Trademark Rights Sufficient To Support Restraint of Trade

The recent decision from the Ontario Court of Appeal in Mars Canada Inc. v. Bemco Cash & Carry upheld a settlement agreement that prevented grey market goods from being imported and sold in Canada. The Court of Appeal held that the trademark holder’s interest in the enforcement of its trademark rights was a sufficient interest to justify a restraint on trade.

Background

In 2006, Mars Canada Inc. (“Mars”) discovered that Bemco Cash & Carry Inc. (“Bemco”) was selling “grey market” Mars products in Canada. Specifically, Bemco was purchasing Mars products in the United States, importing them into Canada, and selling them at a lower price than those offered by Mars. Mars commenced litigation against Bemco and against its supplier, GPAE Trading Corp. (“GPAE”) (collectively, “Appellants”), and then arrived at settlement agreements with both parties. Under those settlement agreements, Bemco and GPAE agreed they would not import or sell Mars products in Canada without the consent of Mars.

In 2010, Mars discovered that foreign products bearing its trademarks were being sold in Canada again through another company, in concert with Bemco and GPAE. Mars brought an action in Superior Court to enforce the settlement agreements and for damages. The Appellants defended on the basis that the settlement agreements were void as being in restraint of trade.

Decision Below

As we previously reported here, after commencing the action, Mars brought a motion for summary judgement before the Superior Court for declaratory relief and damages. The motions judge allowed the motion, finding that the Appellants had breached their settlement agreements. He rejected the argument that the settlement agreements were void as being in restraint of trade. For the purposes of argument, he was assumed that the agreements were in restraint of trade, but he found that the agreements were reasonable in the interest of the parties and reasonable in the interests of the public. He directed a reference as to damages and, in a subsequent endorsement, granted costs on a substantial indemnity basis in the amount of $225,000.

On appeal, the Appellants argued that the motion judge erred in giving effect to the settlement agreements which should have been found void as being a restraint of trade. They also argued that the motions judge erred in directing a reference as to damages as the agreements could only be enforced if Mars established that it suffered damages. Lastly, the appellants sought leave to appeal the award of substantial indemnity costs.

The Appeal

The Court of Appeal referred to and relied on the leading case on restraint of trade, Tank Lining Corp. v. Dunlop Industrial Ltd. which sets out a four-party inquiry:

• whether the covenant is in restraint of trade;
• whether the covenant falls within one of the limited exceptions to the rule that such restrains are void;
• whether the restraint can be justified as reasonable in the interests of the parties; and
• whether the restraint is reasonable with reference to the interests of the public.

Before the Court of Appeal, argument on the first ground of appeal was focussed on the third aspect of the Tank Lining test.  The Appellants argued that because the judge made no finding that Mars had sustained damages, he did not consider whether the responded had demonstrated that it had an interest in need of protection. The Court of Appeal rejected this argument, holding that Mars and the Appellants were competently advised before reaching the settlement agreement, and that Mars had a legitimate interest tied to its trademark rights:

[25] However, as noted by Blair J.A. in Tank Lining, at p. 225, “[w]hen two competently advised parties with equal bargaining power enter into a business agreement, it is only in exceptional cases that the courts are justified in over-ruling their own judgment of what is reasonable in their respective interests”.

[26] In the circumstances of this case, the respondent has legitimate interests tied to its trademark rights. As recognized by the motion judge, at para. 42, “[t]he [respondent] has an obvious interest in the enforcement of its intellectual property rights which, as noted above, remain valid unless or until declared otherwise.”

The Court of Appeal also noted that the agreement was reasonable in the public interest because it prevented confusion between Mars’ trademarked products and the Appellants’ improperly labelled grey market products.

On the second ground of appeal, the Court of Appeal found that there was evidence before the motions judge to support a conclusion that Mars had sustained some damages. The Court of Appeal also noted that, in any event, the action was in breach of contract. As the presence of a valid contract and a breach were established, Mars was entitled to damages, even if only nominal damages.

With respect to the costs award, the Court of Appeal held that the motion judge properly applied the principles relevant to an award of elevated costs. This included the fact that the Appellants had “brazenly breached the settlements,” and tried to rely on an obvious misnomer of one of the corporate parties to try to avoid abiding by the settlement agreement.

The Court of Appeal dismissed the appeal and awarded costs to Mars fixed at $20,000 inclusive of disbursements and all applicable taxes.

The decision of the Court of Appeal may be found here, and the decision of the motions judge is here.