Quality Control Assurance in Trademark Licensing

Introduction

Trademark licensing is a legal phenomenon where a trademark owner (Licensor) grants permission to another (Licensee) to use the trademark on mutually agreed terms and conditions. Traditionally the practice of granting licenses for trademarks was prohibited due to concerns about deception and uncertainty about the source of goods in the minds of consumers. However, as the contemporary industry and commerce progressed, consumers began associating trademarks with the quality of products and services. This led to a development in the trademark law where a trademark began to be seen as signifying and guaranteeing uniform quality standards in all goods sold under a particular mark in addition to symbolizing the physical source of goods. This created an expectation to meet certain quality standards.

The relationship between licensing and quality control is based on the premise that by exerting continuous quality control over the licensed goods, the licensing became acceptable because the licensor remained in the control of nature and quality of goods and services sold in association with the trademark and ensures consumers that they will receive products of equal quality from the licensee. Hence, it reduces the uncertainty associated with the licensing of trademarks.

Forms of Quality Control

1. Financial Control – It means both the licensor and licensee, have various forms of financial relationship through which the licensor ensures quality control over the licensee company. Hence financial control is ensured when the licensor holds equity control over the licensee company, and this is possible when the licensee is a wholly owned subsidiary of the licensor. Therefore, both parties share a common interest in upholding the standard of quality.

• Contractual Control – In this, quality control is ensured by a contractual framework, where the licensor of the trademark has the authority to directly or indirectly maintain quality control, either personally or through a certified agent. It is emphasized that a minimum level of control is enough to meet the quality control criterion.

Strategies to maintain quality control

Trademark licensing is contingent upon the implementation of quality control measures. However, no specific standards are set up for the maintenance of quality control. Hence due to this, the degree of control varies depending on the licensing agreement, product type, and jurisdiction. Nevertheless, it is important to have sufficient control measures in place to guarantee that the quality of the goods or services does not fall below the set standards. Hence following strategies can be adopted to maintain quality control

1. A precise specification is necessary to determine which products may be associated with a brand and which cannot.
2. The licensor should clearly define the procedures for product approval to ensure that there is no misunderstanding or confusion between the parties involved.
3. The licensor should incorporate terms that grant the licensor the right to conduct periodic inspections of the licensee’s operations. This guarantees adherence to quality standards and aids in preserving brand uniformity.
4. Specify in the licensing agreement that the licensee has to obtain prior consent of the licensor for doing any alteration in the trademark and if for any reason the licensor fails to furnish an electronic rendition of the trademark, one should provide a detailed description to the licensee on the exact process they should go through to properly create the mark.
5. Administer regular consumer surveys to evaluate if the licensed items align with customer expectations. Utilize survey findings to assess the quality and to implement any required modifications.
6. Enumerate the reasons for termination that are directly linked to quality control.  If the licensee consistently fails to meet quality standards, the licensor can terminate the agreement.
7. When establishing a license agreement for brand extension, it is important to have explicit requirements for the packaging design and presentation of the brand name. For example, Tic Tac partnered with Coca-Cola to create limited edition mints that have the invigorating flavor of Coca-Cola. The packaging design of this product prominently featured the brand names and utilized the color red to visually convey the fusion of mints and Coca-Cola.

Consequences of absence of quality control

The goodwill of a business and the value of the trademark lies in the quality that it has consistently delivered to its clients, and it is this “quality” that ensures the continued trust of the consumers. If the proprietor tolerates uncontrolled use of his trademark then its value will be diminished leading to the following issues arising out of  lack of quality control.

Naked Licensing – This issue occurs when a licensor grants a license without establishing quality control standards in contractual agreements, potentially deceiving customers and damaging the licensor’s reputation. Merely including royalty clauses in the contract without specific clauses for quality control would result in the license being naked licensing and this would allow the licensee to alter the quality of the product and potentially exploit unsuspecting customers. The Trademark Act of 1999 has established robust regulations to regulate naked licensing through Direct and Implicit quality control provisions.

1. Direct quality control – Section 49(1)(b) and 50(1)(d) of the Trademarks Act mandates the registrar to exercise quality control in license agreements. It provides that licensee contracts will not be registered by the registrar in the absence of a provision of quality control. The registered user must furnish an affidavit showing the relationship between the proprietor and the proposed registered user, including details that show the extent of the control by the proprietor over the permitted use. If the proprietor fails to carry out this requirement, the registrar has the power to cancel the licensing agreement at their discretion or upon application from any person.
2. Implicit quality control– The implicit provisions that deal with quality control are provided in section 57 read with section 9. The lack of quality control may raise doubts about the authenticity of the trademark, as it no longer fulfills its fundamental purpose of identifying the origin of goods. Hence if there is a lack of quality control, these marks may become deceptive, misleading, or generic, and registration of such marks is prohibited within Section 9 and therefore can be revoked.  Section 57 grants the registrar the power to cancel or modify the registration of these marks and correct the register.

Trademark Trafficking – This implies that the registered proprietor utilizes the mark not to signify the origin of the goods, but to treat it as a source of income without any association with the reputation of the goods and services.  In the case of American Home Products Corporation v. Mac Laboratories Pvt. Ltd. and Another, AIR 1986 SC 137, trademark trafficking is defined as the act of registering a trademark without any intention of using it for any goods, but rather to profit from its sale. In India, The Trade and Merchandise Marks Act of 1958 granted the Central Government of India the authority to oversee trademark licensing. However, the Trademark Act of 1999 repealed the previous Act and eliminated any explicit prohibition against trafficking, making it more acceptable. This has led to the adoption of other commercial operations, such as character merchandising, which includes elements associated with trafficking. Despite the widespread acceptance of this activity, it is crucial to establish a balance that prevents uncontrolled trafficking. This may be achieved by –

a. Ensuring that both the proprietor and the licensee have a strong business incentive to preserve the value of a brand name. The proprietor’s pursuit of self-interest necessitates the implementation of quality control measures. Failure to enforce these measures will result in a deterioration in the brand value of the trademark.

b. The Licensor can selectively modify the quality control process. This implies that the Licensor may enforce rigorous quality control requirements for essential items while allowing more freedom for other types of business operations.

c. There must be transparency between the Licensor and Licensee.

Written by Nikita Verma, Legal intern @intepat