, there is no requirement for the source to only be the proprietor but it can also be towards a registered user.
Quite interestingly, Sections 48 and 49, which deals with registered users and registration of registered users, further provides a germane ground for the applicability of the naked licensing doctrine in India. Most importantly, Section 49(1)(b)(i) which deals with the affidavit made by the registered proprietor to the Registrar for registration of a registered user mandates that the proprietor must show the degree of control by the proprietor over the permitted use.
Therefore, though not expressly statutorily codified, there is enough leeway in the statutory language to recognise the concept of naked licensing, at least to the limited extent as that of the United Kingdom. Let us now see how it has been recognised, if at all, by the courts in India.
The initial approach of the Indian Courts was to view the aspect of indiscriminate licensing from the lens of trafficking of trade marks rather than through bare/naked licences. One of first decisions dealing with the concept of unrestricted licensing of trade marks was the decision of the Madras High Court in K.R. Jadayappa Mudaliar v. K.S. Venkatachalam11 where the court peripherally addressed the question as to whether an unrestrained licensing of trade marks can amount to “trafficking of trade marks”. The initial view was to consider whether the licensor had any intent to use the mark. However, there arose no occasion for a detailed study into this issue in the aforesaid judgment.
One of the first cases to incidentally discuss a doctrine similar to naked licensing was the decision of the Madras High Court in Fatima Tile Works v. Sudarsan Trading Co. Ltd.12 It must be clarified at the outset that the case of Fatima Tile Works was in fact not a case of involuntary abandonment but was a case of voluntary abandonment on account of non-use. In this case, Sudarsan Trading Co. Ltd. (STC) acquired Feroke Tile Works along with the registered trade mark “umbrella” in 1967. STC was registered as subsequent proprietor effective 23 April 1967. STC leased its tile factory (Feroke Tile Works) to Eastern Clay Works Ltd., permitting Eastern Clay Works to use STC’s trade mark. Eastern Clay Works was a subsidiary of STC. STC exercised proper control and supervision over quality, specifications and standards.
The petitioners (Fatima Tile Works and Standard Tile Factory) filed original petitions, seeking rectification/removal of the registered trade mark on grounds of:
1. improper assignment to Eastern Clay Works not registered per Sections 41 and 44,
2. non-user by STC under Section 46, and
3. abandonment and dishonesty.
Though the principal ground was on account of non-use, there were detailed findings on the validity of a mark on account of licensing. Though it had held that a mark can become vulnerable if the proportion permits use in a manner which is calculated to deceive or cause confusion, it was not absolute. Crucially, it was held that under the present definition of trade mark, all that is to be shown is that the mark indicates a connection in the course of trade. The Madras High Court also quoted with approval a passage from Kerly on Trade Marks, 12th edition13 to show that a proprietor need not manufacture the product but may simply retain the right to control the manufacturer or ensure compliance with manufacturing specifications or standards or quality as may be laid down by him.
Ultimately, the Madras High Court rejected all grounds, as it was held that factually there was original power of supervision and direct control in the facts of this case.
The judgment in Fatima Tile Works though not on the aspect of involuntary abandonment, held that the crucial test under our legislative framework is whether the mark indicates a connection in the course of trade. It was also established that exercising quality control measures is one such way in which such connection can be maintained. However, if the mark is used in a manner calculated to deceive, it could become vulnerable.
However, directly in the context of disputes between the licensor and licensee, the views of the Indian Courts have been to reject any claim or defence by the licensee on the grounds of dilution or generic nature of the underlying mark. In this regard, the decision of the Bombay High Court in UTO Nederland B.V. v. Tilaknagar Industries Ltd.14 held that the fact that parties seek and obtain a licence to use a trade mark itself is an acknowledgment that the said trade mark has good will and reputation attached to it and is not generic.
Moreover, on the fundamental role and object of a trade mark, the Delhi High Court in Trans Tyres India (P) Ltd. v. Double Coin Holdings Ltd.15 relied upon the decision in the case of Scadecor and held that the conventional theory of trade mark that it connects in the mind of the consumer to the proprietor of the goods is inapplicable to today’s environment. In today’s global environment, the theory pertaining to a trade mark would be that a trade mark connects, in the mind of the consumer, the source wherefrom the goods enter the market, whatever may be the nomenclature of that source. It could be the agent, the distributor or even a person who purchases goods from a manufacturer and sells them in the market. In other words, the mark has come to be identified with the source from where the goods enter the market rather than with the manufacturer.
The Delhi High Court also had the occasion to directly determine an issue between the licensor and the licensee. The decision in Eaton Corpn. v. BCH Electric Ltd.16 represents one of the most comprehensive Indian judicial treatments of licensing, quality control, and the rights of ex-licensees.
