Transcript Parallel Marketing - AKA Importing Gray Goods

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
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
TOPICS




Licensing
Section 50
Control/Inspection
Practice issues

Security Interests
What are they?
Personal property security statutes
Federal statutes

Cases, bibliography



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.
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
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
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 trademark; 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.
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
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.
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.
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 trademark.
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.
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.
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??
Outcome in other assignment /
loss of distinctiveness cases
Trade-mark
Owner/Assignor
Assignee
Goods
Loss of
Reason
Distinctiveness
Type of
Proceeding
WILKINSON
SWORD
English parent
Canadian sub
Razor blades
Yes
Infringement
action
MEPPS
American
distributor
Canadian
distributor
Fishing lures
Yes
HEINZMAN
Heintzman
family, various
successors
Unrelated
company
Pianos
Yes
NEUTRAFRESH
Two separate
companies
owning rights to
mark
S.C. Johnson
Air freshners
No


Canadian sub.
sold altered
product.
Product
perceived as
originated with
French
manufacturer.
Sold pianos
originating in
Korea without
advising
public.
Single source
established as
origin of goods.
Infringement
action
Expungement
proceeding.
Injunction
proceeding
Distinctiveness issues arise in various fact patterns and legal proceedings.
Loss of distinctiveness is a live issue.
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.
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.
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 trademark 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.
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.
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.
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.
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
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.
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
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.
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.
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




UNILEVER TRADE-MARKS