In common law jurisdictions where the law is based on English law, it is only in relatively recent times that the concept of authorising the use of a trademark, or licensing the trademark has become accepted. Earlier this century it was regarded that the licensing of a trademark placed the validity of the trademark registration in jeopardy, even to the extent that a license automatically made the trademark incapable of remaining validly on the Register. The law in most common law countries has gradually changed, firstly to permit the authorisation of use of a trademark which is registered by someone other than the proprietor, by providing for the registration of the user as a Registered User, to the position we are at today, where the concept of licensing is so wide spread and well understood that few restrictions remain. In a great number of jurisdictions it is now possible to license unregistered trademarks and to license registered trademarks in respect of goods or services not specifically covered by the registrations. Licensing restrictions that we must still take account of are not based on difficulties associated with the licensing per se but are generally associated with consumer protection laws, anti-competition laws and the anti-monopoly laws which we must take into consideration when advising our clients particularly concerning multi-territory licenses.

License Categories

Trademark licenses fall into a number of distinct categories. Firstly, there is the manufacturing type license where the licensee acts as a manufacturing and/or distribution arm of the trademark owner, possibly to extend the territory covered by the trademark or to provide the manufacturing and/or distribution facilities which the trademark owner may not have. However, there are many other reasons why a trademark owner would enter into a license agreement of this type.

The second type of license is the promotional license, which may be associated with merchandising and often, involves a sporting organisation or a personality. With this type of license, a large range of manufacturers may be licensed to apply particular trademarks, such as football team logos, to a large range of products ranging from caps items of clothing to memorabilia to food and any other product.

A third type of licensing is known as franchising and we are all well aware of this form. Franchising is a way of enabling the distribution of goods (or services) by controlling the use of the trademark. A trademark owner can expand his business through franchising without the expense of his own separate business. Generally, although not always, the franchisee provides the business premises, staff, and everything else to run the business. The franchiser provides the trademark, and probably advice, training, business plans, advertising programs, and even suppliers of product or raw materials.

A fourth type of trademark license is that which is included in a technology license agreement, relating to, for example, the license of patents, industrial designs, or other industrial property, where the use of the trademark is part of the total package. Many patent licenses, for example, are combined with authority to use a trademark as part of a technology package license.

The licensing of certification trademarks is a fifth form of licensing which is associated solely with a trademark used to certify a quality, accuracy or some other characteristic, including origin and method of manufacture, of goods or services. Certification trademarks may be applied under license in accordance with the rules governing the use of the certification mark. In Australia, a distinction is drawn between an authorised user of a normal trademark and an "approved user" of a certification trademark. The rules governing the use of certification trademarks generally require provisions concerning who may certify the goods and/or services to which the mark is to be applied, the conditions under which an approved user is allowed to use the trademark, the use of the certification mark by the owner in the case where the owner is also a user and provisions governing settlement of any disputes arising from a refusal to allow the mark to be used. The registration of and control of use of a certification trademark is a subject of itself and I will not cover that in detail in this paper.

While these different types of licenses require differing structures, they all have in common the necessary legal requirements of licensing.

Legal Fundamentals

To grant a license is to authorise the use of property for which the grantor has a right, either by proprietorship or some other claim. It is therefore fundamental to licensing, and particularly trademark licensing, that the ultimate licensor has a property right which is able to be the subject of the intended license.

Property Rights

Registered Trademarks

The property right in a registered trademark is usually conferred by ownership of a trademark registration. It is not necessary for the purpose of the right to exist that the trademark be used or that there be a reputation in relation to particular goods or services. The registration itself creates the property, which can then be the subject of the license agreement. Of course, in some countries, the registration cannot be achieved without use of the trademark in relation to the goods of the registration. In most countries, however, all that is required is an intention to use a trademark in order to establish the property right by registration.

Once the property right is established, and in many cases even before the registration has been obtained, while an application is still pending, the owner can authorise another to use the trademark in relation to the goods or services which are or are to be covered by the registration.

