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Has Your Client Protected This Not-So-Hidden Asset?

Posted in Growth

By R. John Moore of Wilson Vukelich, this article was first published in The Bottom Line, April, 2006.

 

 

When clients are buying or selling businesses, a value is always attributed to goodwill. The CICA Handbook gives "goodwill" the following definition: "the excess of the cost of an acquired enterprise over the net of the amounts assigned to assets acquired and liability assumed." Goodwill in the marketplace can be a different thing. It will encompass the reputation of a business as perceived by its clients and the general public. Consideration should be given to how businesses protect this second type of goodwill.

 

Part of the overall concept of goodwill is brand recognition. Businesses work hard to develop a reputation for quality in the marketplace and want to be certain that the general public can discern between wares and/or services provided by them and those provided by other entities.

 

One way of distinguishing the wares and/or services provided by one company from the wares and/or services provided by another is by the use of a trade-mark. Generally speaking, a trademark may be a word or words, a design or logo, or a combination thereof which acts to indicate the origin of a ware or service. For example, one of the most visible uses of trade-marks is in automobiles. If we see the name "Camry" on an automobile, we understand that the automobile was manufactured by Toyota and have certain expectations as to the quality of the automobile. It would be a problem for Toyota if we could not be sure that every automobile bearing the name "Camry" was indeed manufactured by such corporation.

 

Many businesses use trade-marks without even realizing they are doing so and, more importantly, not realizing the value that such businesses are creating. Often a business may put a slogan or a particular saying in its advertising or on correspondence. A consulting firm may use the term "Your partner in the human resources field" in such a manner, and in doing so it is creating value and may have the right to protect its value.

 

Trade-mark protection involves the ability of a business to prevent another business from identifying its wares or services to the public in a way that would cause confusion in the marketplace about where the particular wares or services originated. Often businesses assume that they have adequately protected heir trade-mark because they have incorporated a corporation using such trade-mark as the corporation's name, or have registered such trade-mark as a business name; however, these methods often do not adequately protect the trade-mark rights to the extent desired.

 

The steps a business may have taken to protect its trade-mark become evident when a rival using a similar trade-mark enters the marketplace.

 

If a client has taken no prior steps to protect its trade-mark, its primary option (other than strongly worded "cease and desist" letters) is to rely on the tort of “passing off” in order to protect this part of its goodwill. These rights are enforced through the Courts. There are limitations to the enforcement of these rights: (a) any common law rights are limited to the geographic area where the trade-mark is actually used, and third parties may be able to obtain common law rights to use the trade-mark, or a confusingly similar trade-mark, in other geographic areas in Canada (b) in any enforcement action, the affected party must prove that it has goodwill in the trade-mark, that the use by the third party is misrepresentation and is confusing to the public, and (c) that the party has suffered or will likely suffer damages through the use of the trade-mark by the third party.

 

A client may choose to apply to register its use of the trade-mark through the Canadian Intellectual Property Office. Although the process is somewhat lengthy (often up to a year), the advantages of registration are significant. The owner of a registered trade-mark has the right to use that trade-mark throughout Canada in association with its wares and/or services. This might be particularly important for clients who rely on the internet for their business. In addition, in any enforcement action through the Courts, the registration creates a presumption that the registrant is exclusively entitled to use the trade-mark for its particular wares and/or services. As such, the registrant then only has to establish that the infringing party has caused confusion in Canada and that damages have been, or are likely to be, suffered.

 

Another consideration for businesses is the enhanced value the registration of a trade-mark may provide when that business is being sold. A registered trade-mark may give a potential purchaser more comfort that (a) some forethought has been given to protecting this asset of the business, and (b) the vendor has obtained the intellectual property rights that are confirmed through registration and is in a position to enforce same against third parties.

 

Whether this type of goodwill is an integral part of a business's marketing or is a hidden asset, businesses and their advisors should always consider whether these intellectual property assets are worth protecting, and if so, the steps to be taken to protect same.