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Cautionary notes on settling your trademark or copyright dispute

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The vast majority of disputes over intellectual property rights, including trademarks, patents and copyright, settle before reaching a courtroom. There are many advantages to resolving your dispute through a settlement agreement instead of leaving it to a judge to resolve it, even when that means accepting a less favourable result than what you’d expect to get from the court. For one thing, you can never be certain how the court will decide the case, no matter how confident you are in your position. With a settlement, on the other hand, you get certainty –at least in theory. A settlement will also spare you the stress and distraction of protracted litigation, not to mention the considerable costs.

A settlement agreement, like any kind of a contract, is formed when party A makes an offer to party B and party B accepts the offer. Once party B accepts the offer, both parties are bound by the terms. The terms of a settlement agreement do not have to be set out in single document or be written down at all to be enforceable, so long as there has been an offer and an acceptance of discernable terms.

As simple as this sounds, it is often hard to know, in the fog of negotiations, if and when a settlement has actually been reached. That’s because, in reality, there are typically a number of offers and counter-offers exchanged in the negotiation process, often through emails and phone calls between the parties’ lawyers. This creates hazards for both sides. A party can be deemed to have accepted something it didn’t mean to if it doesn’t clearly communicate that acceptance is conditional on something else. Similarly, a party can wrongly assume that a settlement has been reached when it hasn’t been, because the terms were too vague or because what was thought to be an acceptance was in fact a counter-offer.

This kind of confusion can arise between even the most sophisticated parties and lawyers. This is illustrated in the Federal Court of Appeal’s recent decision in Apotex v Allergan, 2016 FCA 155, a case involving highly sophisticated parties and lawyers, routinely engaged in high stakes litigation over patent rights and blockbuster pharmaceuticals.

In this case, Allergan had commenced an action against Apotex alleging that Apotex had infringed is patent for a drug called gatifloxacin. The parties entered into settlement negotiations through their solicitors. Allergan offered to discontinue its action for infringement if Apotex agreed not to manufacture, sell or export products containing gatifloxacin. Lengthy negotiations ensued over the exact scope of the restrictions. Eventually, Apotex’s lawyers offered to “recommend” to their clients that they agree to the proposed terms and Allergan’s lawyers informed Apotex by e-mail that their clients would accept the terms as negotiated. As a result, Allergan believed that a settlement had been reached. Apotex, however, did not. 

So, Allergan moved in the Federal Court for an order enforcing what it believed to be the terms of a binding settlement agreement. Justice Hughes of the Federal Court held that a settlement had, in fact, been reached and issued an order enforcing its specific terms which he held had been “substantially agreed to”. Apotex appealed Justice Hughes’ decision to Federal Court of Appeal which overturned it, holding that a settlement had not been reached because acceptance had not occurred in respect of sufficiently discernable terms.

This case serves as a useful cautionary tale when it comes to negotiating IP disputes. And the Court of Appeal’s decision provides a number of important takeaways:

  1. Both parties must have intended to create a binding agreement, as judged from the perspective of a reasonable business person looking at the facts and circumstances of the negotiation. It is not enough for one party to subjectively believe that a settlement has been reached.
  2. A settlement will be reached once there is agreement on “essential terms”, even if the details and non-essential terms are still to be worked out. Whether terms are essential or not is, again, to be viewed objectively from the perspective of a reasonable business person.
  3. There can be a mutual intention to create a binding agreement on all essential terms in the absence of a formal written agreement. If you do not mean to accept essential terms until you see them set out in a formal document, this condition of your acceptance must be expressly stated.
  4. The agreement must be between the parties, not just between their lawyers. A lawyer’s statements that “I will recommend this to my client” or “this is acceptable, subject to my client’s instructions” do not constitute acceptance on behalf of the client.

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