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InsiderTAPS (17 June 2019)

Licensing and securitisation under the Trade Marks Bill 2019

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17 June 2019

The long awaited Trade Marks Bill 2019 (“Bill”) which is modelled on the Trade Marks Act of the countries which have acceded to the Madrid Protocol introduces significant and substantial changes to the current Trade Marks Act 1976 including amendments to the law on assignment and licensing of trademarks. Essentially, it introduces a new concept of “registrable transaction”, replaces the current system of registered user with a licensing regime and recognises trademarks as personal and moveable property which may be the subject of a security interest.

1. Introducing a new concept of “registrable transaction”

The Bill introduces a new concept of “registrable transactions” which is defined as “transactions determined by the Registrar in the guidelines or practice directions”. It is noted that “registrable transactions” are not limited to transactions in relation to registered trademarks, but also cover dealings in relation to pending applications.

Although the Registrar has yet to issue any guidelines or practice directions as to what constitutes “registrable transactions”, it may be relevant to refer to the Singapore Trade Marks Act that provides a list of “registrable transactions” that include: (i) an assignment of a trademark or any right in it; (ii) the grant of a trademark licence; (iii) the grant of any security interest (whether fixed or floating) over a trademark; (iv) a court order transferring a trademark; and (v) the making by a personal representative of an assent in relation to a trademark. The aforesaid dealings with registered trademarks are anticipated to be designated as “registrable transactions” under the new Trade Marks Act.

Where a dealing in relation to a trademark constitutes a “registrable transaction”, it must be registered without which the transaction will not be effective against a third party acquiring a conflicting interest in ignorance of the transaction. A person who becomes the trademark proprietor by virtue of the registrable transaction would not be able to claim damages or an account of profits in respect of any infringement of a mark occurring before the date of the application to record the transaction. The recordal of a transaction may be made by a person claiming to be entitled to an interest therein by virtue of the registrable transaction or any other person claiming to be affected by the transaction. This provides greater protection to an interested person whose registrable transaction has been recorded in the Register against other interested parties including a bona fide third party.

a. Registration of the grant of security interest over a trademark

The grant of security interest (whether fixed or floating) over a trademark is anticipated to be one of the “registrable transactions” which must be recorded in the Register.

b. Registration of trademark licence

The requirement to register a “registrable transaction” is specifically exempted for licences. This position is similar with the Singapore position. In other words, whilst a trademark licence may constitute a registrable transaction, it is not mandatory to record the licence. It appears that the current position that recordal of a trademark licence is not compulsory would continue to apply. However, there are advantages to both the licensor and licensee if a trademark licence is recorded in the Register. The advantage for the licensor is that recordal serves as a public record that the licensee is using the mark only in its capacity as a licensee so there would not be any risk of confusion as to who the owner is. From a licensee's perspective, recordal would ensure that third parties are aware of the licensee's interest in the mark. Having said that, failure to record a trademark licence does not render the licence invalid. The public is now deemed to have notice of a licence which is recorded in the Register.

2. Replacing the system of registered user with a licensing regime

Presently, Malaysia adopts the system of registered user. The word “licence” is not used in the current Trade Marks Act 1976. Instead, a person who may be a registered user is defined as any person who receives a grant to use the registered trademark by lawful contract from the registered proprietor for all or any of the goods or services in respect of which the trademark is registered. The effect of the system is to ensure that the proprietor exercises supervisory control over the use of the mark and the quality of goods and services and that use of the mark by a registered user accrues to the proprietor so as to avoid the mark being vulnerable to revocation on the basis that it creates confusion and deception as to the origin of the goods and services and on the ground of non-use, respectively. Case law established by Malaysian courts has been more liberal in recognising trademark licences despite the licensee not being registered as a registered user. In Lam Soon (M) Bhd v Forward Supreme Sdn Bhd [2001] 6 MLJ 651, the High Court held that reputation and goodwill generated from use of a trademark by a licensee will ultimately benefit the licensor. In LB (Lian Bee) Confectionary Sdn Bhd v QAF Ltd [2012] 4 MLJ 20, the Federal Court upheld the findings of the High Court that use by the licensee was equivalent to use by the licensor/trademark owner even though the licensee was not registered as a registered user.

