Your Brand, Their Registration: How Distributors Hijack Trademarks and How to Stop it
Introduction : Imagine that foreign skincare company that set up shop in India. A distributor is hired, the first container is loaded in the boat, and the sales are rolling. But three years down the road, the bond breaks and the company is forced to replace the distributor. Too late-its brand name appears on the Indian trademarks register as belonging to the distributor.
This is not some distant fairy tale. It’s quite common enough that just about every trademark attorney has a tale of their own. The distributor knew its own market, got in first, and filed first. The principal, who was too busy building his or her business to look at the register, never knew about this.
In this blog I consider the reasons for these issues, what the law gives a principle to combat these issues, and how a handful of draft clauses and onboarding checklists might sidestep these issues altogether.
Why Distributors File in the First Place
Sometimes it just comes down to greed. A distributor who has built a local market over many years at great expense may be happy to believe that by registering the brand in a particular country he has secured for himself the capitalized value of that goodwill, to hold or take out of the business as he pleases, sooner or later to sell back to the principal for a serious fortune or to block his imports, or both. Other times it is more naïve. A distributor registers a brand “for the protection” of the principal in a country where the principal has yet to do so, and no-one knows for sure who will do so, and nothing is said about whose name the registration should stand. Not altogether unexpected but harmful all the same.
The Legal Framework
Who is the proprietor?
According to Indian law, every application for a trademark has to be made by a person who claims to be the owner of the mark (Section 18 of the Trade Marks Act, 1999). Ownership does not depend on who first applied, who gave who the first license or who was the first to use. It depends on who takes the mark and acts as a badge of origin and who the public comes to trust with its reputation. A seller has a contract for someone else’s product under the account of someone else’s brand. That’s the fulcrum for nearly every complaint a principal will present.
Bad Faith
Section 11(10)(ii) of the Act requires the Registrar to consider the existence of an application in bad faith in formulating a decision on relative grounds for refusal. Under Indian law, dishonest adoption has been closely watched for a long time. There is little doubt that a dishonest adopted distributor is a prime example of this.
The agency Principle
Indian courts have been sceptical of distributors attempting to claim ownership of marks. In Consolidated Foods Corporation v. Brandon & Co. Pvt. Ltd., AIR 1965 Bom 35, a food distributor tried to register the mark ‘Monarch’. It had described itself as ‘sole distributors’ and said the mark was owned by the manufacturer on its own labels, but it asserted that its agreement gave ownership to it. The Bombay High Court refused to register on the grounds that first, the marks must have been used by the applicant as proprietor, and on the labels its public would have believed they were the manufacturer’s marks; second, because a US company had imported goods under the mark first, its priority in use (under the Paris Convention) trumped its rights under registration (under the Trade and Merchandise Marks Act, 1958). The 1999 Act’s equivalent is Section 18, with proprietor language.
More recently, bad-faith has provided a means for squatting to be challenged successfully. In BPI Sports LLC v. Saurabh Gulati (Delhi High Court, April 2023), the court ruled that 'trade mark squatting' in this manner was bad faith within Section 11(10)(ii) and ordered removal of the mark in a Section 57 petition. That was not a distributor case, but its reasoning can easily be applied. Internationally, Article 6 of the Paris Convention, to which India is a signatory, makes this point to ‘wait-and-watch’ exploiters in the context of applications for registration on behalf of third parties. If the agent registers the mark of the principal without permission or authorisation, the principal can oppose, oppose after publication, oppose within six months of publication, or apply for cancellation, or for assignment of the registration. These rights run side by side with domestic remedies and can prove a helpful interpretative aid to Indian authorities.
The Remedies Available
Opposition
If the principal learns of the application while it is still pending, opposition is the most cost-effective remedy. Valid bases are bad faith, lack of proprietary rights by the applicant, and prior use or reputation of the principal. The time frame is brief and a trademark watch service is invaluable.
Rectification and Cancellation
If the mark is already registered, the owner can then seek to have it removed from the register (Section 57) as a “person aggrieved”. The heart of the submission is that the entry was wrongly made because the applicant was never in fact the proprietor of the mark. Typically, a good deal of documentary material (e-mails, purchase orders, invoices showing the distributor purchasing the principal's branded goods) will be the key evidence. Section 47 (removal on grounds of non-use) is a different matter. It does not assist if the distributor is actually using the mark on the principal's goods, in which case it usually comes second to Section 57.
