Canada: A Cautionary Tale For U.S. Corporations With Canadian Subsidiaries

Last Updated: March 15 2016
Article by Marko Vesely

If one sets up an American subsidiary to do business in the United States and a Canadian subsidiary to do business in Canada, then only the latter would find itself sued as a defendant in Canadian courts, right? Perhaps not.

The recent decision of the British Columbia Supreme Court in Canadian Olympic Committee v. VF Outdoor Canada Co., 2016 BCSC 238, shows the risk of liability in Canadian courts for American parent or affiliated corporations, notwithstanding the use of a dedicated Canadian subsidiary within the organization.

The Corporate Organization at Issue

The corporations at issue in the case design, manufacture and sell the "The North Face" brand of apparel in North America. VF Corporation, the parent Pennsylvania corporation, holds ownership interests in various "VF Group" companies including VF Outdoor, Inc. ("VF USA") and VF Outdoor Canada Co. ("VF Canada"), which are each indirectly wholly owned subsidiaries of VF Corporation. VF USA develops, creates, designs, and arranges for the manufacture of all products and merchandise under The North Face brand, including the line of products at issue in the case. VF USA is then responsible for ordering merchandise from the foreign factory for sales and distribution in the USA. VF USA had presented evidence that it does not carry on business in Canada, including no employees, no address, no retail stores, no accounts, etc. in Canada. VF USA does not sell, import, or arrange for the import of North Face products into Canada.

VF Canada places its own purchase orders for North Face merchandise directly with the foreign factory and receives and pays for the merchandise directly with the factory. The products are shipped directly to Canada. These products are then sold by VF Canada to licensed and independent retailers throughout Canada. Orders can also be placed by consumers through websites for delivery in Canada, and VF Canada pays all duties for these shipments and receives all revenues from these online sales. All marketing materials are originally designed by VF USA and printed in the USA, but VF Canada selects what materials will be chosen for Canadian retailers.

The Lawsuit in Canada

The plaintiff, the Canadian Olympic Committee ("COC"), which is a public authority with specific rights in certain Olympic marks, sued VF Canada and VF USA for trade-mark infringement, false and misleading advertising, and passing off with respect to a North Face collection of apparel and accessories that allegedly used Olympic marks and were promoted in a manner likely to mislead the public into believing that the defendants are official sponsors of the COC in Canada.

VF USA applied to have the action stayed on jurisdictional grounds. It argued that the B.C. Court lacks territorial competence or, in the alternative, that the Court should decline to exercise its jurisdiction in favour of the courts of California as a more appropriate forum.

The Court's Decision

The Court dismissed the application, finding that there was a real and substantial connection to British Columbia (which is the test in Canada for territorial competence) based on VF USA's role in marketing an online sweepstakes contest that allowed users to "find a store," including locations in Canada, and treated residents of Canada as eligible entrants. The Court also made the following findings:

On the evidence, the plaintiff has presented an arguable case that VF Corporation through its various subsidiary companies, including VF Canada and VF USA, operates a functionally integrated business group for the joint benefit of the North Face brand. VF USA and VF Canada share parents and common resources such as legal counsel, technical support, designers, and manufacturers. VF USA designed and developed products and marketing materials for the collection with the intention that the collection would be available at choice for all "North Face" distributing companies, including VF Canada. The distribution pipeline created by VF Corporation uses a foreign manufacturer who produces the collection and then receives orders and exports the collection to VF Canada as an indirect subsidiary company. VF Canada uses materials and branding strategies developed by VF USA to sell the collection in Canada. VF USA directly sponsored a contest directed at Canadian residents to promote the North Face brand and the collection in Canada. In these circumstances, it could be concluded that VF USA intended or at least ought to have known that the infringing products and materials would ultimately be sold and distributed in Canada.

The Court went on to consider the relevant factors connecting the dispute to B.C. and California and concluded that California could not be said to be a more convenient forum.

The Take-Away

Even when care has been taken to create and operate distinct subsidiaries according to national boundaries, an American (or any other foreign) parent or subsidiary may nevertheless find itself a defendant in legal proceedings in Canada depending on the facts of the dispute and the coordination amongst the subsidiaries. And small details can matter, as illustrated in this case by the simple inclusion of Canadian store locations on an online sweepstakes operated by the American subsidiary, which now faces the cost and risk of litigation in Canada.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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