Canada: Brand Enforcement For Franchisors: Legal And Strategic Implications

Last Updated: October 5 2012
Article by David Spratley

Previously published in the Franchise & Distribution Journal (Volume XVII, No. 2).

Brands are a crucial element of any successful franchise system, and brand enforcement is very important for franchisors. However, there are many important issues and strategies to consider before taking steps to enforce a brand. Doing things incorrectly creates reputational and legal risk for the franchisor and its franchise system, and franchisors are well advised to think things through carefully and do some due diligence before firing off cease and desist letters or making demands.

Many of us know that pork is the "other white meat," even if we do not know why we know. This is a testament to branding: THE OTHER WHITE MEAT is a trade-mark owned by the U.S. National Pork Board, and obviously it is used to good effect. Given the mark's value, the Board takes care to protect and enforce its brand. But these examples of the Board's enforcement activities demonstrate the two sides of the brand enforcement coin:

  • The Board prevented the registration of THE OTHER RED MEAT in the United States in association with salmon. The Board successfully argued that its famous trade-mark would be "diluted" if the other mark was registered.
  • On April 1, 2010 (note the date) posted an article about its latest product: canned unicorn meat. The tag-line was "Unicorn – the new white meat." The website promptly received a 12-page cease and desist letter from the Board's lawyers.

Franchisors should understand the reasons for brand enforcement, and the risks involved.

Why Brand Enforcement Matters

Brands are valuable business assets that can lose their value if their underlying trade-mark rights are weakened or lost. Brand enforcement involves protecting those assets.

A franchisor's brands are closely associated with, and a crucial component of, its system. Having strong brands strengthens the system by solidifying its public reputation, which can also make the system more enticing to potential franchisees. However, consumers may be confused if different parties use identical or similar brands with similar products or services, as the public will not know whether those products or services come from the franchisor's system. If the other party's products or services are low-quality and the public think they are associated with the franchisor's system, that can actively harm the system's reputation. And if the confusing use continues, the original brand may no longer be "distinctive" because it is no longer associated with a single source. Marks that are not distinctive are difficult or impossible to enforce, and therefore, weaker and less valuable.

The key question becomes: when are marks, or their associated products or services, similar enough to create confusion? Identifying situations where there is no confusion between two dissimilar businesses is straightforward – for example, Apple Computer and Apple Auto Glass both have apple based brands but no one will think that a windshield repair shop is owned by or affiliated with Apple Computer. Similarly, if an identical brand is used for identical wares or services, then there's a clear infringement.

Franchisors get most nervous where brands are similar and there is some overlap between the businesses, but it is not an obvious infringement. Generally, a franchisor who sees a similar brand being used in an identical market should seriously consider enforcement; if the market overlaps but is not identical, there is still good reason to consider taking steps to protect a brand.

The rationale behind brand enforcement should be clear, as should the reasons that brand owners sometimes take action that seems illogical to the uninitiated. In reality, however, brand owners are often caught in a "damned if you don't, damned if you do" dilemma regarding brand enforcement.

Damned if You Don't

Franchisors should be vigilant about other businesses using identical or similar brands. As discussed, if someone uses an identical or similar mark, because the public gets conflicting messages as to source, this can destroy a brand's distinctiveness and value.

The problem can snowball if left alone. If another party's use goes unchallenged, the franchisor may have more difficulty preventing further parties from moving into the same brand space. Those subsequent users can point to the first two marks and say "if those marks can coexist without confusing consumers, then my mark can do the same," or "because these two marks have coexisted in the same space, the first mark is no longer distinctive and cannot prevent my mark from entering that space." A franchisor in that situation can have serious difficulty preventing other parties from using conflicting brands.

A franchisor who fails to monitor and enforce its trade-marks can find its trade-mark rights substantially weakened or even lost. This is why brand enforcement is important, and why brand owners often try to stop activities that may not seem problematic to those unfamiliar with trade-mark matters.

Damned if You Do

The risks of failing to protect brands are clear. However, brand enforcement also brings public relations, reputational, and legal risks. Take the National Pork Board's response to the canned unicorn spoof – the Board has every right, and very good reason, to protect its brand, but it ended up looking foolish in this particular instance.

Consider this other example: in 2003, Starbucks sent a cease-and-desist letter to a small café called HaidaBucks (located in a remote town in British Columbia and owned and operated by members of the Haida Nation). The café owners went public and received an outpouring of support (mirrored by an outpouring of condemnation directed at Starbucks), including legal assistance from a prominent local firm. Eventually Starbucks dropped its attempts to have the café change its name.

The problem for brand owners is that the general public does not necessarily appreciate that trade mark rights can be lost through lack of enforcement. And brand owners are often portrayed as bullies when they try to enforce their rights against smaller entities. Astute "targets" can leverage this perception to their advantage. Public popularity does not affect trade-mark disputes, but brand owners can take reputational damage while trying to protect their brands, which in turn can affect their brands' value (which is what they are trying to protect in the first place).

Things to Consider when Enforcing Your Brands

Clearly, franchisors must protect their brands. However, doing so can lead to negative publicity and reputational harm. What are prudent franchisors to do? There are many issues to consider before taking steps to enforce a brand, as discussed below.

