Ontario Court Of Appeal Enforces Contracts Restricting Grey Market Sales, Not Void For Restraint Of Trade

In the decision of Mars Canada Inc. v. Bemco Cash & Carry Inc.1, the Ontario Court of Appeal has recently affirmed a Superior Court ruling that a contract that prevents the sale of grey market goods in Canada is valid and enforceable, and not invalid for being in restraint of trade.

The facts are all too familiar: Bemco Cash & Carry Inc. (Bemco) was selling grey market chocolate bars from the U.S. with the MARS, M&M's, MILKY WAY and SNICKERS brands, undercutting the price of products sold by the authorized distributor, and was sued by the Canadian exclusive distributor Mars Canada Inc. (Mars Canada) in the Federal Court. The action was subsequently settled on the basis that Bemco disclose the source of its grey market goods and undertake not to import or sell any more grey market goods in future. In a further settlement agreement, the supplier, GPAE Trading Corp. (GPAE), also undertook not to import or sell MARS branded products, and the settlement included related companies such as Bemco. Four years later, Mars Canada discovered that fresh sales of grey market MARS bars were being made by an affiliate of Bemco and GPAE, and proceeded to sue for breach of the settlement agreements.

Instead of complying when caught, Bemco and GPAE took the position that the settlement agreements were void for being in restraint of trade. On a motion for summary judgment, the Ontario Superior Court held that both the defendants were in breach of the settlement agreements by continuing to import grey market goods into Canada. The motions judge unequivocally rejected the argument that the agreements were in restraint of trade, in reliance on the 1982 Ontario Court of Appeal decision in Tank Lining Corp v. Dunlop Industrial Ltd2.

The Court of Appeal highlighted three key findings of the motions judge3:

(a) even assuming the settlement agreements were in restraint of trade, and not subject to exceptions, the agreements were reasonable in the interests of the parties and in the interests of the public, since they were entered into to settle litigation, which has a purpose favoured by the law and by public policy;

(b) the trademark owner/exclusive licensee was entitled to enforce its registered trademarks; and

(c) the products imported from the U.S. did not comply with packaging and labelling laws in Canada.

Having made these findings, the motions judge directed a reference on quantification of damages and also awarded substantial indemnity costs of $225,000. The...