In the decision of Mars Canada Inc. v. Bemco Cash & Carry Inc.1, the Ontario Court of Appeal has recently affirmed a Superior Court ruling that a contract that prevents the sale of grey market goods in Canada is valid and enforceable, and not invalid for being in restraint of trade.
The facts are all too familiar: Bemco Cash & Carry Inc. (Bemco) was selling grey market chocolate bars from the U.S. with the MARS, M&M's, MILKY WAY and SNICKERS brands, undercutting the price of products sold by the authorized distributor, and was sued by the Canadian exclusive distributor Mars Canada Inc. (Mars Canada) in the Federal Court. The action was subsequently settled on the basis that Bemco disclose the source of its grey market goods and undertake not to import or sell any more grey market goods in future. In a further settlement agreement, the supplier, GPAE Trading Corp. (GPAE), also undertook not to import or sell MARS branded products, and the settlement included related companies such as Bemco. Four years later, Mars Canada discovered that fresh sales of grey market MARS bars were being made by an affiliate of Bemco and GPAE, and proceeded to sue for breach of the settlement agreements.
Instead of complying when caught, Bemco and GPAE took the position that the settlement agreements were void for being in restraint of trade. On a motion for summary judgment, the Ontario Superior Court held that both the defendants were in breach of the settlement agreements by continuing to import grey market goods into Canada. The motions judge unequivocally rejected the argument that the agreements were in restraint of trade, in reliance on the 1982 Ontario Court of Appeal decision in Tank Lining Corp v. Dunlop Industrial Ltd2.
The Court of Appeal highlighted three key findings of the motions judge3:
(a) even assuming the settlement agreements were in restraint of trade, and not subject to exceptions, the agreements were reasonable in the interests of the parties and in the interests of the public, since they were entered into to settle litigation, which has a purpose favoured by the law and by public policy;
(b) the trademark owner/exclusive licensee was entitled to enforce its registered trademarks; and
(c) the products imported from the U.S. did not comply with packaging and labelling laws in Canada.
Having made these findings, the motions judge directed a reference on quantification of damages and also awarded substantial indemnity costs of $225,000. The higher cost award was justified on the basis that the defendants "brazenly breached" their settlement agreements and contrived to avoid the settlements they had made, including asserting trivial grounds of defence that increased litigation costs.
On appeal, the three-member Court4 was asked to rule that the settlement agreements were void for being in restraint of trade, and to overturn the reference on damages and the award of substantial indemnity costs.
The Court of Appeal upheld the lower court decision unanimously, and rejected all grounds of appeal. In respect of the validity of the settlement agreements, the Court affirmed that Mars Canada had a legitimate interest tied to the protection of its trademark rights, which it was entitled to enforce. The Court also identified no error in the motions judge's ruling that the settlement of the litigation was reasonable in the interests of the parties, resolving their dispute and defining the scope of their trading rights. It prevented confusion between the owner's trademarked products and the improperly labelled grey market goods. The right to damages was also recognized, even if these were nominal, and the reference was properly ordered as a result. The Court noted in obiter that sales of grey market goods "cannibalized" the sales of the Canadian distributor.
With regard to costs, the Appeal Court affirmed the award of substantial indemnity costs and added $20,000 in fixed costs on the appeal. The lower court had exercised its discretion to award substantial indemnity costs, which were justified due to the lengths to which the defendants tried to avoid accountability for their conduct, including "brazenly breaching" the settlements and attempting to hide their illicit activities by altering a document. The lower court had held that the defendants' efforts to undermine the agreements were dishonourable and deserving of censure. The Appeal Court concurred.
The Court of Appeal's decision reaffirms that there are legitimate business and public interests served in protecting Canadian consumers from grey market sellers that import goods destined for other markets, particularly where these lack proper labelling for the Canadian market. The upholding of these types of settlement agreements is important not only for brand owners, but also for the Courts, as it permits parties to enter into reasonable market restrictions that aim to avoid future litigation or conflict. These types of settlements can have the added benefit of helping to curb counterfeiting, since grey market channels often serve as a gateway for the infiltration of counterfeit goods.
The decision also sends a message of deterrence to other grey market sellers that would try to avoid or flout their contractual obligations when settling disputes over the sale of grey market goods. The Court of Appeal for Ontario has unanimously rejected the ability to challenge contracts restricting the sale of grey market goods on the basis of restraint of trade, where the parties have entered into the contract as part of a settlement. The case also reaffirms that brand owners are entitled to strictly enforce their trademark rights in Canada.
1 2018 ONCA 239 (issued March 13, 2018)
2 (1982) 40 OR (2d) 219 (CA)
3 2016 ONSC 7201 (CanLII) and costs award at 2016 ONSC 7643 (CanLII)
4 The Court decision came from Justices G. R. Strathy C. J. O, C. W. Hourigan and B. W. Miller.
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