Canada: Marked For Life? Trademarks And The Bankruptcy And Insolvency Act

Last Updated: October 20 2014
Article by Michael J. Hanlon and Jean-François Gauvin

Intellectual property rights are meant to protect that which cannot be easily protected: ideas, images, music and brands. The creators of these intangible concepts are given an economic monopoly over them, in the hopes of fostering greater creativity and economic growth. Bankruptcy law, on the other hand, seeks to equitably distribute the property of the bankrupt among its creditors, subject to the rights of secured creditors.  There is an inherent conflict between the rights of two groups.  First, there are the intellectual property holders where property subject to their rights is in the hands of a bankrupt.  Second, there are the creditors of that bankrupt who wish to see the property sold with no, or minimal, interference from the intellectual property holder.

The Bankruptcy and Insolvency Act (BIA) addresses this conflict by seeking a balance between the two groups.  Under section 82 of the BIA, the holder of a patent can force the trustee in bankruptcy to sell patented items to him or her at a price equal to the bankrupt's cost to purchase or build them. Under section 83 of the BIA, a copyright holder has similar rights. Thus, if the estate is deprived of the potential benefit from the sale of the items under license, at least the estate is not out of pocket.  Conversely, absent such a repurchase, the trustee can sell the items free and clear from any restrictions under the license.

Trademarks, however, are not dealt with under the BIA.  This oversight is surprising given the ubiquity of trademarks in the retail and manufacturing worlds.  What happens when a bankrupt's main asset is inventory subject to trademarks in favour of a licensor who objects to its sale by the trustee? Should the court use its inherent jurisdiction to "gap-fill" the BIA and impose a solution similar to sections 82 and 83 of the BIA?  Two cases offer differing, but complementary, answers to this question.

In Scanwood (Receiver of), a furniture manufacturer produced bookcases for Ikea under license.  Under the agreement between the manufacturer and the Swedish icon, in the event of its receivership or insolvency, the manufacturer was required to sell its Ikea-branded inventory to Ikea or another Ikea approved distributor.  The manufacturer's receiver sought an order allowing it to sell the trademarked inventory without regard for the agreement, as it risked limiting the recovery for that property.  In fact, it could lead to a wholesale loss of the inventory if neither Ikea nor another approved distributor wished to purchase it.  While the court was sympathetic to the potential for such a loss, it felt that the terms of the agreement were such that it could not override them, absent express legislative authority to do so.

However, in the absence of a contractual remedy, another case suggests that the courts should favour a commercially reasonable approach.  Recently, in 185107 Canada inc. (Groupe de compagnies Bennett Litlle ltée--Bennett Little Group of Companies) (Syndic de), the court was faced with a bankrupt distributor of stationery and office products, whose inventory was almost exclusively comprised of products under trademark licensed from a related corporation.  Immediately after appointment of the receiver, the licensor terminated the license. Both the bankrupt and the licensor were controlled by the same individual, who was also a guarantor of the bankrupt's secured creditor.  The agreement was silent as to the fate of any trademarked inventory held by the bankrupt at termination.  The receiver ran a sales process for the bankrupt's assets, and sought to sell the inventory to the successful bidder.  The licensor objected to that sale, or indeed any sale of the trademarked inventory, on the basis of the license's termination.  The licensor did not offer to repurchase the inventory. 

In 185107 Canada inc. (Groupe de compagnies Bennett Litlle ltée--Bennett Little Group of Companies) (Syndic de), the court declined to follow the Scanwood approach.  Unlike the agreement in that case, which at least provided for a method of disposing of trademarked inventory, no such remedy existed here. Applying the license agreement literally would have allowed the licensor to hold the licensee hostage, preventing the licensee from disposing of property it had accumulated while the license was in force, without any form of compensation.  Furthermore, the court was not convinced that the licensor's trademark rights were better protected by the simple destruction of the trademarked property. The sale process had been conducted fairly by the receiver, with due regard for the rights of the licensor. In the end, the absence of any commercially reasonable alternative under the terms of the license allowed the court to order the sale of the trademarked inventory in accordance with the successful bid.

This case serves as a reminder that courts may decline to apply the exact terms of an agreement where to do so would unduly prejudice the interests of the estate, and has clear implications for the drafting of trademark license agreements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Michael J. Hanlon
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