The Wong Lo Kat Herbal Tea trademark dispute once attracted lots of attention in China, and its key issue is the trademark license.  Through trademark license, both the licensor and the licensee can make a profit.  Trademark license can enable the licensor to obtain economic benefits, realize the rapid expansion of the brand and increase the value of the brand.  Meanwhile, it can also reduce the risks of non-use cancellation against the licensed trademark.  For licensees, a stable profit can be achieved through the use of a ready-made trademark and the goodwill of the existing trademark.  However, there are still various risks behind these advantages for each party.  Therefore, it is necessary to forecast and control the potential risks before signing trademark license agreement, in order to avoid or reduce the future disputes.  This article will share with you several risk prevention of trademark license.

China Trademark law and the Regulation on the Implementation of the China Trademark Law does not stipulate the types of trademark license, but according to the Supreme People's Court’s Interpretation of Several Issues Concerning the Application of Law in the Trial of Trademark Civil Disputes, there are three types of trademark license, namely the exclusive licensing, sole licensing, the general licensing.

For exclusive licensing, the trademark registrant only licenses the licensee to use the mark in connection with specific goods and services within the prescribed period, region and in the form of agreement, the trademark registrant shall not use the registered trademark in accordance with the agreement.  Any third party shall not be able to use the registered trademark, either.  Meanwhile, where there is any infringement action, the licensee can file trademark infringement lawsuit in his own name.

Sole licensing refers that the registrant permits the licensee to use the mark in connection with specific goods and services based on an agreement; the trademark registrant can use the registered trademark in accordance with the agreement, but shall not permit others to use the trademark.  Comparing the exclusive licensing and sole licensing, they both only license for one licensee to use the registered mark; but in a sole licensing, the registrant is allowed to use the mark.  In case of infringement action, the trademark registrant can file law suit together with the licensee.  When the trademark registrant does not raise litigation or is negligent to prosecute, the licensee can file trademark infringement litigation separately.

General licensing refers that the trademark registrant license others to use its registered trademark on specific goods or services within the prescribed period, the region and in the form of agreement; the registrant is free to use the registered trademark and can license others to use its registered trademark. This kind of license is currently a common way of licensing, for example, the franchisees is licensed with this way.  Under general licensing, when a trademark infringement occurs, the licensee has the right to file a trademark infringement lawsuit only if the trademark registrant expressly authorizes it.

Although the terms in each trademark license are different and could be negotiated freely by the licensor and the licensee, we suggest the licensor and the licensee each consider the following aspects before reaching agreement in order to protect their right and avoid any disputes in future.

For licensor, it should focus on the following aspects when signing license agreement:

First of all, it is important to choose the partners carefully, and pay attention to the examination of licensee's qualification in trademark license agreement.

If there is any problem on the licensee qualification that is the subject of the licensing agreement, it may cause the agreement to be invalid or unable to perform; the quality problem of licensee’s products will directly affect the licensor, resulting in the loss of reputation or value of the licensed trademark.  Therefore, it is suggested to review the licensee’s qualification first before grant permission to use; in some of the industries, in accordance with the relevant provisions of the state, the licensee need to provide the approval documents for provision of products or services, for example, the licensee shall provide the supporting documents from the Department of Health Administrative for the use of the marks on drugs, medical nutrition food, medical nutrition drinks and baby foods; where the trademark will be used on cigarettes, cigars and packaged tobacco, the licensee shall provide the certification documents approved by the national tobacco administrative office. If the licensee does not comply with the relevant provisions, the licensor shall carefully sign the license agreement.  It is also important for the licensor to investigate the licensee’s production capacity, management level, product quality etc., in order to choose a proper licensee who can provide products of the same quality as the licensor.

Second, the quality control provision during the license period is also important.

According to Article 43 of the trademark law, the licensor shall supervise the quality of the goods that the licensee uses his registered trademark.  Quality monitoring is not only the legal obligation of the licensor, but also the protection of the rights and interests of licensor.  The licensor must continuously make sure that the licensee’s products meet the standard and will not harm the licensor’s trademark value.

We suggest clearly indicating the agreed quality standards in the agreement, avoiding to use the general terms "in accordance with the requirements for party A's quality standard" in order to prevent the disputes in the agreement performance.  The supervision and inspection methods in the license agreement should also be clearly stipulated to prevent the failure of quality supervision rights. The methods of quality supervision and control can include regular and irregular dispatching of technical personnel for guidance, training, inspection, etc., or periodic random inspection and sampling of products, etc..  Quality supervision should also be made throughout the entire agreement period.  Once any quality issue is found, the licensor should take decisive measures, if necessary, timely termination of the trademark license agreement, etc., in order to prevent to cause adverse effect to the brand.

