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What is a Trademark License?
A trademark license is an agreement whereby the owner of the registered trademark (referred to as a “Licensor”) allows a third party (referred to as a “Licensee”) to use the registered trademark in accordance with the terms and conditions set out in the agreement. An essential component of a licensing agreement is the Licensor’s ability to ensure “the nature and quality of the goods or services sold in association with the trademark”[1].
Trademark licensing may occur in a number of situations. For example, in a franchising scenario, a franchisee is permitted to exploit “a particular business model” in addition to being granted a license to use the trademarks and other intellectual property rights belonging to the franchisor[2]. Similarly, as it pertains to merchandising, manufacturers of goods, such as mugs, caps and clothing, are permitted, by way of a license agreement, to use and display the Licensor’s trademarks on their products. Examples include logos belonging to sports teams and trademarks belonging to popular or well-known companies[3]. Another example of a situation where trademark licensing occurs is when the Licensor allows the Licensee to use their trademark that is associated with a component of the Licensee’s product, such as in the case of Intel®, or “made with Intel®”.
White Labeling
By way of example, a similar situation may also arise in the software (e.g., SaaS) and/or product spaces’ with the concept of “white labeling”. White labeling occurs when a retailer sells a product displaying their logo or trademark but, in fact, this product was actually not manufactured by the retailer[4]. In fact, the product will be manufactured by a third party. Indeed, instead of displaying their logo on the finished product, the manufacturer will display the trademark belonging to the retailer[5]. This phenomenon applies to SaaS services when the software is created by, and the intellectual property associated with it is owned by, a third party but the logo belonging to the retailer will appear in association with the software product[6]. White labeling pertains to the present discussion, as normally the trademarks of the retailer will need to be licensed to the manufacturer in order to for the manufacturer to then display the trademark on the finished product.
Reasons for Entering Licensing Deals
One obvious reason to conclude a licensing agreement would be to provide the Licensor with “an additional revenue stream”[7]. However, this is not the sole reason to conclude such an agreement. A licensing agreement can also permit a corporation to expand into another country by allowing the Licensee to use or display the trademark with the associated goods or provide the associated services in a given jurisdiction[8]. A Licensor may also conclude such an agreement in order to benefit from a Licensee’s “distributing, sales or marketing capacity […] without having to invest in developing such capacity within its own establishment”[9]. A trademark owner who is not employing the trademark but still seeks to maintain ownership of the trademark could conclude a licensing agreement to ensure that the trademark will not be expunged due to non-use[10]. A trademark owner might even choose to license their trademark to an infringing party to prevent this party from “diluting the brand image and compromising the reputation of the company”[11].
Controlling Use of the Trademark
In Canada, the section of the Trademarks Act that pertains to licensing agreements is section 50. It reads as follows:
“50 (1) For the purposes of this Act, if an entity is licensed by or with the authority of the owner of a trademark to use the trademark in a country and the owner has, under the licence, direct or indirect control of the character or quality of the goods or services, then the use, advertisement or display of the trademark in that country as or in a trademark, trade name or otherwise by that entity has, and is deemed always to have had, the same effect as such a use, advertisement or display of the trademark in that country by the owner.
(2) For the purposes of this Act, to the extent that public notice is given of the fact that the use of a trademark is a licensed use and of the identity of the owner, it shall be presumed, unless the contrary is proven, that the use is licensed by the owner of the trademark and the character or quality of the goods or services is under the control of the owner.
(3) Subject to any agreement subsisting between an owner of a trademark and a licensee of the trademark, the licensee may call on the owner to take proceedings for infringement thereof, and, if the owner refuses or neglects to do so within two months after being so called on, the licensee may institute proceedings for infringement in the licensee’s own name as if the licensee were the owner, making the owner a defendant”[12].
The first two paragraphs are noteworthy as they both set forth rebuttable presumptions pertaining to the use of the licensed trademark. The first paragraph states that if the registered trademark owner concludes a licensing agreement and, pursuant to the terms of the agreement, the owner controls the character or quality of the goods or services then, as a result, the employment of the trademark or its advertisement by the Licensee are deemed to be acts undertaken by the owner of the trademark.
The second paragraph states that if a public notice is displayed, which states both that the trademark is used pursuant to a licensing agreement and the name of the registered owner, it is presumed that the use of the trademark is licensed and that the owner has control over the character and quality of the goods or services. Usually, on products, such a notice appears as follows: “[Trademark] is a registered trademark of [owner’s name], used under license by [Licensee’s name]”.
The third paragraph is also notable due to the fact that the Licensee may require the Licensor to take the necessary legal action if infringement occurs. In addition, if the Licensor does not fulfil its obligations, the Licensee may undertake legal action on behalf of the Licensor.
