A licence is permission. That single word explains most of what goes right and wrong in these deals. The owner of a brand or a piece of software keeps ownership and allows someone else to use it within limits, usually for money. A Brampton bakery that lets a cousin’s shop in Hamilton use its name, a local software developer selling subscriptions to its dispatch tool, and a retailer signing a vendor’s terms for point-of-sale software are all parties to licences, even if nobody used that word.
Because a licence is permission, its boundaries are what count. Use outside those boundaries may be both a breach of contract and an infringement of intellectual property rights. On the other side, an owner that grants permission loosely may lose control of an asset it spent years building.
Here we look at the two most common kinds of licence for small and mid-sized businesses, in general terms. This is not legal advice about a specific deal. The right wording depends on the asset, the money and the relationship.
First Check Who Owns What
A licence can only pass along rights that the licensor really has. Before negotiating anything else, confirm the chain of ownership.
For a brand, ask who owns the trademark. Is it the operating company, a holding company, or the founder personally? Is it registered with the Canadian Intellectual Property Office, or relying on common-law rights from use in a particular area? An owner can license an unregistered mark, but it is harder to prove the rights and their geographic reach.
For software, ask who wrote the code. The Copyright Act generally makes the author the first owner, with an exception for work made by an employee in the course of employment. A freelance developer hired to build your app may own the copyright unless a signed assignment says otherwise. If you plan to license that app to customers while your developer still owns it, the foundation is unsound. Third-party and open-source components deserve a look too, because their licences may carry conditions that limit how you can distribute or charge for the finished product.
Exclusive, Sole or Non-Exclusive
These three words decide how much of the market each side keeps:
- Non-exclusive: the owner can license others and keep using the asset itself. Most software licences work this way.
- Sole: the owner licenses only one party, but keeps its own right to use the asset. The term is not defined by statute, so spell out what you mean.
- Exclusive: the licensee alone may use the asset within the defined scope. The Copyright Act defines an exclusive licence as an authorization to the exclusion of all others, including the copyright owner.
The last point often surprises owners. Grant an exclusive licence of your software for Ontario and you may have shut yourself out of selling it in your own province. Under the Copyright Act, a grant of an interest in copyright by licence is not valid unless it is in writing and signed by the owner or the owner’s agent, so an exclusive arrangement made on a handshake or by a clicked email reply is on very weak ground.
Exclusivity should be earned. Licensors often tie it to performance, such as minimum sales or royalties, so the right falls away or converts to non-exclusive if the licensee does nothing with it. Otherwise a sleepy licensee can lock up a territory for years.
Brand Licences: Control Is the Price of Keeping the Mark
Trademark licensing has a rule that does not exist in the same way elsewhere. Section 50 of the Trademarks Act treats a licensee’s use as the owner’s use, but only where the owner has, under the licence, direct or indirect control of the character or quality of the goods or services.
Why does it matter? A trademark exists to tell the public where goods or services come from. If an owner lets others use its name with no oversight, the name may stop identifying a single source. That can weaken the mark and may expose a registration to challenge for lost distinctiveness. “Naked licensing,” where permission is handed out with no real control, is therefore a danger to the owner itself.
Good control language is specific and, importantly, actually used. A brand licence should typically include:
- A written description of the licensed marks and their approved forms, including logos and colours
- The goods or services covered, and nothing wider
- Standards for products, ingredients, service or workmanship
- A right to inspect premises, sample products or review records
- Advance approval of signage, packaging, advertising and social media use
- Acknowledgement that the licensee’s use and resulting goodwill belong to the owner
- A promise not to challenge the mark or register anything confusingly similar, including domain names
Family arrangements deserve the same care. A hypothetical: two brothers operate restaurants with the same name, one in Brampton and one in Kitchener. They never wrote anything down, and they never checked each other’s kitchens. If they later fall out, each may claim the name, and neither can easily show who was controlling the brand. A short licence signed while they were getting along would have prevented much of the argument.
When a Brand Licence Becomes a Franchise
This is the most expensive trap in brand licensing. Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000 applies based on what the arrangement actually is, not on what it is called. Broadly, a franchise can exist where someone gets the right to sell goods or services substantially associated with another’s trademark, pays money for that right, and the grantor exercises significant control over the business or provides significant assistance with its operation.
