At the centre of trade-mark law is the notion of distinctiveness – that is, the idea that a trade-mark distinguishes the goods and services offered under the mark from those offered by others. A trade-mark functions as an indicator of source that lets consumers know that the goods and services originate from a particular trader and, as such, are of a certain character or quality. When a trade-mark owner does not police the use of its mark by third parties, even legitimate use by authorized licensees, the owner risks diluting the distinctiveness, and ultimately negatively affecting the strength, of its mark.
Under subsection 50(1) of the Trade-marks Act (the “Act”) if a third party uses a trade-mark under license from or with the authority of the owner of the trade-mark and, under the license, the trade-mark owner maintains “direct or indirect control of the character or quality of the goods or services”, then such use is deemed to have the same effect as if the trade-mark owner was using the mark itself. As such, the trade-mark remains distinctive of the owner.
But what does this “control” requirement actually obligate a trade-mark owner to do? The Act does not tell us, exactly.
We know from subsection 50(2) of the Act, that a trade-mark owner can benefit from a presumption that the requisite control has been maintained when public notice is given that the use of the mark is licensed use and the identity of the trade-mark owner is revealed. This may be achieved, for example, by a statement on product packaging that “TM-X® is a registered trade-mark of Company Y used under license by Company Z”. Where such notice is provided and licensing of the mark is called into question, the party making the allegation will bear the burden of proving improper licensing or lack of control over the character or quality of the goods in order to rebut the presumption.
The Federal Court has also held that there are three main methods by which a trade-mark owner can demonstrate that the control element required under subsection 50(1) of the Act has been met. They are:
- by clearly attesting to the fact that it exerts the requisite control;
- by providing evidence demonstrating that it exerts the requisite control; and
- by providing a copy of the license agreement that provides for the requisite control.
In some cases, and particularly with method (1) noted above, the standard of proof appears to be quite low, at least in non-use cancellation proceedings under section 45 of the Act. Under section 45 of the Act, a sworn affidavit to the following effect has been held to be sufficient:
“Under the license between the owner of the trade-mark and the licensee, the owner has controlled the quality of the services in association with which the trade-mark has been used at all times during the Relevant Period.”
This sworn statement was held to be sufficient evidence of the requisite control without any corroborating documents or explanation as to how the character or quality of the services was defined, communicated, monitored or controlled. Similarly, with respect to method (3) noted above, it appears that a provision in a license agreement that the owner of the trade-mark “has direct control over the character and quality of the services offered by the licensee”, without further specification, may also be sufficient in non-use cancellation proceedings under section 45 of the Act. There is also no requirement under the Act that trade-mark licenses be in writing or, where a written agreement exists, that it be produced in trade-mark opposition or cancellation proceedings.
Despite these seemingly lax requirements, given the serious consequences that may result from a finding of improper licensing, trade-mark owners should nonetheless be vigilant in controlling the character and quality of the goods and services offered by a licensee of the mark. Consequences of improper licensing can include the cancellation or expungement of a trade-mark registration and a finding that the trade-mark at issue is no longer distinctive of the owner. Although the Courts and Opposition Board may sometimes accept that a license with character and quality provisions satisfies the control element required under subsection 50(1) of the Act, with little evidence of actual control by the trade-mark owner, there is still the possibility that the party challenging the mark may adduce evidence that the owner did not, in fact, maintain such control over the character and quality of the goods or services, and the Opposition Board and Courts are obligated to consider such evidence.
There are also important business reasons that a trade-mark owner should put in place, monitor and enforce a licensing agreement with adequate quality control provisions. In particular, a failure to do so may give licensees the freedom to produce and offer goods and services that are inferior, driving down both the goodwill and commercial value of the owner’s trade-mark.
Accordingly, an owner who authorizes a third party to use its trade-mark should, wherever possible:
- have a written license agreement in place that confirms that the owner maintains control over the character or quality of the goods or services and outlines how the licensor will exercise such control (including rights of inspection by the owner of the licensee’s premises and goods);
- require that notice be given to the public that use of the mark is under license and identifies the owner of the trade-mark;
- clearly set out the expected standards of character and quality, for example, by way of written guidelines that licensees are required, under the license, to follow; and
- actually monitor on a regular basis and enforce the standards put in place to ensure the licensee’s goods and services are of the expected character and quality.
Following these “best practices” will help trade-mark owners ensure that the distinctiveness and value of their trade-marks are maintained.