Can a trademark licensor be held liable for the negligent actions of its licensee? In a decision involving United States presidential candidate Donald Trump, the Ontario Superior Court of Justice in Singh v Trump held that the egregious negligence of a licensee in this case did not provide a basis in law for imposing liability on a licensor.

Because proper trademark licensing in Canada requires control by the licensor, the Singh v Trump decision raises an interesting question as to the obligations of trademark licensors in Canada.

Background

In the early 2000s, developer Talon International Inc. (“Talon”) launched plans to develop a luxury hotel and condominium in downtown Toronto. Talon entered into a license agreement with Trump Marks Toronto LP (“Trump Marks”) to use the Trump name and trademarks for the building, which would be called the Trump International Hotel & Tower (“Hotel”). The Hotel was originally marketed as a 70-storey mixed-use complex comprising residential condominium units and luxury hotel guestrooms – both of which were sold to the general public.

Prior to signing their purchase agreement, prospective purchasers were provided a preliminary document entitled “Estimated Return on Investment” and advised of the general success of investments bearing the Trump name, which they were told would ensure high average rental and occupancy rates.

After incurring substantial losses, purchasers of the hotel units sued for rescission of the purchase agreement and damages, claiming that they relied on and were misled by the “Estimated Return on Investment” document, which they alleged contained numerous misrepresentations. Several defendants were named, including Donald Trump, his two affiliated companies and the developer Talon.

The Court’s Decision on Licensor Liability in Canada

The Ontario Superior Court of Justice heard from two plaintiffs as test cases decided on motions for partial summary judgement, which dealt with only certain of the plaintiffs’ claims. For the purposes of the summary judgement motions, the plaintiffs withdrew their motions as against Mr. Trump’s affiliated companies, including Trump Marks, for undisclosed reasons. The issues raised in the test cases were ultimately dismissed. Of particular note is the Court’s finding on the issue of licensor liability.

The Court rejected the plaintiff’s arguments that (a) by licensing the Trump brand to Talon, Mr. Trump misrepresented that Talon had the experience to properly build the Hotel and sell the units in a competent, professional manner, and (b) it was foreseeable to Mr. Trump that if he did not properly vet and supervise his licensees in Canada, their actions might harm purchasers in his branded Hotel.

In finding that the claim against Mr. Trump was “devoid of any merit,” the Court held that Mr. Trump did not make any express representation that Talon had the experience to properly build and sell the Hotel in a competent, professional manner. Further, no such representation could be implied from the fact that Mr. Trump is an “icon” whose name is a “brand,” which creates a “buzz” of interest.

Importantly, the Court went on, surprisingly, to hold that “there is no support in law for the proposition that if the licensee of a brand is egregiously negligent, then the licensor of the brand is responsible for the negligence.” The Court held that Mr. Trump did not grant the license – his corporation Trump Marks did. (Interestingly, the marks were only transferred from Donald J. Trump, the individual, to a corporation by an assignment recorded in March 6, 2016.) In any event, the Court held that the granting of a license to use the Trump name was not a representation as to Talon’s experience or competence. Accordingly, even if Trump Marks could be liable for the actions of its licensee, Mr. Trump could not be personally liable.

The Ontario Court of Appeal subsequently reversed the lower Court’s decision, in part. The Court of Appeal set aside the judge’s dismissal of certain causes of action against Mr. Trump. However, the issue of licensor liability was not discussed in the appellate decision.

Obligations of Trademark Licensors in Canada

In Canada, a trademark must be distinctive of its owner – that is, the mark must identify only a single source of the goods or services to purchasers. As such, the use of a trademark by parties other than the owner undermines this function and dilutes distinctiveness of the mark. Several decades ago, the licensing of trademarks in Canada was essentially prohibited except in limited circumstances in Canada as it was difficult to reconcile the idea of a trademark being used by multiple licensees and the idea that the function of a trademark is to identify a single source.

Section 50 of the current Canadian Trademarks Act (“Act”) now permits trademark licensing in Canada, and provides that the use of a trademark by a licensee is deemed to be use by the trademark owner, provided the owner has direct or indirect control over the character or quality of the goods or services used in respect of the trademark. Accordingly, in order to take advantage of the protection offered under section 50 of the Act, trademark owners seeking to license their marks in Canada must comply with the requirements set out in this provision.

So what does this mean for a trademark licensor?

As noted above, control by the licensor over the character or quality of the goods or services provided by a licensee is key, as the absence of control may invalidate the trademark as being non-distinctive. While a written license is not required, the safest approach for ensuring control is typically by way of an explicit term in a written license agreement that the goods or services offered by the licensee must conform to a set of standards, specifications or instructions approved by the licensor. Further, in order to maintain such control, the agreement should also provide for a right of the licensor to regularly inspect the licensee’s premises and/or the right to obtain samples and require changes in order to ensure the licensee’s compliance with the agreement’s quality control provisions. Importantly, these rights should be exercised on a regular basis.

Interestingly, the requirement for Trump Marks to maintain control of the character or quality of the goods and services being provided by Talon was not discussed by the Ontario Superior Court of Justice in Singh v Trump. Further, in finding that having Mr. Trump’s name associated with the project did not establish the degree of proximity required to give rise to a duty of care to investors – the Court did not address the plaintiffs’ argument that Mr. Trump did not vet or supervise his licensees in Canada properly.

Accordingly, the Court’s holding – that the egregious negligence of a licensee does not provide a basis in law for imposing liability on a licensor – appears inconsistent with the system of quality-controlled licensing of trademarks mandated by the Trademarks Act.

In any event, to maintain the enforceability of their marks, it is necessary for licensors to exercise supervision and control over the character or quality of the associated goods or services. This control will decrease the risk of licensor liability and ensure the benefit of section 50 of the Trademarks Act.