A recent decision of the Federal Court illustrates the importance of having a clear understanding and a written agreement concerning who owns the underlying intellectual property rights in a new business venture. 2572495 Ontario Inc. v. Terlin Construction Ltd. 2024 FC 1366
The Facts
The plaintiff is a family-run retail business that includes an electronic commerce component operating through an Amazon “storefront” and a website.
The defendant also is a family-run business but in construction, general contracting, and associated manufacturing, including design and millwork services. The defendant has a computer numerical control machine that can be used to apply designs and shapes to metal and plastic parts.
At the beginning of the Covid-19 pandemic, Service Ontario contacted the defendant to design and manufacture protective plexiglass shields for use at customer service counters. The defendant began by designing hanging shields and then free-standing counter shields.
The defendant hoped to sell these products online but lacked e-commerce experience. They contacted the plaintiff to discuss a possible business relationship. The parties met and agreed orally to a profit-sharing arrangement in which they would split the profits equally on the sales of the plexiglass shield products.
The parties worked collaboratively on the design and marketing of plexiglass shields under the name EZGARD. The plaintiff sold the EZGARD products produced by the defendant from the plaintiff’s existing Amazon storefront, in addition to the newly created websites with the domain names EZGARD.com and EZ-GARD.ca.
Applications were filed to obtain copyright, industrial design, and trademark registrations in plaintiff’s name to take advantage of Amazon’s intellectual property mechanisms and combat third-party infringements.
The oral profit-sharing arrangement continued smoothly for some time, until the parties tried to put their agreement in writing. The parties dispute the original terms, and specifically whether the plaintiff is entitled to a portion of the offline sales of the EZGARD products to the defendant’s customers.
The plaintiff sued in the Ontario Superior Court of Justice claiming breach of contract, and other related claims The defendant defended the action and claims breach contract by counterclaim.
In a separate Federal Court action launched by the plaintiff each party claims and counterclaims, respectively, concerning the infringing activities which they say the other party has engaged resulting in damage, asserts their own intellectual property rights, and disputes the rights asserted by the other party.
The defendant bought a motion for summary judgement seeking declarations it owns the copyright and industrial design registrations, and that the plaintiff has no right to the trademarks in issue.
The Copyright Registration
The copyright registrations relate to a work consisting of the exterior packaging of the EZGARD CounterShield products including the arrangement of printed matter on the packaging. The defendant argued that the Work is nearly identical to the initial packaging mock-up created by its employee, who also created the EZGARD Logo at the same time.
On reviewing the evidence, the court concluded that the defendant’s employee was the author of the work as she exercised skill and judgment in the placement and styling of the elements of the EZGARD Packaging and reduced the ideas into a fixed expression.
The Copyright Act provides that an assignment of copyright is not valid unless it is written & signed by the owner. Absent a written assignment, signed or otherwise, the Judge concluded that the defendant’s employee rather than the plaintiff’s employees was the original author of the work. The copyright registration was invalid and expunged from the register of copyrights.
The Industrial Design Registration
The Judge concluded ownership of the EZGARD Industrial Design Registrations was not appropriate for summary disposition and must be left to be determined at the trial of the action and the counterclaim.
Unlike the situation for copyright the Judge said there is no requirement that an assignment of a design be in writing. There was competing evidence as to whether the parties agreed to an assignment.
The Common Law Rights to the EZGARD marks
Similar to the finding concerning the industrial design the Judge concluded ownership of the EZGARD Marks is not appropriate for summary disposition and must be left to the trial of the action and the counterclaim. A hard look at the parties’ evidence revealed conflicted positions about who first used the EZGARD Marks in association with the goods that ultimately will turn on credibility.
Comment
It is sad to see a successful business enterprise fall apart because the participants did not work out who should own the underlying intellectual property rights and how the profits should be shared. In any event the decision illustrates the importance of working out an appropriate structure at the beginning to deal with intellectual property rights and profit sharing and having it confirmed in a written agreement.
If you have questions, please contact me at mckeown@gsnh.com
Goldman Sloan Nash & Haber LLP 480 University Avenue, Suite 1600 Toronto, Ontario M5G 1V2 Direct Line: (416) 597-3371 Fax: (416) 597-3370 Email: mckeown@gsnh.com
These comments are of a general nature and not intended to provide legal advice as individual situations will differ and should be discussed with a lawyer.
A version of this article originally appeared in the Law360 Canada published by LexisNexis Canada Inc.
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