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Cosmetic Warrior: When is a Trademark Used in the “Normal Course of Trade” and Who Gets to Decide that Question?

Fasken
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Intellectual Property Bulletin

A recent decision by the Federal Court of Appeal ("FCA") clarifies two issues of interest to marketers and trademark professionals alike. The first issue relates to the definition of "use" of a trademark in the "normal course of trade," while the second issue relates to the standard of review that courts apply when they review decisions of the Trademarks Opposition Board ("TMOB").

This decision is important because in Canada, "use" of a trademark on goods (but not on services!) only qualifies as valid trademark use under the Act if it occurs "in the normal course of trade". This means that the definition of the "normal course of trade" directly affects how trademark owners must use their marks in Canada in order to maintain their registrations.

In the Cosmetic Warrior case, the FCA rejected the idea that profits need to be generated from the transfer of trademarked goods before that transfer can be considered to have occurred in the normal course of trade. As such, depending on the circumstances, promotional items that are sold at cost can potentially be considered valid use of a trademark in Canada, provided that they sufficiently contribute to a larger profit-making business or commercial endeavour.

Background

The TMOB dismissed a cancellation proceeding launched by Riches, McKenzie & Herbert under section 45 of the Trademarks Act against a Canadian trademark registration for the mark "LUSH", owned by Cosmetic. Cosmetic is a company active in the bodycare and cosmetics industry, operating in Canada through a licensee known as Lush Canada, which in turn operates the LUSH stores.

The application sought to expunge the LUSH mark from the registrar at least as far as it applied to clothing items like t-shirts. The applicant argued that the mark was never used in the "normal course of trade", since there were no commercial sales of the clothing. Instead, as part of its promotional strategy, Lush Canada was in the habit of selling t-shirts and tank tops bearing the LUSH trademark to its employees in Canada and the US in very limited quantities, either as a work uniform or as gifts to their friends and family. This clothing were sold to employees at prices approximating their acquisition costs, and perhaps even at a loss.

However, the TMOB found that even promotional material sold at or near cost was still a sale in the ordinary course of business.

On appeal to the Federal Court, Justice Manson concluded that the TMOB decision was unreasonable, since he found that the t-shirt sales did not occur in the "normal course of trade". He accordingly struck the mark from the Register. Justice Manson grounded his ruling on the absence of evidence of profits, the limited extent of the sales, their promotional nature, along with the fact that Cosmetic was not generally in the business of selling clothing items. For Justice Mason, these factors favoured a finding that the sales did not constitute use of the mark in the normal course of trade.

"Use" of a Trademark in the "Normal Course of Trade"

On appeal, the FCA considered whether profit-generating activities were required for a transaction to qualify as being "in the normal course of trade."  The FCA first noted that if a transaction generated a profit, this certainly tends to show that it transaction occurred in the normal course of trade. However, the converse was not true: FCA was very clear that actual profit is not required in order to demonstrate valid use of a trademark "in the normal course of trade."

Indeed, the Court noted the potential problems that would follow from imposing a strict profit requirement. For example, merchandise sold at a discount might amount to sufficient use to maintain registration of a trademark. The FCA therefore demonstrated a great concern in keeping the notion of "use" as flexible as possible, and not constraining it by requiring trademark owners to demonstrate that every transaction involving their mark actually contributes to the firm's bottom line.

However, while profits aren't strictly necessary, this doesn't mean that any free distribution or at-cost sales of a product count as valid trademark use. The FCA's decision must also be understood as a word of warning to trademark owners to the effect that not all use of a trademark will suffice to maintain a registration. The FCA made clear that the use of a trademark must form part of a larger pursuit of profit-making through the transfer of trademarked goods. Trademarks owners facing a section 45 proceeding should ensure that their evidence shows a sufficient nexus between any non-profit transactions they rely and their overall commercial business.

Correctness as the Standard of Review of TMOB Decisions

The second aspect of this decision is most relevant for Federal Court litigators, particularly in the context of the pending trademark reforms. Here, the FCA confirmed that correctness review applies to the TMOB's statutory interpretation of the Trademarks Act.

In recent years correctness review has very much been the exception rather than the rule in Canadian administrative law. Indeed, it has become exceptional for courts to deny deference to administrative decision makers interpreting their home statute. This makes the FCA's decision to adopt correctness review here both surprising and important.

The FCA drew an analogy with the Supreme Court of Canada's decision in Rogers Communications,[1] a case involving the concurrent jurisdiction of the Federal Court and the Copyright Board. In Rogers, the SCC held that since both administrative and judicial decision makers had to interpret the Copyright Act, the same standard of review should apply to both types of decision maker when their decisions reached a higher court. Otherwise, inconsistencies would develop.

Transposing this reasoning in the Cosmetic Warrior case, the FCA maintained that this same inconsistency would arise under the Trademarks Act, and as such, concurrent jurisdiction removes the presumption that the TMOB benefits from any deference when interpreting the Trade-marks Act in general, or the meaning of "normal course of trade" in particular. As a result, correctness review applied.

In the context of the impending trademark reforms, it will likely become more difficult to introduce new evidence on appeals from the TMOB to the Federal Court. This potential difficulty, combined with sudden availability of correctness review, suggests that statutory interpretation arguments may become increasingly popular means of challenging unfavourable TMOB decisions.



[1]Rogers Communications v SOCAN, 2012 SCC 35, paras 14-15.

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