Some business risk analysis is helpful. What are the risks of letting the other party use its brand? Does it directly compete with the franchisor's system? If not, do either party's areas of natural expansion include more directly competitive fields? Is the franchisor's brand a key brand or is it associated with a minor aspect of its system? And what about the other party's brand – they may fight tooth and nail to preserve a key brand but be more willing to give up a minor one. And how much time and money has each side put into establishing and promoting its brand? A party that has had a splashy launch party for a new brand will likely be unwilling to abandon the brand at the first sign of trouble.

Legal risk analysis is also crucial. How strong are the franchisor's marks? Are they highly distinctive, or made of common or descriptive words? Are they well-known enough to be considered "famous"? Famous marks get extra protection beyond the specific products or services with which they are associated, and owners of famous marks can prevent others from using brands in unrelated spheres if such use will "dilute" the famous mark by reducing its selling power. The National Pork Board successfully opposed the registration of THE OTHER RED MEAT in the United States on this basis by demonstrating that its mark was famous, and convinced the tribunal that this mark would be diluted if the other mark was registered. In Canada, franchisors who can prove that their marks are "famous" might be able to prevent the use of similar marks in unrelated areas of business.

Are the franchisor's marks registered, or will the franchisor have to rely on its common law rights? A franchisor can enforce a registered trade-mark across Canada regardless of where the franchisor actually uses the mark. Unregistered marks, on the other hand, are enforceable only in geographic regions where the owner can prove it has developed a reputation in association with the mark.

Similarly, how strong are the other party's marks? Are they registered, or is there a pending application that the franchisor might be able to oppose? If the mark is registered already, the franchisor will have to consider applying to have it expunged from the trade-marks register. How much, and where, does the other party use its marks?

Another crucial question is the relative strength of the marks. Even if the franchisor has trade-mark registrations, if the other party has superior rights due to prior use, then the franchisor's attempts to enforce its brands can backfire. Receiving a response to a demand letter saying "we've been using our mark for much longer than you have used your mark, so if they are indeed confusing, as you allege in your demand letter, then you are infringing our rights" is obviously not a happy event.

Franchisors should also consider the cost of enforcement – and that means the entire enforcement process, not just the initial demand letter. Sending a demand letter does not cost much, but few parties capitulate immediately on receiving one. How far is the franchisor willing to escalate beyond an initial demand? Will it launch a lawsuit? Will it actually carry through with a lawsuit if the other side resists? What kind of negotiated solution might be acceptable? These are all things to consider before sending the first demand letter.

The franchisor should also decide what it wants to accomplish. Does it want the other side to stop using its brand completely? Does it want the brand, or how the other party uses the brand, changed slightly or significantly? Does it want to create a licensed use, where the other party can use the mark under licence from the franchisor? Does it want the other side to pay profits, or damages, or legal fees? These considerations will significantly affect enforcement strategy.

The franchisor must also consider its reputational risk. If the dispute is publicized, how will the franchisor and its business look? Parties who receive demand letters are often not shy about posting them on the web or talking to the media. The franchisor might be prepared to take on some reputational risk to protect key brands, and a local PR backlash might be acceptable if enforcement results in a stronger overall brand. On the other hand, if there is little risk that the other party's activities will seriously affect the franchisor's brand, then the cost and potential negative publicity of enforcement may not be worthwhile.

The last legal risk to consider is how the other side is likely to respond. A party who receives a demand letter might go to court in its home jurisdiction for a declaratory judgement that it does not infringe the franchisor's marks. This can suddenly draw the franchisor into litigation in a jurisdiction not of its choosing, where the franchisor has lost home-court advantage. And if the franchisor never intended to sue and was merely hoping to scare the other party off, suddenly it must seriously consider getting engaged in the litigation because a formal declaration that the other party does not infringe could be more damaging to the brand than the other party's mere use of its brand.

Finally, if the franchisor decides enforcement is appropriate, it should still think about what form of enforcement is best. Should there be a formal demand letter from the franchisor's lawyers? A business-to-business letter from the franchisor? A less formal phone call? And what tone is appropriate? Each approach sends a different message and may lead to different results.

Keeping Your House in Order

There are clearly many issues for a franchisor to consider before enforcing trade-mark rights. Some of them depend on the other party or other outside circumstances. However, many of them depend on the franchisor's organization and preparedness. Because brands are a key part of the franchise system, the franchisor should have an organized and consistent branding strategy. The franchisor should select brands that are strong and distinctive, and should investigate whether there are conflicting existing brands before adopting a new brand. Once the franchisor has selected a brand, it should protect that brand by obtaining and maintaining trade-mark registrations, using the brand consistently, and ensuring that its franchisees have proper trade-mark licences and only use the brand in accordance with that licence and with the franchisor's other requirements. These are all elements within the franchisor's control that will put the franchisor in a stronger position to enforce its brands if it becomes necessary to do so.

Final Thoughts

Brand enforcement is an important issue for franchisors, but there are many things to consider regarding when and how to enforce a brand. Franchisors should be vigilant for conflicting brands in the marketplace, but should do their homework and think things through carefully before taking steps against any such conflicting brand.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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