It is not uncommon for businesses to evolve into complicated structures. Considerations such as tax planning, estate planning and liability protection often lead to the creation of multiple corporations and other legal entities such as trusts. While many businesses recognize the importance of protecting their intellectual property by taking steps such as registering trade-marks, they often do not turn their minds to the issue of whether the owner of a trade-mark and the party actually using the trade-mark are one and the same. This oversight can dilute your trade-mark protection.
A common example of a situation where a dichotomy exists between trade-mark owner and user is where a business’s intellectual property (including its trade-marks) is owned by a holding company (“Holdco”) where Holdco is the parent corporation to the operating entity (“Opco”) which actually uses the trade-marks to market and sell the business’s goods and services. In other words, Holdco owns the trade-marks, but Opco uses them. The benefit of this structure is that the intellectual property (which can in some cases be a business’s most valuable asset) is protected from certain third party claims against Opco. Another common example is where a trade-mark is registered by an individual who is then operating as a sole proprietor but who later incorporates, with the corporation thereafter using the trade-mark (while the trade-mark is still owned personally by the founder).
In each of the foregoing examples, a written trade-mark license agreement should exist between the trade-mark owner (as licensor) and the trade-mark user (as licensee).
The need for such a license agreement between related parties is not intuitive, since in this scenario there is no concern that the trade-mark owner will pursue the related company for trade-mark infringement. So why is a license agreement required? The issue is that where a trade-mark owner knowingly permits others to ‘infringe’ their trade-mark rights (even if the ‘infringer’ is a related party), the result may be a loss of distinctiveness of the trade-mark, making it difficult to later enforce the rights associated with that trade-mark if an unrelated third party infringes those rights. Use of a trade-mark by a non-owner may also expose the trade-mark to expungement proceedings for non-use.
There is no risk of diluted rights, however, where use by a third party has occurred pursuant to the terms of a license agreement. In fact, the Trade-marks Act deems use by a licensee to be use by the owner. The laws of some jurisdictions deem use by a related party to be use by the owner, thereby eliminating the need for license agreements between related companies. Canada’s Trade-marks Act does not, however, contain such a provision. Without a license agreement in place, a related company could inadvertently weaken the distinctiveness of a valuable trademark through its use of the mark. It is possible that a court could find a verbal license agreement to exist in the absence of a written one. However, evidence of such a verbal agreement would have to be provided to the court, whereas the existence of a written license agreement would simplify or even avoid the need for costly court proceedings in the first place.
A related party trade-mark license agreement does not have to be a complicated document. It can be indefinite in duration and can usually (so long as both parties are Canadian entities) provide for a nominal royalty (although tax advice should be sought on this point). All license agreements, however, must give the licensor direct or indirect control over the character or quality of the wares or services in conjunction with which the trade-mark is used.
All businesses that place value in their intellectual property would be wise to seek the assistance of a lawyer with the requisite expertise who can conduct an intellectual property audit on the business, part of which would involve a review of whether trade-mark license agreements are required within the business structure.
Trina Fraser is a partner with BrazeauSeller.LLP. Trina's practice focuses on business and commercial law, Internet and e-commerce law, trade-mark law and commercial litigation. She negotiates and drafts a wide range of business agreements, including agreements of purchase and sale, intellectual property licenses, commercial leases, franchise agreements, non-competition and non-disclosure agreements and marketing/distribution agreements. Trina regularly advises her business clients with respect to the regulation of promotional contests. Trina is also a registered trade-mark agent.
To contact Trina Fraser call 613-237-4000 ext. 232 or e-mail tfraser@brazeauseller.com