Benefits & Risks of Licensing Trademarks
The purpose of a trademark is to distinguish the goods and services of one company from those of others in the marketplace. The essence of a trademark is distinctiveness.
Proper licensing of trademarks is frequently overlooked, to the peril of the trademark owner.
Licensing a trademark to third parties allows the trademark owner to extend the goodwill in the trademark and to further capitalize on the goodwill.
However, the risk of doing so is that, absent control exerted by the owner, a licensee modifies the trademark in a way that diminishes its distinctive nature. This puts at jeopardy the validity of the trademark which may result in the trademark itself being invalidated or cancelled within Canada.
Control over Licensed Trademark – Section 50 of the Trademark Act
Section 50 of the Trademarks Act allows a trademark owner to reconcile the requirement of maintaining distinctiveness of the trademark, with the ability for non-trademark owners to make sanctioned use of a trademark.
Under section 50, the use of a trademark by a licensee is deemed to be use of the trademark by the trademark owner, provided the owner maintains and exercises, direct or indirect, control over the character or quality of the goods/services associated with the licensed trademark.
This level of control applies even to related companies such as between a parent company and its subsidiary.
Key ways for the trademark owner to maintain and exercise such control include:
- setting quality standards for the goods/services associated with licensed trademark that the licensee must comply with;
- requiring the licensee to provide samples of the goods and allowing the owner to inspect such samples (or inspect the services, if applicable) associated with the licensed trademark; and
- allowing inspection of the licensee's facilities.
Best Practices
Here are some best practices for trademark licensing:
- Written Licence: Have a written trademark licence, even between related companies. A written license is not mandatory, but it supports the existence and the terms of a licence.
- Control: The trademark owner must exercise control over: (i) the standards on how the licensed trademark is to be used by the licensee, and (ii) the character and quality of the goods/services associated with the licensed trademark. These terms of control should be reflected in a written trademark licence; and
- Public Notice: Require the licensee to provide public notice that indicates (i) use of the trademark is licensed and (ii) the name of the trademark owner. By doing so, a rebuttable presumption is created that the trademark owner has the requisite control under section 50 of the Trademarks Act. However, public notice is not a substitute for proper licensing.
The author would like to thank Harry Scannell, Summer Student-at-Law, for his assistance with this blog.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.