May 09 2023

By: Dino P. Clarizio and Sarah McLaughlin

Summary

Licensing trademarks can be beneficial to the trademark owner, and when done correctly it can greatly enhance the rights afforded by the trademark. The key to proper licensing is to ensure the trademark owner exercises control over the character and quality of the licensee’s goods and services that use the trademark. However, the absence of such control can lead to the invalidity of a trademark registration and to the loss of all rights to the trademark. Trademark owners must, therefore, ensure that proper control is in place whenever rights to a trademark are granted to another entity.

Discussion

In Milano Pizza Ltd. v. 6034799 Canada Inc. 2023 FCA 85 [Milano FCA], the Federal Court of Appeal clarified the legal test for determining if a trademark is properly licensed.

Subsection 50(1) of the Trademarks Act provides that use of a trademark by a trademark licensee will be deemed use by the trademark owner if the owner exercises control over the character and quality of the licensee’s goods and services that use the mark. The Federal Court of Appeal clarified that the Court, not the trademark owner, will decide if the manner and degree of control exercised by the trademark owner over the quality of their licensee’s goods and services is sufficient to satisfy subsection 50(1) of the Trademarks Act.

Milano Pizza appealed the Federal Court’s decision to expunge their registration of MILANO PIZZERIA design mark for lack of distinctiveness as Milano Pizza did not have sufficient control over their licensees that use the design mark (Milano Pizza Ltd v 6034799 Canada Inc, 2022 FC 425). Milano Pizza licenses independent owner-operators to run Milano Pizzeria restaurants, including the use of the design mark. The trademark license required licensees to purchase products from Milano’s preferred suppliers and to use the mark in a specific territorial area.

The main ways a trademark owner can demonstrate the required control over a licensees’ goods and services are to swear to the fact that they exercise control, to provide evidence of the exercise of control or to have a licence agreement that explicitly provides for the required control (Empresa Cubana Del Tabaco Trading v Shapiro Cohen, 2011 FC 102). The trial judge had found that the licence at issue only provided control over the quality of the ingredients used by the licensee, not the finished product, and the licence did not give the trademark owner any right to inspect the licensed locations. There was also no evidence that Milano Pizza exerted any actual control over the finished products. Notably, there was no sampling or monitoring of the final food items. Further, there was no control over most operational aspects of the business that determined the quality of the goods and services.

The main issue raised on appeal was whether the trial judge erred in law by requiring a trademark owner to exercise a specific manner and degree of control over their licensees’ goods and services. The Federal Court of Appeal dismissed Milano Pizza’s argument that the trademark owner should be able to determine the appropriate level of control over their licensee’s goods and services. The Court reasoned that “it would make a mockery of section 50(1) if any type or degree of control was acceptable” (Milano FCA para 6).

This decision of the Federal Court of Appeal aligns with the purpose of the Trademarks Act as a form of consumer protection legislation and the legal purpose of trademarks as a guarantee of origin from the trademark owner (Mattel, Inc v 3894207 Canada Inc, 2006 SCC 22). The purpose of Trademarks Act is to “ensure consistent quality across all products or services bearing a particular mark” (Milano FCA para 5).  Therefore, sufficient control by the trademark owner over the quality of the finished product or service is required. The Federal Court of Appeal determined that section 50(1) furthers this purpose by requiring the owner to have sufficient control over their licensees’ goods and services bearing the mark. Requiring the court to defer to the manner and degree of control over a licensee that the trademark owner determines is sufficient would frustrate this legislative purpose.

The Federal Court of Appeal also dismissed Milano Pizza’s contention that the trial judge dictated the manner in which control over the licensee should be exercised in this case. The Court found that the critical determination at trial was that Milano Pizza lacked any control over the licensees’ final pizza products and services. 

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Tags: Dino Clarizio, IP Litigation & Enforcement, Sarah McLaughlin