[penci_text_block block_title_align=”style-title-left” custom_markup_1=””]By Ellery Lew of Witten LLP

A trademark is the core of every franchise brand.  It should never be taken for granted or you risk diluting its value and, in extreme cases, losing your rights to it.

The concept of distinctiveness is an essential element to a trademark.  This concept is the element that gives a trademark its value as a brand.  Distinctiveness should be considered for every decision you make in relation to your trademark.  It is important when it comes to choosing your trademark, using it, licensing others to use it and enforcing it.

Like many trademark concepts, distinctiveness is deceptively simple.  It is based on the theory that a trademark is intended to designate the source of a good or service.  It is the role of the trademark, therefore, to distinguish the owner of that trademark, and the goods and services produced or provided by that owner from the other producers in the marketplace.  This is known as the “source” theory of trademarks which is essential to the law of trademarks.

This theory initially prevented a trademark owner from allowing anyone else to use their trademark.  If someone else was permitted to use it, then the trademark no longer distinguished the owner from others in the market, and the value of the trademark was considered lost.  This was because the trademark in question had lost its distinctiveness.  This result is potentially fatal to a trademark owner’s rights.¹

The Trademarks Act defines distinctive as follows:

distinctive, in relation to a trademark, describes a trademark that actually distinguishes the goods or services in association with which it is used by its owner from the goods or services of others or that is adapted so to distinguish them; ²

A registered trademark is considered invalid and will be expunged from the trademark register if it is not distinctive.  Pursuant to the Trademarks Act, a trademark can be held to be invalid if the trademark is not distinctive at the time proceedings bringing the validity of the registration into question are commenced.³  If a trademark is held to be invalid, the owner loses the exclusive rights to its use ⁴ and it will be subject to expungement. ⁵

Historically, a trademark owner could not authorize or permit others to use the trademark.  To do so would result in loss of distinctiveness.  This prohibition was revised over time to accommodate modern commercial realities.  Currently, a trademark owner can license others to use a trademark and that does not necessarily result in loss of distinctiveness.  However, there are risks that need to be managed.

Section 50 of the Trademarks Act addresses the issue of licenses.  It provides the “conditions under which the owner of a trademark may license its use without impairing the trademarks distinctiveness.”⁶ These conditions are:

• existence of a license; and
• existence of a certain control over the character and quality of the wares. ⁷

Section 50 creates a deeming provision such that use by a licensee under license while the owner has “direct or indirect control of the character or quality of the goods or services” is considered as if it was use by the owner.  This avoids a loss of distinctiveness result.

A written license agreement does not appear to be necessary if control can be inferred from the circumstances.⁸ Examples where control can be inferred have been cited in the case law as follows:

1. there is evidence that the goods are marked as being manufactured “under license”;
2. there are statements detailing how the owner sets standards which relate to the goods and services;
3. there are details relating to a corporate structure or a reporting relationship which suggests the requisite control;
4. there is evidence that the same person presides in a control position in both the owner and the licensee; or
5. there is evidence of shared corporate premises between the owner and the licensee. ⁹

Although there is a possibility that control will be inferred, there is always a risk that it will not, so use of a written license agreement is always preferred and recommended even as between closely held entities with related or overlap in ownership.

A written trademark license agreement may be helpful to prove the second element of the test, above, the “existence of a certain control over the character and quality of the wares”.  The exercise of control is necessary to ensure distinctiveness is preserved by the license relationship.  However, it appears that the mere fact of the existence of a comprehensive trademark license agreement with mechanisms built in to exercise control may create the presumption that control is in fact being exercised.

For example, the court in Boston Pizza International Inc. v Boston Chicken Inc.¹⁰ stated:

[56]            It is undeniable that the applicant, through its comprehensive franchise agreement, purports to control every aspect of the franchisee’s operations. This agreement is supplemented by the applicant’s Operations Manual, memoranda and inspections, which serve to ensure that quality control is achieved. The agreement further provides that the applicant is entitled to enter the franchisee’s premises so as to verify compliance by the franchisee with its obligations. Failure to comply by the franchisee constitutes an event of default which allows the applicant, at its option, to terminate the agreement.

