Drafting a trademark licence that survives a quality-control challenge
A trademark licence without real quality control can cost the licensor the mark. The clause that prevents it is four paragraphs long. Here they are.
A trademark tells the consumer that goods come from one source and meet one standard. When the owner lets someone else use the mark without controlling that standard, the mark stops telling the truth. Courts in several jurisdictions have called this a naked licence and treated it as abandonment. Indian law has not gone quite that far in so many words, but the Trade Marks Act builds quality control into the definition of permitted use, and a licence that ignores it invites a rectification petition from the first competitor who notices.
The fix is not complicated. It is just routinely skipped.
What the clause has to do
A quality-control clause does four jobs, and most drafts do only the first.
- Set the standard. Specify what quality the licensed goods or services must meet. Not "high quality" or "standards acceptable to the licensor". Refer to a specification, a sample approved in writing, a schedule of manufacturing standards, or the licensor's own published product specifications as amended from time to time.
- Give the licensor the right to check. Inspection of premises on reasonable notice, the right to call for samples at defined intervals, the right to review marketing material before use.
- Say what happens when the standard is not met. A cure period, suspension of the right to use the mark on non-conforming goods, and termination if the failure is repeated or uncured.
- Make the licensor actually do it. This is the part the contract cannot do alone. A licensor who has the right to inspect and never does is in a weaker position than one who inspects annually and keeps the reports. Draft a short schedule that makes inspection a routine obligation, and tell the client to follow it.
Four paragraphs that work
The following is a skeleton, not a template to paste. Adjust the intervals and the standard to the business.
Quality standards. The Licensee shall ensure that all Licensed Products conform to the specifications set out in Schedule 2, as updated by the Licensor from time to time on not less than thirty days' written notice, and to all applicable laws and standards.
Approval of samples and materials. Before first commercial sale of any Licensed Product, and before any material change to it, the Licensee shall submit production samples for the Licensor's written approval. The Licensee shall not use any packaging, label or advertising bearing the Mark that has not been approved in writing.
Inspection. The Licensor may, on seven days' notice and during business hours, inspect the Licensee's premises and processes, and may call for not more than two sets of samples in any quarter. The Licensee shall maintain quality records and make them available on request.
Non-conformance. If the Licensor notifies the Licensee that any Licensed Product does not conform, the Licensee shall cease sale of that product until the non-conformance is cured to the Licensor's reasonable satisfaction. A failure to cure within thirty days, or three non-conformance notices in any twelve-month period, is a material breach.
Recordal, and whether to bother
Recording the licensee as a registered user on TM-U is optional under the Act, and many licensors skip it. There are two reasons not to skip it. First, a registered user's use counts as use by the proprietor for non-use purposes, which matters if the licensor itself does not trade under the mark in India. Second, a registered user can, subject to the agreement, take infringement action in its own name, which the client may or may not want. Decide, and draft the clause either way.
The clause everyone forgets
Whatever else the licence says, add one sentence: all goodwill arising from the Licensee's use of the Mark accrues to the Licensor. Without it, a long-running exclusive licensee in a territory where the licensor has never traded will one day argue that the goodwill is theirs. They will sometimes be right.
The IP Licensing and Contracts course drafts a full brand licence for a food franchise, quality-control schedule included, and then negotiates it from the franchisee's side.