Cutler-Hammer Inc. (predecessor of Eaton Corporation) had a long-standing relationship with BCH Electric Limited (BEL) dating to 1965. Various agreements were executed, including a registered user agreement (1979—1986) granting BEL rights to use trade marks “CUTLER-HAMMER” and “CH”. After the agreements expired, BEL continued using the marks and eventually applied for registration in its own name. Eaton sued for trade mark infringement; BEL defended on grounds including abandonment and acquiescence.
BEL further argued that Eaton had abandoned the trade marks by not renewing certain trade mark registrations, not using the marks in India and not exercising quality control over BEL’s use. The court held that the plaintiffs have been using the trade marks worldwide and there is no reason to assume that the same were abandoned. Mere fact that the registrations of few trade marks inadvertently lapsed and then no steps were taken to reinstate the said registration on account of adopting the new version of it, the same is no ground to claim that plaintiffs have abandoned the trade marks. It further concluded that:
1. An ex-licensee who has expressly acknowledged the proprietor’s rights and agreed not to claim ownership cannot, after expiry of the licence, assert proprietorship or claim abandonment by the licensor.
2. A licensee’s use of a trade mark, even for an extended period, does not give the licensee standing to challenge the proprietor’s rights based on alleged naked licensing or abandonment.
3. Where adoption of a mark by a licensee was initially dishonest (claiming proprietorship while under licence), subsequent use cannot purify the dishonest inception.
The Division Bench decision in BCH Electric Ltd. v. Eaton Corpn.17, affirmed the Single Judge’s decision and provided additional analysis. When BEL argued that Eaton had acquiesced in BEL’s use of the marks. The court rejected this,
1. citing Power Control Appliances v. Sumeet Machines (P) Ltd.18, and held that for the defence of acquiescence to succeed, the defendant must have acted with bona fide belief that it was not treading on anyone else’s rights;
2. it further cited Hindustan Pencils (P) Ltd. v. India Stationary Products Co.19, and held that any use in its inception if tainted it would be difficult in most cases to purify it subsequently;
3. a licensee who has used a trade mark under express agreements acknowledging the proprietor’s rights cannot later claim that the proprietor abandoned the mark through lack of quality control;
4. even substantial delay by the proprietor in bringing suit does not defeat an injunction where the licensee’s adoption was dishonest.
Therefore, a conspectus of the judicial terrain makes it clear that there has been no categorical authoritative judicial precedent on the concept of involuntary abandonment. The focus appears to be viewing licensing either as a facet of trade mark licensing or to focus on voluntary abandonment through statutorily prescribed situations like non-use. This was established in several cases including Gujarat Bottling Co. Ltd. v. Coca Cola Co.20. The court interpreted trade mark abandonment primarily through the statutory framework of Section 47, which provides for removal based on non-use for five years or longer without proper reasons. Applying the principles from the case of Gujarat Bottling Co. Ltd., abandonment requires proof of both objective non-use and subjective intent to relinquish rights. Unlike the US doctrine of involuntary abandonment through naked licensing, Indian law does not automatically infer abandonment from licensing deficiencies alone.
Though there is adequate statutory backing to introduce the concept of naked licensing, so far, the Indian Courts have consistently held against any attempts by licensees to stake a claim or against the trade mark of the licensor. Similarly, UK Courts have also not found a bare licence or naked licence to be per se wrong.
Case study: Naked licensing as a double-edged sword
In the light of above discussion, let us analyse a small hypothetical example where “A” Ltd. the registered user of a trade mark licenses to “B” Ltd. to use its trade mark on its products with certain quality control measures in the agreement. Subsequently, “A” by an inadvertent error does not renew the registration and “B” with “A” ’s permission enters its name as the owner. The licence agreement is thereafter renewed. After lapse of certain period, the trade mark again falls for renewal, this time “A” does it. “B” now sues “A” for abandonment of its trade mark by filing a suit for declaration as “B” to be the owner of the trade mark. Can “B” succeed in its attempt to usurp “A” ’s ownership over the trade mark?
In order to answer this question, there are a few more common law aspects that might help answer the question above. Section 90, Trusts Act, 1882, provides a solution:
90. Advantage gained by qualified owner.—
Where a tenant for life, co-owner, mortgagee or other qualified owner of any property, by availing himself of his position as such, gains an advantage in derogation of the rights of the other persons interested in the property, or where any such owner, as representing all persons interested in such property, gains any advantage, he must hold, for the benefit of all persons so interested, the advantage so gained, but subject to repayment by such persons of their due share of the expenses properly incurred, and to an indemnity by the same persons against liabilities properly contracted, in gaining such advantage.
