Canada: A Bright Day for Grey Marketers

Last Updated: August 21 2007
Article by Casey Chisick and Shane Hardy

The Supreme Court of Canada recently released its eagerly awaited decision in Euro-Excellence Inc. v. Kraft Canada Inc. [2007] SCC 37.

The Euro-Excellence Inc. case saw the Supreme Court tackle the thorny issue of whether the Copyright Act, R.S.C. 1985, c. C-42 (the "Act") could be used as a tool in the attempts by intellectual property owners to prevent the importation of grey market goods to Canada. Unlike black market/counterfeit goods, grey market goods are genuine articles that are purchased abroad and then imported into Canada. Grey market goods raise the ire of intellectual property holders by circumventing the normal distribution channels established by manufacturers, increasing competitive pressures and often helping to drive down prices.

Euro-Excellence Inc. had been an authorized distributor of Côte d’Or chocolate bars but lost distribution rights in 2000. Since that time, Euro-Excellence Inc. had been importing genuine Côte d’Or chocolate bars to Canada – as an unauthorized distributor. Similarly, since 2001 Euro-Excellence Inc. had been importing, also as an unauthorized distributor, genuine Toblerone chocolate bars to Canada.

In an effort to prohibit such importation, Kraft Foods Belgium SA ("Kraft Belgium") obtained Canadian copyright registrations for three Côte d’Or logos, which it owned. Kraft Foods Schweiz AG ("Kraft Schweiz") also obtained Canadian copyright registrations for two Toblerone logos, which it owned. Kraft Belgium and Kraft Schweiz then entered into exclusive licence agreements with Kraft Canada Inc. ("Kraft Canada"), which provided Kraft Canada with the right to use the logos with confectionary products in Canada. Shortly thereafter, Kraft Canada confronted Euro-Excellence Inc. and, citing its exclusive Canadian rights under copyright, demanded that they stop selling any products to which the logos were affixed.

The Lower Courts

Kraft Canada commenced proceedings in the Federal Court and achieved a favourable result at trial. Finding that Kraft Canada was entitled to prevent the import of articles bearing logos that infringed copyright in the logos, the trial judge awarded damages to Kraft Canada in the amount of $300,000 and implemented an injunction that prohibited Euro-Excellence Inc. from selling, distributing, exposing or offering for sale copies of the logos. While not prohibiting Euro-Excellence Inc. from selling the chocolate bars themselves, the trial judge did order that the products be rendered non-infringing prior to further sales.

While allowing the appeal in part, the Court of Appeal refused to overturn the decision of the trial judge and sent the issue of damages back to the trial judge for reconsideration. The trial judge subsequently heard further submissions and upheld his original damage award of $300,000.

Division in the Supreme Court

The decision of the Supreme Court of Canada revealed a sharply divided Court concerned with at least two distinct issues.

The first concern was whether the secondary infringement provisions of the Copyright Act properly applied to this sort of situation at all. The essential element of secondary infringement by an importer is sometimes referred to as "hypothetical infringement," that is, although it is not possible under the Act to infringe copyright in Canada by manufacturing items in another jurisdiction, an importer will nonetheless be liable for secondary infringement if the items imported would have infringed copyright if made in Canada by the person who made them elsewhere.

In a strongly -worded opinion, Bastarache J. (LeBel and Charron JJ. concurring) argued that this hypothetical infringement was not made out because it is not possible to infringe copyright simply by importing goods "having a copyrighted work affixed to their wrapper, this work being merely incidental to their value as consumer goods." In his view, the purpose of the Copyright Act is to protect the "legitimate economic interests" of the author and, therefore, "it is only when it is the work itself which is the subject of the sale or other commercial dealing that it can properly be said that [section 27(2)] applies and its protection becomes available." On that basis alone, Bastarache J. would have decided against Kraft.

Rothstein J., however, writing for himself and Binnie J. and Deschamps JJ., rejected both the proposition that "incidental" works are not protected by copyright and the theory of "legitimate economic interests" espoused by Bastarache J., finding no basis in the Copyright Act for either. That issue aside, and approaching the matter on the basis of what he viewed as a "straightforward application" of the secondary infringement provisions, Rothstein J. raised a different concern. He noted that, in order to establish a claim to secondary infringement, Kraft Canada needed to prove that the makers of the works in question (Kraft Belgium and Kraft Schweiz) would have infringed copyright in the logos had they been made in Canada, rather than Europe.

After a detailed analysis of the provisions in the Act related to copyright ownership and licensing, Rothstein J. concluded that an exclusive licensee (in this case, Kraft Canada) is not permitted to maintain an action against its licensors (in this case, Kraft Belgium and Kraft Schweiz) for copyright infringement. Given that conclusion, Rothstein J. held that Kraft Canada had not established secondary infringement by Euro-Excellence Inc. Fish J., in brief concurring reasons, endorsed the reasoning of Rothstein J., and the appeal was therefore allowed (McLachlin C.J. and Abella J. dissenting) – and the reasons of Rothstein J. became the majority opinion – notwithstanding the vehement disagreement between the two groups of justices who nonetheless concurred in the result.

An interesting aspect of the decision, and one that may be addressed in future cases, is whether Rothstein J.’s views on the ability of an exclusive licensee to sue the owner-licensor for copyright infringement actually represent the majority view of the Supreme Court. On that narrow question, five of the nine justices reached an affirmative answer, finding that a licensor can indeed be liable to an exclusive licensee for copyright infringement. In fact, had Bastarache J. not determined that it was not necessary to decide this issue, in view of his conclusion as to the inapplicability of the secondary infringement provisions to the facts before him, it seems likely that, purely as a mathematical result, the appeal would have been dismissed rather than allowed. It will definitely be worth watching what happens when this issue is next before the courts.

What Does This Mean for Attempts to Prevent Grey Marketing?

For the moment, the Supreme Court has made it quite clear that the secondary infringement provisions of the Copyright Act are available as a way to address grey marketing. It can safely be said that the outcome of this case would have been different if Kraft Belgium and Kraft Canada had assigned copyright in the logos to Kraft Canada rather than proceeding by way of exclusive licence. Had that step been taken, Kraft Canada would have been able to demonstrate the hypothetical infringement required by the Act in order to successfully maintain a claim for secondary infringement. As a practical matter, the residual confusion over the rights of an exclusive licensee means that the necessity of assigning, rather than simply licensing, copyright will be left to be determined by future courts.

In the meantime, however, the chances of being able to use intellectual property legislation to clamp down on grey marketing may well be in decline. As noted by Fish J. in his concurring reasons:

Without so deciding, I express grave doubt whether the law governing the protection of intellectual property rights in Canada can be transformed in this way into an instrument of trade control not contemplated by the Copyright Act.

If this doubt proves contagious in future decisions, owners of valuable intellectual property may yet need to look in new directions in order to prevent the importation of grey market goods into 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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Casey Chisick
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