The third one is to protect the licensor’s ownership of their trademark right.  The licensee should be prohibited from registering and using the trademark similar to the licensed trademark to prevent dilution of the distinctiveness and reputation of the trademark.

During the term of trademark license, the licensee may develop their own brands for their own benefit, which is permitted.  However, if the licensee is going to register or use the mark which is identical or similar to the licensed trademark on similar or relevant goods/services, registration and use of such mark will make consumers believe that there is a certain connection between the trademark and the licensed trademark. When the license relationship is terminated, this confusion and misrepresentation will adversely affect the licensor's brand.  To avoid this risk, it is recommended that the licensor includes the terms in the agreement to determine: (1) without the consent of the licensor, the licensee shall not apply for or use any trademark that is the combination of other distinctive word or graphic element and the licensed mark on any goods or services in the certain territory; (2) without the consent of the licensor, the licensee shall not use and register the trademark similar to the licensed trademark on any goods or services in certain territory; (3) without the consent of the licensor, the licensee shall not apply for the trademark of the licensor’s trade name, product name, packaging design and advertising language involved in the licensing.

The licensee also needs to consider the risk prevention, including the following aspects:

First, in front of the signing licensing agreement, the licensee should conduct investigation upon the licensor the licensed trademark, because the drawbacks of the licensor or the licensed trademark may make the agreement unable to fulfill.

It is necessary to check whether the licensed trademark is a registered trademark and the right is stable.  If the licensed trademark is still pending examination and the registration is still not granted, then it is risky that the mark might be rejected for registration during the subsequent examination, which is better not to sign the license agreement under such situation.  Even if it is a registered trademark, it should be investigated whether the trademark registration was under any procedure of cancellation or invalidation.   Existence of such procedure means that the trademark right is not stable, and it may be involved in the trademark ownership dispute.  The licensee should verify the relevant issues and evaluate the possible risks for using such trademark.  If it has to sign a licensing agreement, it is better expressly agreed upon in the agreement that, the licensee’s losses due to the licensed trademark ownership dispute shall be borne by the licensor.  It is suggest the licensee to verify the validity of the licensed trademark, whether it is a registered trademark in China; and if it involves exporting, it shall examine whether the licensed trademark has been registered in the exporting country.

Second, it is important to ensure the stability of the trademark right during the license period through the terms of the agreement.

Keeping stability of the licensed trademark is an important guarantee for the licensee's rights, as a result, it is better to agree the terms as follows or limitations in the licensing agreement: (1) during the term of license agreement, the licensed trademark shall not be transferred to others; or in case of transfer, they need to guarantee that the new assignee continues to perform the original license terms of the agreement.  (2) The licensor shall handle the renewal of the licensed trademark in time to ensure the continuity of the licensed trademark right.  (3) During the period of the licensing, the licensor shall participate in the administrative procedure in a timely manner and actively.  The licensor shall bear the liability for breach of agreement if the licensee's rights are harmed results in the invalidation of the licensed trademark right.  In case of infringement of the licensed trademark, the licensor shall promptly defend the rights.

To ensure the right for use of the licensed mark during the licensing rights, the licensee shall make a corresponding restrictive agreement that if signed agreement is the exclusive licensing or sole licensing, the licensee in the agreement is only one licensee in the same area, and the licensor should not permit other third party to use the licensed mark.

Third, it is also import to record the license with the China Trademark Office. According to article 43, if a licensor authorizes another party to use his registered trademark, the licensor shall submit the trademark license to the trademark office for the record.  A trademark license without recordation with the Trademark Office cannot be used against any third parties.  At present, the trademark office has further simplified the process of trademark license, namely, no need to provide the license agreement for the record, or to file with the trademark office within 3 months from the date of signing the license agreement.  Although the record is not a necessary requirement for a licensing agreement comes into effect, but if it is not in time recorded, the validity of the licensing agreement scope will be limited, only effective between the licenser and the licensee, not a defense against a third party in good faith.  If the licensor licenses the trademark to a number of entities, the licensee who does not record the license will not be able to resist the licensee who recorded the trademark license and other bona fide third party.  Therefore, in order to guarantee the use of the rights and interests, the licensee shall specify in the license agreement that the licensor shall submit the application to record the license with the trademark office within the time limit specified in the license agreement.

Of course, the above tips are not the only ones that the parties to a trademark license should consider.   There are also many aspects of which the licensor and the licensee should be aware, such as the responsibilities of both parties upon the termination or expiration of the agreement, the consequences of breaching the agreement, etc..  This article just points several key issues relating to trademark rights.