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Provisional injunction granted: no “unclean hands” in royalty dispute

In Cameo Knitting v Kodiak Group Holdings (2024 QCCS 292), the Quebec Court of Appeal decided whether to issue a provisional injunction enjoining the Defendants, Kodiak Group Holdings, from terminating their agreement with Cameo Knitting for cause on January 3, 2024.

Kodiak Group Holdings and Cameo Knitting have a Trademark License Agreement involving the sale of apparel, wherein Cameo is the manufacturer and Kodiak is the distributor. Cameo pays Kodiak monthly royalties to distribute its apparel to wholesalers/retailers. Kodiak recently changed their business practices and stopped distributing apparel to Costco and Walmart. This costed Cameo Knitting approximately $12M in annual sales revenue. As a result, Cameo began placing the monthly licensing fees it would ordinarily have paid to Kodiak in trust with its attorneys.

The parties then started negotiating terms of a new Trademark Licence Agreement. They came to a consensus on key issues in late August 2023. Cameo continued placing its licensing fees in trust as the agreement was revised and finalized over the following months. On November 17, 2023, Kodiak notified Cameo that it would not execute their new agreement until all past-due royalties were paid in-full. The Court found that this language was consistent with Cameo’s understanding that past-due royalty payments could be made at closing. Kodiak proceeded to revise the draft agreement with Cameo, despite threatening to cease communication if past-due royalties were not paid. Ultimately, when Kodiak and Cameo were unable to agree on the terms of their new contract in early January 2024, Kodiak terminated its existing contract with Cameo for cause.

Cameo sought a temporary order to suspend Kodiak’s termination of their licensing agreement. The Court characterized this as a safeguard order seeking to temporarily maintain the commercial relationship between the parties. A provisional injunction requires analysis of: (1) the appearance of right, (2) the alleged serious or irreparable prejudice, (3) the balance of inconvenience and (4) the urgency of the matter.

The Court accepted that the matter was urgent, as Cameo needed to know whether its twenty-year relationship with Kodiak had ended. There was no inconsistency in Cameo’s conduct regarding its position on urgency: the delay in bringing the application was explained by the fact that Cameo hoped to conclude a finalized agreement.

The Court held that Cameo had a strong appearance of right, as it was abusive for Kodiak to strip Cameo of rights that it had held for twenty years. Kodiak continued negotiating the new contract with Cameo until the end of 2023 and used language consistent with the notion that past-due royalties could be paid once the new agreement had been finalized. These facts supported Cameo’s allegation of bad faith against Kodiak.

On the question of irreparable prejudice and the balance of inconvenience, the Court accepted that Cameo would suffer important penalties for failing to fulfill its purchase orders with suppliers. Moreover, Cameo would suffer substantial reputational harm and depreciation of goodwill since it is known internationally as the exclusive distributor of Kodiak apparel. The Court further noted the lack of evidence that the temporary injunction would inconvenience Kodiak if granted. These findings militated in the Plaintiff’s favour.

There was no question that Cameo had come to the Court with clean hands, as Kodiak accepted Cameo’s failure to pay the monthly royalties until very recently. Both parties appeared to understand that Cameo would pay the past-due royalties once the new agreement had been signed. Cameo had been in default on its royalty payments for nearly a year, the parties had a longstanding relationship, and had allegedly agreed on all essential conditions of the new agreement. Given these facts, the Court could not find that Cameo had come to the Court with unclean hands.

Finding for Cameo on these criteria, the Court granted the provisional injunction against Kodiak.