Federal Court Finds Parties Failed to Settle in Trademark Infringement Mediation

1. Shake Shack bought out Chic Shack at a price that reflected past investments, developed goodwill, and expansion potential;
2. Chic Shack phased out the use of LE CHIC SHACK, adopted a new mark, and was properly compensated;
3. Chic Shack’s radius for exclusive expansion was defined and the compensation would vary with the degree of the geographical limitations imposed; or
   
4. Shake Shack abandoned all plans for an eventual Canadian expansion.
   

At mediation, the parties made various offers and responses to each other throughout the day. Shake Shack’s view was that the parties reached an agreement on the structure of a transaction and the monetary aspects of the deal. This included an upfront payment, as well as payment for each of the first 10 SHAKE SHACK restaurants opened in Canada.

What Makes a Binding Settlement Agreement?

The Court held that a transaction is formed as soon as the parties agree on its essential elements. This is true even if the parties wait to agree on secondary elements or subsequently confirm the agreement in writing. That said, the Court held that legislation or regulations may create special requirements for certain types of contracts – for example, Rule 389 of the Federal Court Rules, SOR/98-106 (“Rules”), which imposes the obligation for a settlement to be in writing.

In their submissions, both Shake Shack and Chic Shack referred to Apotex Inc. v. Allergan Inc., 2016 FCA 155 (“Apotex”), where the FCA outlined the requirements of a settlement agreement. It held that, for an agreement to be reached, the parties need not agree on every element, but rather just the essential ones. While the FCA’s overview was restricted to common law jurisdictions, these principles are not dissimilar to those in Quebec.

The Court explained that it must use an objective standard in determining whether there is a binding settlement agreement and what terms are essential. As phrased in Apotex, the test is whether a reasonable bystander would conclude that, in making a settlement offer and accepting it, both parties intended to enter into legal relations. When conducting this analysis, the Court must look at the actual conduct of the parties and not just their intentions.

Turning to what is meant by “essential” terms, the Court emphasized that it must adopt an objective standpoint and undertake an evidence-based inquiry. It must, again, put itself in the shoes of a reasonable businessperson and assess the parties’ conduct to conclude whether anything essential was still subject to disagreement and in need of finalization.

The fact that a further document may be required to formalize the agreement is not an impediment to finding that a settlement document is a binding contract, so long as the document outlines the agreement on all of the essential terms.

The evidence does not support that a settlement agreement had been reached

The Court concluded that the evidence did not show, on a balance of probabilities, that it was more likely than not that a settlement agreement had been reached by Shake Shack and Chic Shack at the end of the mediation session. This conclusion was supported by three main factors.

First, the conduct of both the mediator and the parties supported the conclusion that no settlement agreement had been reached at the end of the session. Prothonotary Steele mentioned twice in her direction that she had “adjourned” the mediation. This direction made clear that the mediation was not considered completed or deemed terminated, so the matter was not settled. Additionally, the evidence showed that the parties did not follow the mandatory requirements to confirm the existence of a total or partial settlement agreement, set out in Rule 389(1) and (2).

Second, Shake Shack failed to persuade the Court that the parties reached an agreement on all essential elements of the transaction contemplated by them during the Mediation Session.

Essential elements must be viewed and assessed from the perspective of both parties, and elements will only be non-essential if they happen to be secondary for both parties. The Court determined that, in a trademark infringement case, an issue relating to the scope of the geographical limitations to be placed on a party is significant, not minor. The evidence showed that the geographic limitation of the exclusivity zone had not been agreed upon. A reasonable businessperson would want clarity regarding the exact limit of the geographical area in which they can continue to operate.

Finally, according to Shake Shack’s own evidence, the terms upon which it had an agreement in principle at the end of the session had morphed over time, creating two different versions.

Outcome

The Court concluded that the parties had no agreement to settle the litigation and Shake Shack’s Motion was dismissed. It did not find that further submissions on costs were necessary and determined that Chic Shack was entitled to costs.

Authors: Jaclyn Tilak