- Published: 01 December 2011
Recording licenses: legal requirement or advisable precaution?
A contradiction between Andean laws, local laws, regulations, case law and administrative requirements raise the issue as to whether or not to record a license agreement before the Ecuadorian Trademark Office. Maintaining the register up to date is not only a legal requirement, but is also very important when dealing with cancellation actions and, issues of standing and with third parties in general.
Andean Decision #486 related to Intellectual Property Rights, and the Ecuadorian Intellectual Property Law prescribe legal requirements mandating that the registry is updated by recording assignments, changes of name, changes of address, and licenses. Article 162 of Andean Decision states that “all trademark license agreements must be recorded before the national IP office. Lack of registration will render the agreement ineffective against third parties.” The apparent meaning of this article is that the failure to record a license will be penalized by making the agreement of private status and, thus, valid only among the parties entering into it. However, the consequences can expand to different aspects of trademark law.
Enforceability of the agreement
A non-recorded agreement is enforceable only between the parties entering it. However, similar to race or first-to-file statutes, if a licensee obtains an exclusive license with the trademark owner, but fails to record it, if the trademark owner later grants an exclusive license to a bona fide third party which does in fact record it, the exclusive license to the latter party prevails.
Article 165 of the Andean decision states that “the IP Office will cancel a trademark registration by request of an interested party, when, without justification, the trademark has not been used in at least one Member Country by the owner, licensee or an authorized third party for three years before the filing of the cancellation action.” Clearly, there is no explicit requirement to record a license as use by an authorized party would still be considered valid use. Furthermore, Article 19 of the TRIPS (Agreement Trade-Related Aspects of Intellectual Property Rights) states: “When subject to the control of its owner, use of a trademark by another person shall be recognized as use of the trademark for the purpose of maintaining the registration.”
However, in a Cancellation Action No. 01-277-AC-2003 initiated by XOXO Clothing Company against the trademark X-O, the IP Committee ruled against the cancellation because the plaintiff had no standing. Curiously, the plaintiff itself was not the proper owner of the marks, but it was a subsidiary of two of the companies which owned the XOXO marks internationally. The Plaintiff did not have any license agreement or any update in the register that allowed the IP Committee to establish that it had a legitimate interest in the XOXO mark, or in cancelling X-O, and therefore the cancellation was rejected.
Even though it appears as if there is no consequence of failing to record an agreement, in practice it is advisable to maintain the trademark record up-to-date. Proving ownership, authorized use, control, and even standing to attack a third party’s trademark is straightforward with a recorded document. For a trademark owner, this document also serves as evidence against third parties, government authorities or its licensee in case of litigation.
Administrative approval of agreements
The Andean Community Decision demands that the agreements comply with Foreign Investment, Trademark, Patent, Licenses and Royalties Regulations as well as local free competition trade practices now governed by the new Antitrust Law in Ecuador (2011).
For compliance with competition, technology transfer and foreign investment regulations and more advanced agreements such as franchises previously required recordals before the IP Office and before the Department of Trade and Industry. Recently, new regulations which have come into effect now only require recordation before the IP Office, as the powers to check for compliance of local provisions have been delegated back to the IP Registry.
In a code-based system such as the Ecuadorian system in which the formality of writing prevails, the practical benefits of counting with a recorded document outnumber the risks and burdens of not recording an agreement. With a continuously demanding Tax Agency, a registered agreement helps support the fixing of royalties, transfer pricing, export of profits or money transfers in general, and allows for the proper deductions of expenses and it even helps support the value of the trademark if sold.
The cost of recording a license agreement cannot be compared to the burden of producing evidence of use, the risks involved in litigation, the potential of being declared unenforceable, or the support of financial transactions. Determining whether to record a license agreement or a change in ownership depends on the type and amount of participation in the local market and the likelihood of litigation. A strategy with a local counsel should be developed on a case-by-case basis.
This article was first published in Country Index: Licensing Special
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