Category: Cannabis Industry

$500 Million Class Action Suits Force Ontario Cannabis Company to Restructure and Offer Settlements

Post author By Written on behalf of Bader Law
Post date July 29, 2021

In a recent decision, the court detailed how an Ontario cannabis company attempted to restructure and offer settlements in response to class actions against it seeking damages of $500 million.

Cannabis Company Faces Class Actions

The company is a public company and a licensed producer of cannabis in Canada with facilities in Ontario.

However, following audits by Health Canada at its facilities in 2019, shipments of all its cannabis products were stopped and its cannabis licenses were partially suspended.

Additionally, in July 2019, the company publicly announced that it had been growing cannabis in breach of federal law, resulting in an immediate and substantial decline in the price of its shares.

Shortly thereafter, numerous class actions were commenced against the company in several provinces in Canada and at the federal and state level in the United States, claiming damages in excess of $500 million.

Company Seeks Restructuring to Deal with Legal Issues

Despite extensive efforts to resolve its issues, by March 2020, the company determined it was in its best interest and those of its stakeholders to commence proceedings under the Companies’ Creditors Arrangement Act (the “CCAA”). The CCAA is a federal law allowing insolvent corporations that owe their creditors in excess of $5 million to restructure their business and financial affairs.

Since commencing CCAA proceedings, the company completed each of the business restructuring objectives, including completion of the remainder of its remediation work, reinstatement of its cannabis licenses, resumption of production and processing operations and a return to the recreational and medical cannabis markets.

Company Enters into Mediation for Settlement Of Class Actions

With regard to the class actions suits against it, in 2020, the company obtained a mediation order appointing a judge to conduct a mediation process.

On January 19, 2021, following extensive negotiations, the company entered into a Restructuring Support Agreement (“RSA”) with the representative plaintiffs in both the Ontario and the U.S. class actions.

Company’s Restructuring Includes Settlement Offers for Class Actions

The settlement framework set out in the RSA provided for the establishment of a trust for the benefit of the class action claimants. Under the proposed settlement, the company would contribute $50 million, among other legal manoeuvres. Subsequently, additional settlements were reached with co-defendants resulting in the trust receiving an additional $83 million.

Later, the plan was overwhelmingly approved by each class of creditors both by the numbers voting and by the value of their claims.

Company Seeks Court Approval of Plan

As a result, the company went to court to obtain approval of the CCAA plan and to implement the framework for the settlement of the class action claims.

As explained by the court, the requirements that must be met for court approval of a plan of compromise or arrangement under the CCAA are:

1) There must be strict compliance with all statutory requirements;

2) All material filed and procedures carried out must be examined to determine if anything has been done or purported to have been done which is not authorized by the CCAA and prior orders of the court in the CCAA proceedings; and

3) The plan must be fair and reasonable.

Court Refuses to Approve Plan

Ultimately, the court refused to approve the plan. Specifically, it took issue with one provision in the Plan, which provided for the bar orders required by the SRA. The court explained:

“[W]hile there is evidence of the importance of the assignment to the settlement between the [company] and the [class action] Claimants, there is no evidence of the importance of the [class action] Claimants being able to maintain their claims against the non-settling defendants and recover 100% of the damages while barring the non-settling defendants right to contribution and indemnity.”

As a result, the court refused to approve the plan, finding that its wording was not fair and reasonable in the circumstances.

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Running a business involves an infinite number of both daily and long-term decisions, all of which will impact your venture. Choosing the appropriate legal structure will influence your success as it will affect your business from start-up options and share capital, to providing for future investment and profit-sharing. The way in which a business is structured will also have a significant effect on risk and liability.

Deciding how to structure your business is a task best undertaken with the guidance of an experienced corporate lawyer with noteworthy experience advising business owners on risk and liability. At Bader Law, our business services lawyers have been advising clients who are looking to make the best choices about how to organize their business venture for several years. We work hard to protect your financial and legal interests while ensuring your company operates successfully.

The business services our team offers include experience advising and assisting cannabis start-ups with business structure and licensing matters.

