The Federal Court of Appeal recently dismissed Dragona Carpet Supplies Mississauga Inc.'s (Dragona Mississauga) appeal of a Federal Court decision (2022 FC 1042) denying Dragona Mississauga's passing off claim. In doing so, the Federal Court of Appeal made some instructive observations on trademark licensing and establishing the requisite degree of control in order to establish a valid license. In the appeal decision, the Court also considered the manner in which goodwill is to be assessed in the context of a passing off claim.
In the underlying Federal Court decision, the court expunged Dragona Mississauga's registered trademarks and denied its passing off claims against Dragona Carpet Supplies Ltd. (Dragona Scarborough). In the appeal, Dragona Mississauga only challenged the Federal Court's denial of its passing off claim – it did not appeal the decision below as it pertained to the expungement of its trademark registrations. Dragona Mississauga argued that the Federal Court erred in finding that Dragona Mississauga had no goodwill in the asserted mark (Dragona Trademark) and that Dragona Scarborough did not engage in any misrepresentation.
The parties to the case, Dragona Mississauga and Dragona Scarborough, were two separate businesses, run by members of the same extended family, selling flooring-related products. Dragona Mississauga operated predominately in Mississauga, and Dragona Scarborough operated predominantly in Scarborough although it also had customers throughout the Greater Toronto Area. The former principal of Dragona Scarborough used to be a 50% owner of Dragona Mississauga until 2012, when he sold his shares in Dragona Mississauga to the other owner of Dragona Mississauga. Dragona Scarborough, which began operating in 1984, was the first to use the Dragona Trademark, and for a lengthy period of time thereafter both parties used the Dragona Trademark in association with their businesses. The Federal Court found, and the Court of Appeal concurred, that Dragona Mississauga's use of the Dragona Trademark was under (an oral) license from Dragon Scarborough. Given the finding of a license, the Federal Court held that Dragona Mississauga had no goodwill in the Dragona Trademark as any such goodwill developed though Dragona Mississauga’s use accrued to Dragona Scarborough by virtue of the license deemed by the Court to have been in place.
Dragona Mississauga appealed the Federal Court’s goodwill analysis on two grounds: (1) the Federal Court erred in law by not applying the correct legal test for goodwill, and (2) the Federal Court erred in finding that any goodwill that arose from Dragona Mississauga’s use of the Dragona Trademark accrued to Dragona Scarborough by virtue of the oral license. The Court of Appeal dismissed both grounds.
First, Dragona Mississauga argued that the Federal Court erred in law by failing to identify the relevant market segment in which there was goodwill. The Federal Court identified the parties' customers as comprising contractors, retailers, and the public, but it ultimately considered the goodwill in the parties' customers as a whole rather than restricting its goodwill analysis to one segment of the customer population. The Court of Appeal found that this was not an error, stating that while "[a] separate analysis for a certain type of consumer will be necessary where the evidence shows that one group may clearly be confused while another may not be" that "was not the case here."
Second, Dragona Mississauga argued that the Federal Court committed a palpable and overriding error by holding that Dragona Mississauga's post-2012 (when the ownership of the two entities was essentially split) goodwill from its use of the Dragona Trademark accrued to Dragona Scarborough under s. 50(1) of the Trademarks Act. Under s. 50(1), goodwill arising from a licensee's use of a licensed trademark accrues to the licensor/owner, provided the licensor has "direct or indirect control of the character or quality of the goods or services" offered by the licensee under the mark. While the Court of Appeal observed that the Federal Court’s reasons "swim dangerously close to committing" the error of simply taking Dragona Scarborough’s word that it asserted control over Dragona Mississauga's final products and services, the Court Appeal was not satisfied that any error was committed. The Federal Court determined that Dragona Scarborough exercised sufficient control over the use of the Dragona Trademark based on the evidence that was before the Court. While there was not a significant amount of evidence to support this conclusion, there was evidence that Dragona Mississauga acknowledged the fact that Dragona Scarborough owned the mark, which the Court of Appeal held was highly relevant to the issue of control, noting that “an acknowledgement may constitute evidence of an intention to abide by established standards associated with mark”. That said, the Court cautioned that ownership is not dispositive of control. Here, the Court held that the minimal amount of evidence of control was understandable in the context of the case, including the fact that the vast majority of the items in the two stores were identical.
Though it was not necessary to determine the appeal given its finding with respect to a lack of goodwill attributable to Dragona Mississauga, the Court of Appeal also addressed Dragona Mississauga's appeal of the Federal Court's finding that there was no misrepresentation, which is the second criterion required to establish passing off. Dragona Mississauga argued that the oral license for the Dragona Trademark allowed Dragona Mississauga to use the trademark west of Yonge St. and Dragona Scarborough to only use it east of Yonge St., so Dragona Scarborough's use of the trademark west of Yonge St. constituted misrepresentation. The Federal Court found this geographical division of use to be illusory, and the Court of Appeal upheld that finding noting that Dragona Scarborough was, in fact, legally entitled to use the Dragona Trademark in overlapping geographical areas owing to the fact that it had used the mark throughout these areas for a long time (i.e. since before the effective split in ownership between the parties in 2012), so Dragona Scarborough's use of the Dragona Trademark west of Yonge St. was not a misrepresentation. The Court of Appeal emphasized that the concurrent and overlapping use of a trademark, by multiple parties where they are each entitled to do so, is competition, and legal, as opposed to illegal passing off.
Dragona Carpet Supplies Mississauga Inc. v. Dragona Carpet Supplies Ltd., 2023 FCA 228