A Tale of Two Valves – How a Trade Mark Was Lost 


Summer 2010 - (Intellectual Property Brief Summer 2010 )

Intellectual Property Brief Summer 2010

There is often a "honeymoon" period when parties start doing business together. Creating the deal is exciting and parties are optimistic – but wise businesses and counsel know how quickly the relationship can deteriorate. The Federal Court's recent decision in JAG Flocomponents N.A. v. Archmetal Industries addresses just such a falling out. Both parties sought to register the same trade mark – and when one succeeded, the other brought this action to expunge it. The decision is particularly noteworthy as it clarifies when "use in Canada" occurs in the context of a consignment relationship where a foreign manufacturer transfers goods to a Canadian distributor on consignment.

The plaintiff, JAG Flocomponents N.A. ("JAG"), is in the business of marketing ball valves used primarily in the oil field. It entered into what was essentially a partnership with a Canadian importer of valves, Archmetal Industries Corp. ("Archmetal"), and its parent company, Fortune Manufacturing Co., Ltd. ("Fortune"), wherein Fortune would manufacture the valves in China and Archmetal would import them into Canada. The parties agreed that valves would be advertised and sold in Canada under the name FUSION. A consignment agreement entered into by the parties provided that the valves received by JAG would remain the sole property of Archmetal until sold by JAG to third parties. Further, the consignment agreement's clause 12 stipulated that all intellectual property which arose out of the arrangement would be equally owned by the parties. Later, JAG would enter into an unrelated agreement with a third party, Suzhou Neway Machinery Co., Ltd. ("Neway"), wherein Neway would manufacture valves to be distributed by JAG under the name FUSION. These valves were advertised by JAG under the name FUSION in JAG's catalogues and at trade shows. Archmetal and Fortune were aware of this arrangement.

When the business relationship between JAG and Archmetal / Fortune began to falter, the parties took steps to protect their own interests. Archmetal filed an application to register the trade mark FUSION in Canada and claimed a date of first use of September 2002, which was the date Fortune first shipped valves to JAG. The application proceeded to registration and was the subject of this action for expungement by JAG. In April, 2003, JAG filed an application to register FUSION which was later denied by the Trade-marks Office on a successful opposition by Archmetal. Of importance is the fact that neither party made the Trade-Marks Office aware of clause 12 of the consignment agreement, which stated that the parties would own intellectual property equally.

JAG sought to have Archmetal's registration expunged, claiming that (i) Archmetal was not entitled to register the mark, as JAG was the proper owner; (ii) Archmetal claimed an inaccurate date of first use of the mark; (iii) Archmetal made material omissions to the Trade-Marks Office; and (iv) that the mark had lost distinctiveness. JAG succeeded on each ground – but the Court refused to name JAG as the owner of the mark.

On the first ground, the Court found that, based on clause 12 of the consignment agreement, JAG and Archmetal equally owned the mark FUSION and therefore neither was entitled to its exclusive use.

With regards to the allegation that Archmetal's claimed date of first use was inaccurate, the Court reiterated that a foreign entity selling goods through a distributor, retailer or wholesaler may still benefit from "use" in Canada. However, the transfer of the valves by Fortune to JAG in September 2002 was not a "transfer in the ordinary course of trade" required by section 4 of the Trade-marks Act. In keeping with Lin Trading Co. v. CBM Kabushiki Kaisha , a sale to a distributor in Canada constitutes "use" in Canada if there is an intent that the sale to the distributor be to promote the mark in Canada. The present consignment relationship required that the valves would not become the property of JAG until they were sold to third parties. JAG would not pay Fortune for the valves until such time. Accordingly, Archmetal's claimed date of first use was inaccurate and constituted a material misrepresentation sufficient to expunge the mark's registration.

Turning to JAG's claim regarding distinctiveness, the Court found that, as the valves manufactured by both Fortune and Neway were marketed under the FUSION name, and as neither Archmetal nor Fortune had any control over the quality of the valves made by Neway, the FUSION mark was not distinctive.

Further, the Court considered whether the registration should be expunged due to misrepresentations made to the Trade-Marks Office. Expungement on this ground requires that the omission or statement be material, whether it be fraudulent and intentional or innocent but material. Failure to disclose clause 12 of the consignment agreement was a material omission intended to deceive the Trade-Marks Office, in the Court's opinion, and justified expungement of the FUSION mark.

Although this decision did not hinge solely on the wording of the consignment agreement, careful consideration of intellectual property rights when drafting such agreements can help parties better delineate their rights proactively and not let them slip away, as they did in this case.

This article appeared in Lang Michener's Intellectual Property Brief Summer 2010.