Distributor’s bankruptcy does not excuse non-use of trademark

On May 29, 2019, the Trademarks Opposition Board (TMOB) released its decision in McDougall Gauley LLP v 2001237 Ontario Limited, a section 45 proceeding regarding the trademark TRAX Design (TMA651,790) (the “Mark”). Section 45, which is sometimes referred to as the “use it, or lose it” provision, allows the Registrar of Trademarks to expunge or amend a trademark registration if the owner of the mark has not used it, within the meaning of section 4 of the Trademarks Act, during the three-year period preceding the issuance of the section 45 notice. However, under section 45 an owner can be excused for non-use of their registered trademark, if they can demonstrate special circumstances justifying a period of non-use. The TMOB’s decision in the TRAX Design section 45 proceeding sheds light on what constitutes special circumstances excusing non-use of a trademark. Background On January 6, 2017, the Registrar issued a section 45 notice to the owner of the Mark, 2001237 Ontario Limited (the “Owner”), at the request of McDougall Gauley LLP. In response to the notice, the Owner submitted evidence showing that it was in the business of supplying footwear bearing the Mark to the Canadian market. The Owner distributed its footwear to retail stores, which would then sell the goods to end consumers. Two of the largest re-sellers of the Owner’s goods were discount retail stores The Bargain! Shop (“Bargain”) and Hart Stores (“Hart”). In 2013, The Bargain! Shop underwent court-supervised restructuring proceedings, while Hart Stores was granted bankruptcy protection in 2011. Because of the bankruptcy and insolvency proceedings involving Bargain and Hart, the Owner was forced to discontinue sales to Bargain and Hart and, as a result, the Mark fell into non-use. The Owner argued, however, that the bankruptcies of Bargain and Hart constituted special circumstances excusing its non-use of the Mark during the relevant period. The Owner further argued that it always intended to resume use of the Mark and indeed, had formed a relationship in 2017 with Fields Stores Limited (“Fields”) to supply slippers bearing the Mark to the discount retailer. The TMOB’s Decision In order for special circumstances to excuse non-use of a trademark, the reasons for non-use must rise to the level of special circumstances – that is, circumstances or reasons that are unusual, uncommon, or exceptional. If the reasons for non-use constitute special circumstances, then three-criteria will be considered in determining whether the special circumstances excuse non-use of the trademark. The three criteria to be considered are:

1. The duration of the owner’s non-use;
2. Whether the reasons for non-use are beyond the owner’s control; and,
3. Whether the owner had a serious intention to resume use.

With respect to the registration for TRAX Design, the TMOB held that the bankruptcies of Bargain and Hart did not constitute special circumstances excusing the Owner’s non-use of the Mark. First and foremost, the TMOB concluded that the bankruptcies of Bargain and Hart were not special circumstances. Rather, the decision not to sell to Bargain and Hart was a business decision on the part of the Owner. According to the TMOB, the circumstances were not unusual, uncommon, or exceptional because the Owner could have made efforts to secure alternate distributors once it decided not to sell to Bargain and Hart. Additionally, the Owner’s evidence described Bargain and Hart as the Owner’s “two largest accounts”, which the TMOB interpreted to mean that the Owner did, in fact, have relationships with other distributors in place. Furthermore, the TMOB conclude that even if the bankruptcies of Bargain and Hart did constitute special circumstances, they did not excuse the Owner’s non-use because all three criteria weighed against the Owner. First, the Owner’s non-use of the Mark lasted for a period of approximately five years, which included a two-year period from 2011 to 2013 that preceded Bargain filing for bankruptcy. The TMOB held that this was an excessively long period of non-use, particularly given that the Owner offered no explanation for the non-use during the two-year period prior to Bargain filing for bankruptcy. Second, the TMOB held that the Owner’s reasons for non-use were not beyond the Owner’s control, since the decision to discontinue sales to Bargain and Hart was a business decision. In considering the second criteria, the TMOB also relied on the Owner’s five-year period of non-use, noting that “Circumstances such as the bankruptcy of a licensee may excuse only a short period of non-use.”[1] Addressing the third criteria, the TMOB concluded that the Owner did not have a serious intention to resume use of the Mark during the relevant period. Rather, the Owner only entered into its agreement with Fields, after a section 45 notice was issued and, therefore, could not establish the requisite intention to resume use. In this regard, the TMOB emphasized that a “Serious intention must be accompanied by clear and concrete steps to re-establish use prior to the date of the section 45 notice.”[2] Takeaways The TMOB’s decision in McDougall Gauley LLP v 2001237 Ontario Limited, re-affirms that a trademark owner will not be excused for non-use of their mark simply by virtue of a licensee or distributor’s bankruptcy. Rather, for a licensee or distributor’s bankruptcy to constitute special circumstances excusing non-use, the trademark owner must have a serious intention to resume use of the mark, and indeed, must resume use as quickly as possible. Furthermore, the owner must take steps to secure alternate distributors and/or licensees and should be prepared to furnish evidence of such efforts.