Remain vigilant over your licensees in trademark agreements

Intellectual Property /
John Simpson
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By Tony Poland, LegalMatters Staff • Protecting your trademark rights means not only guarding against infringers but ensuring you have sufficient control over licensees, says Toronto intellectual property lawyer John Simpson.

“Businesses often look for friendly arrangements with others but the trademark owner must always be vigilant,” says Simpson, principal of IP and new media law boutique Shift Law Professional Corporation. “There are two kinds of policing to consider when you own a trademark. There is policing against those who may be competing with you and those you have licensed to share your trademark.

“Be friendly at your own peril because a trademark is a valuable commodity. You are responsible for not only ensuring you have the rights to control your trademark but for exercising those rights to control them,” he tells LegalMattersCanada.ca. “If your trademark loses its distinctiveness, you stand to lose it.”

Failure to exercise control

Simpson says business owners have found their trademarks invalidated for failing to exercise enough control over their licensees’ use of their mark.

In Milano Pizza Ltd. v. 6034799 Canada Inc., for example, he says federal court found there was a lack of oversight of the pizza chain’s licensees as well as a lack of prompt enforcement over its trademark rights. The Federal Court of Appeal later upheld the decision.

Trademark owners must govern, either indirectly or directly, the character and quality of goods and services that are sold by licensees of the trademark, Simpson says.

Control can be demonstrated through clear terms in the licensing agreement along with requirements imposed by a trademark owner, he says. Conducting quality checks is also important, adds Simpson.

“I could have a license agreement with you that states I have the right to dictate your use of the trademark and then go off and you don’t hear from me for three years,” he says. “In that time, you could have done all sorts of things with the trademark that I was unaware of. By then, I have lost the rights to the trademark, even though I had the right to enforce and control your use of it. Without the owner’s supervision, the trademark can become non-distinctive.”

Simpson says a trademark can only identify one trade source.

Important to know who is behind the trademark

“It is important for the consumer to know who is ultimately behind a trademark,” he says. “And who is ultimately behind the trademark has the power to control what it means along with the quality of goods or services associated with it. That is the underlying purpose of trademark law.”

If someone uses the trademark without permission, it can confuse the consumer and dilute the brand, Simpson says.

“The trademark holder would then lose their ability to enforce their rights against others,” he says. “In the same vein, if you have given a friendly party permission to use your mark and you turn a blind eye when they violate the terms of your agreement, you will lose your trademark just as you would if an infringer was using it. It should be noted, however, that the trademark owner does not have to exercise control over every aspect of the licensee’s business.” 

The point of a licensing agreement is not about the exchange of money, he explains.

“What makes a licensing agreement a licensing agreement is not payment or royalty,” says Simpson. Instead, it is the ability for the trademark owner to control the use of the trademark.”

He says there are nuances to the law and a lack of a written licensing agreement or control of the day-to-day operations is not necessarily required to maintain trademark control.

Written licence is not always vital

In Corey Bessner Consulting Inc. v Core Consultants Realty Inc., Simpson successfully argued a written licence is not always vital to maintaining trademark control and that his client had managed to ensure sufficient oversight through means other than a written agreement.

His client, who runs a commercial realty brokerage in Montreal, developed an association with a broker in 2015 and offered him the use of his branding and website to open a commercial realty brokerage in Toronto. However, by 2018 the relationship had deteriorated and the Toronto broker sold his share in the business to his friend.

Simpson’s client moved to dissolve the arrangement, asserting sole ownership of the trademark that the two businesses were sharing. However, the remaining partner argued that, among other things, he had been granted joint ownership in the trademark and had common rights in it.

While no written agreement existed, Simpson was able to convince the court the circumstances in the case amounted to a licensing agreement.

“The reason why cases such as Milano and Bessner get litigated is because there are businesses that have some sort of informal arrangement where it serves both of them at the time,” says Simpson.

“But if the owner has consistently failed to dictate the terms of use, they have lost that ability to enforce their rights to their trademark. The bottom line is you cannot have two parties co-owning a trademark. If the owner wants to keep control, they must show control.”