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Cannabis Industry

‘Subway’ Restaurant Wins Trademark Claims Against Cannabis Retailer ‘Budway’

Post author By Written on behalf of Bader Law
Post date July 1, 2021

We had previously written about a case in which Toys “R” Us won its claims against a cannabis dispensary for using the trademark and trade name Herbs “R” Us.

More recently, in a similar case, the Federal Court of Canada ruled that a cannabis store called Budway had infringed the Subway restaurant chain’s trademarks.

Subway Files Claim Against Budway

Subway IP LLC, which owns Canadian registered trademarks used in association with SUBWAY-branded sandwich restaurants, brought an application to enjoin a cannabis retailer from using the “BUDWAY” trademark in association with its cannabis and wellness store.

Subway holds a number of registered trademarks associated with its name, one of which was registered in 1987 for use in association with restaurant services and the second of which was registered in 1999 for use in association with “sandwiches, prepared salads, buns and rolls, cookies, muffins, pastries, beverages”. Subway also holds three design marks associated with the name Subway, which had been registered in different variations in 2000, 2007 and 2019.

In 2020, Subway became aware of a cannabis store’s use of the Budway design at its retail location in Vancouver, British Columbia. Additionally, Instagram posts showed the use by the account “budwayonclark” of a “mascot” in the form of a submarine sandwich filled with cannabis leaves and bloodshot, half-opened eyes.

Subway alleged that the cannabis store’s use of its Budway trademark infringed Subway’s registered trademarks, which amounted to both passing off and depreciation of the goodwill in those marks, contrary to sections 7(b), 20, and 22 of the Trademarks Act. Subway requested an injunction and damages.

Budway did not respond to the court application and the case was therefore heard without its involvement.

Court Finds in Favour of Subway

The court began by explaining that a trademark registration grants the owner the exclusive right to use the mark throughout Canada in respect of the goods and services in the registration. Further, the right to exclusive use will be deemed infringed by the sale, distribution, or advertisement of goods or services in association with a confusing trademark. To establish whether a trademark is confusing with another trademark, the applicant must prove that the use of both trademarks in the same area “would be likely to lead to the inference that the goods or services associated with those trademarks are manufactured, sold, leased, hired or performed by the same person, whether or not the goods or services are of the same general class”. The court then explained:

“In determining whether trademarks are confusing, the Court has regard to all of the surrounding circumstances, including the particular circumstances identified in subsection 6(5) of the Trademarks Act, namely inherent or acquired distinctiveness; length of time the trademarks have been in use; the nature of the goods, services, business, and trade; and the degree of resemblance between the trademarks. While all factors must be considered, the weight given to each factor will depend on the circumstances, with the degree of resemblance often likely to have the greatest effect…. The test for confusion is to be applied as a matter of “first impression in the mind of a casual consumer somewhat in a hurry” at a time when they have “no more than an imperfect recollection” of the registered mark and without giving the matter “detailed consideration or scrutiny”.”

After reviewing the evidence, the court ultimately concluded that the cannabis store’s use of the Budway trademark infringed the registered trademarks of Subway, and amounted to both passing off and depreciation of the goodwill in those marks, contrary to the Trademarks Act. The court therefore issued an injunction against Budway prohibiting it from using the mark and awarded damages in the amount of $15,000, and costs in the amount of $25,000.

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Cannabis Industry

Landlord Was Entitled to Terminate Lease for Cannabis Store Without Proper Licence, Ontario Court of Appeal Rules

Post author By Written on behalf of Bader Law
Post date March 25, 2021

In a recent Ontario Court of Appeal decision, the court dismissed a sublessee’s appeal after the landlord repossessed the premises in which he was operating an unlicensed cannabis store.

Cannabis Store Owner Subleases Commercial Property

The sublessee began occupying the commercial premises in January 2019, under an oral sublease granted to him by the original tenant, who had operated a restaurant.

The tenant’s lease required business conducted on the premises to comply with federal, provincial, and municipal law. As such, the sublessee was bound to comply with that obligation.

The sublessee operated a cannabis store on the premises. He did so without either a licence or any valid exemption from the licensing requirements under the Cannabis Control Act, 2017 and the Cannabis Licence Act, 2018.

