1. Trade-marks as Business Assets by Carolyn Tate Corporate Solicitor, Intellectual Property Unilever Canada Inc. for Intellectual Property Law (Law298HS) University of Toronto Faculty of Law Thursday, April 7, 2005

2. TOPICS  Overview  Attributes of trade-marks as business assets  Attributes of trade-marks as instruments of consumer protection  Trade-mark duality  Ownership  Acquiring ownership rights  Loss of ownership rights  Valuation  Tax issues  Assignment (Transfer, Sale) Trade-mark source theory Section 48 Breck’s and other cases Technical issues

3. TOPICS  Licensing  Section 50  Control/Inspection  Practice issues  Security Interests  What are they?  Personal property security statutes  Federal statutes  Cases, bibliography

4. INTRODUCTION  Some attributes of trade-marks as business assets  Trade-marks are business assets/property.  Clearly valuable, but as intangible property, they are difficult to value.  Trade-mark rights are national in scope but since trade is regional and global, they can be difficult to protect. Grey goods and counterfeits cause problems.  As business assets trade-marks attract issues connected to ownership, transfer, licensing, security, taxation and portfolio administration.  Examples.

5. INTRODUCTION  Attributes of trade-marks as instruments of “consumer protection”  Trade-marks have functioned as a form of consumer protection since their original use in the market towns of feudal England to demonstrate ownership of goods, indicate origin and confirm quality.  These values were protected largely through the tort of passing off which is connected to yet more ancient marketplace offences. In the latter half of the 19th century, the use of trade-marks as commercial marketing devices was rationalized by allowing for their registration through a legislative program.  Laskin, CJC, speaks in Breck’s Sporting Goods of the requirement that there be no deception or confusion of the public in the message conveyed by the trade-marks.  Examples

6. INTRODUCTION  Trade-mark duality  Attributes of trade-marks as property and as instruments of consumer protection don’t always sit well together and give rise to some of the inconsistencies found in trade-mark jurisprudence and policy.  Trade-marks represent a state-granted monopoly in an economic system based on a policy of competition.  Corporations want to take advantage of both characteristics of trade-marks -- to be able to deal with them freely as assets without undue legal interference -- buy, sell, license, use as security.  They also like to take advantage of their role as instruments of consumer protection, in the case of counterfeiting, for example, where the assistance of the state is often solicited.  Examples

7. OWNERSHIP  Acquiring trade-mark ownership rights  Acquiring trade-mark rights is quite straightforward: rights are acquired through actual use in Canada or a country of the Union; or through making known in Canada.  To acquire a registered trade-mark, the trade-mark has to be registerable.  “It is not registration that makes a party proprietor of a trade- mark; he must be proprietor before he can register”.  Act defines what trade-mark use is in Section 4.  Indispensable trade-mark maxim: Use it or lose it.  Examples.

8. OWNERSHIP  Loss of ownership rights  Loss of ownership rights is a more complex business.  Ownership rights can be lost through genericisation (Aladdin/Thermos) and through failure to educate the Canadian public about the source and quality of goods after assignment (Heinzman).  Both fall under the more general ruberic of a loss of distinctiveness - that is, the quality which allows trade-marks to distinguish the goods of the owner from the goods of all others.  Trade-mark distinctiveness, validity and therefore ownership rights can also be lost through faulty assignment or licensing.  Trade-marks can also be weakened by loss of distinctiveness through failure to police the trade-mark register. Terms which once operated to distinguish goods are allowed to become common on the register; confusing marks are allowed to co-exist in the marketplace, narrowing or eliminating the ambit of protection for the mark.  Examples

9. OWNERSHIP  Valuation / taxation / due diligence / portfolio administration  Considering trade-marks as business assets also begs of the question of how they are valued, what they are worth.  Difficult to value; various methods are used.  How the development of trade-marks, their sale and trade-mark royalties are taxed also an issue in business contexts. See, for example “Income Tax and Goods and Services Tax” in Hughes on Trade-marks.  Due diligence, effective warranties in context of acquisitions / divestitures are necessary to ensure that one is acquiring valid marks.  Consistent portfolio administration preserves ownership rights. Failure to respond to office actions, renewals and the like can jeopardize trade-mark rights.  Examples.