Unregistered Trademarks

The property right in the trademark may be conferred solely by the use of the trademark such as to establish a reputation and goodwill in relation to the goods or services in respect of which the mark is used. In this case, the property right which exists is not the trademark as an entity, but the combination of the trademark with the reputation and the goodwill developed through use of the mark. Often, the license of an unregistered mark is associated with the license of a registered trademark, as was the situation in the United Kingdom GE case [(1969) RPC 418] which concerned the use of trademarks in relation to goods outside the scope of the registration. In this UK case, it was held that licensing of the registered mark could extend to the goods outside the scope of the registration, thus giving rise to a license in respect of a trademark for goods for which the mark was not registered.

Of course, the whole question of licensing an unregistered trademark, and the validity of such licenses, is still being debated. In many jurisdictions the licensing of an unregistered trademark is not permitted. In Malaysia, for example, an unregistered trademark cannot be licensed. However, an applicant for a registration may appoint a registered user prior to the trademark application proceeding to registration. If the mark is subsequently refused then the license becomes invalid. In Taiwan, it is not possible to license an unregistered mark and, further, any license of a registered mark must be recorded with the Trademarks Office.

In the People’s Republic of China, only proprietors of trademarks which have been registered in China are able to license other entities to use the trademark. It is mandatory for the trademark license agreement to be submitted to the Trademarks Office for recordal. This must be done within three (3) months of the date of execution of the license otherwise the administration may impose a fine or even request the Trademarks Office to cancel the registration of the trademark. While these legal requirements have been in place for some time, it appears that they have not been consistently enforced by the Chinese authorities. However, I would strongly recommend that any trademark license agreement in relation to a Chinese trademark registration be recorded although it is probably best to adopt a minimalist form of license agreement for this purpose.

These countries are just three examples to show that universal acceptance of licensing un-registered trademarks is not yet with us. I do not know the position in all European countries, but given the changes we have seen in licensing trademarks in the past 70 years throughout the world, from the time when it was not possible to license a registered trademark, to today, where we see rampant commercialisation and character merchandising, and the lifting of bans in various countries in relation to "trafficking" in a trademark, the wide acceptance of licensing unregistered marks appears to me to be inevitable.

Coming back to the initial point of legal fundamentals, the first legal requirement of licensing, therefore, is that the licensor has a property right which is capable of being licensed in the relevant territory .

Where the licensor is not the owner of the trademark, licensing rights can be derived from an agreement with the trademark owner, such as in a Head License Agreement which allows the grant of sub-licenses. Licensing rights can also be conferred by legislation. In some countries, such as Australia, unless the license agreement contains specific provisions to the contrary, the legislation permits the licensee (Authorised User) to give permission to any person to apply the trademark to the goods, or in relation to goods or services, in respect of which the mark is registered. It is therefore most important in Australia that a trademark license agreement contains specific reference concerning whether or not the licensee is authorised to grant sub-licenses in respect of the trademark. Obviously, the question of control by the trademark owner must be a major consideration in the granting of a license which permits sub-licenses.

Control

The second fundamental requirement for current trademark licensing is that the owner of the trademark rights has control over the use of those rights. Not only must the owner have the ability to control the use, the owner must also exercise that ability or risk misuse of the trademark by the licensee even to the extent that the licensor may be held not to have fulfilled its obligations and duties under the license.

In Australia, the Trademarks Act states that use of a trademark by an authorised user is authorised use to the extent only that the user uses the trademark under the control of the owner of the trademark. The words, "to the extent only that the user uses the trademark under the control of the owner ...." is a specific statement that actual control is required. It is not enough that the authorised user agreement, or license agreement, contains the usual provisions "the user may only use the said trademark in respect of the said goods if such goods conform to the standards of manufacture and quality laid down, given or approved from time to time by the licensor.", and "On request by the licensor, the licensee hereby agrees to supply the licensor, at all reasonable times, samples or specimens of all wrappers, packaging and literature in use by the licensee relating to any of the goods of permitted use offered for sale by the licensee, and the licensee further agrees that the licensor or its duly authorised representative or agent has the right to inspect the goods for which the said trademark is to be used and to inspect the methods of making the said goods on the premises of the licensee or on the premises of any sub-contractor to the licensee.".

