Are Your Licence Agreements Protecting You?
In the context of franchising, there are a few different licence arrangements that are created and entered. Most commonly licences are used in regard to the use of Intellectual Property (IP) and distribution agreements with suppliers. For the purposes of this article, the discussion is limited to IP licence arrangements, where it is noted that recent legal updates need to be considered so that you don’t end up in a situation where your licence is more of a hindrance to your business, as opposed to a protection.
In regard to licensing around IP, many franchises are understandably set up so that the IP of the franchise is separately owned by a different entity to the franchisor. This corporate structure requires, therefore, a licence agreement to be entered between the two entities. Most would then think that once the licence agreement has been signed that business can continue as usual and that everything is then protected.
However, are you aware that if an owner of a trade mark does nothing to demonstrate its control over that trade mark, other than enter a licence agreement that the trade mark, or any other IP held by the company owning the IP, is susceptible to either being removed after the initial three years of registration and/or being barred from a claims of infringement against a third party because of lack of evidence that the IP holding entity ever took steps to maintain control? That is exactly what can happen, and is an argument being used by many to avoid liability for infringement. This set of circumstances can also, in turn, cause the IP owner’s own use of the trade mark or other IP, to become liable under the Australian Consumer Law as a misrepresentation of a brand which might not be clearly arguable as being held by the IP owner. This issue has been discussed and determined in a number of recent court cases and is explained further below.
Firstly, and by way of background information, it should be noted that the legislation in regard to Trade Marks, in particular Section 8(1) of the Trade Marks Act 1995, provides that a person is an authorised user of a trade mark if the person uses the trade mark in relation to goods or services, “under the control of the owner of the trade mark”. Use by an authorised user of the trade mark is an authorised use to the extent only that the
user uses the trade mark “under the control of the owner”. Section 8(3) then goes on to say that:
● “If the owner of a trade mark exercises quality control over goods or services:
o (a) dealt with or provided in the course of trade by another person; and
o (b) in relation to which the trade mark is used;
the other person is taken, for the purposes of subsection (1), to use the trade mark in relation to the goods or services under the control of the owner.”
The key question is then how is this assessed and which is where the issues that have been raised comes into play. This question of how control is exercised was considered and a test decided on in the court case of Pioneer Kabushiki Kaishai v Registrar of Trade Marks (1977) 137 CLR 670 where it was considered that the “essential requirement” for maintenance of the validity of a trade mark was determined as requiring a “connection” in the course of trade with the registered owner, “even though the connection may be slight”.
Recently however, the Judges in cases such as Hells Angels Motorcycle Corporation (Australia) Pty Ltd v Redbubble Ltd (2019) FCA 355 have looked at this point further and instead expanded on the earlier decision by saying:
“There must be control as a matter of substance. For example, I do not think that it could be suggested that the mere fact that the registered owner granted a licence or revocable authority to use the trade mark would be sufficient without more established control within s 8….
As I have said, actual control will be a question of fact and degree. A licence agreement may contain a term that sets in detail a quality standard to be achieved. The details in the agreement may be such that it is not necessary for the registered owner to give directions or instructions from time to time. The licensee, aware of its obligations, may faithfully comply with those obligations without any entreaties or demands from the licensor….”
What does this mean on a commercial level? Most importantly such legal decisions show that there must be practical and regularly monitored measures implemented between all levels i.e. IP owner, licensee and any sub-licensees, that can actively demonstrate measures, where required, as to the maintenance and control of the intellectual property. The manner in which such measures take place is not fixed and could be as simple as the IP owner implementing a checklist, which is referred to at certain intervals throughout the year, to conduct cross-checks to prove that the IP that is licensed, is being used in line with and consistent to the terms of the licence agreement and maintaining records of these reporting measures.
The best tools and ways to protect are individual to the business, how its structured and its capacity/needs. Nevertheless, every business must, where issuing licences, consider the manner in which it will enforce and document the use of the licence by licensees.
DC Strategy Lawyers
Nina Rossi is a commercial and intellectual property lawyer admitted to the Supreme Court of New South Wales. She has completed Bachelor Degrees in Arts (Linguistics and History) and Law, along with a Masters in Management from the University of Sydney. Nina began her career working as a Trade Mark Examiner at IP Australia, later moving on to private practice and serving clients across industries, including fashion, IT, not for profit, food product manufacturing/distribution and food services. Nina has otherwise worked over the past 8 years in commercial and corporate advice and contract drafting, litigation, intellectual property registrations, advice and disputes and insolvency matters. Nina is keen to work with clients to grow their franchise and/or business and help achieve their goals.