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  1. Feature Licensing in India Key licensing issues in India Licensing is the ideal way to tap into the potential of the booming Indian subcontinent. It opens up trade opportunities while also shielding foreign interests from some the complexities of the jurisdiction They not only allow for effective participation By Safir Anand and Ira Handa, Anand of foreign interests in Indian trade and and Anand, New Delhi commerce, but also shield such interests from the complexities of the system. The Indian economy is awakening. What was A second issue that must be considered initially perceived as an obstacle – a surging is which business sectors to target. This population – today looks set to be the issue is even more relevant for diversified catalyst for explosive growth in GDP and a businesses, as the government has opened boom in consumption. up some sectors to automatic foreign Understandably, business interests in participation, while in others approval is the country are flourishing, encouraged by needed; and equity participation is capped investment-friendly government policies in certain sectors. and the confidence engendered by a These factors must be considered when progressive judiciary. structuring the agreement and adequately As a result, foreign direct investment is defining the scope of the goods, services, pouring into the country: the first quarter of territories and the like covered under the the 2007-08 financial year saw inflows of agreement. In this context, Indian law as US$4.9 billion, as against US$1.7 billion in interpreted by the courts holds that the the same period the previous year. nature of an agreement which constitutes a While the potential that India represents licence or assignment will be determined not is enticing, doing business in the country is by the terms used therein, but rather by the still characterised by some complexities. intent of the parties as manifested in the These stem partly from the fact that the agreement. Thus, an agreement does not country is ruled by a coalition government, qualify as a licence agreement simply but also from diversities of culture and because of the terminology used therein. language, divergences in policy between the state and central governments, and What constitutes a licence? even the intricacies of choosing the right For an agreement to be regarded as a business partner. licence, the relevant factor for consideration is whether it provides for the exercise of Licensing and franchising as a quality control over the licensee. business model Previously there was much debate as to One of the main issues of doing business what constituted a licensing agreement, with in India is choosing the appropriate route to the relevant factors cited ranging from do so. Should a foreign business set up a recordal of the licence with the Trademark fully owned company? A subsidiary? A joint Office as a registered user agreement to the venture? Or should it leverage its IP rights transactional nature of the agreement. This through franchising and licensing? debate was finally resolved by a landmark Given the pros and cons of doing decision of the Apex Court of India, which business in India, franchising and licensing confirmed the modern trend of recognising appear particularly appropriate channels. common law licences as long as there is Licensing in the Boardroom 2008 17
  2. Licensing in Indiafacto quality control. Thus, what is relevant • The Competition Act whether quality control exists, and not the • The Trademarks Act 1999.extent of such control. • The Consumer Protection Act 1986. If there is no quality control and other • Labour laws.checks, the courts may consider the • Taxation laws.agreement to be a “naked licence”. This is a • The Foreign Exchange Management Actlicence which grants permission to use the 2000.mark without other provisions pertaining toquality and other forms of control. A naked Their impact on licensing agreements islicence may be regarded as an inference of explored below.abandonment, as the lack of checks couldresult in the public being misled, in which Licensing and contract lawcase the trademark will have ceased to Section 27 of the Indian Contract Act 1872function as an informational device. provides: “Every agreement by which anyone The quantum of quality control has not is restrained from exercising a lawfulbeen defined or prescribed in guidelines profession, trade or business of any kind isor through legal decisions. Based on to that extent void.”interpretations of agreements and judicial The exception to this clause states:findings, however, it may be inferred “One who sells the goodwill of a businessthrough diverse factors such as an effective may agree with the buyer to refrain fromaudit mechanism, the training of personnel, carrying on a similar business, withinthe provisions of samples, a right of specified local limits, so long as the buyer,inspection, financial and managerial or any person deriving title to the goodwillcontrols, and the nature of the relationship from the buyer, carries on a like businessbetween licensor and licensee (eg, therein; provided that such limits appear tosubsidiary/affiliate/group company). the Court reasonable, regard having had to Further, many licensing agreements the nature of business.”contain specific quality requirements that Therefore, a provision that restricts theare either included in the agreement or licensee from operating or participating in aattached to the schedule. These quality competitive business for the duration of therequirements are usually technical in nature agreement is valid; but if the restraintand not only specify the licensor’s control continues to operate after the expiry of theover activities under the agreement, but can agreement, it is illegal and therefore void.also spill over to cover other activities such In interpreting such conditions, the Indianas manufacturing processes, marketing and courts will apply the test of reasonablenessadvertising, sales, discounts, exchange – that is, they will consider whether:policies and after-sales guarantees. • The contract is reasonable between the parties.Pre-licensing preparations • The contract accords with the publicAt the negotiation stage, it is advisable interest.for the licensor to protect its know-how,including trademarks, trade secrets and Notably, a licensee can be restrictedother proprietary information, by entering from divulging confidential information andinto a non-disclosure agreement or trade secrets both during and after thememorandum of understanding with the termination of a franchise agreement.prospective licensee. When drafting suchagreements, it is imperative to ensure their Competition law and licensingenforceability under Indian contract law and The Competition Act 2002 (pendingthe relevant intellectual property statutes, notification) aims to prevent practicesand to ensure they are watertight. that have an adverse effect on competition, It may also be wise to seek to enter to promote and sustain competition ininto such agreements with employees and the markets, to protect the interests ofother third parties or consultants of the consumers and to ensure freedom of trade.licensee who might also come across the Predominantly, the act focuses onprotected information. activities and agreements that hinder competition or unnecessarily hamper theApplicable legislation functioning of the market forces which areThe keys laws that come into play when essential to healthy competition. It imposestrademarks are licensed are as follows: strict bans on anti-competitive agreements• The Indian Contract Act 1872. and cartels that have or are likely to have an18 Licensing in the Boardroom 2008