Passing Off
Even where it has no registration in India, a principal with a reputation can bring a claim of passing off. Section 27 keeps alive the rights at common law, and section 34 prevents someone who has put the mark to earlier use from being trumped by a later registration. Reputation established in other countries can be a useful pointer, and not entirely uncontroversial, but the evidence issue is a challenge: the principal must demonstrate that the goodwill was spread to India before the time of registration.
Contract remedies
Where there is a distribution agreement with an acknowledgment of ownership, no-challenge clause and a requirement to assign any registration on demand, the principal may bring an action for breach and claim specific performance or injunctive relief. It’s a lot easier to order a distribution to do something when it agrees to do it in writing. In other words, the remedy is only as good as the document.
Why Distribution Agreements need Express Ownership and Registration Clause
Particularly when entered into in haste, often when the focus is price, territory and exclusivity, distribution agreements are often over-briefed on intellectual property and such rights are dealt with in one or two boilerplate provisions (if at all).
As a result, where a dispute does arise, the principal must rely on inferring and establishing innocent agency or conceding and arguing goodwill. That is fine, but long and expensive and far from guaranteed. Express allocation of rights takes the guesswork out of the equation.
Clarify ownership- The majority of the rights to the Brand, now and in the future, are owned by the principal and the distributor is granted a non-exclusive limited licence to use the Brand to undertake the distribution.
Confidential information- Restrict the distributor from disclosing any of your company or product related confidential information during and after the agreement period. Enforce all your IP. The distributor shall not register any mark, company name and domain anywhere in the world.
Distributee assignment- Where the distributor does obtain such a registration, it holds it on behalf of the principal and must assign it on request free of charge.
Add a no-challenge provision- The distributor would promise not to challenge the rights of the principal during or after the term.
Control local good will- Goodwill resulting from the use of the distributor belongs to the principal.
Account termination- Upon termination, the distributor will cease using the brand, hand over the domains and listings, and assist in cancelling any fraudulent filings.
Offer injunctive relief- Pre -contractually agree that the principal will be entitled to injunction if the IP clauses are broken.
A Distributor On Boarding Checklist For Principals
Contracts help, but process prevents. A principal expanding into a new territory may want to follow this checklist:
Get registered- Register the mark in the territory before revealing the expansion or even the intention to establish in the territory to any distributor.
Search the register- Find out if the territory company, its affiliates or directors are already in the register or in the name or website of the proposed distributor.
Do due diligence- Research the distributor’s history with other brands. A history of conflict is not good.
Document ownership- Include the above clauses and have the agreement signed before the goods are shipped.
Record the licence- Maintain a short separate trademark licence document with quality clauses.
Own the digital share- The principal should be the owner of domain names, marketplaces registries and social media accounts in the territory, with a user account for the distributor.
Set up monitoring- Monitor trademark register, domain records and listings on marketplaces and all registered names in the territory.
Review annually- Check the register at least once a year and again on renewal or change of territory.
Consider the exit strategy- Agree upfront on disposal of stock, handover of the mark and co-operation on register transfers.
Conclusion
Registration hijacking is a silent killer. It makes no noise, and frequently only appears when the plant is losing its minds over the commercial relationship. The law has not been left empty handed. Bad faith, the agency rule, prior use, and the Paris Convention all serve to point to the principal. But employing those principles involves actual litigation, the fortuitous twists of fate, and the desire for an impartial arbiter. The smarter, and cheaper, option is to address ownership up front, register early, clearly state who owns what in the agreement, and keep track of the register. A brand is as portable a corporate asset as one can find. It is at least as important as the price list.
Author: Swati Kumari in case of any queries please contact/write back to us via email to content@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney
Endnotes
Trade Marks Act, 1999, ss. 11(10)(ii), 18, 27, 34, 47, 57 (India).
Paris Convention for the Protection of Industrial Property, 1883, art. 6septies.
Consolidated Foods Corporation v. Brandon & Co. Pvt. Ltd., AIR 1965 Bom 35; (1964) 66 Bom LR 612 (India).
BPI Sports LLC v. Saurabh Gulati (Delhi High Court, April 2023).
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