Introduction
Facts
Court decision on licensor liability in Canada
Obligations of trademark licensors in Canada
What does this mean for trademark licensors?
Can a trademark licensor be held liable for the negligent actions of its licensee? In a decision involving President-elect Donald Trump, the Ontario Superior Court of Justice in Singh v Trump held that the egregious negligence of a licensee 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 decision raises an interesting question as to the obligations of trademark licensors in Canada.
In the early 2000s developer Talon International Inc launched plans to develop a luxury hotel and condominium in downtown Toronto. Talon entered into a licence agreement with Trump Marks Toronto LP to use the Trump name and trademarks for the building, which would be called the Trump International Hotel & Tower. The hotel was originally marketed as a 70-storey mixed-use complex comprising residential condominium units and luxury hotel guest rooms, both of which were sold to the general public.
Before signing the purchase agreement, prospective purchasers were provided with a preliminary document titled "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. The purchasers claimed that they had relied on and were misled by the "Estimated Return on Investment" document, which they alleged contained numerous misrepresentations. Several defendants were named, including Trump, his two affiliated companies and Talon.
Court 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 judgment, which dealt with only some of the plaintiffs' claims. For the purposes of the summary judgment motions, the plaintiffs withdrew their motions against 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:
- by licensing the Trump brand to Talon, Trump misrepresented that Talon had the experience to properly build the hotel and sell the units in a competent, professional manner; and
- it was foreseeable to 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 Trump was "devoid of any merit", the court held that Trump made no 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 Trump is an "icon" whose name is a "brand" which creates a "buzz".
Importantly, the court held 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". It found and that Trump did not grant the licence – his corporation (Trump Marks) did; interestingly, the marks were transferred from Trump to a corporation by an assignment recorded only on March 6 2016. In any event, the court held that the granting of a licence 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, 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 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 the distinctiveness of the mark. Several decades ago, the licensing of trademarks in Canada was essentially prohibited except in limited circumstances, 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 Canadian Trademarks 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 that the owner has direct or indirect control over the character or quality of the goods or services used in respect of the trademark. In order to take advantage of the protection offered under Section 50, trademark owners seeking to license their marks in Canada must therefore comply with the requirements set out in this provision.
What does this mean for trademark licensors?
The licensor's control 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 licence is not required, the safest approach for ensuring control is typically by way of an explicit term in a written licence 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 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 over 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. Further, in finding that having 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 Trump did not properly vet or supervise his licensees in Canada.
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 Canadian Trademarks Act.
To maintain the enforceability of their marks, licensors must 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 Canadian Trademarks Act.
For further information on this topic please contact Nicole Vidinu or Philip Lapin at Smart & Biggar/Fetherstonhaugh by telephone (+1 613 232 2486) or email ([email protected] or [email protected]). The Smart & Biggar/Fetherstonhaugh website can be accessed at www.smart-biggar.ca.