Before acquiring a trademark in Canada, purchasers will want to ensure that the seller used the trademark in the previous three years, and when the transaction takes longer to close, the parties will want to ensure the trademark rights do not lapse. Failing to do so risks having the newly purchased trademark expunged. The Federal Court of Canada recently released its decision in Centric Brands Holding LLC v. Stikeman Elliott LLP, which serves as a cautionary tale for Canadian trademark acquisitions.[1] The Court affirmed the Registrar of Trademarks’ decision to expunge the Applicant’s newly acquired trademark AVIREX (the Mark) because the previous owner had not used the trademark in the preceding three years.
The Registrar’s decision
The Mark, AVIREX, known for its association with popular military-style leather jackets notably worn by Tom Cruise in Top Gun (1986), was assigned to the Applicant as part of a larger transaction between the Applicant and an affiliate of its previous owner. While the purchase and sale agreement for that transaction was signed in June 2018, the Mark was not assigned to the Applicant until October 29, 2018. Less than three weeks before that assignment took place, the Registrar issued a notice to the previous owner under section 45 of the Trademarks Act, RSC 1985, c T-13 (the Act).[2]
A section 45 notice requires that the registered owner of a trademark provide evidence of its use during the three-year period immediately preceding the date of the notice. If this evidence cannot be provided, the owner must provide the last date the mark was used and the reason for its lack of use since that date. In this case, the relevant three-year period was October 12, 2015, to October 12, 2018 (the Three-Year Period).[3] Since the previous owner was the registered owner of the Mark during the Three-Year Period, the Registrar required evidence that either the previous owner, or a licensee, had used the Mark. Concluding that no such use had occurred and no special circumstances existed to excuse the previous owner’s lack of use, the Registrar expunged the Mark.[4] The Applicant appealed to the Federal Court, arguing special circumstances existed to excuse the absence of use.[5]
The special circumstances exception
Section 45 operates as a mechanism to remove “deadwood” from the trademark register.[6] Upon receiving notice, a registered owner who fails to provide use of the mark in question will generally have their mark expunged unless there are special circumstances excusing the absence of use. Special circumstances that excuse non-use are unusual, uncommon, or exceptional, and are determined through reference to: the length of time during which the trademark has not been in use; whether the registered owner’s reasons for not using its mark were due to circumstances beyond its control; and whether there exists a serious intention to shortly resume using the mark.[7]
The Federal Court’s reasoning
The Federal Court held that the special circumstances exception did not apply. While special circumstances may excuse non-use of a trademark, the Federal Court held that it is the non-use before the owner receives notice under section 45 that must be excused. Since the Applicant did not technically acquire the Mark until after the section 45 notice was issued, it was the previous owner’s absence of use that needed to be excused, not the Applicant’s. The Court found that the Applicant’s failed attempts to use the Mark after acquiring it were irrelevant to the special circumstances analysis.[8]
In reaching its decision, the Federal Court noted that the Applicant was aware of the section 45 notice when it completed the acquisition, the assignment was on an “as is, where is” basis, and the transaction provided the Applicant with reasonable access to the previous owner’s books and records, with the ability to request additional information (including information about the previous owner’s non-use).[9]
Takeaways: Trademark use as part of the due diligence phase
Providing a healthy reminder for the type of due diligence required when acquiring trademarks in Canada, the Federal Court’s decision illustrates the importance of ensuring to-be-acquired trademarks have been used in the three years preceding the acquisition. Whether it be through representations and warranties, securing evidence of use, or providing a holdback on the purchase price if the trademark is expunged within three years of closing, purchasers would be wise to protect themselves from paying for a soon-to-be expunged trademark.
*As of March 8, 2024, a notice of appeal has been filed appealing the Federal Court’s decision. An update on the appeal will be provided once a decision is rendered.*
For further information, please reach out to Meredith Bacal, Brenden Roberts or any members of the Firm’s Intellectual Property group.
[1] 2024 FC 204
[2] Ibid at paras 3-7.
[3] Ibid at para 7.
[4] Ibid at paras 14-19.
[5] Ibid at paras 20-21.
[6] Ibid at para 63.
[7] Ibid at paras 36-37.
[8] Ibid at paras 66-72, 81, 83, 84.
[9] Ibid at paras 77-79.