Illustrations
(a) A, the tenant for life of leasehold property, renews the lease in his own name and for his own benefit. A holds the renewed lease for the benefit of all those interested in the old lease.
(b) A village belongs to a Hindu family. A, one of its members, pays Nazrana to Government and thereby procures his name to be entered as the inamdar of the village. A holds the village for the benefit of himself and the other members.
(c) A mortgages land to B, who enters into possession. B allows the Government revenue to fall into arrear with a view to the land being put up for sale and his becoming himself the purchaser of it. The land is accordingly sold to B. Subject to the repayment of the amount due on the mortgage and of his expenses properly incurred as mortgagee, B holds the land for the benefit of A.
In the above example, we could equate “B” to be the qualified owner for the purposes of this section. The word property used in this section is wide and includes incorporeal property too. When Illustration (c) is applied to the facts of the case, it is clear that a qualified owner (B) who gains an undue advantage in derogation of rights of the original owner (A) (in this case it is a suit for declaration as “B” to be the owner of the trade mark), holds the advantage in trust for the original owner. So even if the suit is decreed, the decree should be held by “B” in trust for “A”, thus making the entire litigation redundant. Furthermore, Section 116, Evidence Act, 1872, could be applied too. It estops a licensee who has entered upon use of a trade mark by licence from the proprietor from denying the proprietor’s title at the time the licence was granted. But this cannot be used once the licence agreement expires.
Conclusion
To conclude, the doctrine of naked licensing is a popular defence taken by a licensee to an action for infringement by licensor in USA. The doctrine is based on certain core jurisprudential understanding of a trade mark. It is believed that naked licensing, i.e., licensing without maintaining any quality control would defeat the very core object or principles of a trade mark. Therefore, any licensor who indulges in a bare or naked licence is said to have involuntarily abandoned his trade mark.
Though the core themes and tenets of naked licensing is applicable and possibly even compatible with the British and the Indian legal system, this theory has not been unequivocally accepted in either jurisdiction. While in the United Kingdom, it has been clearly held that a bare licence cannot per se be objectionable, the courts in India have not laid down any categorical or conclusive determination on the extent of applicability of naked licensing. While some courts have reaffirmed the jurisprudential basis, nearly all courts have been hesitant to allow any claim by licensees against the claim of the licensor to the mark. However, the statute itself is fairly flexible and a combined reading of Sections 9(2)(a) and 57, Trade Marks Act, 1999 would render a mark, which has become deceptive on account of absence of quality control, liable to cancellation.
While there is no direct judicial precedent on this issue in India at this stage, the scheme of the Act admits of such a challenge. In an appropriate case, where an aggrieved party is able to establish confusion arising from uncontrolled licensing, the mark may be tested against Section 9(2)(a) and consequently be removed under Section 57. However, the threshold for such a finding is likely to be high. The position remains that failure to exercise adequate quality control does not merely affect enforcement, but may, in a given case, expose the mark itself to cancellation. There is also incredible reluctance from the part of the Indian Courts to intervene at the instance of a licensee and therefore, this may pose further hurdles to an unbridled recognition of the principle of naked licensing in India.
*Partner, M/s Nomos Solutions, Solicitor (England & Wales) and Advocate practising, Madras High Court.
**Advocate practising, Madras High Court.
***Advocate practising, Madras High Court.
1. As per Trade Marks Act, 1999, S. 9(1)(a), trade marks which are devoid of any distinctive character, that is to say, not capable of distinguishing the goods or services of one person from those of another person should not be registered.
2. 2002 SCC OnLine US CA 9C 2
3. Stanfield v. Osborne Indus., Inc., 1995 SCC OnLine US CA 10C 2
4. Freecycle Sunnyvale v. Freecycle Network, 2010 SCC OnLine US CA 9C 6
5. Taco Cabana Interim,. Inc v. Two Pesos, Inc., 1991 SCC OnLine US CA 5C 1 .
6. 167 F 2d at page 489.
7. 1958 SCC OnLine US CA 2C 1.
8. 2010 SCC OnLine US CA 9C 6.
9. Taco Cabana Interim. Inc v. Two Pesos Inc., 1991 SCC OnLine US CA 5C 1.
10. 2001 SCC OnLine UKHL 37.
12. (1992) 74 Comp Cas 423 : 1991 SCC OnLine Mad 178.
13. Kerly, Kerly’s Law of Trade Marks and Trade Names (12th Edn., Sweet & Maxwell, London, 1986).
20. (1995) 5 SCC 545 : (1995) 84 Comp Cas 618.
