IP à la Carte: A Caution for Acquisitions Involving Intellectual Property 

publication 

January 2012

Intellectual Property Bulletin

A recent decision of the Federal Court of Canada1 has reiterated the importance of thorough due diligence in transactions involving intellectual property ("IP") and attention to contractual terms dealing with the transfer of assets which include intangible assets.

In the Mirage case, the plaintiff operated a number of cafés in southern Ontario which formed its "Symposium Café" franchise. Each of the Symposium Cafés were of a common look and feel and offered overlapping restaurant services. In addition to registering numerous trade-marks containing "Symposium Café" and other expressions, the plaintiff also registered a trade dress representing the interior of the cafés; as depicted below, such being comprised of walls and columns of antiqued stone, a reproduction of the School of Athens fresco, a circular mahogany bar and a circular floor tile pattern extending around the circular bar:

                               

 

 

After a few years of expansion, the Symposium Café franchise experienced financial difficulties, resulting in litigation with a creditor. Minutes of Settlement were eventually entered into, whereby all of the assets of two of the Symposium Cafés were transferred to the creditor. The settlement also provided that the creditor was at liberty to sell those two Symposium Cafés "within or outside" the Symposium Café franchise. The defendants then acquired the assets of the two cafés from the creditor on an "as is, where is" basis.

In spite of offers from the plaintiffs, the defendants declined to operate the cafés within the franchise system; instead, they changed the name of the business to "Café Mirage". Nonetheless, they retained the interior design of the cafés and continued to use the School of Athens trade dress, menus and certain trade-marks of the Symposium Café franchise.

The plaintiff took issue with the continued use of its IP by the defendants outside of the franchise system. However, the defendants were of the view that in acquiring the business and assets of the two cafés, they were entitled to continue to use the trade-marks and associated IP.

In finding that the defendants' continued use of the plaintiff's trade-marks constituted trade-mark infringement, the Court opined that the transfer of the assets of the business did not give the defendants the right to use the associated trade-marks if that use was outside of the franchise system.

The Court also found that while the transfer of the assets of the business included an implied license for the defendants to use the menus acquired in the asset sale, as copyright does not transfer with physical assets such as menus, the license did not permit the defendants to make new menus which were substantial reproductions of the plaintiff's menus.

Take-away

This decision serves as a valuable reminder to both buyers and sellers involved in transactions which transfer IP.

Whenever the value of a business being acquired is dependent, even to a certain extent on its IP, the buyer should be cognizant of the form of IP involved. The terms of the purchase and sale agreement may have varying results depending on what type of IP is being transferred. A buyer should also consider the extent of rights that it will need in order to continue to operate the business as it wishes (e.g., does the buyer need to acquire all title in the IP, or is a license to use the IP sufficient?). Of course, thorough due diligence as to the extent of rights held by the seller in the IP is always necessary, along with a sufficient degree of specificity as to the terms transferring the intangible assets of the business. Buyers should also consider including necessary representations and warranties from the seller for assurance that that the seller is able to transfer or grant what the buyer desires; such may provide recourse to the buyer and mitigate their responsibility for costly litigation if necessary.

Sellers should also be aware of the extent of rights over their IP that they are granting in the purchase and sale agreement (e.g., does the seller wish to transfer all title in the IP or would it rather grant a conditional license to use the IP? ). In the case of trade-marks, their purpose is to distinguish the wares and services of one's business from those of another; thus, if multiple businesses are permitted to use the same, or confusingly similar marks outside of a license arrangement, the marks lose distinctiveness (and consequently, their value as trade-marks). Therefore, sellers should be certain that by selling a portion of their business, they do not jeopardize the value of the IP in the business they retain.

by Sarah Kilpatrick

1 1429539 Ontario Limited v Café Mirage Inc., 2011 FC 1290, 97 CPR (4th) 95 ["Mirage"]. 

a cautionary note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2012