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Trademark Licensing

1. "Single Source"

Theory Prior to the enactment of the Lanham Act in 1946, in the U.S., and prior to the enactment of the Trademarks Act of 1993, in Canada, trademark statutes did not allow the owner of a trademark to license the trademark. Licensing was disfavoured as a trademark practice and considered inconsistent with the basic function of a trademark. Prevailing case law held that, because a mark indicated the source of wares or services, licensing a mark to another, different source of the wares or services was deceptive. Under the "single source" theory, licensing a trademark was often viewed as an abandonment of rights in the licensed trademark because it resulted in multiple sources for the wares or services.

2. Quality Theory

During the 1930s, the "single source" theory began to yield in the U.S. to the business and marketing pressures of the growing franchise model for doing business. Courts began to recognize that a trademark could symbolize more than the physical source of the wares, and instead guarantee a uniform level of quality in all wares or services sold under a particular trademark.

3. Modern Licensing Law

The cornerstone of modern Canadian and the U.S. trademark licensing law is the reliance on the quality theory of trademarks. If a trademark symbolizes not a single, specific source of the goods or services, but a specific assurance of quality, the owner of the trademark may license the trademark to any number of licensees so long as consistent quality is maintained. Thus, quality control by the licensor is the sine qua non of a valid trademark license.

Lanham Act Licensing Provisions in the United States

The owner's ability to license use of a trademark was explicitly incorporated into the Lanham Act by providing that use of a trademark by a "related company" inures to the benefit of the registrant or applicant. A "related company" is defined to include "any person whose use of the mark is controlled by the owner of the mark with respect to the nature and quality of the goods or services in connection with which the mark is used." This provision has been held to be an affirmative adoption of the quality theory of the licensing of trademarks. So long as the owner of the trademark exercises adequate quality control over the wares or services of the licensee, licensing of the trademark is no longer considered an action resulting in the abandonment of the underlying trademark.

Trademarks Act Provisions in Canada

The Trademarks Act of 1993 abandoned concept of registered user and replaced it with a concept that licensing by the owner of a trademark was permissible and use by a licensee would be considered use by the owner, provided that the owner exercised direct or indirect control over the character and quality of the wares and services in question.

Naked License

In Canada and the U.S., the licensor of a trademark has an affirmative duty to control both the nature and the quality of the wares and/or services of the licensee. Regardless of whether a license provides for quality control by the licensor, if the licensor does not actually exercise its right to control quality, the license agreement may by found to be a "naked license." To avoid the possibility of being judged an abandonment, a valid trademark license should both provide some method of quality control by the licensor and identify upon what wares or in connection with what services the licensee is permitted to use the licensed trademark.

Unfortunately for the unwary licensee, while the owner of a trademark has an obligation to the consumer to monitor the quality of its licensees' goods and services, the owner has no obligation to its licensees to maintain a particular quality level for its own wares and services. Accordingly, in rare circumstances, a licensee may find the value of the licensed trademark diminished by the trademark owner's own actions. To prevent this occurrence, a licensee may wish to contractually obligate the licensor to maintain its own level of quality.

Unregistered Marks

Because the 'related company' provisions of the Lanham Act in the U.S., and the ‘registered user’ provisions of the Trademarks Act in Canada, apply only to trademarks that have been registered in the USPTO and CIPO or for which an application for registration is pending, the ‘related company’ and the ‘registered user’ doctrines may not apply to marks that exist solely at common law.

4. Hallmark of a Trademark License

A trademark license is an agreement in which the owner of a mark grants another party a limited right to use the trademark on specified wares and/or services in a given territory for a specific time. The licensor continues to own the trademark, and the use of the mark by the licensee inures to the benefit of the licensor. A license, unlike an assignment, does not require or operate to transfer the goodwill of the licensor's business. In a trademark license, the licensee's rights in the mark are inherently limited, and the licensor has continuing obligations, including monitoring the quality of the licensee's wares and services, and maintaining and policing the trademark.

5. Hallmark of a Trademark Assignment

A trademark assignment represents a complete transfer of all of the owner's rights in the mark. A valid trademark assignment must include assignment not just of the trademark and any registrations or applications for the trademark, but also the goodwill of the business with which it is associated.