Section 50 of the Act is notable in that it contributes in preserving the distinctive nature of the trademark by considering use of the trademark to have been undertaken solely by the owner, regardless of whether or not this use is actually undertaken by the Licensee. In addition, to ensure that the licensing agreement falls under the protection of section 50, it is crucial that an agreement respect certain criteria. First, although not a requirement under the law, the agreement should be written, as this would make it easier to prove before a judge, if ever litigation arises. The Licensor should also make clear that they have complete and total control over the character and quality of the wares or services, which could be done by providing manuals or training materials to enforce certain standards on the Licensee or by including a clause whereby a Licensor has the right to inspect the wares to ensure their quality.
What Clauses Must a Licensing Agreement Contain?
A typical licensing agreement will normally contain several of the following clauses:
A clause outlining the trademark in question;
The scope of the license, for example whether or not it is an exclusive license and the territory over which this license will apply;
The length of the contract and whether it may be renewed or terminated;
A “guarantee” that the trademark in question is valid;
A representation or warranty of non-infringement clause whereby the Licensor warrants that the licensed trademark does not infringe on a third party’s intellectual property;
A clause whereby the Licensee acknowledges the validity of the trademark and affirms that it will not contest its validity in a legal proceeding;
A clause dealing with the fact that the Licensor must maintain control over the characteristics and quality of the goods and services;
Obligations of the Licensee, such as the payment that must be made in exchange for the rights granted to it by the agreement;
An IP insurance clause, such for purposes of risk transference;
An IP indemnification clause exposing the Licensor’s “obligation to defend, indemnify, and hold harmless the other party from and against losses, damages, and expenses arising or resulting from a third-party IP infringement claim”;
A confidentiality clause;
A non-compete clause; and
Amongst other types of clauses.
Licensing Agreements and Expungement Proceedings
Licensing agreements may also play an integral part in expungement proceedings pursuant to section 45 of the Trademarks Act. An expungement proceeding is a proceeding whereby a third party requests that the Registrar expunge or amend a registered trademark if the trademark owner does not provide proof of use of the trademark during the three years preceding the issuance of the expungement notice. One way in which a trademark owner may provide proof of use is by way of a licensing agreement. If the employment of a trademark is undertaken by a Licensee, the registered owner must demonstrate that they had control over the characteristics or the quality of the services. The registered owner may demonstrate control using one of the three methods enumerated in the highly cited Federal Court of Canada decision in Empresa Cubana del Tabaco Trading v. Shapiro Cohen[13]:
The registered owner “can clearly swear to the fact that they exert the requisite control”[14];
The registered owner “can provide evidence that demonstrates that they exert the requisite control”[15];
The registered owner “can provide a copy of the license agreement that explicitly provides for the requisite control”[16].
Bankruptcy and Licensing Agreements
Nor must we forget in times of COVID-19, when companies face the risk of becoming insolvent, or worse going bankrupt, the Licensees’ rights pertaining to the licensed IP, including trademarks. In fact, recent amendments to the Bankruptcy and Insolvency Act[17] gave Licensees additional protection if ever the Licensor would go bankrupt. New section 65.13(9) of the BIA allows a Licensor’s right to use the licensed IP to be undeterred by the court-authorized sale of the IP. In addition, new section 72.1 of the BIA preserves a licensee’s use rights even if the property is included in a sale or disposition by a Trustee or if the Trustee disclaims or resiliates (e.g., terminates) the licensing agreement. Similarly, new section 246.1 of the BIA protects the licensee’s use rights if the property is included in a sale or disposition by the receiver or if the licensing agreement is disclaimed or resiliated (or terminated) by the receiver.
Conclusion
While a licensing agreement does have its advantages, a trademark owner must ensure that the agreement does not negatively impact the trademark by causing it to lose its distinctiveness. If a trademark loses its distinctiveness, one potential fallout of such a situation could lead to the trademark losing its validity.
To ensure that a licensing agreement is concluded properly and without any unforeseen and unwanted consequences, it is beneficial to consult with a trademark agent. If you have any questions regarding the matter, please do not hesitate to contact us.
About us
Durand Lawyers brings Law & Business Together. We are a law and business advisory firm specialized in intellectual property, business strategy, as well as civil and corporate law. We are uniquely positioned to help clients in emerging technology industries such as environment, SaaS, AI, FinTech and cannabis, employing both lawyers and experienced entrepreneurs to get the best possible outcomes. For more information visit our website at www.durand-lex.com. We are also involved with the LES and FORPIQ
[1] WIPO, Trademark Licensing, Module 12, p. 5, available at: https://www.wipo.int/export/sites/www/sme/en/documents/pdf/ip_panorama_12_learning_points.pdf. [2] Id., p. 6. [3] Id. [4] https://www.investopedia.com/terms/w/white-label-product.asp (published July 7, 2020). [5] Id. [6] https://www.profitwell.com/blog/saas-white-label/ (published May 14, 2020). [7] Id., p. 8. [8] Id. [9] Id., p. 9. [10] Id. [11] Id. [12] Trademarks Act, R.S.C. 1985, c. T-13, s. 50. [13] 2011 FC 102. Appeal dismissed per Cohen v. Empressa Cubana Del Tabaco, 2011 FCA 340 (CanLII). [14] Id., par. 84. [15] Id. [16] Id. [17] R.S.C. 1985, c. B-3.