Court considers whether consignment transaction results in trademark use

In JAG Flocomponents NA v Archmetal Industries Corporation (2010 FC 627, June 10 2010), one of the issues considered by the Federal Court was whether the delivery of goods from the Chinese manufacturer to the Canadian distributor, for sale on a consignment basis, effectively constituted use of a trademark in Canada.

Under the Canadian Trademarks Act, the concept of 'use' of a trademark in association with goods is set out in Section 4(1), which provides as follows:

"[A] trademark is deemed to be used in association with wares if, at the time of transfer of the property in, or possession of, the wares, in the normal course of trade, it is marked on the wares themselves or on the packages in which they are distributed, or it is in any other manner so associated with the wares that notice of the association is then given to the person to whom the property or possession is transferred."

Moreover, in Canada, it is a generally accepted principle that the “normal course of trade” may include one or more intermediaries that goods will pass through before reaching the ultimate consumer. As a result, the sale of goods by a manufacturer to a distributor has been deemed to constitute use of the mark in the normal course of trade (see Lin Trading Co v CBM Kabushiki Kaisha ((FCA) (1989) 21 CPR (3d) 417)).

Both of these concepts were considered by the Federal Court in the present case. In particular, the court examined what would constitute a transfer of the property in, or possession of, the goods such that there would be use of the mark in Canada.

JAG Flocomponents involved an action by the plaintiffs for expungement of the registered trademark FUSION. As part of the expungement analysis, the court considered whether there was a material misrepresentation as to the date of first use claimed by defendant Archmetal Industries Corp when it applied to register FUSION in the Canadian Trademarks Office.

The FUSION mark, for use in association with “ball valves for industrial use”, claimed a date of first use in Canada of September 2002. This claim was based on a shipment from defendant Fortune Manufacturing to plaintiff JAG. Although the precise nature of the relationship between the plaintiffs and the defendant in this matter is somewhat complicated, the parties had set out the basics of their relationship via a letter of intent, as well as a consignment agreement. According to the letter of intent, defendant Fortune Manufacturing was to consign its valve products to JAG on certain terms, which were set out in the consignment agreement. In particular, Clause 2(b) of the agreement provided as follows:

"Unless otherwise provided, all products of the company received by the agent shall, at all times, remain the sole property of the company pending sale by the agent. The agent shall receive and keep safe the products as a prudent trustee and shall take reasonable measures to identify and insure the company’s products and not commingle same with the agent’s own goods."

On review, the court held that the transaction in September 2002 failed to meet the requirements of Section 4 of the act, as it was not in the “ordinary course of trade”. Although sales to a distributor are generally accepted as “use” under Section 4, the court distinguished the transaction on the basis that “aside from JAG being required to pay for product only when it was sold, there was never any intention to treat the delivery of product as a sale or transfer to JAG”. In other words, there was no transfer of property in the goods from Fortune Manufacturing to JAG. The court noted that use under Section 4 would instead occur when JAG sold the goods to the next level of trade.

The court further noted that the transaction did not constitute a transfer of possession within the meaning of Section 4, since JAG held the products as a trustee for Fortune Manufacturing and not in its own right. Accordingly, as there was no transfer of the property in, or possession of, the goods as of the date alleged in the application, there was a material misrepresentation in respect of the claimed date of first use. The court thus held that the registration ought to be expunged.

This decision is of interest, as a distinction was made by the court as to the nature of possession set out in Section 4 of the act, whereas the act itself does not state any such distinction. The practical result of such a distinction is that the possession of a manufacturer’s goods by a distributor, which are for sale by the distributor on a consignment basis, may be insufficient to qualify as use “in the normal course of trade”.

Given the commonality of this type of sales structure for manufacturers across industries, trademark owners should exercise caution when assessing the date of first use of their marks in Canada.
Jennifer Galeano and Robert A MacDonald, Gowling Lafleur Henderson LLP, Ottawa

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