The Bill abolishes the current system of registered user and replaces it with a licensing regime which does not require compulsory registration. Whilst there are no explicit restrictions under the Bill on the power of trademark proprietors to grant licences, it would appear from Section 46(1)(d) that the absence of control on the part of trademark proprietor of the use of the mark by his licensee may render the mark deceptive and liable to be revoked. In this regard, trademark proprietors must continue to exercise quality control over the goods and services licensed under the trademark to ensure that there is no confusion and deception as to the origin of the goods and services without which it may render the mark liable to revocation.

a. Introducing stricter formality requirements

The Bill introduces stricter formality requirements that a licence must be in writing and signed by or on behalf of the licensor without which it will not be effective. This represents a change from the previous position when a licence need only be by “lawful contract” and thus would encompass oral licences and technically, may be registered. However, as there is no infringement of a mark if use is made of it with the consent of the proprietor, there is still scope for oral licences albeit such licences apparently would not be registrable.

The Bill further provides that a licence is binding on a successor to the interest of the licensor, except a bona fide third party who, without notice of the licence, has given valuable consideration for the interest or unless the licence provides otherwise. Normally, the position is that nothing in a trademark licence would prevent the assignment of the licensor’s interest, but it is common for a trademark licence to provide that the licensee should not be able to assign his interest under the licence, or at least that he should not be able to do so without the prior written consent of the licensor.

b. Recognising sub-licensing

The Bill expressly recognises sub-licensing and accords equal protection to sub-licensees. A licensee may be given permission in a trademark licence to grant sub-licences. It is a matter for the parties to agree whether any sub-licensing would have to be subject to the prior consent of the trademark proprietor.

c. Strengthening rights of licensees in case of infringement,

Whilst maintaining the rights of licensees in relation to trademark infringement which are substantially similar with the current provisions, the Bill further introduces new provisions to protect their interests.

Essentially, unless otherwise provided in a licence agreement, a licensee is entitled to call upon the trademark proprietor to take infringement proceedings (Section 70(2)), and if the proprietor fails to do so within 2 months of being called upon, the licensee may bring the proceedings in his own name as if he were the proprietor (Section 70(3)). Where a licensee initiates his own infringement proceedings, save with the leave of the Court, he cannot proceed to trial without having joined the proprietor either as his co-plaintiff or as a defendant, but the defendant will not be made liable for any costs in relation to the action unless he takes part in the proceedings.

Despite there being no exception to Sections 70(2) and 70(3) in relation to interlocutory proceedings where speed is crucial to the success of the proceedings as licensees may want to bring an application for interlocutory relief as soon as possible after learning of the infringing use of the trademark without further delay after the two months of inactivity on the part of a disinterested proprietor, the Bill provides some flexibility in allowing the licensee to seek interlocutory relief without the need to join the proprietor.

The Bill further introduces a provision to the advantage of licensees that where a trademark proprietor brings infringement proceedings, any loss suffered or is likely to be suffered by his licensee will be taken into account and the Court may direct the plaintiff as it deems fit in holding the proceeds of the damages assessed on behalf of his licensee. As it is anticipated that the action will be brought by the proprietor, it would appear that this provision would apply even where his licensee is not a party to the proceedings. However, there is no reciprocal provision for cases where the infringement proceedings are brought by the licensee for any losses of the proprietor are to be taken into account. This may be a matter to be dealt with in the licence agreement.

d. Recognising exclusive licence and introducing new rights for exclusive licensees

The Bill expressly recognises exclusive licence which is defined as one which authorises the licensee to use a mark in the manner authorised by the licence to the exclusion of all other persons including the licensor and introduces new rights for exclusive licensees which are distinct from the rights of non-exclusive licensees. Presently, there is no distinction between the rights of exclusive and non-exclusive registered users.

An exclusive licence may provide that the exclusive licensee enjoys the same rights and remedies as if the licence had been an assignment (Section 71(1)). Where such provision is made, the exclusive licensee is entitled to initiate infringement proceedings against any person other than the proprietor in his own name and has concurrent rights and remedies with the proprietor.

Where infringement proceedings are brought by an exclusive licensee, a defendant may raise any defence which would have been available to him as if the action had been brought by the trademark proprietor. This would cover cases where the defendant has the consent of the proprietor to make use of the mark. Hence, it is arguably possible for a trademark proprietor to give consents which are binding upon his licensees including the exclusive licensee despite the exclusivity of the licence and Section 71(1). In such circumstances, the remedy available to the aggrieved exclusive licensee would be that the granting of such consent constitutes a breach of the licence agreement and in contradiction of Section 71(1).

