Certain licensed producers have been licensing their trademarks (or the trademarks of their retail arm) to successful applicants for Ontario cannabis retail licenses. Trademark license agreements involve downside legal risk; in particular, the “accidental franchise”, and must be drafted with a view to the laws and cases that define the boundaries between franchising and licensing. If a trademark license amounts to a franchise, a franchise disclosure document must be presented to the retail store owner in compliance with the Arthur Wishart Act (Ontario franchise legislation).
Franchising Defined
Franchise relationships have three characteristics:
- The licensee makes payment to the licensor
- The licensee sell products associated with the trademark of the licensor
- The licensor exercises significant control or assistance with respect to the business of the licensee (or has the right to do so)
Regardless of the intentions of the licensor and licensee, a franchise relationship exists if these three characteristics are present.
Cannabis Retail License Holders in Ontario
As just 25 retail licenses have been issued in Ontario for the time being, licensed producers have had to compete to enter into trademark license agreements with retail license holders. The result being that licensed producershave had to pay retail license holders an initial fee in exchange for an undertaking to display the trademark at storefront, rather than vice versa. As more retail licenses are issued, this should change. However, putting aside the initial fee, some cannabis trademark license agreements provide for periodic assistance (or “consulting”) charges to be paid by the retail license holder to the licensed producer. Where these assistance charges correspond to acts of “significant assistance” within the meaning of the Arthur Wishart Act (Ontario franchise legislation),[2] as interpreted by the courts, the licensed producer may have the obligations and liabilities of a franchisor.
Under the Arthur Wishart Act, franchisors must provide prospective franchisees with a disclosure document containing, among other things, all “material facts” that relate to the franchise. Where the franchisor fails to meet this obligation, the remedial consequences can be substantial and can include rescission of the agreement and liability for any damages resulting from non-disclosure.
A franchisor that fails to provide a disclosure document has several strategic options, including late issuance of the disclosure document so that the limitation period contained in the Arthur Wishart Act begins to run. A potential “loophole” to be aware of is section 2(3)5 of the Arthur Wishart Act, which provides that:
(3) This Act does not apply to the following continuing commercial relationships or arrangements: …
(5) An arrangement arising from an agreement between a licensor and a single licensee to license a specific trade-mark, trade name, logo or advertising or other commercial symbol where the license is the only one of its general nature and type to be granted by the licensor in Canada with respect to that trade-mark, trade name, logo or advertising or other commercial symbol [emphasis mine].
Ambitious licensed producers in the retail space will of course seek to expand beyond a single license arrangement and so section 2(3)5 may only assist such licensed producers for a limited period of time, if at all.
I encourage both cannabis trademark licensors and cannabis retail store owners to contact Siskinds’ Franchise, Licensing and Distribution Group or Cannabis Law Group for more information.
Need Cannabis Licensing & Retail Legal Assistance?
For more information, contact Siskinds’ Franchise, Licensing and Distribution Group or Cannabis Law Group.
[1] In the remainder of this blog, I refer to both licensed producers and other cannabis companies together as “licensed producers”, for ease of reference.
[2] The AGCO (Alcohol and Gaming Commission of Ontario) has been scrutinizing third party agreements entered into by retail license holders for control exercised by the third party.