Granting licenses has practically become an integral part of using and developing trade-marks. It helps expand a trade-mark's reach to cover a wider range of goods and services while mitigating the financial risks normally associated with this type of expansion; the owner of the trade-mark can rely on the expertise and network of businesses already established in the relevant areas of trade. This way, a company that owns a strong trade-mark in its primary line of business can maximize the financial advantages of its prominence and fame. In the wake of recent Supreme Court of Canada case-law, one might even go so far as to say that the significant use of a trade-mark in association with a diversified range of goods and services is an important factor when claiming broad protection as a famous mark.
Applying this formula in Canada can be dangerous, however, if the requirements imposed by Canadian legislation are ignored. Where there is failure to comply, Canadian courts can declare a trade-mark invalid for loss of distinctiveness, expunge a business's trade-mark registration, or even refuse to register a trade-mark. All this could leave the door wide open to third parties interested in riding on the coattails of a company's fame. Such a calamity is not unheard of even after years of apparent stability. One reason for this is that Canada's Registrar of Trade-Marks accepts for purposes of registration general statements regarding arrangements with licensees. The fact that a trade-mark has been issued a certificate of registration is no guarantee of success in the event the validity of licenses is put into question.
In Canada, the validity of licenses is not tied to their registration in a public register or any other form of disclosure to a public authority. This, however, is a relatively recent development – before 1993, all licenses had to be registered with the Canadian Intellectual Property Office to ensure the trade-mark's validity. License registrations made under that old regime ceased protecting trade-mark owners after this legislative change. An application for registration of a trade-mark must nonetheless specify if the proposed or existing use of the trade-mark is by the applicant or a third party to whom a license is or will be granted. It is not necessary, however, to specify the identity of the licensees.
Section 50 of the Trade-marks Act provides that the use of a trade-mark by a licensee is deemed to have the same effect as the use by the owner of the trade-mark provided that, under the license, the trade-mark owner controls the character or quality of the goods and services at issue. This provision gives little indication of the backdrop against which it is set. Canadian law inherited from British trade-mark law the historical concept that a trade-mark can only be associated with the industry of a single entity. Granting licenses was construed as a misrepresentation to consumers of the origin of the goods, since until then goods had always been manufactured exclusively by the owner of the trade-mark. Such conduct was sanctioned by loss of trade-mark rights.
Section 50 of the Trade-marks Act does not entirely repeal this rule; it merely creates a way for businesses to grant licenses without compromising their trade-marks. That said, entrepreneurs are well advised to tread the path traced by the Trade-marks Act. One of the difficulties confronting businesses operating in Canada is the relative "youth" of this legislative provision. There are still a number of grey zones that should be navigated with caution.
Section 50 of the Trade-marks Act states that the licence must grant control over the character or quality of the goods or services. If the text of the license agreement only governs the appearance of a trade-mark (layout, size, colours, etc.) without dwelling on the quality or character of the goods or services themselves, maintaining rights to the licensed trade-mark could prove more difficult. It would then have to be shown, for instance, that such a provision was an implied term of the agreement.
Standards concerning the quality and character of the goods and services must be set by the owner of the trade-mark for the licensees to comply with. Until now, the courts have not required a very detailed articulation of such standards. In some cases, the fact that a trade-mark holder had to comply with quality standards defined from time to time by the trade-mark owner without more specificity sufficed. Requiring licences to maintain or exceed the character and quality of goods or services already on the market may also be sufficient. Naturally, it is a far more delicate matter to define standards for businesses that venture outside their usual field of activity. The agreement must normally provide means for controlling the character and quality of goods and services. Such provisions can require, for example, that samples be approved prior to production, manufacturing samples be sent on request, or for the inspection of production or distribution facilities.
Courts have not yet clearly ruled on whether trade-mark owners must adduce evidence that they have actually controlled the character and quality of goods and services manufactured under license pursuant to the agreement. However, the mere existence of an adequately drafted license agreement has prevented businesses from losing their trade-marks in the course of administrative proceedings initiated to expunge unused trade-marks. In such a context, trade-mark holders must be able to show use enuring to their benefit by a licensee when they do not use the trade-mark themselves in Canada. The mere existence of a written license often suffices. This can probably be explained by a desire to respect the summary nature of such administrative proceedings by limiting the scope of the evidence adduced. It is uncertain whether such a lax approach would be acceptable in Federal Court proceedings. Businesses would be wise to implement controls and be in a position to document them.
