Edward Chapman Ladies’ Shop Ltd. v. Edward Chapman Ltd.

In July 2007, the British Columbia Court of Appeal upheld the decision of the British Columbia Supreme Court in Edward Chapman Ladies’ Shop Ltd. v. Edward Chapman Ltd. This decision is interesting, as it shows that the split of a business in 1959 had significant implications for the expansion plans of those separated businesses fifty years later.

Background

In 1890, Mr. Edward Chapman arrived in Vancouver and bought out an existing men’s and women’s clothing store. Mr. Chapman carried on the enterprise under his own name, assisted by a Mr. Ernest Rea, and eventually incorporated it under the name “Edward Chapman Limited” (ECL). After Mr. Chapman’s death in 1938, Mr. Rea took over the direction of the business and held the majority of shares in the company, while Mr. Chapman’s descendants retained a minority interest.

By 1959, the ladies’ wear and the men’s wear divisions were being carried on in separate premises, and Mr. Rea proposed that the Chapman family take over the men’s wear business and the Rea family continue running the ladies’ wear business through a separate new corporation. Thus the “Edward Chapman Ladies’ Shop Limited” (LSL) was incorporated by the Reas, who then purchased from ECL the ladies’ wear business “including the inventory of the stock-in-trade, furniture and fixtures and goodwill” for a purchase price of $141,688.32.

From 1959 to 1982, the separate businesses co-existed and even co-operated in their marketing, jointly buying advertising and labels bearing the Edward Chapman name and holding an anniversary fashion show in 1980. In 1982, the Chapman-controlled ECL opened a women’s wear division called “Chapy’s.” LSL objected to this, but ultimately did not proceed with legal action, partially because it was understood that ECL would continue selling women’s wear only under the trade name “Chapy’s.” However, in 2002, the Chapman-controlled ECL stopped using the name “Chapy’s” and made it clear that it intended to carry on its women’s wear division solely under the name “Edward Chapman Limited.” LSL commenced an action for passing off, and ECL responded by alleging that LSL had no right to use the name “Edward Chapman” by itself in respect of ladies’ wear, and that this right remained with ECL.

The B.C. Supreme Court decision

The Supreme Court found that LSL was successful in establishing the three elements of passing off, namely, goodwill, misrepresentation and damage, and rejected ECL’s two defences relating to concurrent use.

The court found that LSL had developed a distinctive reputation for fine ladies’ clothing, not only under its corporate name “Edward Chapman Ladies Shop,” but also under the names “Chapman’s” and “Edward Chapman’s”. ECL raised the defence, however, that it had established concurrent use of the “Edward Chapman” name in respect of women’s clothes. If ECL had used the name “Edward Chapman” in respect of its own line of women’s clothing such that it had built up a reputation under that name in the women’s wear market, the goodwill might have been considered “shared” between the two companies, and LSL might not have succeeded with its passing off action. The court, however, found that although ECL had built up its own reputation for women’s wear, this reputation was associated with the name “Chapy’s.” Thus in respect of women’s wear, the name “Edward Chapman” was only distinctive of LSL, not ECL, despite the fact that the same name in association with men’s wear was distinctive of ECL.

ECL also defended itself by relying on a number of cases that established that, although some confusion is inherent when there are concurrent users of the same trade name, concurrent use by itself does not constitute passing off. The court accepted this statement of the law, holding that in such a case, a claim for passing off cannot succeed unless one party does something that increases the risk of confusion inherent in the sharing of the same name. The court went on, however, to find that ECL’s decision to drop the name “Chapy’s” in respect of its women’s clothing business constituted just such a confusion-increasing action, and was “an attempt by [ECL] to insinuate itself into the valuable goodwill attached to [LSL]’s business.” For this reason, ECL’s defence failed, and the element of misrepresentation was found to exist.

Finally, the court found that LSL had suffered damage due to the risk of harm to, and loss of control over, its goodwill or reputation in the ladies’ clothing market. In the result, ECL was made subject to an injunction permanently prohibiting it from using the name “Edward Chapman” (or variations of it) in association with women’s wear, unless it gives equal prominence to the name “Chapy’s.”

The B.C. Court of Appeal decision

On appeal, ECL revived an argument that it had abandoned at the trial level, claiming that the effect of the 1959 transaction between the companies was not to confer upon LSL the ownership of the “Edward Chapman” name in association with ladies’ wear, but merely a license or permission to make use of the name. ECL claimed that the goodwill developed by LSL had accrued to ECL through this license relationship, and that ECL continued to have an “inherent” and proprietary right to use “its own name” in association with its own wares (women’s clothing).

The Court of Appeal rejected these claims, mainly because all of the evidence pointed to the fact that the parties in 1959 did not intend to create a license, but rather intended to assign all of the goodwill relating to the ladies’ wear business, including the use of the “Edward Chapman” name in association with those wares, to LSL. The court also pointed out that, under the Trade-marks Act, a licensee’s use of a trade-mark only accrues to the benefit of a licensor if the licensor retains and exercises control over the character and quality of the goods sold in association with the mark, which ECL did not do. Thus ECL was unsuccessful in its claims based on the transfer agreement, and the passing-off decision against it was upheld.

The Court of Appeal noted that “it may seem ironic” that it was the Chapman family, through ECL, that was restricted in its use of the words “Edward Chapman” in its ladies’ wear business, but “such is the nature of trade names and marks.” In owning a trade-name, in this case “Edward Chapman,” ECL did not and could not own the words themselves, but only the association between those words and a particular type of wares, men’s clothing. In the circumstances, the ownership of that particular association was no barrier to a finding that the association between the words “Edward Chapman” and women’s clothing, which was a separate thing altogether, belonged exclusively to LSL.

The Court of Appeal also responded to ECL’s claim to have, as an alleged licensor, an “inherent” property right in the “Edward Chapman” name by observing that “’property’ in a name or mark is by its nature transitory.” The Court explained that the property right exists (at least in the case of unregistered marks and names) only so long as the name is distinctive of the owner’s goods. Thus if another person starts using the name, “action must be taken before the interloper has developed its own reputation—otherwise the ‘property’ is lost, or at least will not support enforcement by means of a passing-off action.”