The Federal Court Trial Division recently held that intellectual property rights do not automatically transfer in an asset sale. Moreover, the Court enforced a registered trademark in restaurant trade dress and copyright rights in restaurant menus.
In 1429539 Ontario Limited v. Café Mirage Inc., the plaintiff franchisor agreed to convey the assets of two of its cafés to a creditor. The creditor agreed to include a covenant in any subsequent purchase agreement which provided that should the cafés be sold to a buyer who would not operate them as a franchise, that the purchaser would remove the plaintiff's signage. The creditor made such a sale to the defendant, who then declined an offer to enter the franchise system. Nevertheless, the defendant ran the cafés using copies of the plaintiff's menus, trademarks and restaurant trade dress. An infringement claim was therefore brought by the plaintiff.
The defendants argued they had acquired an implied license to use the trademarks and copyrighted menus through the plaintiff's consent. The Court held that the consent to the use of the plaintiff's trademarks only applied within the franchise system. Thus, this implied right dissolved when the defendants refused to join. In addition, the Court held that the defendants had an implied license to use the plaintiff's menus, since copies were purchased as assets, but that the defendants had breached the plaintiff's copyright by reproducing a substantial part of them.
The defendants argued that copyright and trademark rights were included in the asset purchase. The Court held that intellectual property rights do not automatically transfer in an asset sale, and as such, any intended transfer should have been dealt with explicitly in the sale agreement. Without such rights having been conveyed, the Court held that, by using their logos and trade dress, the defendants had breached the plaintiff's trademark rights, and ordered the signs be returned.
This case is a reminder that copyright and trademark rights can be protected if properly enforced, and that special attention must be given to intellectual property rights in an asset purchase if they are intended to be transferred.
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