Canada: Trademark Owners And Franchisors Beware: In Milano Pizza Ltd. v. 6034799 Canada Inc., Lack Of Licensor Control Leads To Invalidation Of Trademark

In its recent  Milano Pizza Ltd. v. 6034799 Canada Inc.  decision, the Federal Court ordered the expungement of a trademark registration because the plaintiff did not exercise sufficient control over the use of the trademark by its licensees. This decision provides a helpful reminder of the dangers of relying on verbal agreements instead of written trademark licenses, and the need for trademark owners to maintain control over their licensees.

Summary of the facts

Milano Pizza Ltd ("Milano Pizza"), had been granting trademark licenses to local pizzerias in the Ottawa area. The licensing agreements were often oral agreements, and rarely written down. The agreements mandated the purchase of branded products from designated suppliers as well as the grant of specific territories in exchange for licensees to be able to use the name "Milano Pizza" or "Milano Pizzeria".

6034799 Canada Inc., otherwise known as Milano Pizzeria – Baxter, was a licensee of Milano Pizza until their license was terminated by Milano Pizza in June 2016. Despite this termination, 6034799 Canada Inc. continued to operate under the original Milano Pizzeria signs, menus, and social media advertising, although they did adopt a new storefront logo. Milano Pizza brought an action against 6034799 Canada Inc. claiming trademark infringement of their exclusive right to the Milano Design Mark and requesting declaratory and injunctive relief. 6034799 Canada Inc. counterclaimed, asking for expungement of the Milano Design Registration.

Invalidity of Milano Design Mark

A summary judgment in 2018¹dismissed some of the earlier claims and counterclaims made by the parties, which meant that the sole issue remaining at trial was the validity of the Milano Design Mark (the "Mark"). 6034799 Canada Inc. challenged whether MILANO PIZZA legitimately licensed the Mark to any of the Milano Pizzeria owner-operators. If notm then the Milano Design Registration would be invalid.

To address this issue, the Court analyzed whether Milano Pizza adequately controlled the licensed Mark, pursuant to subsection 50(1) of the Trademarks Act. This subsection of the Act states that in order to maintain a trademark which is being used by third parties, a trademark owner must maintain sufficient control over the character or quality of the goods and services sold under the licensed trademark. If control is insufficient or absent, the licensor/trademark owner risks losing the trademark's distinctiveness. As a result of which the trademark can be expunged. Ultimately, the Court concluded that the Mark was non-distinctive for two reasons. First, Milano Pizza failed to establish that it exercised control of the character or quality of services performed by the licensees under the Mark. Second, the Court found that the coexistence and prior use of the trademark PIZZERIA

MILANO for an entirely unaffiliated pizzeria in Masson, Quebec prevented Milano Pizza from invoking any acquired distinctiveness the Mark might have enjoyed.

• Lack of direct or indirect control over licensed goods and services

Having regard to the entire regime of licensing agreements in place between Milano Pizza and its licenses, the Court conceded that Milano Pizza did exercise some form of control over the quality and character of the ingredients being used by their Licensees (the input). Licensees indeed had to obtain their pizza ingredients from specific suppliers. However, the Court found this to be insufficient to benefit from subsection 50(1).

In fact, the Court concluded that Milano Pizza did not exercise proper control over the quality of the finished products (the output). It stated that Milano Pizza failed to monitor in a meaningful way the pizza and food items on their menu produced by the licensees, namely through periodic or regular sampling. Milano Pizza did not enforce any uniform standard for these food items. The Court made clear that proper control of a licensed trademark must include supervision of both the input and the output.

The Court further concluded that Milano Pizza never enforced a right of inspection. Milano Pizza did not provide for a right of inspection in its license agreements. Milano Pizza also failed to prove that it actually inspected or approved the products and other food items. Such behaviour is contrary to the relevant jurisprudence which require that at a minimum, provision for a right of annual inspection and a right to terminate a license if products are deficient demonstrates adequate control under subsection 50(1) of the Act. In short, a licensor must regularly inspect their licensees and documents the conclusions of those inspections as part of what is controlled licensing.

• Existence of a non-affiliated MILANO PIZZERIA

A further problem for the distinctiveness of the Mark was the lengthy co-existence of a third-party pizzeria located in Masson, Quebec. It had operated under the PIZZERIA MILANO mark, using the same menu and store sign display for over 40 years. The Court found that the similarities between the trademarks of the two businesses, and the fact that they were working in the same industry meant that the MILANO PIZZA mark was no longer distinctive of a single source.

The importance of this coexistence is an important reminder that registered trademarks are national in scope. Trademark owners and licensors must therefore police the use of their trademarks Canada-wide and must enforce their rights when necessary to avoid their trademarks losing their distinctive character due to coexistence of confusingly-similar marks. Otherwise, their registrations would be susceptible to expungement proceedings based on lack of distinctiveness. Third-party use need not be widespread – here only a single competitor sufficed to invalidate the mark.

Court's Conclusion

This decision is a timely reminder on the fundamentals of trademark licensing: (1) trademark licences should be embodied in written contracts; (2) those contracts must include the required legal inspection and control rights for the licensor, and these rights must extend to the character and quality of the licensee's final products, not just the inputs used to generate those products; (3) the licensor must diligently exercise inspection and control rights under the license; and (4) the trademark owner must police non-licensed use of the mark, even on a small scale. Failure to respect these fundamentals could easily lead to the invalidation of the trademark, as occurred here.

If you would like to formalize your verbal licensing agreements, or have a lawyer review your written agreements for compliance with the Trademarks Act, please do not hesitate to reach out to Fasken's team of trademark practitioners.

Footnote

1 Milano Pizza Ltd. v. 6034799 Canada Inc., 2018 FC 1112 (CanLII), https://canlii.ca/t/hvxtg

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.