Trademarks have long been recognized as valuable company assets, and trademark licensing, including manufacturing/distribution licensing arrangements, promotional or product licensing and franchise licensing, is an effective tool for brand owners to capitalize on such assets. In each case, the use of trademark licenses can be an effective tool to maximize brand exposure and revenue through use of a trademark by entities other than the brand owner.
However, such licenses can also be fraught with peril if the respective rights of the parties are not properly laid out, and can in fact lead to loss of trademark rights in Canada if proper "control" over the goods and services associated with the trademark is not maintained by the trademark owner.
Modern day licensing of trademarks was long resisted under Canadian trademark law, where it was found difficult to reconcile the idea of multiple licensees (or multiple "sources") using a trademark, with the concept of a trademark being designed to designate a single source of origin. Canadian law originally attempted to resolve such conflicting ideas through "registered user" provisions, and it was not until 1993 that the Canadian Trademarks Act was amended to better deal with the modern day realities of trademark licensing.
Section 50 of the current Trademarks Act permits trademark licensing in Canada, and provides that use by a licensee will, for all purposes of the Act, be considered use by the trademark owner, provided that the owner has direct or indirect control over the character or quality of the wares (goods) or services.
Control over the character or quality of the goods and services provided by a licensee is key to any proper trademark license in Canada; failure to allow for or maintain such control may lead to invalidation of trademark rights within Canada. While control is presumed to the extent that public notice is given of the trademark license and the identity of the trademark owner, direct or indirect control must be allowed for and maintained under the license in order for use by the licensee to be considered use by the trademark owner. Where control by the trademark owner is not maintained in Canada, it may be found that multiple parties are using the trademark, and such a trademark would be invalid as it would no longer designate a single source to the consumer.
The type of "control" to be exercised over the character or quality of the goods and services does not need to be extensive, as long as it exists in fact and the trademark owner has the ability to exercise such control. For example, the control could include simply requiring the licensee to meet certain industry standards for goods or services, or meet standards set out by the trademark owner (whether in the trademark license itself or separately). The products or services offered by the licensee do not need to be of the same quality or character as those of the trademark owner, just at a certain level as controlled by the trademark owner.
To maintain the required "control," the trademark owner must also be given a means to ensure that the necessary standards are being met and to require the licensee to rectify any deficiencies. Such provisions could include a right to inspect premises, or could also be accomplished by way of the licensee periodically submitting product samples to the trademark owner.
It is somewhat unclear under current Canadian jurisprudence as to whether the trademark owner must exercise its control by actually using its right of premises or product inspection and enforcing compliance with the standards or specifications as set. However, in reading section 50 as a whole, it would appear that the actual exercise of control may be necessary to ensure that use by a licensee inures to the benefit of the trademark owner, and it is therefore highly recommended that trademark owners exercise de facto control over the character or quality of its licensee's goods or services in Canada.
In certain circumstances, control can be found in the absence of a written license agreement or specific provisions dealing with the same, where evidence shows that a measure of control does in fact exist. For example, where a parent company directs the activities of a closely held subsidiary, control may be found to exist even in the absence of a formal license agreement. However, it is always preferable in Canada that a written trademark license agreement is put in place that clearly lays out the manner in which the trademark owner will maintain control over the character or quality of the licensed goods and/or services, to ensure the benefit of section 50 of the Canadian Trademarks Act.
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