Even though there are no mandatory formalities, trademark licensing remains a trap for the unwary in Canada. Particular attention must be given to how licenses are drafted to avoid attacks on the validity of the underlying trademarks. It is quite possible that a license agreement acceptable under foreign law will not meet Canadian requirements.
The notion of "control" of the character or quality of the goods or services associated with a trademark is central to Canadian trademarks law. For instance, the control could manifest itself as the right of a trademark owner to conduct inspections and request reports and samples in connection with the goods or services. It was found in the past by the courts that a right of annual inspection and a right to terminate the license agreement in the event products are found to be deficient were indicative of sufficient control.
Generally speaking, the requisite control does not entail control of the day-to-day business operations, nor merely control of the visual appearance of the licensed trademarks. Control over limited aspects of the processes (ex. what parts or ingredients can be used) that does not extend to the finished products or services actually sold or provided to consumers is insufficient.
If a license agreement fails to include adequate control mechanisms, there is risk that the use made by the licensee will not be attributed to the owner of the mark, which can have dramatic consequences. A trademark owner would be exposed to:
- an administrative expungement proceeding under section 45 of the Trademarks Act for non-use before the administrative authority, the Trademarks Opposition Board (TMOB), and
- an invalidation proceeding for non-distinctiveness or non-use before the Federal Court of Canada.
Since the purpose of section 45 proceedings is to remove "deadwood", the person defending the registration needs to meet a lower threshold.
If there is no written license agreement or if the license agreement contains inadequate provisions, it may nonetheless be possible for the owner to claim the benefit of the licensee's use of the mark if they can show that the requisite control is exerted in practice. In other words, this would be informal control by providing direction on the quality and characteristics of the goods and services, or verifying compliance with particular standards.
The requirement for control also applies to licenses within the same corporate group, except for licenses relating to "pharmaceutical preparation" where mere corporate control is sufficient. In other words, in the field of life sciences, medical devices or other products that are not pharmaceutical preparations still need to be subject to the control of the trademark owner even if it owns all of the outstanding shares of the licensee. The control could be demonstrated when the same individuals hold managerial positions in both the licensee and licensor to show that the same standards are being applied.
A good practice is to give public notice that the use of a trademark is a licensed use and identify the owner of the mark. Such public notice will give rise to a presumption that a trademark owner exerts the necessary control over the quality and character of the goods and services.
When drafting a license agreement, care should be taken to use flexible language on the scope of the agreement to account, for example, for the creation of new trademarks and the extension of the use of the trademark to new goods and services. If the language is too rigid or limited, the parties may need to amend the license agreement to remain compliant with the control requirements.
Beyond the important substantive requirements mentioned above, there are no formal requirements. While it is possible to register trademark license agreements with the Canadian Intellectual Property Office (CIPO), this is not mandatory. Moreover, a trademark license agreement does not need notarization or attestation by a public official to be valid in Canada.
Trademark license agreement must meet the requirement of the formation of a contract under its governing law, which in some cases may require that consideration be given by the licensee. It is a common practice to impose royalty payments as a consideration, but it could be a promise to do or refrain from doing something for the contract to remain valid under Canadian common law.
Canada's trademark law presents uniqueness that trademark owners should be aware when leveraging and monetizing on their trademarks through license agreements, even within the same corporate group.
Our IP team has extensive experience in assisting enterprises to draft and negotiate trademark licenses in Canada and can provide you with the appropriate assistance.
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.
