opinionBy Richard Pasipanodya
IN this 34th instalment, we canvass the conceptual development and implications of trademark licensing in commercial practices.
Modern era liberalised concepts of trademark licensing painstakingly evolved through three legislative innovative phases, namely; prohibition, registered and controlled user, and liberalised statutory provisions.
Blanket prohibition: Originally all forms of trademark licensing were regarded as invalid and of no force or effect on the grounds that as symbols indicative of source or origin of goods or services, trademarks could not be legally used by third parties as this would lead to public deception or confusion.
Registered user: In response to demands from commerce, prohibition was grudgingly relaxed and replaced by a rigidly-controlled registered user system whose underlying objective remained mainly to safeguard the public from deception or confusion. This is why it was progressively required that:
The licencee be registered in the trademarks register as the registered user of a trademark. This would serve as constructive notice of the licensing arrangement to the public;
The Registrar of Trademarks be furnished with full particulars of the nature and scope of the licensing arrangement, including the mechanisms by which the proprietor would exercise control over the use of the trademark by the licencee, and
The Registrar was to conduct a substantive examination of the licensing arrangement and satisfy himself that the licensing was not contrary to underlying public interest.
Liberalised phase: Continued technological transformation in commercial practices ushered in modern liberalized trademark licensing. For, not only did the registered user system prove unduly complicated, cumbersome and costly, but it became increasingly inconsistent with modern marketplace realities of the transformed nature and functions of trademark.
Because of the increasingly supra-national character of trademarks, most businesses made trademark licensing commonplace, especially in character merchandising and franchise operations. Some trademarks expanded beyond business branding to individual, organisational and national characterisation. The public became accustomed to purchasing goods or services marketed under licences.
Article 21 of the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS Agreement) permits, as amplified by the WIPO Guidelines on trademark licensing of March 2000, member states to determine their own domestic conditions and requirements for trademark licensing along with seeking to simplify and harmonise global formalities on the recording or registration of licensing arrangements.
The implication of the TRIPS Agreement as amplified by the Guidelines was to globally liberalise trademark licensing while recognising and acknowledging differences in levels of socio-economic development, hence the needs and aspirations among nations. Nevertheless, liberalization of trademark licensing simply implied the release or discarding of the strict requirement for registration of trade licensing as was required under the registered user system.
In a nutshell, liberalisation of trademark licensing ushered in an unfettered system of permissible trademark use by third parties. Among other matters, registration or recording of licensing arrangements was deregulated and made strictly voluntary and on relaxed requirements. On the hand licensed use (whether registered or not) is now deemed as use by the proprietary owner of the mark themselves such that registration of the mark will not be invalidated on grounds of non-use so long as the trademark is properly used and maintained.
Notwithstanding the introduction of liberalised trademark licensing, however, it remains a fundamental principle of trademark law that the public must be protected from deceptive or confusing use of the licensed mark. As such, the proprietary owner of the licensed mark remains obliged or dutybound to ensure that the licensed trademark retains its distinctive character and that it is not improperly used as to cause public deception or confusion, lest it is invalidated.
Trademark licensing big business
Legislative liberalisation has made trademark licensing a major business activity worldwide. This is because technology has transformed the use of trademarks to include signifying compliance with safety requirements, fullfilment of technical specifications or interactivity of complex systems.
By this relaxation legislation has come to recognise that trademarks are endowed with a personality as revealed by their potency and prowess or magnetic force to create new while retaining old customers, hence product loyalty. Thus the market value of trademarks lie in their ability to create sales; enhance profitability; expand and maintain market share; introduce new product lines; strike and support strategic partnerships and market alliances; secure external funding; respond to unfair competition, and expand royalties through effective licensing.
Why licensing is so successful
Trademark licensing has globally become so successful a business not only because of the transnational nature of business practices and the phenomenal increase in customer orientation across the globe, but due to a plethora of reasons. Among these are:
Ease of implementation of the licensing arrangements;
Enhanced geo-political visibility and growth of the trademarks across borders;
Tapping into new sources of income;
Minimum investment cost requirements with calculable risks.
As with any business venture, trademark licensing has its own associated risks, albeit relatively limited to control of quality, use, infringement and parrallel importation.
Quality control: Proceeding on the perceived assumption that consumer orientation has acknowledged licensing, it is thus also true that in the customer's mind the source or origin function of trademarks is linked to the assurance of constant, consistent and predictable quality of the trademarked products.
For this reason serious consequences may befall the validity of the mark if quality control is not properly exercised. In this regard it is recommended that the proprietor include quality control mechanisms in the licensing arrangement, such as clearly elaborating methods of producing the goods, the nature of packaging material and its design requirements, and the requirement to submit samples for inspection, including on-site production.
Use control: Three essential reasons why control over trademark use must be exercised are: Prevention against the risks of generic use of the mark, which use makes the mark become synonymous with the product, such was the fate that befell the ELEVATOR mark and others; Limiting the number of third parties entitled to use the mark, as this reduces the risk of the trademark being used in different forms, hence protect the brand identity; and to satisfy the trademark use requirement insofar as the licencee has to use the trademark strictly with respect to similar goods and services over which the trademark is registered.
Infringement control: Where the proprietary owner sits by and permits their trademark to be frequently infringed upon without taking resolute preventive action, this may result in it being weakened, hence lose protection. In the ultimate, the licensing relationship may be disrupted to the detriment of both parties. As such, the proprietor has to by all means necessary resolutely take action against infringement either on their own, by joining the licencee or giving them the power to sue in their own capacity.
Parallel importation: This occurs where licensed goods are legally imported into a licencee's jurisdiction. Such goods are usually sold at a cheaper price to the detriment of the licencee. Accordingly, licensor has to ensure that they reduce the risk of parallel importation, not only by limiting the geographical jurisdictions, but also the number of licencees.