While clauses of this type may be essential in a license agreement between arms-length parties to provide the basis for control, if the licensor abdicates its responsibilities and does not actively and adequately police the use of its trademark it runs the risk of the trademark being misused and therefore becoming liable to revocation or devaluation at the very least. Further, if the user does not use the mark "under the control of the owner", in other words, if the owner does not exercise the control, then the use of the mark by the user may well be disregarded in infringement or removal proceedings where use is being relied on to establish reputation and distinctiveness.

The issue of control is vital to current trademark licensing, and in those jurisdictions in which licensing is embodied in the legislation, quality control is usually an essential element. This is so particularly in the United States, Canada, most if not all Europe, most of Asia and the pacific regions. Again referring to the Australian Trademarks Act, a person is defined as an Authorised User if the person uses the trademark under the control of the owner of the trademark. In Australia, the control is considered effective in two (2) circumstances. Firstly, if the owner of the trademark exercises quality control over goods or services the use of the mark is taken as being under the control of the owner. It will be seen that this form of control is control of quality of goods or services in relation to which the trademark is used. Such quality control may be embodied in an agreement between the parties having clauses along the lines of those referred to above, and the owner must then exercise that quality control as I have previously indicated.

There are many areas of trademark usage which may be subject to quality control. Bearing in mind the need to be seen to exercise control rather than simply be capable of controlling, trademark proprietors should look carefully at the following areas:

Standards of Manufacture

Preliminary Samples

Continuing Samples

Labels

All labels, packaging, tickets and all other forms of using the trademark on or in relation to the goods must be approved before use.

Inspection of Premises

Marketing

Records

Failure to provide adequate facilities in the license agreement to enable proper control over the use of the trademark to be achieved may well lead to the dire consequences referred to above if the licensee misuses the mark.. Inadequate exercise of control may also lead to conflict between the licensor and the licensee which can result in expensive and time consuming litigation. Inadequate control may also lead to product liability difficulties. The area of product liability is very unsettled, but there is a strong argument for suggesting that inadequate exercise of quality control by a licensor may be a basis on which the licensor may be held at least partially responsible in the case of injury caused by a defective product. This aspect has/will be covered by my colleague, Ms Beryl Green.

The second form of control is the exercise of financial control by the owner of the rights over a person dealing with the goods in relation to which the mark is used. In this case, the User is taken to use the trademark under the control of the owner. It will be apparent that financial control applies particularly to related companies, and it has long being the practice in Australia that a shareholding of more than 50% will be sufficient to establish a financial control. This may well be different in other countries, such as in the United States, where control based on a non-wholly owned subsidiary might be rejected without additional evidence of the nature of the controlled use, such as by written agreement or otherwise.

The financial control referred to in the Australian Trademarks Act extends well beyond the corporate boundaries of related companies. Financial control can extend to financial agreements between parties through which the control may be exercised over the licensee's relevant trading activities. Such agreements will not necessarily enable the licensor to control all aspects of a licensee's business, and it is possible for such an agreement to be in place whereby the licensee has control over only certain defined business functions which relate to the trademark use. In this case, while the licensor may have partial financial control in relation to the licensee's business, it does not necessarily have control over all the business of the licensee.

The concept of control being a requirement for trademark licensing separates trademark licensing from licensing of other forms of intellectual property. For example, a patent license does not necessarily have any built-in form of control by the proprietor of the patent over the quality of the licensee's product. Of course, many patent license agreements will have such conditions in-built, but they are not essential to the patent license. However, at the present time, control by the trademark owner over use of its mark is an essential feature of a trademark license. This sets the trademark license apart from a mere consent to use. A consent to use may be given by a trademark owner to another person who wishes to use the or a similar mark in relation to particular goods, generally not comprised within the trademark owner's registration. Such a consent is not a license, royalties are not usually paid and no formal agreement apart from the consent notice is required. Where consented use comes under the watchful eye of the trademark owner, that consent becomes a license and the control becomes a prerequisite.

