Trademarks in commercial concession agreements: law enforcement problems

Originally published in Trademark Lawyer Magazine

In recent years, relations based on a commercial concession agreement have been widely demanded in the economic sphere of the consumer sector. Experts note that its contractual structure is the best means of expanding business for firms that ensure the implementation of high standards of entrepreneurial activity using this method. In addition, this business model allows you to create and develop a network business model in a much shorter time, including in different countries.

At the same time, questions remain regarding the legal regulation of the commercial concession agreement, which leads to disputes about the  effectiveness of the normative provisions of national law and, as a result, litigation, for example, about the abuse of the right in the absence of  registration of exclusive rights.

Among others, the issues of the role of a trademark as part of the complex of exclusive rights belonging to the copyright holder and the consequences associated with the lack of rights to the trademark at the time of the conclusion of the contract are topical. According to the legal structure of the commercial concession agreement, established in Paragraph 1 of Art. 1027 of the Civil Code of the Russian Federation [1], under an agreement, one  party (right holder) provides the other party (user) the right to use a set of exclusive rights belonging to the right holder in the user’s business activities, including the right to a trademark, service mark, as well as the rights to other objects of exclusive rights provided for by the agreement, in particular, to a commercial designation, a secret of production (know-how) for an agreed upon period of time in exchange for a fee.

From the concept of a commercial concession agreement, it follows that the list of objects, the right to use which can be granted under the agreement, is open, and the parties independently determine its composition. However, an analysis of related norms and law enforcement practice shows that the discretion of the parties in this part is limited, in particular with regard to the means of individualization.

So, by virtue of a direct indication of the current law, it is impossible to grant the right to use a company name (Clause 2 of Article 1474 of the Civil Code of the Russian Federation) and a geographical indication (Clause 6 of Article 1519 of the Civil Code of the Russian Federation).

At the same time, the defects associated with granting the right to use a trademark entail the following risks and consequences:

• The fact that there is no right to a trademark in the composition of the set of exclusive rights transferred under an instrumentation agreement gives, in the event of a litigation, grounds for its requalification from a commercial concession agreement into a license agreement [2]. But, if the agreement contains information about the transfer of rights but it is impossible to identify the trademark itself (for example, by indication of registration data or other individualizing features), the contract will be recognized as not concluded due to inconsistency of the essential condition [3].
• The absence of the right to a trademark as part of the instrumentation to be transferred under a commercial concession agreement entails the refusal of the authorized body to register the provision of the instrumentation, in connection with which the transfer of rights under the agreement will not take  place by virtue of Paragraph 2 of Art. 1028 of the Civil Code of the Russian Federation. Thus, according to the recommendations of Rospatent, under a commercial concession agreement the set of exclusive rights belonging to the right holder must include the right to a trademark without fail. At the same time, the procedure for checking the terms of the agreement for compliance with the terms of registration provides for checking information about registered trademarks (Clauses 3.4.1., 3.4.5 of the Recommendations on verification of agreements on the disposal of the exclusive right to the results of  intellectual activity or means of individualization) [4].

In addition, granting the right to use a trademark as an appropriate means of individualizing goods (works, services) is one of the system-forming features of a commercial concession agreement, which is due, in particular, to its entrepreneurial nature. Therefore, unlike the consequences of the termination of the copyright holder’s exclusive rights to other objects, the termination of the rights to a trademark is the basis for the termination of the commercial concession agreement as a whole if there is no replacement of the terminated right with a new similar right (Clause 3 of Article 1037 of the Civil Code of the Russian Federation). In this case, the agreement is also terminated in relation to other objects of exclusive rights without the possibility of automatic re-qualification of the commercial concession into license agreements.

It follows from the foregoing that granting the right to use a trademark is a basic (essential) condition of a commercial concession agreement, which must be taken into account when agreeing on its subject matter.

With regard to the consequences of the absence of the right holder of the rights to the trademark at the time of the conclusion of the contract, the practice is ambiguous.

It follows from the legal structure of a commercial concession agreement that it is not a real, but a consensual agreement, i.e., is considered concluded from the moment the parties reach an agreement on all its essential terms (Clause 1, Article 1027, Clause 1, Article 432 of the Civil Code of the Russian Federation).

