Executive Summary: Key Legal and Evidentiary Issues

• Appeal concerned the denial of a motion to set aside a 2021 default judgment under Rule 399 of the Federal Courts Rules.

• Appellants failed to file a statement of defence in a trademark infringement lawsuit, resulting in default judgment.

• Federal Court found no reasonable explanation for the failure to defend and dismissed the motion without assessing the remaining criteria.

• Appellants argued they believed the matter had been resolved informally through settlement discussions.

• The Federal Court of Appeal held there was no palpable and overriding error in the lower court’s reasoning.

• Although damages were previously awarded, no costs were granted for this appeal due to concerns about fairness in conduct by both parties.

Facts and outcome of the case

Background and parties involved
The case arises from a trademark infringement action initiated in 2016 by Dunn’s Famous International Holdings Inc. against several individuals and entities. By January 2017, 2474234 Ontario Inc. and Moishe Smith (later represented by his estate) were added as defendants. Following partial settlements with other parties, Dunn’s Famous continued its claim against Smith and the company. In February 2020, the company served a second amended statement of claim. Smith and 247 failed to respond with a defence.

Default judgment and motion to set it aside
In November 2020, the respondent brought an ex parte motion under Rule 210 of the Federal Courts Rules for default judgment. The Federal Court granted it in January 2021, awarding $163,894.22 in damages. This included a $50,000 franchise fee and 5% royalties based on calculated net revenues. In 2023, the appellants moved under Rule 399 to set aside the judgment, arguing they believed settlement discussions had resolved the issue.

Trial-level decision
The Federal Court dismissed the motion, holding that the appellants failed the first requirement for setting aside a default judgment: providing a reasonable explanation for their failure to defend. Because the legal test is conjunctive, the court did not assess whether the appellants had a defence on the merits or acted promptly in bringing their motion.

Appeal and arguments before the Federal Court of Appeal
On appeal, the appellants did not challenge the legal test applied but alleged that the trial judge made a palpable and overriding error in failing to recognize that ongoing settlement discussions led them to believe a defence was unnecessary. The Federal Court of Appeal rejected this argument, finding the lower court's evaluation of the record was reasonable and supported by evidence. The Court also noted gaps in the documentation, such as conflicting financial figures and the unexplained absence of remittance forms in the original record.

Decision and outcome
The appeal was dismissed. The Court found no reviewable legal or factual error. It acknowledged that although troubling questions remain, such as unexplained discrepancies in revenue figures, these issues were irrelevant to the appeal's narrow scope—whether the motion to set aside the default judgment was wrongly denied.

Costs and final remarks
Both parties requested costs, with the respondent seeking elevated costs and a declaration that the appeal was frivolous. The Court declined to make such a declaration and awarded no costs, citing problematic conduct by both parties, including the respondent’s introduction of potentially privileged material.