In July 2019, a company purchased the property and became the head landlord.

In August 2019, the new landlord gave notice that the tenant was in breach of its lease because the premises were being used for the sale and distribution of cannabis without a licence. The notice gave 10 days to rectify the breach, failing which the landlord would repossess the premises. Doing so would terminate the tenant’s lease and, as a consequence, the sublease.

Landlord Repurposes Premises Following Police Raid

However, despite the fact that the cannabis store had continued to operate, the landlord did not act on the notice until April 21, 2020, when there was a police raid of the premises. During the raid, the police seized several kilograms of marijuana and charged four of the sublessee’s employees, though neither the sublessee nor his business were charged.

Following the raid, the landlord changed the locks and retook possession, purportedly terminating the lease. The landlord did not issue a fresh notice of default before doing so. The landlord had continued to accept rent payments between the August 2019 notice and the April 2020 retaking of possession.

The sublessee went to court seeking an order granting him relief from forfeiture and re‑entry into his business. He argued that the landlord knew he was running a cannabis retail business and consented to him subletting the unit from the tenant for that purpose. He also argued that his cannabis store was a legal operation and he had not breached the lease. Finally, he argued that even if he had breached his lease, the forfeiture was unlawful because he was not given notice of the landlord’s intention to terminate the lease or an opportunity to cure any breach. In the end, the sublessee argued that it would be unjust to deny him relief from forfeiture in this case.

In response, the landlord submitted that the sublessee did not have a valid sublease with the tenant for the premises and, therefore, had no standing to seek relief from forfeiture. In the alternative, it submitted that by carrying on an illegal cannabis business, the sublessee had breached the terms of its lease with the tenant. The landlord also argued that it was not required to give the tenant or sublessee notice of intention to terminate the lease in April 2020 because notice was given under the Commercial Tenancies Act in August 2019 that the tenant was in breach of its lease because the premises were being used for an unlicensed cannabis store.

Lower Court Rules Against Sublessee

The application judge rejected the sublessee’s argument that the landlord was not entitled to terminate the lease (and thus the sublease) and retake possession in April 2020 without issuing a fresh notice and giving further time to cure the default. She found that, following the August 2019 notice, the landlord had been misled by information provided by the sublessee that he had a valid exemption from licensing requirements and thus could lawfully run a cannabis store on the premises. She found that the landlord had not acted earlier to terminate the lease in reliance on that misleading information.

The application judge concluded that it was only when the police advised the landlord in April 2020 that no licence or exemption existed for the premises that it came to understand that it had been misled. The application judge held that the landlord was entitled at that point to act on the original notice, which had clearly indicated that it was not prepared to continue the lease if the cannabis store was operating illegally.

In dismissing the sublessee’s application, the application judge stated:

“I find that the breach of the lease was very serious. [The sublessee] was operating an illegal cannabis store for more than 15 months. When [the landlord] confronted him about the status of his business, [the sublessee] misled [the landlord] into thinking that he had a lawful exemption to run the business without a license. There is nothing inequitable or unjust about prohibiting an illegal business from continuing its operations.”

The sublessee appealed to the Ontario Court of Appeal. He argued that the application judge’s conclusion that the landlord was entitled to act on the August 2019 notice was unjustified. He submitted that the decision rested on the premise that he had intentionally misled the landlord. While the sublessee conceded that he had no licence or exemption, he argued that at the relevant time he believed he was entitled to an exemption and therefore had not intentionally mislead the landlord when he provided information that he had a lawful exemption.

Court of Appeal Dismisses Appeal

The court rejected the sublessee’s argument, stating that the application judge’s conclusion was not premised on a finding that he had intentionally misled the landlord, nor was it necessary for her to so find. On the same basis, the court rejected the sublessee’s argument that the application judge had erred in not granting relief from forfeiture.

The court stated that the actual underlying issue before the application judge was whether, by reason of the delay in proceeding under the August 2019 notice and the acceptance of rent, the landlord had waived the breach of lease referred to in that notice, thus requiring a fresh notice in April 2020.

