The granting of a long-term trade mark licence is a frequent practice in commercial transactions, particularly in related-party dealings.

This post explores whether such licences may introduce unforeseen risks to the enforceability of a trade mark and, if so, how these risks can be mitigated.

The Function of a Trade Mark

A trade mark primarily serves as a source identifier, distinguishing the goods or services of one entity from those of another. It encapsulates brand goodwill and provides consumers with an assurance of consistent quality. The legal protection and enforcement of trade mark rights depend on maintaining the distinctiveness and credibility of the mark in the marketplace.

A long-term trade mark licence generally refers to an agreement where the trade mark owner grants usage rights to a licensee for an extended period, potentially indefinitely. While such arrangements are not inherently problematic, they can pose risks if not properly managed.

The primary concern arises when the licensor fails to implement adequate quality control measures over the licensee’s use of the trade mark. This can result in "bare licensing", a situation where the trade mark is used without sufficient oversight, thereby diminishing its distinctiveness and impairing its ability to serve as a reliable source identifier. In severe cases, this lack of control may lead to the mark’s expungement from the trade mark register.

To maintain a trade mark’s validity, long-term licensing must include rigorous quality control mechanisms to ensure that the goods or services associated with the trade mark continue to meet the standards set by the trade mark owner. These measures are critical in preserving the trade mark’s function and require ongoing monitoring by the licensor.

Long-termlicensing arrangements coupled with insufficient quality control present a heightened risk of a trade mark losing its distinctive character. Without proper oversight, the licensee’s use of the trade mark may deviate from the brand’s established standards, leading to consumer confusion and potential dilution of the trade mark’s value.

Legal Precedents

South African courts have reinforced the importance of quality control in trade mark licensing. In AM Moolla Group Ltd and Others v The GAP Inc and Others [2005] ZASCA 72, the Supreme Court of Appeal highlighted that bare licensing could undermine a trade mark’s distinctiveness if it results in a loss of its function as an identifier of origin. Where distinctiveness is eroded, an application for expungement of the trade mark may be a viable remedy.

Consequences of a Trade Mark Losing Its Function

If a trade mark loses its distinctiveness due to inadequate supervision or improper use by a licensee, it may no longer serve as an indicator of origin. This could lead to significant legal and commercial repercussions, including:

• Weakened enforceability of trade mark rights against infringers.
• The risk of third parties successfully applying for the trade mark’s expungement.
• A decline in consumer trust and potential brand dilution.

To safeguard against the risks associated with long-term licensing, trade mark owners should consider the following best practices:

• Incorporate quality control measures in the agreement. The licence agreement should explicitly define the quality standards expected of the licensee and require ongoing compliance monitoring.
• Maintain comprehensive records. Documenting the licensee’s use of the trade mark, including periodic audits, inspections, and communications, serves as evidence of active oversight.
• Include termination rights. The agreement should grant the licensor the right to terminate the licence if the licensee fails to uphold the agreed standards, ensuring control over brand integrity.
• Carefully draft the agreement. While a long-term licence may resemble an implied assignment, clear contractual boundaries must be set to differentiate licensing from ownership transfer.
• Monitor market usage. Actively tracking how the trade mark is used and perceived in the marketplace helps ensure it retains its distinctiveness and functions effectively as a trade mark.

Conclusion

Long-term trade mark licensing is a strategic commercial tool, but it must be carefully managed to avoid legal and reputational risks. By enforcing stringent quality control measures, maintaining active oversight, and structuring agreements with appropriate safeguards, trade mark owners can protect their rights and uphold the distinctiveness of their marks.

Failure to do so could lead to the erosion of the trade mark’s function and, in extreme cases, its removal from the register—ultimately diminishing the brand’s value and legal protection.