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A tale of two DRAGONAS

This case involves two related companies that had been using the same trademark based on an informal understanding. After many years of peaceful coexistence, there was a falling out and as a result, one of the companies, Dragona Carpet Supplies Mississauga Inc. (Dragona Mississauga), brought a claim of passing off against the other, Dragona Carpet Supplies Ltd. (Dragona Scarborough) and its related company, FlooReno Building Supplies Inc. (FlooReno). The action was dismissed by the trial judge, Justice Zinn (2022 FC 1042), as was Dragona Mississauga’s appeal (2023 FCA 228). 

Background

The story starts in 1984, when Nizar Hamam (NH) founded Dragona Scarborough and started selling flooring-related products. In 1992, NH founded Dragona Mississauga with his brother-in-law, Talal Issawi (TI). Each owned 50% of the shares. While separate companies, the two businesses operated jointly to a large extent, using the same suppliers and obtaining discounts based on their joint sales. In 2016, NH’s sons took over Dragona Scarborough and they opened a second business, FlooReno, in 2021 in Mississauga, which also used the DRAGONA trademark.

In 2012, TI purchased NH’s shares in Dragona Mississauga after a falling out. The share purchase agreement was silent as to ownership of the DRAGONA trademark, but the trial judge found that Dragona Scarborough continued to own the trademark based on evidence from a mutual friend, Mostapha, who had mediated the agreement. He testified that following the sale, TI’s son had said, in the presence of TI, that Dragona Scarborough owned the mark, with the understanding that Dragona Mississauga could continue using it.

TI subsequently registered three DRAGONA trademarks, a word mark and two logos, in 2014 and 2016. The registrations were then assigned to Dragona Mississauga. The trial judge accepted Mostapha’s evidence that TI had asked him to tell NH not to oppose registrations of the trademarks as he only intended to use the marks for a couple of years. He also found that NH did not oppose the registrations because it was understood that Dragona Scarborough owned the marks and because he wanted to avoid a family dispute given that his sister was married to TI and relied on the income from the business.

Dragona Mississauga commenced this action after FlooReno opened locations in Mississauga, displaying the DRAGONA mark, seeking an injunction restraining the use of the mark in the western part of the Greater Toronto area (west of Yonge Street) by FlooReno and Dragona Scarborough. The respondents counterclaimed seeking damages and expungement of the DRAGONA trademark registrations. The Federal Court dismissed the action and ordered the expungement of the registrations in view of the use of the DRAGONA mark by Dragona Scarborough. Dragona Mississauga consented to the expungement.

The Federal Court held that the DRAGONA trademark was indeed owned by Dragona Scarborough and that the use of the DRAGONA marks by Dragona Mississauga was subject to an oral license. By virtue of s. 50 of the Trademarks Act, the license meant that the goodwill associated with the use of DRAGONA by Dragona Mississauga accrued to Dragona Scarborough. In view of this finding, the Court held that Dragona Mississauga had failed to meet the first two parts of the test for passing off – it had not established that it had goodwill associated with its use of the DRAGONA trademark or that the defendants had misrepresented their businesses through their use of the mark. (The Court mentioned, but did not address, the third element of passing off, actual or potential damage).

Goodwill

On appeal, Dragona Mississauga argued that the trial judge had erred in finding that the goodwill associated with its use of the mark after 2012 accrued to Dragona Scarborough because Dragona Scarborough did not exercise adequate control over the character and quality of Dragona Mississauga’s goods and services. Its position was that the trial judge had considered the acknowledgment of ownership by Dragona Mississauga to constitute an acknowledgement of a right of control of the mark. This, it said, was a mistake – an acknowledgement of ownership, in and of itself, is not evidence of the exercise of control as required by s. 50.

The Court of Appeal agreed that s. 50 requires “not only a licence to use a mark (which could more fairly be equated with an acknowledgement of ownership), but also a demonstration of direct or indirect control over the character of the quality of goods or services associated with the mark.” While an acknowledgement of ownership might constitute evidence of an intention to abide by standards of use, “ownership is not dispositive of control.”

The Court of Appeal found that while the “Federal Court reasons swim dangerously close to committing” the error of conflating an acknowledgement of ownership with control, it had not done so:

The judge conducted an extensive review of the business relationship between Dragona Scarborough and Dragona Mississauga from 1992 to 2021. He noted that Dragona Mississauga was opened to expand the business of the already well-established Dragona Scarborough. [NH] had “significant dealings” with [TI] and both the Dragona businesses, and there was considerable cross-over between the businesses with respect to products, suppliers, rebates, and even inventory and customers (though the inventory sharing arrangement ended in 2012) … Specifically, the volume rebates allowed Dragona Scarborough to influence the goods sold by Dragona Mississauga …

The Court of Appeal also noted that there was evidence that one of NH’s sons “visited the Dragona Mississauga store and ‘kept an eye on [the] business’”, and referenced the trial judge’s comment that the share purchase agreement “was between [NH] and [TI] as individuals, and therefore could not have addressed the use of the DRAGONA trademark, as this would have required Dragona Scarborough and Dragona Mississauga to be parties to the agreement.”

Misrepresentation

Since Dragona Mississauga failed to establish the requisite goodwill, its appeal failed. The Court went on, however, to consider the second element of passing off – misrepresentation by Dragona Scarborough and FlooReno. The Court found that even if there had not been an oral trademark license in place, the defendants’ use of the DRAGONA mark in Mississauga would not have constituted a misrepresentation.

More specifically, throughout the period 2012 to 2021, Dragona Scarborough had been active west of Yonge Street, including in Mississauga, and Dragona Mississauga had been active east of Yonge Street, including in Scarborough. Therefore, in the absence of a license, both would have had goodwill throughout the GTA. Since Dragona Scarborough had goodwill in Mississauga, it had “every right to use the mark” in that part of the GTA and “any resulting confusion … is just the result of the respondents ‘making a truthful statement of fact which [they] ha[ve] a legitimate interest in making’.”

The Court went on to state that the conflict here “arises from the use of overlapping marks” and “is not misrepresentation, but competition”, which is distinct from passing off.

The Dragona Mississauga argued that the trial judge erred in his understanding of concurrent, overlapping uses. The Court of Appeal did not agree. It found that the judge had correctly “concluded that where the parties have jointly used and jointly benefited from the use of a mark, neither can exclude the other from using it in association with their respective business.”

Conclusion

This case is a good reminder that intellectual property should always be front of mind and taken seriously. The conflict, which presumably cost the parties significant amounts of time and money (not to mention family tensions) could have been avoided if there had been a proper trademark license put in place when Dragona Mississauga was created in 1992 or if trademark ownership and use had been addressed at the time of the share purchase agreement in 2012. In all areas of business involving dealings between two or more parties, even if related, the time to address potential problems is before they arise.

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