10. ASSIGNMENT  Trade-mark source theory  Original idea was that trade-marks had to indicate a single source for goods because a single source ensured consistent quality - those pewter cups with that particular hallmark originated with that silversmith.  Assignment of trade-marks without the business goodwill with which they were associated invalidated the marks because they no longer functioned to indicate the source of goodwill.  Trade expanded and commercial practices changed, and so eventually did the Canadian trade-marks Act, which introduced in 1953 a provision which allowed for the assignment of trade-marks apart from goodwill without invalidating them.

11. ASSIGNMENT  Section 48 - Trade-mark Transferable (1) A trade-mark, whether registered or unregistered, is transferable, and deemed always to have been transferable, either in connection with or separately from the goodwill of the business and in respect of either all or some of the wares or services in association with which it has been used. (2) Where two or more persons interested. - Nothing in subsection (1) prevents a trade-mark from being held not be distinctive if as a result of a transfer thereof there subsisted rights in two or more persons to the use of confusing trade-marks and the rights were exercised by those persons. (3) Registration of transfer. - The Register shall register the transfer of any registered trade-mark on being furnished with evidence satisfactory to him of the transfer and the information that would be required by paragraph 30(g) in an application by the transferee to register the trade- mark.

12. ASSIGNMENT  Breck’s and Other Cases  Notwithstanding this liberalisation of the assignment section, Canadian courts at all levels have indeed held that trade-marks were not distinctive (and therefore invalid) because two or more person held rights to confusing marks after transfer or variations on this theme.  We are going to look at some of those cases.

13. ASSIGNMENT  Facts in Breck’s (1)  Plaintiff/Appellant Breck’s Sporting Goods Co. Ltd., was the assignee of the Canadian mark MEPPS for use with fishing lures originating in France.  Defendant Magder/Sportcom Co. Ltd., was a Canadian company selling MEPPS fishing lures obtained neither from Canadian trade-mark owner nor from the French manufacturer.  Proceedings: Breck’s successfully sued Magder/Spotcom in the Federal Court, Trial Division for trade-mark infringement. Decision was overturned in Federal Count of Appeal and upheld in SCC per Laskin, CJC.

14. ASSIGNMENT  Facts in Breck’s (2)  On the facts, SCC found that Canadian consumers did not associate the lures with the Canadian trader but rather with the French manufacturer.  Ratio: Section 47 (now s. 48) does not permit assignment without regard to the associative character of the assigned trade-mark in identifying the goods as those of the assignee owner. Protection against public deception still resides in the definition of distinctiveness in s. 2(f) and in the application of s.18.  Question: does it make sense that provisions intended for consumer protection are used to resolve disputes between competitors??

15. Outcome in other assignment / loss of distinctiveness cases

16. ASSIGNMENT  Other Related Issues  Trade-marks can be assigned with respect to some or all of the goods for which it is registered.  Assignments can, but need not be, registered.  All associated marks (that is confusing marks owned by a single entity) must be assigned together pursuant to section 15.  What this means in practice is that assigning marks in acquisitions and divestitures can result in some interesting messes, which can result in invalidation of marks. Most can be sorted out, but diligent portfolio management is required.  Some examples.

17. LICENSING  Trade-mark quality theory  Licensing is important from a business point of view because it expands business opportunities and the value of marks.  When Trade-marks Act was amended in 1953 to allow for assignment of trade-marks without associated business, Act was also amended to allow for licensed use of marks through a scheme of “registered users”.  All licensees had to be registered; the scheme was viewed as highly technical, cumbersome and expensive.  In 1993, Act was amended to remove the registered user scheme and section 50 was enacted to allow for licensing without registration.  Examples.

18. LICENSING  Section 50 (1) For the purposes of this Act,if an entity is licensed by or with the authority of the owner of a trade-mark to use the trade-mark in a country and the owner has, under the licence, direct or indirect control of the character or quality of the wares or services, then the use, advertisement or display of the trade- mark in that country as or in a trade-mark, 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 trade-mark in that country by the owner.