The dangers associated with license grants can even exist within a group of related companies. Courts have already indicated that the mere fact that a trade-mark owner holds directly or indirectly all or a majority of the shares of a company using a trade-mark is not by itself enough to establish sufficient control under section 50 of the Trade-marks Act. No special treatment is given to licenses granted within a corporate group, except where trade-marks relate to pharmaceutical preparations (provided conditions such as indicating the name of the trade-mark owner on the packaging and the name of the distributor holding the license are met).
Care should be taken when drafting and managing license agreements (especially within the same corporate group) as certain provisions can give rise to difficult issues in the event of a dispute with a third party. One classic problem arises from provisions prohibiting the use of trade-marks in a different form or in association with goods or services not identified in the agreement. Any changes made to the trade-mark will usually require such provisions be amended or extended to cover additional goods or services. If the intent to allow the licensee to follow these developments does not correspond to the language of the agreement, anyone who wants to oppose the trade-mark may argue that the licensee acted unlawfully and without any control by the trade-mark owner (and therefore without the protection afforded by section 50 of the Trade-marks Act, exposing the trade-mark to possible impingement claims).
The absence of a written license agreement will not necessarily entail the loss of rights to a trade-mark. A demonstration will need to be made however, that control was indeed exerted by the trade-mark owner, even in the context of summary administrative proceedings. When the general public has easy access to the licensed goods and services, it is often possible to demonstrate such control if the goods and services have been periodically consumed by the officers or employees of the trade-mark owner, even in an informal context. In the contrary situation, it may be difficult to bring such evidence if a structured compliance program was not in place.
One way to help defend an attack on the validity of a registration is to require licensees to affix on the goods, the packaging thereof or even on panels or promotional brochures for services, a notice stating that the trade-mark in question is the property of the registered owner, and that it is used under license. Under section 50 of the Trade-marks Act, the character or quality of the goods or services is then presumed to be under the trade-mark owners' control. Such a notice, in all likelihood, will not make a trade-mark invulnerable to an attack based on a lack of control if actual evidence is brought of the absence of control over the character or quality of the goods and services (or a sufficient level of deficiency of this control), this presumption can be reversed.
A license may not be needed in a number of situations. For example, Canadian courts recognize that the benefit derived from the use of a trade-mark, such as the resale by importers, distributors or retailers, of products acquired from the trade-mark owner automatically enure to the owner. A license does not need to be granted further to Section 50 of the Trade-marks Act. This would normally also be the same for the resale of a service provided by the trade-mark owner. If a distributor or importer modifies the goods or provides additional services (such as repair, installation or configuration services) in connection with the trade-mark, a proper trade-mark license could be useful to counter any future attacks. This would also be the case for services rendered in connection with a trade-mark by the retailers or distributors of the trade-mark owner's goods. The Courts have recognized, however, that the considerable level of control that exists in franchisor-franchisee relations meets the requirements of section 50 of the Trade-marks Act.
Ensuring that the use of your trade-mark in Canada is structured so as to benefit from the protection of section 50 of the Trade-marks Act when necessary is of great strategic importance. Attacks based on the alleged loss of a trade-mark's distinctiveness or the absence of use by the owner of a trade-mark registration because of improper licensing are extremely common in Canada. Countless administrative proceedings are instituted under section 45 of the Trade-marks Act to expunge trade-mark registrations to overcome objections by the Registrar of Trade-Marks based on a confusing trade-mark registration. Furthermore, trade-mark infringement litigation will usually give rise to a counterclaim that the trade-mark and its registrations are invalid. Claim of entitlement to a trade-mark arising through use is also usually contested in infringement proceedings by arguing that the plaintiff cannot benefit from the use made by its licensees.
Failing to put in place adequate corporate policies governing the licensing in Canada can place your business in a compromising position, forcing you to settle at a discount even in cases of blatant misappropriation of your trade-mark's reputation. If the matter goes further, a judgment could forfeit your rights to a trade-mark.