It is difficult to determine from this quote how much is presumed from the agreement itself and how much evidence was provided as to the exercise of actual control under the agreement.

The court in the same case continued with this line of reasoning as follows:

[58]            In support of its position, the respondent referred me to the decision of Evans J. (as he then was) in Cheung Kong (Holdings) Ltd. v. Living Realty Inc. (2000), 1999 CanLII 9394 (FC), 4 C.P.R. (4th) 71, and to the decision of Trade-marks Opposition Board in MCI Communications Corp. v. MCI Multinet Communications Inc. (1995), 61 C.P.R. (3d) 245. These cases stand for the proposition that a licensor must exercise actual control over its licensees in order to benefit from their use of the mark. I agree with counsel for the applicant that these cases can be distinguished, from the case before me, on the ground that in Cheung Kong and in MCI Communications, the licensors did not have a formal license agreement with their licensees. In the present matter, the applicant, through its franchise agreement, controls almost every aspect of the franchisee’s operations. Coupled with the applicant’s Operations Manual, memoranda and inspections, the system in place allows the applicant to exercise effective control with respect to the quality of the wares and services provided by the franchisee. [emphasis added]

This leaves the impression that it is the fact of the license agreement alone that supports a finding of distinctiveness as opposed to the need to prove the actual exercise of control.  However, when read in context, these quotes may not be as far-reaching as they appear.  Boston Pizza International (the Applicant) was the owner of the BOSTON PIZZA trademarks which was seeking to expunge the registration of the BOSTON CHICKEN trademarks.  Boston Pizza International cited its BOSTON PIZZA marks and sought the expungement on the basis of confusion with its trademarks.  Boston Chicken resisted that argument by arguing that the BOSTON PIZZA marks, which were registered trademarks, were not distinctive of its owner.

The party claiming a registered trademark is not distinctive has the onus to show it is not.  The court was likely commenting that there was insufficient evidence to show that the BOSTON PIZZA mark was not distinctive and there was positive evidence, ie. the franchise agreements, to show that it was distinctive.

One can conclude, though, that having proper trademark license agreements which show the mechanisms with which a trademark owner can exercise control may, in the right context, be sufficient to support a presumption that control is in fact exercised.

By contrast, in the case of Realestate World Services (1978) Ltd. v Firstline Trust Co.¹¹ the court considered the necessity to actually exercise control even where franchise agreements are in place.  The court stated:

22 In the present case, the applicant company appears to have some control over its franchisees who use the trade-mark REALPOINTS (Ord cross-examination transcript, q. 99-105). However, in my view, the fact that the applicant company controls the franchisees is not sufficient to show that the owner also has control over the character and quality of the services, pursuant to Section 50(1) of the Act. Consequently, I agree with the opponent that the distinctiveness of the applicant’s mark has been lessened to some extent.

This quote suggests:

1. There may be partial loss of distinctiveness; and
2. Proof of control must be sufficiently detailed to address the character and quality of the services.

This illustrates that one cannot always rely on the existence of a franchise agreement to support a finding of control over the character and quality of the goods and services licensed under it.  Hillstone Restaurant Group Inc v Houston Canada Inc.¹² cited the Realestate World Services case for the proposition that a license agreement is not sufficient to show control:

[61] Although the Applicant’s evidence shows that there was licensed use of the Marks by franchisees, the case law is clear that the fact of a franchisor’s having some control over its franchisee is not sufficient, on its own, to establish control over the character or quality of the wares or services [see Realestate World Services (1978) Ltd. v. Firstline Trust Co. (1997), 77 C.P.R. (3d) 406 (T.M.O.B.)]. That being said, in this case, the franchise documentation does suggest that the Applicant had control over the character and quality of the Services offered by the franchisees under the HOUSTON banner.¹³

These cases taken as a whole demonstrate that there is value in having a written license agreement to ensure there are mechanisms with which the owner can exercise control, but having a license agreement alone is not necessarily sufficient to ensure distinctiveness is preserved.  One must actually exercise control over the character and quality of the products and services with which the trademark is registered or associated.