Where the infringement concerns a matter in which both the proprietor and the exclusive licensee have concurrent rights of action, save with the leave of the Court, whichever of them brings the proceedings must join the other as his co-plaintiff or as a defendant, but the defendant will not be liable for any costs in the action unless he takes part in the action. An example whereby both the proprietor and the exclusive licensee would have concurrent rights of action in infringement is where an exclusive licence covers only some of the goods registered but all of the registered goods are the same or similar to those in relation to the infringing mark. In such circumstances, they would either need to agree to be co-plaintiffs or one of them would need to join the other as defendant. As mentioned earlier, either of them may seek interlocutory relief without the need to join the other.

Where the Court is to assess damages for any proceedings in which there are concurrent rights of action, the Court must take into account the terms of the licence and any pecuniary remedy already awarded or available to either of them. It is specifically provided that where one party has been awarded damages, no account of profits will be directed and vice versa. If an account of profits is directed, the profits must be apportioned appropriately subject to the licence agreement and the Court may direct the party to the proceedings as it deems fit in holding the proceeds of the damages assessed on behalf of the other.

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3. Recognising trademarks as a form of security interest

Presently, the law does not provide for the registration of security interest in trademarks. Following the Bill, a trademark, whether it is registered or pending, would be treated as an object of personal or moveable property despite its intangibility. It follows that a trademark is assignable by way of security and may be the subject of a charge in the same way as other personal and moveable property, such as stocks and cars. The assignment must be in writing and signed by or on behalf of the assignor and assignee without which it will not be effective. The registered trademark which is assigned may be transmissible either in connection with the goodwill of a business or independently and may be partial so as to limit it to some and not all of the goods or services for which the mark is registered.

An assignment by way of security involves the transfer of ownership of the trademark to an assignee on the condition that the trademark will be reassigned when the security obligations are discharged in full by the assignor and this allows the assignee to enforce the rights in the event of default by the assignor. A charge differs from an assignment in that no transfer of ownership takes place but the chargee is able to obtain rights over the trademark with priority over other creditors (including the right to appropriate or dispose of it in the event of enforcement and to apply the proceeds of realisation in or towards the discharge of a loan).

As mentioned, it is anticipated that registration of the security interest over a trademark may be required so that it protects an assignee or chargee against a third party acquiring a conflicting interest without knowledge of the security interest.

The Bill introduces the right of entry of an express trust in the Register which is not permissible under the Trade Marks Act 1976. Entry of an express trust further facilitates the concept of trademarks as personal and moveable property capable of being security interest. Notwithstanding the entry of express trust, the Bill stipulates that such notice of express trust shall not affect the Registrar and failure to enter the notice in the Register shall not affect any rights or duties under the trust. Consistent with it being personal and moveable property, it is to be noted that subject to the provision of the new Trade Marks Act, equities in respect of a registered trademark is enforceable in the same way as personal and moveable property.

Under the Companies Act 2016, a company that creates a charge on a trademark must register the charge with the Registrar of Companies, failing which the charge will be void against the liquidator and any creditor of the company.

It is noted that a special provision is made for the assignment of unregistered trademarks not to be affected by the new Trade Marks Act. Whilst the right of assignment of unregistered trademarks to which goodwill is attached is preserved, the assignment may be insufficient and therefore may not be enforceable unless the business to which the goodwill is attached is transferred or assigned as well.

The recognition of trademarks as a form of security interest is a welcome development for innovators and IP proprietors. It remains to be seen whether there will also be a shift in lenders' acceptance towards securitising intangible assets which have become increasingly valuable to businesses, to form the basis of security. However, a downside of using trademarks as security is that their value will be dependent on the borrower's business value which may be difficult to evaluate and ascertain. This is because expertise in IP valuation in Malaysia is presently developing and the standards to be met are yet to be set in stone unlike tangible assets and is largely relative to the owner and the owner’s intended use.

If you have any queries or require more information, please feel free to get in touch with us.

LLL
Lee Lin Li
Partner
T: +603 2050 1898
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CKY
Chong Kah Yee
Associate
T: +603 2050 1831
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