Failure to submit a report on the use of the trademark. Risks and consequences for a licensee.

The trademark owner, who grants the right to the use of the means of individualization belonging to him, is interested in the user’s (licensee’s) use of this right to the extent and subject to the terms and conditions stipulated in a license agreement. As a way of monitoring the use of the trademark, the reports are used, where the licensee provides the licensor with the different information on the use of the mark (the period, the quantity of the products, the territory of the use and other information).

Whereby, the condition obliging the licensee to provide the licensor with the reports on the use of the result of the intellectual activity or the means of individualization is contained directly in the Civil Code of the Russian Federation (hereinafter referred to as the C.C.R.F., the Code). Thus, according to Paragraph 1 of Article 1237 of the C.C.R.F., the licensee shall submit the reports on the use of the result of the intellectual activity or the means of individualization to the licensor, unless otherwise is stipulated by the license agreement.

However, Paragraph 1 of Article 1237 of the Code also contains a provision saying that: “If the license agreement that stipulates submitting the reports on the use of the result of the intellectual activity or the means of individualization does not contain the conditions on the period and procedure for submitting them, the licensee shall be obliged to submit such reports to the licensor at his request.”

Thus, it turns out that if the parties to the license agreement have forgotten to negotiate the condition for providing/not providing the reports, the licensee will be forced to do so at the request of the licensee by virtue of express reference by the law.

On the one hand, the aim of the licensee’s obligation to provide the report on the use of the trademark enshrined in the law is to provide the right holder with a tool that allows monitoring the use of the right belonging to him, including monitoring the quality of the products or services for the individualization of which this designation is used, monitoring the territory or the period of the use, and exercising statistics and analytics. In addition, using the reports, one can get the information on the volumes of the products, what is of absolute importance in the cases, when remuneration for the granted right to the use of the trademark is calculated based on the percentage ratio of the cost of the sold products marked with the trademark.

But if to look at this matter on the other side, then in the case, when the parties have forgotten to determine the conditions on the period and procedure for submitting the reports, or if the right holder has not indicated this specifically in the license agreement, there may be a situation, when the right holder can use the provisions of Paragraph 1 of Article 1237 of the C.C.R.F. in bad faith.

Thus, due to the fact that the licensee will be obliged to submit such reports to the licensor at his request, the licensor can send such requests every day, while establishing the minimum periods for providing the report, or he will establish a list of the criteria that should be reflected in the report, what will lead to the situation that the user will be engaged only in preparing the reports instead of being engaged in his commercial activities.

You will most probably say that this is unlikely, because if the right holder behaves like this, then no one will conclude the license agreements with him, and therefore, he will not earn money by selling the right to the use of the trademark.

I would partially agree, but I will still afford assuming the following situation. The right holder concludes the license agreement and receives the lump sum remuneration. The licensee, in turn, invests his efforts and resources in the development, advertising and, as a result, the recognition of the trademark at the market. Further, the right holder being aware of the fact that the trademark has become recognizable enough and he does not need investing in advertising himself, and existing without the competitors in the person of the very licensee, he will earn much more, the licensor is trying to terminate the license agreement due to a substantial breach of its terms and conditions, indicating as such condition, for example, the failure to submit the report in time or that the report is incomplete or inaccurate, for which reason the right holder, in his opinion, loses control over the use of the trademark.

Of course, it is impossible to affirm categorically that if the first breach by the licensee of the period or procedure for submitting the report has occurred, the right holder’s statement of claim for the termination of the license agreement will be immediately satisfied. However, the right holder, who intends to terminate the agreement on these grounds, may use the previous judicial acts as evidence of the repeated breach.

Thus, it can be concluded that one of the risks of the failure to submit the report on the use of the trademark can be judicial proceedings on the termination of the license agreement due to the substantial breach of the terms and conditions. The consequence of such statement of claim, accordingly, can be the termination of the license agreement and, as a result, the loss of the right to the legal use of the trademark.

At the same time, when concluding the license agreement, the parties may also establish the licensee’s liability for the failure to submit the report or the failure to submit the report in time. As a rule, such liability for the failure to fulfill the obligations for submitting the reports is expressed in the form of the user’s obligation to pay a penalty or fine in the amount determined by the parties.

It should be noted that the current legislation of the Russian Federation does not contain the norms that stipulate applying liability measures against the licensee for the failure to submit the report on the use of the result of the intellectual activity, thereupon determining the liability measures for the failure to fulfill such obligation lies solely with the parties to the agreement.

At the same time, this conclusion is partially confirmed by the legal position reflected in Decision of the Supreme Arbitration Court of the Russian Federation of 21.12.2010 No. VAS-17168/10 in case No. A40-18624/10-51-122, according to which the satisfaction of the claims for the recovery of damages regarding the license agreement is refused, since the defendant’s failure to submit the report on the use of the result of the intellectual activity is not the basis for applying the liability measures to the defendant.

Thus, summing up the article, we can conclude that the party’s failure to submit the reports on the use of the trademark or the failure to submit them in time can entail applying financial liability measures to it, if it is determined by the agreement, and in the case of the repeated breach of its obligations for providing the reports, in my opinion, this can entail the termination of the license agreement due to the substantial breach of its terms and conditions.