At the same time, some courts5 hold the position that it is impossible to conclude a commercial concession agreement in the absence of the right holder of the rights to the trademark. Proceed from the fact that by virtue of Paragraph 1 of Art. 1448 of the Civil Code of the Russian Federation, the right to dispose of a trademark, including the right to grant third parties the right to use it, arises from the moment the copyright holder acquires the exclusive right to the trademark.

And the exclusive right to a trademark arises from the moment of state registration of a trademark and extends its effect also to the period from the moment of filing an application to registration, according to which, as a rule, the priority of exclusive rights to this trademark is established (Paragraph 1 of Article 1232, Paragraph 1 Article 1484 and Paragraph 1 Article 1491 of the Civil Code of the Russian Federation) [6].

Thus, if at the conclusion of a commercial concession agreement, the right holder does not have the exclusive right to the trademark, the right holder does not have a real opportunity to fulfill the obligation under the contract to transfer the right to use as part of the set of exclusive rights, since before the registration of the trademark it is impossible to grant the right to use it.

Other courts [7], on the contrary, believe that the law does not connect the moment of concluding a commercial concession agreement with the right holder having the whole complex of exclusive rights, including the right to a trademark. They are motivated by the fact that the commercial concession agreement is consensual, therefore, the presence or absence of the right holder of the right to a trademark at the time of the conclusion of the agreement does not affect the emergence of relevant obligations for the parties, since this relates to the scope of performance, and not to the time of conclusion of such an agreement.

In addition, the courts [8] note that when concluding a commercial concession agreement, users, acting with the degree of care and diligence required by the nature of the transaction, are not deprived of the opportunity to require the right holder to present documents of title to the trademark, as well as independently verify information on the registration of the mark (filing an application) using the open registry of trademarks and service marks. On this basis, the courts reject arguments about the bad faith of right holders and misleading users when concluding a commercial concession agreement  regarding the possibility of its execution.

It seems that this approach is quite consistent with the nature of the commercial concession agreement and the requirements for business entities when concluding it.

Thus, we believe that when concluding a commercial concession agreement, each of the parties must exercise care and discretion. In particular, pay attention to the presence in the contract of a condition on granting the right to use a trademark and its individualizing features as part of the set of exclusive rights, including information on registration or filing a corresponding application, and also check this information for compliance with the state register of trademarks.

Sources:

1.“Civil Code of the Russian Federation (Part Two)” dated 01/26/1996 N 14-FZ (as amended on 07/01/2021, as amended on 07/08/2021) (as amended and supplemented, effective from 01/01/2022 ) // SPS “ConsultantPlus”.

2.Determination of the Supreme Court of the Russian Federation of March 16, 2017, N 310-ES17-1098 in case N A68-11597 / 2015 // SPS  “ConsultantPlus”.

3.Resolution of the IP Court dated 06/07/2021 N С01-754/2021 in case N А40-98878/2020, Decision of the Arbitration Court of the Tomsk Region dated 08/31/2011 in case N А67-4427/2010 // SPS “ConsultantPlus”.

4.Recommendations on verification of agreements on the disposal of the exclusive right to the results of intellectual activity or means of individualization, approved. Order of Rospatent dated December 29, 2009, N 186 // SPS “ConsultantPlus”.

5.Resolution of the IP Court dated 06.02.2019 N С01-627 / 2016 in the case N А68-9982 / 2015 // SPS “ConsultantPlus”.

6.Resolution of the IP Court dated August 15, 2018 N С01-577 / 2018 in case N А71-16755 / 2017 // ConsultantPlus ATP.

7.Decision of the Arbitration Court of the Krasnodar Territory dated 11/29/2021 in case N A32-32991/2021 // ATP “ConsultantPlus”.

8.Resolution of the IP Court dated 06/03/2022 N C01-703 / 2022 in case N A32-32991 / 2021, Decision of the Arbitration Court of the Udmurt Republic dated 02/09/2021 in case N A71-13539 / 2020 // ConsultantPlus ATP.