ALTERNATE VIEWS

While I have indicated that control is a fundamental requirement for trademark licensing, this view does not necessarily have universal support. In the article "'naked is not a four- letter word: debunking the myth of the "quality control requirement" in trademark licensing", by Kevin Parks in The Trademark Reporter, Vol 82, 531, Mr Parks suggests that quality control should not be a requirement for trademark licensing. Mr. Parks believes that the requirement for quality control of the products of a licensee imposes an obligation of quality maintenance on the licensee which the proprietor does not have. He suggests that the public has no right to demand goods of a particular quality from a licensor, and they should therefore not have that right in relation to goods of a licensee. Mr Parks further argues that by requiring quality control, an inconsistent treatment exists between licensing trademark owners and non-licensing trademark owners. He suggests that non-licensing trademark owners will be able to produce goods of a whole range of different qualities while the licensing owners will need to exercise quality control over the licensed product or risk abandonment of the licensed mark.

I believe Mr Parks has confused the issues of "quality control" with the issue of the trademark owner being enabled and required to exercise control over the use of his trademark. Notwithstanding, however, I do agree with Mr. Parks that the commercial sophistication and reality of the usage of trademarks has moved in the direction where trademarks are now often more an indication of identity than an identification of quality. This is particularly the case in merchandising trademarks, such as cartoon characters, sports men and sports women and people famous for other fields of activity or endeavour, sports teams and even sporting events. The purpose of such trademarks is very often primarily one of association and promotion of a commercial activity in which the greatest interest of the purchasing public is in the identification with the trademark owner rather than any expectation of a particular quality of goods. In fact, it is often the case that goods of varying qualities are licensed goods.

It follows that with these marks, the connection in the course of trade between the consumer and the trademark owner is not for the purpose of identification of the source of goods, nor is it necessarily for the purpose of identification of a particular quality or characteristic of goods. The connection may be purely one of promotion of the trademark owner and nothing else. Of course a large number of trademarks are used to identify quality. Everyone who buys a can of Coke expects it to be of a known quality. The person who buys an Olympic Games cap, however, may simply be wishing to identify with the Olympics rather that being assured of a cap of a particular quality. The "Olympic Games" trademarks are not used for purposes of indicating quality so much as to promote the Games thus providing a "source" connection as distinct from a "quality" connection. We are all aware of the Walt Disney cartoon characters such as Donald Duck, Mickey Mouse, Goofy and so on being used in a trademark sense. It is, I think, doubtful that these trademarks are used to indicate a quality of goods as distinct from providing some connection with the intellectual association of fun and games which the cartoon characters engender.

However, while quality control may no longer be necessary in all types of licensing agreements, the key is that the use of the trademark by the licensee maintains a commercial connection between the goods (or services) and the trademark proprietor by some form of control exercised by the proprietor over the user whereby the proprietor is able to ensure that the trademark is used in accordance with the proprietor’s wishes. Some form of control must be in place to also satisfy the public interest requirement and prevent the mark becoming deceptive or confusing. That control may be unrelated to "quality", and the license may merely provides a connection of identity between the licensee and licensor to indicate source as distinct from quality.

The requirement for quality control might be appropriate in one category of licensing, i.e. Category 1 relating to manufacturing, but not appropriate to another category, i.e. Category 4 relating to merchanidising. Perhaps there will need to be a change in the way license agreements are drafted and in the way they are understood by trademark authorities which recognises different types of agreements for different types or categories of license.

