Establishing Control: Authorised Use of TMs
In this article we examine the concept of ‘authorised use’ of trademarks: what it is, why it’s important, and how to prove it.
The benefits of allowing others to use your trademarks
One of the main rights enjoyed by the owner of a registered trademark is the right to authorise other persons to use that mark. There are many scenarios where the registered owner would want to do this, but the two most common are probably the following:
the user is an unrelated party who agrees to use the trademark to sell the goods and services, usually in return for a payment such as royalty or licence fee;
the user is a related party, perhaps one which acts as a holding company for IP asset protection purposes.
These arrangements are important because they can help to achieve important strategic objectives of increasing revenues and reducing legal risk.
Authorised use - what is it?
Trademark owners need to be careful about who they allow to use their trademarks. The Trade Marks Act 1995 establishes a system for regulating the use of marks by other people based on the principles of ‘authorised use’ and an ‘authorised users’, although in practice, ‘authorised users’ are often called ‘licensees’.
An authorised user is not simply a person who is allowed to use a trademark. Section 8(1) of the Act 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.
Emphasis added.
Authorised use - why does it matter?
Authorised users enjoy certain rights
If a person meets the criteria for being an ‘authorised user’ under the Trade Marks Act 1995, then – subject to any agreement to the contrary – the user enjoys certain rights. These include the right to:
give permission to others to use the mark;
give permission to others to alter the mark; and
sue others for infringement.
Trademark owners can benefit from the authorised use
The Act also provides that any use of the trade mark by an authorised user is deemed to be a use of the trademark by the registered owner.
This can be particularly important because sometimes a trademark owner doesn’t use the trade mark in Australia in his or her own right. As explained in this article, if a trade mark owner doesn’t use the trademark, then it could be removed for non-use. However, if another party has used the mark as an ‘authorised user’, then the trademark won’t be removed because that party’s ‘authorised use’ is regarded as being a use by the trademark owner.
How to ensure that a user is an ‘authorised user’
As discussed above, the question of whether a user is an authorised user ultimately comes down to whether or not they use the trade mark under the ‘control’ of the owner. Control can be established in various ways, but there are two which are specifically listed in the Act: quality control and financial control.
Quality control
If the owner exercises ‘quality control over goods or services dealt with in the course of trade by another person’, then the use by that other person is deemed to be an ‘authorised use’. This element refers to the exercise of quality control over the goods or services, and not quality control over the use of the trademark.
Financial control
If the owner exercises ‘financial control’ over the user’s ‘relevant trading activities’ then the use by the other person will be an authorised use.
If a parent company owns the trade mark that’s used by its subsidiary, the parent will probably exercise financial control if all of the directors of the two companies are identical. In a 2019 case, the Full Federal Court decided that the common directorships between two companies indicated a ‘unity of purpose’ with respect to the use of the trade mark. If the two companies have identical shareholdings, or if the subsidiary is wholly owned by the parent, then this would also assist.
However, matters become somewhat grey as soon as we depart from that scenario. For example, in a 2008 case, it was held that a parent company in a corporate family group did not exercise ‘financial control’ over its subsidiary even though members of the same family owned the shares in the two companies, one person was the general manager of both companies, the two companies operated out of the same premises and shared the same bank account for a period of time.
Recommendations
We have two main recommendations to make when the registered owner is not using the trademark within Australia.
Sign a written licence agreement
It’s important to have a written licence agreement in place between the registered owner and the user. In a 2008 case, the Federal Court held that not having a written agreement was evidence that the owner doesn’t exercise control. The licence agreement should include at least some of the following:
relevant, measurable, quality standards relating to the goods or services being sold under the trademarks;
documented quality control processes;
an obligation on the part of the licensee to provide written reports regarding the quality of goods and services sold on a periodic (at least annual) basis;
a right of the trademark owner to conduct inspections and otherwise audit the products, perhaps by way of requiring samples to be provided, or mystery shoppers sampling services;
measures that can be taken if the standards are not met, including ultimately, the termination of the licence;
measures preventing the authorised user from changing the trade mark or sub-licensing (at least without permission).
Exercise actual control over the quality of the goods and services
While having a licence agreement is important, the owner also needs to demonstrate that it is actually exercising the rights given under the agreement. In a 2016 Federal Court case it was held that a written licence agreement alone was insufficient to prove control in the particular circumstances.
As such, we recommend that trademark owners keep written evidence showing that the control measures in the written licence agreement are actually being utilised. This may include keeping copies of periodic reports on the quality of goods or services, and acknowledgments that they have been reviewed and accepted.