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Profit and Trademark Use

A recent decision of the Federal Court of Appeal adds clarity to the requirement to show use under the Trademarks Act for goods.

The Facts

The appellant is a cosmetics company that operates through licensees worldwide. These include Lush Canada, which operates LUSH stores. T-shirts and tank tops bearing the LUSH trademark are sold by Lush Canada in limited quantities to LUSH store employees in both Canada and the United States to wear as part of their uniform, and sometimes to give as gifts to family and friends. The appellant also creates limited edition t-shirts bearing the LUSH mark to promote its public awareness and lobbying campaigns, which address social and environmental issues of importance to the cosmetics industry. The proceeds from these items go to direct action and charitable groups.

The respondent caused a notice under section 45 of the Act to be issued. The section authorizes the Registrar, on a request made after three years from the date a trademark was registered, to require the owner of the trademark to provide evidence showing that it was in use in Canada during the preceding three-year period. If the owner fails to show use in Canada within that period, or a good reason for non-use, the registration will be expunged.

The Trademarks Opposition Board

The appellant filed evidence in response to the notice that suggested that the t-shirts were sold to employees at cost, and even though the trademark owner’s primary business was personal care products and cosmetics, the LUSH-branded t-shirts were “themselves objects of trade” and “not merely promotional” (emphasis in original), since they had been sold to employees, invoices had been issued, and taxes had been collected on the sales.

The definition of “use” for a mark in association with goods is as follows:

4 (1) A trademark is deemed to be used in association with goods if, at the time of the transfer of the property in or possession of the goods, in the normal course of trade, it is marked on the goods themselves or on the packages in which they are distributed or it is in any other manner so associated with the goods that notice of the association is then given to the person to whom the property or possession is transferred.

The Hearing officer accepted that the evidence was sufficient to show use. He did not consider it appropriate to expand the jurisprudence to suggest that a registered owner needed to show that it sold its goods strictly for monetary profit for such sales to be considered “in the normal course of trade”.

The Federal Court

On appeal, the Federal Court judge found that the hearing officer had unreasonably failed to consider evidence submitted by the appellant indicating that the t-shirts and tank tops were identified as “swag” by their supplier and were sold by Lush Canada to employees at prices approximating their acquisition cost. On a review of the evidence, the judge found the hearing officer’s conclusion that the sales were in the “normal course of trade” to be unreasonable. The judge based this view on the absence of evidence of profit, the limited extent of the sales and their promotional nature, and that the appellant was not normally in the business of selling clothing. He, therefore, struck the trademark from the register.

The Federal Court of Appeal

On appeal it was found that the Hearing officer correctly determined that subsection 4(1) does not require that a transfer of trademarked goods be for actual profit to constitute a transfer in the “normal course of trade.” A conclusion that actual profit is required would mean that such common business practices as selling last year’s trademarked merchandise at a discount would never amount to use sufficient to maintain registration of a trademark. In addition, to require a trademark owner to establish that sales did or would generate profit – something that can be a complex evidentiary task – would put at risk the summary nature of section 45 proceedings.

It was also found that the Federal court judge incorrectly applied the “reasonableness standard” of review. A judge reviewing a decision of a Hearing officer for reasonableness should not reassess the evidence and substitute his or her own appreciation of the evidence for that of the Hearing officer. That would amount to applying the correctness and not the reasonableness standard: Rather, the question for the Federal Court was whether the Hearing officer’s decision was unreasonable.

The reasonableness standard is a genuinely deferential standard. It is based on the idea that there may be multiple valid answers to a legal dispute and that courts ought not to interfere where the Hearing officer’s decision is rationally supported. A decision is not unreasonable because the evidence would support another conclusion. The Hearing officer is entitled to deference regarding both findings of fact and inferences of fact.

Comment

This decision clarifies that a registered owner need not establish that it sells its goods strictly for monetary profit for such sales to be considered “in the normal course of trade”. It also clarifies the application of the reasonableness standard in appeals from a decision of a Hearing officer in section 45 proceedings. The same standard can also apply in appeals form a decision in an opposition.

Finally, the court referring to the Supreme Court of Canada, said unlike other forms of intellectual property, the gravamen of trademark entitlement is actual use. In trademarks law the watchword is “use it or lose it”.

John McKeown

Goldman Sloan Nash & Haber LLP

480 University Avenue, Suite 1600

Toronto, Ontario M5G 1V2

Direct Line: (416) 597-3371

Fax: (416) 597-3370

Email: mckeown@gsnh.com

These comments are of a general nature and not intended to provide legal advice as individual situations will differ and should be discussed with a lawyer

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