19. LICENSING  Section 50 (2) Idem. - For the purposes of this Act, to the extent that public notice is given of the fact that the use of a trade-mark 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 trade-mark and the character or quality of the wares or services is under the control of the owner.

20. LICENSING  Section 50 (1) redux ... If an entity is licensed... to use the trade-mark... and the owner has... direct or indirect control of the character or quality of the wares..., then the use... of the trade-mark... by [the licensed] entity has, and is deemed always to have had, the same effect as such a use... of the trade-mark... by the owner.

21. LICENSING  Trade-mark quality theory  Enactment of licensing provision changed the theory or policy or at least emphasis on the trade-mark scheme is based from one guaranteeing source to one guaranteeing quality.  No recordal of license necessary.  “Licenses need not be in writing, but “mere share ownership is not evidence that the parent has control over the use of the trade-mark in the hands of the subsidiary”.  So licenses are required between affiliated companies as well as with unrelated entities.

22. LICENSING  Trade-mark quality theory  Main issue is to ensure that licenses include adequate provision for control of the character or quality of goods and services, including provision for inspection  Not a lot of cases on section 50.  Unitel Communications Inc. v. Bell Canada (1995), 61 C.P.R. (3d) 12. Gibson, J. found that as to distinctiveness the respondent was remarkably lax in its management and policing of its trade-mark rights. Unauthorized use was of such an extent that by the time these proceedings were commenced as to render the trade-marks not distinctive of the respondent and those entitled to use the trade-marks under registered user arrangements

23. LICENSING  Trade-mark quality theory  In the words of Gibson, J: “The evidence simply fails to show that those agreements and arrangements, if they could be construed to be licensing arrangements, provided the “...” direct or indirect control of the character or quality of the... services...” in the hands of the respondent that the new legislative scheme required  Eli Lilley and Co. v. Novopharm Ltd. (2000), 10 C.P.R. (4th) 10, aff. 73 C.P.R. (3d) 371 held that an oral license is sufficient for use of the appearance of capsules by the Canadian plaintiff to be deemed use by the U.S. plaintiff.  Both cases include consideration of the factors which led to the enactment of the new licensing provisions.

24. LICENSING  Necessary provisions of trade-mark license agreements  User should undertake to use the marks in strict accordance with instructions, standards of quality and trade-mark specifications.  Owner should have the right to inspect premises and examine samples.  All packaging, labelling and advertising material should be approved by the owner.  User should not authorize a third party to use the mark or transfer the mark.  User should acknowledge no right, title or interest in the mark.  User should cooperate in protection of the mark.  Territory and term clearly set out.  Source: Hughes on Trade-marks

25. LICENSING  Trade-mark licensing scenarios for purposes of tax treatment  Canadian company licenses marks it owns to a Canadian company.  Canadian company licenses marks it owns to a U.S. or other foreign company.  Canadian company licenses marks owned by a U.S. or other foreign company.  Canadian company licenses marks owned by a Canadian company.  Tax implications different for each.

26. SECURITY INTERESTS  “A security interest is a proprietary right in personal property, tangible or intangible, that secures payment or performance of a debt or related obligation.”  So a trade-mark is the proper subject matter of a security interest and provincial security legislation such as the Ontario Personal Property Security Act applies.  Generally thought that the effect of federal statutes such as the Trade-marks Act have no effect on security for personal property, but the Trade-marks Office will put security documents on file if requested and they are noted on the public register.  This public notice can be helpful when undertaking due diligence in acquisitions and divestitures.  Examples.

27. CASES, BIBLIOGRAPHY  Case Citations  S.C. Johnson & Son, Inc. v. Reckitt & Colman (Overseas) Ltd. (1995), 59 C.P.R. (F.C.T.D.)  Bibliography  Robic-Leger Canadian Trade-marks Act, annotated, ed. Hughes Richard, 2001  Fox on Canadian Law of Trade-marks and Unfair Competition Act Fourth Edition by K. Gill and S. Joliffe, 2002. See Chapter 15, “Commercial Transactions involving Trade Indicia”.  Hughes on Trade-marks, by R. Hughes and others, 1984-2000  Fox, Harold G. The Canadian Law of Trade Marks and Unfair Competition, Second Edition, 1956

28. UNILEVER TRADE-MARKS