Canada: Ontario Court Declares That Bare Trademark License Agreement Is Not Subject To Franchise Disclosure Legislation

A recent decision of the Ontario Superior Court of Justice found that a bare trademark license agreement was not subject to Ontario's franchise legislation. The decision provides guidance to companies that wish to avoid the application of Ontario's Arthur Wishart Act (Franchise Disclosure), 2000 (Act) when licensing their trademarks.

MGDC Management Group v. Marilyn Monroe Estate, 2014 ONSC 4584, concerned an application for rescission under the Act. The Licensees operated various Marilyn-Monroe-themed restaurants, and the Licensor had licensed the trademarked name "Marilyn Monroe" to the Licensees for this purpose. The Licensees argued that the contract was a "franchise agreement" under the Act and sought statutory rescission.

The License Agreement granted the Licensee a non-transferrable, non-assignable, non-divisible right and license to use the trademark "Marilyn Monroe." The license was the only one of its kind that the Licensor had ever granted. This latter point was relevant as the Act contains an express non-application provision that excludes from the ambit of the Act any "arrangement[s] arising from an agreement between a licensor and a single licensee to license a specific trade-mark ... where such license is the only one of its general nature and type to be granted by the licensor with respect to that trade-mark" (Non-Application Provision).

The Court agreed that substance must trump form in the analysis of whether an agreement is a franchise agreement under the Act, which meant that the mere fact that the agreement was called a "License Agreement" was not necessarily determinative of the issue.

However, in considering the substance of this arrangement, the Court held that it lacked the hallmarks of a franchise agreement and instead fell within the Non-Application Provision. The Court emphasized that the agreement was simply a trademark license, with the Licensor lacking the "significant control" traditionally found in a franchise agreement. Three aspects of the Court's analysis are noteworthy:

(a) First, the Court recognized that a trademark license necessarily reserves certain rights of control to the licensor. Since the purpose and effect of these control provisions was to protect the integrity of the trademark, they didn't satisfy the "significant control" element in the statutory definition of "franchise agreement." According to the Court:

While the License Agreement does provide the [Licensor] with a number of different rights to approve and to veto designs and business methods that the [Licensees] might employ in their use of the trademark, those rights do not change the essential character of the License Agreement as a trademark licensing arrangement. The [Licensor] as trademark owners have negotiated various rights with respect to the ... business operations in order to protect the integrity of their trademark, but for no other purpose beyond that.

(b) Second, the Court emphasized the fact that the Licensees had primary if not sole responsibility under the License Agreement for the design and operations of the restaurants:

Under the License Agreement, the [Licensees] were themselves responsible for developing and operating their restaurant business, including creating the décor and colour scheme, ensuring quality and uniformity of the products and services, creating the food and beverage products, advertising and promoting the business, selecting and training their own franchisees, and carrying out all review or audits of the restaurants.

c) Third, the Court also emphasized that the Licensor's sole contribution to the Licensees' restaurants was the trademark (meaning that there was no "significant assistance" as contemplated in the statutory definition of "franchise"):

The record contains no evidence that the [Licensor has] used [its] contractual rights ... to establish or dictate to the Licensees how to design or run their business. The [Licensor] do[es] not operate, or even assist the [Licensees] in operating, a restaurant; [the Licensor] did not create the [Licensees'] restaurant and do[es] not supply goods and services to the [Licensees'] restaurant. Their sole contribution ... is to license the "Marilyn Monroe" name.

This decision strongly suggests that bare trademark license agreements will fall outside the Act, provided that their "control provisions" go no further than necessary to protect the licensor's trademark rights. Unfortunately, the full scope of the decision is obscured by the Court's reliance on the Non-Application Provision, which requires that the license be "the only one of its general nature and type to be granted by the licensor with respect to that trademark." It is unclear how the Court would have decided the issue had the Licensor had similar license arrangements with other licenses. This is especially unfortunate as the Court's findings concerning the absence of significant control and assistance by the Licensor would have been sufficient to take the arrangement outside the statutory definition of "franchise agreement" (without resort to the Non-Application Provision).

We note that a materially similar Non-Application Provision is found in Manitoba's The Franchises Act, CCSM, c. F-156, New Brunswick's Franchises Act, SNB 2007, c. F-23.5, and Prince Edward Island's Franchises Act, RSPEI 1988, Cap. F-14.1. However, no such provision is found in Alberta's Franchises Act, RSA 2000, c. F-23.

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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