Reread the control clauses recommended above. A licensor who dictates how the licensee runs its business, sets its methods and supplies an operations manual, and who collects a fee, could be creating a franchise without knowing it. The result can be serious. A franchisor must give prospective franchisees a disclosure document at least 14 days before they sign or pay anything. If disclosure is late or deficient, a franchisee may have the right to rescind within 60 days of receiving it, and if no disclosure is given at all, within two years of the grant. Rescission can mean refunding money and compensating for losses.
So if you are expanding by letting others use your name, get advice on where the line is. Controls aimed at product quality are a different thing from controlling someone’s whole business operation, though the boundary needs case-by-case judgment. Our franchises page covers that side of the work.
Software Licences: The Questions Worth Asking
Software deals look different because of how the product gets delivered and because customers depend on it daily. Whether you are the developer or the buyer, go through these:
Who may use it, and how many? Licences may be priced per user, per device, per location or per transaction. A Brampton logistics company that adds two depots may suddenly be out of scope, and many vendors have audit rights to check.
Installed or subscription? Installed software may continue running after the term if the licence allows it. A subscription, often called software as a service, stops when the subscription does. In that case the contract is about access and service as much as permission.
What about our data? Ensure the agreement says that you own the data you enter, how you can export it, and how quickly and in what format you can get it after termination. If personal information is involved, your privacy obligations continue when a vendor holds it for you.
What happens if the vendor disappears? For critical software, customers sometimes negotiate source code escrow, where a neutral party holds the code and releases it on certain events such as insolvency or the end of support. It is often not available for low-cost subscriptions, but it may be worth raising for custom-built tools.
What about custom work? If a developer adapts the software for you, who owns the changes? Paying for development does not, on its own, transfer copyright. Address ownership, or at least a broad licence-back, in writing. And check whether moral rights have been waived.
Support and service levels. A bare promise of “reasonable support” gives you little to enforce. Ask for response times, uptime commitments, and credits for failure.
Royalties and Other Money Terms
Fee structures vary: flat, per unit, or a percentage of sales. If you use a percentage, the definition of the base does most of the work. “Gross sales” and “net sales” can differ hugely depending on whether returns, discounts, taxes and shipping come off. Also consider:
- Minimum annual royalties, so that a licensee cannot sit on the rights
- Regular written reports and a deadline for payment
- A right to audit records, with cost-shifting if underpayment exceeds a set percentage
- Interest on late payments, with the rate stated as an annual rate
- Currency, HST treatment and any cross-border tax
That last item catches many companies. Where a Canadian business pays royalties to a non-resident, withholding tax under Part XIII of the Income Tax Act may apply, subject to specific exceptions and tax treaties. Decide in the contract who bears that cost, and talk to your accountant first.
Warranties, Infringement and Liability
Licensees typically want assurance that the licensor owns the asset and that using it will not infringe anyone else’s rights. Licensors, for their part, want those promises limited. A common compromise is for the licensor to defend third-party infringement claims and, if necessary, replace or modify the software or refund fees, subject to a cap. Read how that indemnity interacts with the limitation of liability clause, because a broad-looking promise can be hollowed out by a low cap elsewhere.
Also decide who has the right to enforce the mark or copyright against outsiders. If someone copies your licensed product, can the licensee sue, or only the owner? Must the other party cooperate? Exclusive licensees of copyright may have standing to act in some situations, but your contract should still address who leads and who pays.
Ending the Licence
Every licence should answer what happens when it ends. Otherwise you might end up with a former licensee who still has inventory, signs and a website.
Consider a defined sell-off period for existing inventory, removal of signs, and transfer of domains and social accounts. For software, cover data return and deletion, and any continuing right to use what has been paid for. Grounds to terminate should include non-payment, quality breaches, insolvency events, unauthorized assignment and challenges to the owner’s rights. Federal insolvency legislation contains some protections for intellectual property users when a licensor becomes insolvent, but a licensee relying on critical software should not treat those as a complete answer.
Also address assignment and change of control. An owner might accept licensing its name to a trusted Brampton operator but not to whichever company later buys that operator. Without a clear clause, you may have less say than you expect.
Before You Sign or Send One
Vendor terms often arrive as a click-through or a form agreement, and they are not always negotiable. Even so, read scope, renewal, price increases, liability cap and data exit. A clause that renews automatically for another year unless you give 90 days’ notice may be the most costly sentence in the document.
If you are the owner granting rights, resist copying a licence from the internet. Those forms often come from other countries, refer to laws that do not apply in Ontario, and may not address control or franchise risk at all. Our intellectual property page describes how a lawyer can help draft or review one. The core question is the same on both sides: exactly what permission is being given, for how long, for how much, and on what conditions does it stop?