In the Ontario Superior Court, the Plaintiff moved for summary judgment for rectification of the written form of a settlement agreement and a declaration of liability of the Defendant Bemco Cash & Carry Inc ("Bemco Cash"). The Plaintiff also sought a declaration of liability of the other Defendants for breach of a second settlement agreement.
The Plaintiff had originally sued Bemco Cash in the Federal Court for engaging in grey marketing of goods bearing the Plaintiff's trademarks. Grey marketing is referred to as "[b]uying genuine branded products abroad and selling them in competition with a local distributor of the foreign vendor (and/or its parent company or group of companies)".
The Court noted that there is nothing inherently wrong with grey marketing. Furthermore, the sale of the legitimate foreign purchased goods in Canada cannot be claimed to amount to unlawful passing off. The situation is less clear as to whether trademark registration affords a Canadian trademark owner the ability to prevent third parties from selling products bearing its marks, which are legitimate goods sourced from a foreign parent or affiliate of the Canadian trademark holder.
The Federal Court of Appeal had previously held that a Canadian licensee cannot rely upon its licensed trademark rights to prevent the sale of goods purchased legitimately from the foreign owner of the plaintiff's licensed trademarks. However, the Court of Appeal expressly distinguished the situation where the plaintiff is not just a licensee but actually owns the Canadian trademarks, as was the case here. Furthermore, the Court of Appeal made no decision concerning that situation.
The Ontario Court stated that Bemco Cash had every right to advance the defence that the Plaintiff's trademarks could not be used to prevent grey marketing. However, Bemco Cash did not defend the case, and instead, decided to settle. In the settlement agreement the Defendant was referred to as "Bemco Confectionary Sales" (name of the vendor who had sold its business to the Defendant), rather than Bemco Cash. On the issue of rectification, the Court was satisfied that it was in the interests of justice to resolve the matter summarily. The evidence showed that the intention of both sides was that Bemco Cash was the party to the settlement agreement. The agreement was rectified to replace "Bemco Confectionary Sales" with the actual Defendant. The Court also found that Bemco Cash had breached the agreement by resuming grey marketing activities without the Plaintiff's consent.
The Court also held that the second settlement agreement was breached. Pursuant to the first settlement agreement, Bemco Cash had disclosed to the Plaintiff its source of foreign goods was the Defendant GPAE. The Plaintiff demanded that GPAE also cease its grey market activities. GPAE entered into a second settlement agreement rather than having the issue resolved in Federal Court. The agreement purported to bind GPAE's affiliates, shareholders, directors, officers, employees, and agents. The Defendant Mr. Ebert, knowing that the agreement included his personal covenant as shareholder, signed the agreement on behalf of GPAE. For the purposes of this litigation, GPAE admitted that it had once again imported the Plaintiff's branded products from the United States. Thus, the Court held that GPAE and Mr. Ebert were therefore plainly and admittedly violating their settlement agreement.
The Court also dismissed the Defendants' argument that the agreements to refrain from purchasing the Plaintiff's branded products from the Plaintiff's affiliates abroad are not a valid contract. Even if the agreements engaged the doctrine of restraint of trade, the Court found that the restraint was supported by three different grounds, which all satisfied the four part test set out in Tank Lining Corp. v. Dunlop Industrial Ltd. The three grounds were that:
- The Agreements are Settlement Agreements to resolve litigation, which are strongly favoured and supported by the law;
- The Plaintiff has a statutory right to enforce its registered trademarks; and
- The Defendants are prohibited from selling the grey marketed products by Federal Labelling and Packaging Law.
Therefore, the Court held that the two settlement agreements were not void in restraint of trade.