Foreign brands in India licensing your brand
While the figures are small compared to other international markets, India is on the fast track to establishing itself as a strong potential market in the future world of licensing. Brands with strong consumer recognition, relevance and loyalty have successfully extended into new product categories.
Gaurav Marya, president of License India, said: “Brand extensions are flourishing for a number of reasons. More and more companies today realise that one of their most valuable assets is the brand, and not just their technology or other tangible assets. A strong brand commands loyalty, emotions, preference and associative powers, which are hard to duplicate by the competition. The brand is the USP for many products today.
Also, in the much cluttered marketplace, where it is very expensive and timeconsuming to get brand recognition and brand affinity, many companies choose brand extension licensing to launch new products, by leveraging the power of existing strong brands.” Licensing in India has grown to become a multi-purpose marketing strategy, with a plethora of brands and manufacturers increasingly exploring this space. India is a progressive market for brands, characters, entertainment, fashion, sport and art.
"INDIAN INTELLECTUAL PROPERTY LAW PROVIDES MODERATELY AGGRESSIVE PROTECTION IRRESPECTIVE OF WHETHER THE RIGHTS ARE REGISTERED OR NOT."
Fashion retailers stay ahead of the pack with nearly 25 percent of organised retailers using a licensing strategy in order to enlarge their merchandise. Last year, Spanish fashion brand Zara opened its first Indian store and was followed by the Chinese clothing giant Yishion. They were preceded about three months earlier by the brands Vero Moda, Diesel and 7 For All Mankind.
Licensing in the entertainment industry is a close second, where international and Indian characters are being licensed across different categories of FMCG products, consumer products, gaming, etc. Industry estimates in 2009 placed total character licensing sales in India at $100 million.
Licensing has been around for many years and today the licensing scheme is widening, with more focus on benefits other than just royalty revenues. Rahul Gambhir, director of licensing at Tommy Hilfiger, commented that “if handled right, licensing is a low-cost and high-gain prospect. A right partner, right category, right time, right pricing and right control makes a successful model.”
Should a foreign company setting up business in India choose the franchising route, licensing route, joint venture or a wholly owned subsidiary? Many international businesses venture into India through the licensing or the franchising route, which allows for effective participation and also shields their interests from certain complexities of the system.
While there are certain restrictions on foreign direct investment in Indian retail, many foreign players have established a strong foothold through strategic licence arrangements, retail franchising agreements, wholesale cash and carry models, etc.
How does licensing work?
From a business perspective, it is important to weigh the advantages of licensing against its disadvantages compared with the alternatives for commercialising products and services. There are various aspects such as market viability, quality management, use of a trademark, determination of royalty, etc. that should be considered before closing a brand licensing contract.
It is important to understand that licensing is based on trust and that a brand and its fame would grow under the arrangement, not otherwise.
At the pre-licensing stage, it is advisable for the licensor to protect its intellectual property rights, including trademarks, trade secrets and other proprietary information by entering into a non-disclosure agreement with the prospective licensee and also with its employees, other third parties or consultants of the prospective licensee who might have reason to be exposed to confidential information.
Under a typical licensing model, the intellectual property rights owner (licensor) and another who is authorised to use the right (licensee) enter into an agreement in exchange for an agreed payment, either as a one-time lump-sum payment or in lieu of future royalties.
Such an agreement grants various rights to the licensee, including the right to use the brand and sell the products or services using proprietary knowledge or a trademark. In consideration for these rights, the licensor is entitled to receive either a fee from the licensee, which is usually agreed as a percentage of sales, guaranteed minimums or as timeline-based, fixed royalty payouts.
The intellectual property environment in India and licensing
Intellectual property law in India is fairly progressive, both in terms of statutory rights and enforceability of intellectual property rights in court. Indian intellectual property law provides moderately aggressive protection irrespective of whether the rights are registered or not, i.e. based on common law rights arising from usage or international reputation and goodwill.
Intellectual property rights are classified based upon statute and common law. Statutory rights include trademarks, copyright, patents, designs and domain names, and common law rights include trade dress, trade secrets and confidential information. The Indian law on trademarks has been suitably modified to reflect modern business trends. A licensee falls under the definition of a ‘permitted user’, covering the use of a registered trademark not only by a registered user but also by another authorised third party.
Although the Trademarks Act does not speak of unregistered trademarks, the Indian courts endorse them as common law licensing. The Supreme Court confirmed the trend of recognising common law licences in Gujarat Bottling Co. Ltd. v Coca Cola Co., as long as there is de facto quality control. What is relevant is whether quality control exists and not the extent of such control, and that the licensing does not cause confusion or deception among the public and does not destroy the distinctiveness of the trademark.
The Indian courts began the culture of awarding damages in 2005 (Time Inc. v Lokesh Srivastava), duly recognising the commercial importance of intellectual property and its economic implications. Litigation arising from licensing is minuscule, save for those arising from breach of contract, and many disputes are resolved out of court in settlement—an arbitration provision is usually made in the licence agreement and therefore the settlement agreements are rarely in the public domain.
If an agreement has been effectively made in compliance with local laws and has provided an adequate number of safety valves, it can be enforced effectively, whether through a court or through a dispute resolution mechanism as may be identified in the agreement.
Some tips on licensing your brand
- Be cautious about who you are doing business with and who your partner is. Ensure that there is no compromise on quality in order that there is no brand dilution. Be imperative about expanding your brand’s product lines sensibly.
- If entering into a paid-up licence (when the licensee pays a one-time lump sum payment in lieu of future royalties) be careful of the assignment right. In the event that the licensee is acquired by a bigger company and if the licence is assignable, the larger company may get a licence to the intellectual property rights without having to pay a dime to the owner. Ensure that in the event of a licensee’s insolvency or filing for bankruptcy, the licence terminates automatically.
- Get into the habit of keeping and maintaining accurate and complete agreement files. At least two significant advantages are—if a licence dispute arises, the party with better agreement files has an early edge, while accurate and complete agreement files make it easier for a potential buyer to conduct its due diligence and enhances how the potential buyer views your business.
- Leave goodwill and understanding on both sides and keep long-term relationships in mind. Circumstances change, modifications may be required and one can never gauge what one’s company will be in another five or so years. Licences are a different kind of negotiation. The licensee wants the licensor to be successful and at the same time wants a fair deal.
- Be ready to negotiate on the price and be flexible on the type and timing of payments. More than one type of payment may be included in a deal. There are various types of payments such as upfront lump-sum payments, milestone payments based on commercialisation goals or a running royalty after commercialisation.
As regards pricing, keep in mind that a licensor will make payment proposals through a prism of expansive market and sanguine profit possibilities, while the licensee will contemplate pricing based on costs and risks, such as the cost of commercialising the brand, the risk of a lawsuit, and the changing and uncertain markets.
Licensing has always been considered a steady stream of revenue. The marketing and advertisement benefits generated from licensing have an impact on brand equity and return on investment enhances the scope of revenue. It is important that careful attention is given to each and every detail in the drafting and implementation processes of a licence agreement.
Sana Jaffri is a senior associate at Lall Lahiri & Salhotra. She can be contacted at: gpo@lls.in