  3. Licensing in India appreciable adverse effect on the economy. cannot be avoided due to lack of knowledge Therefore, when the licensee is the only and good faith of the seller. In such cases, seller in the market and the licence liability is imposed the licensor, licensee and agreement allows it unilaterally to change in some cases the vendor. the price of the product, this is considered As such matters might involve press illegal as it amounts to abuse of a dominant attention and may affect the goodwill and position. Further, if a group of licensors reputation of the business, it is imperative enter into a combination that may be that utmost care be taken to ensure detrimental to competition, this will be void. compliance with the standards established However, this does not extend to “share by the Indian government. subscriptions or financing facility or any acquisition, by a public financial institution, Trademark law foreign institutional investor, bank or venture The law on trademarks has been suitably capital fund, pursuant to any covenant of a modified to reflect modern business trends. loan agreement or investment agreement”. A licensee falls under the definition of a The act aims to safeguard the “permitted user”, where “permitted use” intellectual property rights of the licensor: covers use of a registered trademark Section 5(3) allows the licensor to impose not only by a registered user, but also by reasonable restrictions required to protect another authorised third party that is not its IP rights. a registered user. The Trademarks Act is silent on the Consumer protection and related laws licensing of unregistered trademarks, but the The Consumer Protection Act 1986 aims to courts have endorsed this as common law provide relief to consumers who have been licensing. In Gujarat Bottling Co Lt v Coca or are likely to be affected by detrimental Cola Co AIR 1995 SC 2372, it was held that products sold to them by a seller. the licensing of trademarks is governed by Especially in cases where the licence common law which is also statutorily agreement involves a licence to manufacture permitted, provided that: the product along with use of the brand, the • The licensing does not cause confusion courts will carefully scrutinise the quality or deception among the public. control provisions of the agreement to • It does not destroy the distinctiveness ascertain liability. It is thus essential that of the trademark. the applicable indemnity clauses be drafted • A connection in the course of trade with extreme caution and foresight to provide consistent with the definition of the for such contingencies. trademark continues to exist between the In cases of food adulteration, the courts goods and the proprietor of the mark. have explicitly stated that the act of adulteration is dangerous and that liability However, only the registered user may Safir Anand is a senior partner and head of trademarks at Anand and Safir Anand Anand. A strategist on several IP portfolios, Mr Anand also advises on Senior Partner issues including franchising and licensing, character merchandising, Email: sports law, IP audits, due diligence, contractual agreements, Tel: +91 98 1003 7333 packaging and advertising law, competition law and IP valuation, oppositions and rectifications. Mr Anand is the co-chair of the Legal Anand and Anand Committee of Franchising Association of India and is also an executive New Delhi council member. Ira Handa is an associate in the trademarks department of Anand Ira Handa and Anand. She advises extensively on numerous transactional Associate matters, including licensing and commercial agreements involving Email: the protection and exploitation of IP rights. Her scope of advice Tel: +91 98 1030 6676 ranges from personality rights to sports law, advertising law, online transactions, employment matters, media agreements, outsourcing Anand and Anand and distribution and manufacturing agreements. She also handles New Delhi trademark clearances and oppositions. Licensing in the Boardroom 2008 19
  4. Licensing in Indiainstitute infringement proceedings in its own used as a defence in all legal proceedingsname. It can also implead the licensor as a alleging non-use of the licensor’sdefendant in proceedings, but in such cases trademarks.the licensor is liable for costs only if it The courts have also held that aenters an appearance and participates in licensee, by entering into the licensingthe proceedings. agreement, affirms the licensor’s ownership Any use of the trademark by the and is therefore estopped from contestingregistered user or a common law licensee the validity of the trademarks that form thewill be deemed to be use by the proprietor, subject matter of the agreement.and not by a party other than the proprietor,for the purposes of removal from the Conclusionregister and the imposition of limitations on Licensing has always been associated withgrounds of non-use. In such cases, it is a steady revenue stream for the licensor.important that there be a real trade However, the marketing and advertisementconnection between licensor and licensee. benefits generated from licensing have anAs long as this trade connection continues impact on the brand equity and return onin the form of quality controls, regular investment which significantly increases thefinancial dealing and other forms of audit, scope of revenue. In emerging economies,the connecting link between the licensor’s a licensing agreement can be of greattrademark and the licensee is bona fide. importance and have far-reachingUnder these circumstances, use by a sub- consequences. Therefore, the drafting andlicensee may also inure to the benefit of the implementation processes require carefullicensor. As stated above, such use can be attention to each and every detail.20 Licensing in the Boardroom 2008