How to slice through trademark challenges: Key takeaways for proper trademark licensing | Smart & Biggar
Licensing trademarks in Canada can be beneficial to a trademark owner when done properly, including providing a potentially powerful source of revenue. However, without careful drafting and management of the license, things can go wrong and impact the owner’s trademark rights, as we previously noted in an IP Update on the Milano Pizza Ltd v 6034799 Canada Inc, 2023 FCA 85 decision (“Milano Pizza”).
More specifically, pursuant to subsection 50(1) of the Trademarks Act (the “Actˮ), use of a licensed trademark by a licensee will be deemed use by the trademark owner provided that the trademark owner exercises direct or indirect control over the character or quality of the licensee’s goods and services associated with the licensed trademark. Accordingly, proper licensing may significantly enhance the rights in a trademark and enable trademark owners to capitalize on the goodwill that has been built in its trademark by a licensee.
However, absent the requisite control, a trademark owner may lose its rights in the licensed trademark or, if the licensed trademark is registered in Canada, the registration may be invalidated. This is because uncontrolled licensing may render the trademark non-distinctive (i.e., the trademark will point to more than one source – the licensee and the trademark owner, instead of a single source – the trademark owner).
In this article, we provide a brief overview of the decision in Milano Pizza and further discuss the best practices to consider to mitigate the risks associated with licensing trademark rights.
Background
By way of illustration, the Federal Court of Appeal decision in Milano Pizza affirmed the Federal Court’s earlier decision (2022 FC 425), where the Court expunged the trademark registration for the MILANO PIZZERIA design mark due to a lack of distinctiveness, as the trademark owner and licensor Milano Pizza did not have sufficient control over its licensees’ use of the trademark.
The Court of Appeal emphasized the rationale underlying subsection 50(1) of the Act, and dismissed the appeal with costs. Notably, the Federal Court of Appeal clarified that the Court, not the trademark owner, will decide if the manner and degree of control exercised by a trademark owner over the character or quality of a licensee’s goods and services associated with the licensed trademark are sufficient to meet the requirements of subsection 50(1) of the Act.
Best practices
Here are some key takeaways and best practices that trademark owners should consider when licensing their trademarks in Canada:
- Give public notice of the license. Subsection 50(2) of the Act creates a presumption that the use of a trademark is made under a license and that the owner has exercised the necessary control, if public notice is given of the identity of the trademark owner and the fact that the use is under license. It is generally sufficient to include the name of the trademark owner and an indication that the mark is used under license on the product or the packaging. However, it is critical to understand that this presumption is rebuttable, and does not replace the need for actual control under the license.
- Have a written Trademark License Agreement in place. There is no requirement under subsection 50(1) of the Act as to the form of the license between a trademark owner and a licensee. A license may be expressed in writing, orally or implied. However, as the Federal Court of Appeal stated in the Milano Pizza decision, “[…] this case instead can be characterized as a cautionary tale regarding the difficulties of proving, with the passage of time, both the subsistence and terms of an oral license arrangement”. Accordingly, in order to facilitate proof of the license arrangement and ultimately help the Court conclude that the necessary control has been exercised, trademark owners should strongly consider entering into a written Trademark License Agreement with a licensee. We recommend working with an experienced trademark practitioner to set up the Trademark License Agreement to ensure that it contains appropriate terms.
- Exercise control. In addition to giving public notice of the license and having a written Trademark License Agreement in place, a trademark owner must exercise actual control over the character or quality of the licensee’s goods and services associated with the licensed trademark. This control may be exercised by the trademark owner directly or indirectly through an agent. The Milano Pizza case referred to above serves as a good reminder that trademark owners must exercise control over the quality of finished products and services; in that case, the licensing program of the trademark owner provided that the licensees had to purchase ingredients from suppliers and distributors approved by the trademark owner and the licensed mark could only be used by the licensees within an agreed-upon territory. Nevertheless, the Court found the terms of this licensing arrangement insufficient to demonstrate the requisite control under subsection 50(1) of the Act, as the trademark owner did not exercise control over the character or quality of the finished products (i.e., the pizza itself).
Conclusion
Navigating the landscape of trademark licensing in Canada is fraught with potential pitfalls, and demands a careful and thorough approach. If trademark rights are to be effectively protected and enforced, then the importance of sufficient control should not be undervalued.
By adopting best practices, business owners can not only better leverage their trademarks financially, but also mitigate the risk of losing their trademark rights or having their registration invalidated.
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