For both Canadian and foreign trademark owners, engaging in a distribution-type relationship is an important and sometimes necessary means of growing one's business or entering into new markets. When a trademark owner is planning to authorize a third party to distribute or sell its branded goods, either on an exclusive or non-exclusive basis, though, the owner should consider certain important trademark issues that may have significant business and legal impact. In particular, from a commercial perspective, an express recognition of trademark rights and the treatment of trademarks as important business assets in distribution agreements should increase brand awareness and business value.
When entering into a distribution agreement involving branded goods, a trademark owner will generally already own trademark registration(s) in one or more countries/regions of business relevance. Such registrations are important IP assets that can be used not only to facilitate enforcement and protection of one's brands, but also as tangible business assets to leverage in commercial arrangements (such as distribution agreements) and through which the value of a brand owner's goodwill can eventually be measured.
A distribution relationship generally grants a distributor the right to sell branded goods. In practical terms, however, it is usually necessary for a distributor to promote and advertise the branded products to potential customers in order to generate sales. Such activities certainly impact upon the goodwill or reputation associated with a branded product.
Thus, when entering into a distribution agreement, a trademark owner should ensure that any goodwill created by the distributor benefits the owner during the term of the distribution agreement, and that the owner is actively involved in the marketing and advertising of branded goods that are the subject of the agreement. Similarly, upon termination of the agreement, the trademark owner should ensure that any rights and goodwill associated with the trademark during the course of the distribution relationship flow back to the owner.
Moreover, during the term of the distribution agreement, the owner should ensure that the distributor respects the stipulated manner of use of the trademarks, maintains the quality normally associated with the branded goods, and identifies itself as an authorized licensee of the trademark(s). The latter is particularly important for purposes of ensuring that consumers recognize the brand owner as the true owner of the trademark(s) despite use of the trademarks by the distributor. While these considerations are routinely taken into account in the context of a formal trademark license agreement, they should certainly be incorporated into a distribution agreement of branded products, or services, which is effectively a distribution/licensing agreement.
Another key issue that should be considered prior to entering into a distribution/licensing agreement is enforcement of the licensed trademark(s) for both parties' mutual benefit. It is generally in the business interest of both the trademark owner and the distributor to prevent unauthorized sale, infringement and counterfeiting in the distributor's territory. Although this is a matter for negotiation, the trademark owner or licensor usually prefers to control the enforcement process. Irrespective of how the parties agree to manage trademark enforcement, a distribution/licensing agreement should clearly set out the respective rights and obligations of the distributor/licensee and trademark owner/licensor when it comes to litigious matters, including who will assume the control and costs of any ensuing legal and/or administrative proceedings, and the apportionment, if any, of a damage or settlement award.
While some of the principles discussed above may be standard or apply automatically by operation of law, this may vary from jurisdiction to jurisdiction. In other words, if distribution is to occur in several countries, a trademark owner should be attentive to identifying and addressing trademark issues that may be unique to the particular jurisdictions that are contemplated by the agreement.
The precise terms of a distribution/licensing agreement will differ depending on the parties and the context. However, irrespective of the circumstances, it is always beneficial for a trademark owner to consider the issues discussed in this article early in the negotiations with a potential distributor, in order to better manage one's trademark rights and to increase the value of such trademarks.
Furthermore, since a distribution/licensing agreement reflects the amount that a distributor/licensee is willing to pay to make use of and benefit from an owner's brand, if leveraged properly by way of royalty-bearing licences, for example, the trademark owner may use such royalty-bearing licences in any eventual valuation of the brand with subsequent distributors and even purchasers of the brand.
Tomek Nishijima, Montreal
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