The recent case of 8073902 Canada Inc. v. Vardy¹⁴ adds a different element of uncertainty to the analysis of distinctiveness.  The court in that case stated:

[43]  Mr. Vardy argues that a few infringements by a few unlicensed businesses are not sufficient to impact the distinctiveness of his Mark.  He points to Auld Phillips at para 37, where the Court noted:

In his text, The Canadian Law of Trade Marks and Unfair Competition, 3rd ed. (Toronto: Carswell, 1972) at page 287, Harold G. Fox stated, with regard to loss of distinctiveness, that:

The amount of piracy necessary to cause loss of distinctiveness is a difficult question. A few scattered and unprosecuted infringements by several traders are not sufficient to cause a mark to become public juris, nor will extensive infringement by a single trader be sufficient.

This quote, similar to the quote above from Realestate World Services suggests that distinctiveness is to some degree a spectrum.

One should not confuse control over the trademark itself with control over the character or quality of the goods and services.  Control over the trademark itself contributes to distinctiveness, regardless of whether it is licensed to others, by ensuring that there is consistency in its representations and appearance to the ultimate consumers.

However, that is not the test for distinctiveness for a license arrangement.  In order to ensure distinctiveness is not lost in a licensing arrangement which permits trademark use by a third party, then there must be control over “the character or quality of the goods or services” with which the trademark is associated.

Ultimately, distinctiveness is a question of fact.  The definition in the Trademarks Act seems to require the actual exercise of control so the best practice is to ensure control is in fact exercised.

There are clues as to what the court considers to be a valid exercise of control in the Boston Pizza International case.  The court referred to the following factors when analyzing control:

1. The franchise agreement itself which “purports to control every aspect of the franchisee’s operations”;
2. The operations manual;
3. Inspections;
4. The right to enter the premises to verify compliance;
5. The right to default the franchisee if it does not comply with the system standards.

Most franchise systems are designed and built with control mechanisms in them.  Most franchisors have an inherent understanding that control over the franchisee operations are necessary to ensure consistency of products and services across the system.  Most franchisors exercise that control through a process of a system manual, training, inspections, mystery shoppers, and other mechanisms designed to ensure consistency.

This article focused on the need to exercise control in a trademark licensing arrangement.  Distinctiveness can also be lost by permitting unauthorized use as well, ie. where there is no contractual relationship.  This article does not address this risk in detail.

Failure to exercise the proper control over licensees’ use of a trademark can lead to a host of problems.  One of them is the risk that the trademark used in the franchise system may lose its distinctiveness, resulting in loss of the legal protection associated with a strong and distinctive mark.  This could include expungement if the trademark is registered.

The writer wishes to acknowledge the assistance of Emma-Lee Kramer and Spencer Marks of Witten LLP with legal research.

¹ Cheerio Toys and Games Ltd. v. Dubiner, 1965 CanLII 67 (SCC), [1966] SCR 206
² Trademarks Act, RSC 1985, c T-13, s. 2
³ Trademarks Act, RSC 1985, c T-13, s. 18(1)(b)
⁴ Trademarks Act, RSC 1985, c T-13, s. 19
⁵ 8073902 Canada Inc. v. Vardy, 2019 FC 743 at paras. 1, 2, 50, 51 and Judgment
⁶ Laurent Carriere, Canadian Trade-Marks Act Annotated, 4.0 Purpose at 13 (Thomson Reuters)
⁷ Tommy Hilfiger Licensing Inc. v Produits de Qualite I.M.D. Inc., 2005 FC 10 at par. 75
⁸ Virgin Enterprises Limited v City Water International Inc., 2015 TMOB 19 at par. 30
⁹ Virgin Enterprises Limited v City Water International Inc., 2015 TMOB 19 at par. 30
¹⁰ Boston Pizza International Inc. v Boston Chicken Inc., 2001 FCT 1024 at para 56
¹¹ [1997] TMOB No. 67
¹² 2011 TMOB 154
¹³ Hillstone Restaurant Group Inc v Houston Canada Inc., 2011 TMOB 154 at par. 61
¹⁴ 2019 FC 743[/penci_text_block]