Also, at the present time, license agreements require a form of control either quality control or financial control. For certain categories of trademark licensing, the exercising of that control is very important, although such exercise is perhaps not so important where the control is purely financial and/or the trademark licensing category is in the merchandising area. If quality control ceases to become an essential feature of trademark licensing, the function of a trademark license will change in the future perhaps to a system where the source of control of use of the trademark is more relevant than the actual quality of the goods produced by the licensee. It remains to be seen how any such change will effect the advantages that licenses provide such as the ability to control parallel important and franchising.

LAWFUL CONTRACT

Another fundamental of legal requirements of licensing a trademark is that there is a lawful contract which grants defined rights, such as the right to use the trademark, the right to apply a trademark, the right to sub-license, the right to issue infringement proceedings and the like. Although a lawful contract does not need to be in writing in most major jurisdictions, without a written contract or agreement, the evidentiary requirements for establishing the nature of the control are insurmountable. Accordingly, in practice, the lawful contract needs to be in writing and it needs to set out all the conditions and restrictions which apply to the particular license.

LEGAL LIMITATIONS OF TRADEMARK LICENSING

Apart from the limitations concerning the licensing of unregistered trade marks in some jurisdictions, the principle limitations in licensing trademarks today derive from the need to avoid restrictive and anti-competitive trade practices. There are many and varied forms of anti-competitive and fair trading legislation around the world and there are many countries without legislation which is as effective as we might like to see, notwithstanding TRIPS. This therefore, clearly flags the need to have professional input from experts in all countries for which an agreement is to be prepared.

In Australia, like many countries, it is illegal under our Restrictive Trade Practices Act for a license agreement to have provisions which fix prices and which ties a licensee to a particular supplier of goods (unless such is required for quality control purposes). The Australian Act prevents companies entering into anti-competitive agreements in much the same way that similar legislation applies to license agreements in the United States and throughout Europe. However, there are differences. For example, in Australia, it is not illegal for an agreement to include a clause which prevents the licensee challenging the validity of the trademark. Also, we do not have a provision corresponding to Article 85(2) of the Treaty of Rome. Consequently, if a clause of an agreement was found to contravene the Trade Practices Act, it may well be that only that clause would be effected, not necessarily the whole agreement.

THE BLOCK EXEMPTION

I do not profess to be an expert on European licensing laws or the Block Exemptions. Most of you will know more than I on this topic. I will therefore comment only briefly on the Block Exemptions as I understand them.

The European Union’s anti-trust laws stem from Articles 85 and 86 of the Treaty of Rome. Article 85 prevents companies entering into anti-competitive agreements, while Article 86 prohibits abuse of a dominant market position. Article 85(1) prohibits certain terms in an agreement the effect of which reduces, prevents or otherwise restricts competition unless the agreement has been exempted by the European Commission. If an agreement contains prohibited clauses, Article 85(2) says that no part of any such agreement may be enforced. An exemption is provided by Article 85(3) if the agreement resulted in some benefit to the consumers, including economic improvement or technical improvement.

Agreements which otherwise would have been notifiable to the Office of Fair Trading may be exempt under one of several Block Exemptions relating to technology transfer, franchising or distribution. The Technology Transfer Block Exemption enables the Commission to grant exemptions to blocks of agreements which relate to, for example, to patent licenses, know-how licenses or combinations thereof. If such an agreement incorporates trademark licensing, specific provisions in the Exemption extend the scope of the regulation to such ancillary trademark licensing, and relate to matters such as not using the trademark license to effectively extend a patent license beyond the life of the patents.

The definition of franchise in the regulation refers to a package which includes industrial or intellectual property relating to trademarks, trade names, signs, utility models, designs, copyright, know-how or patents. While Block Exemptions cover franchising, in which the trademark license is part of a wider business agreement, there is no specific block exemption for pure trade mark licenses. However, the franchise exemption does provide an indication of what might be prohibited in a trademark license. For example, it is permitted to grant to the franchisee an exclusive licence which will exclude the franchisor operating in the franchisee territory. It is possible to require the franchisee to obtain goods or services from a designated party in certain circumstances. Various forms of quality control are permitted, including inspection of premises, use of specified equipment, complying with presentation methods, and the like. Therefore, the franchising block exemptions will provide a clear indication as to what will be allowable and what will be unacceptable in a straight trademark license agreement.