The court held that the requirements for a waiver had not been established and the waiver argument could not succeed.

As a result, the sublessee’s appeal was dismissed.

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Cannabis Industry

‘Toys R Us’ Files Trademark Claims Against Cannabis Retailer ‘Herbs R Us’

Post author By Written on behalf of Bader Law
Post date February 25, 2021

In a recent Federal Court of Canada case, Toys “R” Us filed three separate claims against a cannabis dispensary for using the trademark and trade name Herbs “R” Us.

Toys “R” Us Files Trademark Claims Against Herbs “R” Us

Herbs “R” Us Wellness Society is a company operating a cannabis boutique and dispensary in Vancouver, British Columbia under the trademark and trade name HERBS R US.

Toys “R” Us, a toy, clothing, and baby product retailer,owns sixteen registered trademarks, including variations of its TOYS R US design, five other marks that include or consist of TOYS R US as a word mark; six other design and word marks for related “R” US marks (such as KIDS “R” US Design and GIFTSRUS), and a word mark for R US alone.

Toys “R” Us filed three trademark claims against Herbs “R” Us in the Federal Court of Canada, claiming:

(1) infringement under section 20 of the Trademarks Act;

(2) passing off under subsection 7(b) of the Trademarks Act; and/or

(3) a likely depreciation of goodwill under section 22 of the Trademarks Act.

Herbs “R” Us did not respond to the application, so the case proceeded solely on the evidence filed by Toys “R” Us.

Court Awards Damages to Toys “R” Us for Depreciation of Goodwill

On Toys “R” Us’ first claim, the court found that the HERBS R US design mark was similar to one of Toys “R” Us’ and therefore proceeded to a confusion analysis with respect to that mark.

The court explained that a confusion analysis considers “all the surrounding circumstances,” including:

(a) the inherent or acquired distinctiveness of the trademarks or trade names;

(b) the length of time they have been in use;

(d) the nature of the trade; and

(e) the degree of resemblance between them, including in appearance or sound or in the ideas suggested by them.

In this case, the court concluded that:

“Despite the similarity of the trademarks and the other factors that favour Toys “R” Us, I conclude that the vast differences between the goods and services are such that there is no likelihood of confusion. I cannot agree with Toys “R” Us’ contention that resemblance between the marks is such that use of the HERBS R US design trademark “unquestionably would give the impression to consumers that Toys R Us has expanded its retail services into these other areas.” To the contrary, it strikes me as unlikely in the extreme that a Canadian consumer, even a casual one somewhat in a hurry with an imperfect recollection of the TOYS R US mark, would see the HERBS R US trademark and conclude that a well-known toy retailer had started branching out into storefront “dispensary” services or cannabis sales, either by itself or through a licensee.”

As a result, the court held that Toys “R” Us had not established that the HERBS R US mark was confusing with its mark and had therefore not established infringement s. 20 of the Trademarks Act.

For related reasons, the court dismissed Toys “R” Us’ claim for passing off.

However, the court did find that Toys “R” Us had proved that Herbs “R” Us had used its mark, or a mark so closely akin to its mark, in a manner likely to have the effect of depreciating the goodwill in Toys “R” Us’ mark contrary to s. 22(1) of the Trademarks Act. The court came to this conclusion by examining the four elements required to prove such a claim, which have been set out in previous case law as follows:

Was the claimant’s registered trademark used by the defendant in connection with wares and services?
Was the claimant’s registered trademark sufficiently well-known to have significant goodwill attached to it?
Was the claimant’s mark used in a manner likelyto have the effect on that goodwill?
Was the likely effect to depreciate the value of its goodwill?

In the result, the court therefore dismissed Toys “R” Us’ claims for infringement and passing off, but allowed their claim for depreciation of goodwill.

The court thus grantedan injunction prohibiting Herbs “R” Us from using the HERBS R US trademark and ordered delivery up or destruction of goods, packaging, labels and advertising material bearing the HERBS R US trademark in any form. In addition, it awarded damages in the amount of $15,000 arising from Herbs “R” Us’ violations of the Trademarks Act and costs in the amount of $15,000.

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