There are also block exemptions in relation to exclusive distribution and purchasing agreements, but that it is a separate issued.

The block exemptions, if applicable to an agreement, include lists of terms which are automatically exempted from the operation of Article 85(1) (the white list), those terms which are specifically not exempted (the black list) and a list of other provisions which may or may not be exempt depending upon the circumstances (the grey list).

In the United States, franchising is a commonly used method of distribution of goods based on the use of the franchisor’s trademark. Franchising is regulated by the Federal Government (FTC) as well as by some individual states. If a franchise exists in the United States, the FTC requires that a disclosure statement be provided to ensure that the franchise agreement conforms with the applicable federal laws. State laws may also require the submission of agreements for approval. It is not the purpose of this paper to examine the US franchise laws in detail. I would recommend, however, that before entering into any licensing or franchise agreement in the United States the views or advice of an attorney specialising in this area of the law should be obtained well in advance.

Australia has recently adopted a mandatory Franchising Code of Conduct, similar to that of the United States, after attempting to self-regulate. The new Code became effective on 1^st August 1998.

Other limitations of licensing in many countries include the need to specify whether a trademark license is an exclusive or non-exclusive license. The terms usually used are whether the user of the trademark is to be a sole user or a non-exclusive user. If the user is to be a sole user then this will exclude the owner of the trademark using the mark in the licensed territory. The sole user will usually have rights to sue for infringement and be able to join the owner of the mark as a defendant if the owner refuses to take action in relation to infringement.

Recordal

In many countries throughout the world, a license agreement in respect of a registered trademark, often referred to as a Registered User or Authorised User agreement, was required to be registered to obtain the benefits conferred by the relevant legislation. These benefits included the statutory acknowledgment that use by the user inured to the benefit of the proprietor and the right to take infringement action. Of course, registration of the agreement was not mandatory in most countries, although it is mandatory in some as I have indicated above. In relatively recently enacted legislation in Australia, United Kingdom and Canada, the recordal of authorised users has been abolished, although in Australia at least, a recordal of an interest in a mark may still be made by a user.

Because of the need for or desirability of recording an agreement with the relevant Trade Marks authority, when agreements are prepared for many jurisdictions, it is often preferable to prepare specific agreements for individual countries which can be used in those countries for recordal purposes.

What Of Goodwill

One of the fundamental advantages of licensing a registered trademark is that the use of the mark inures to the benefit of the trademark owner and not the user. This fundamental is the corner stone on which licensing of trademarks is built. As a result of this, the goodwill developed through use of the mark also vests with the owner when the license is correctly prepared and monitored for the relevant territory. Factors affecting the goodwill include:

Exercising the necessary control;

Recording the license in those countries where recordal is necessary, such as Malaysia, and Thailand;

PARALLEL IMPORTS

as a result of recent developments in Europe concerning exhaustion of rights, a major advantage of trademark licensing has become the ability to use a license to exercise contractual control over use of the mark thus preventing parallel importation of goods into the European Community. This provides a huge benefit to manufacturers outside the Community who can license use of their trademark within Europe and through those licensees, prevent the importation of goods originally marketed outside Europe. Similarly, the European company is able to license use of the trademark in territories outside the Community and prevent parallel importation from those territories into the Community. You will all be familiar with the recent Silhouette case which, while not explicit in this regard, provides the clearest implicit indication that the Community does not recognise worldwide exhaustion of rights. Licensing into and out of Europe, therefore, will become a tool to be used by trademark owners world-wide to counteract the exhaustion of rights principles which otherwise apply prevent parallel imports.

In Australia, some trademark owners have been able to use copyright to prevent importation of goods properly marked by the trademark owner overseas. However, recent amendments to the Australian Copyright Act will prevent this act being used to restrict trade. these amendments will come into effect in about 15 months time.