Canada: SCC Divided On Key Issues Of Copyright Law And Policy: Grey Marketer Prevails

Kraft Canada Inc. v. Euro Excellence Inc.

On July 26, 2007, the Supreme Court of Canada (SCC) issued its decision in the case of Kraft Canada Inc. v. Euro Excellence Inc. The SCC allowed the appeal of Euro Excellence, thereby disallowing Kraft Canada's claim of secondary infringement of copyright against Euro Excellence.

While the SCC's decision to allow the appeal was made by a margin of seven to two, a deeply divided SCC produced four sets of reasons in reversing the decisions of both the Federal Court of Appeal (2005 FCA 427) and Federal Court (2004 FC 652). The decision raises interesting questions about the interface of intellectual property and competition law, in particular the extent to which copyright law can and should be used to limit competition from grey-market imports.

Background

The case arose as an attempt to prevent grey market activity in CÔTE D'OR and TOBLERONE chocolate. In this case, Euro Excellence had purchased genuine CÔTE D'OR and TOBLERONE chocolate outside of Canada, and then imported into Canada and sold the chocolate, against the wishes of Kraft Canada, which was the exclusive Canadian distributor of the CÔTE D'OR and TOBLERONE products.

To address the grey marketing, Kraft Foods Belgium S.A. (Kraft Belgium) and Kraft Foods Schweiz AG (Kraft Switzerland), the producers of CÔTE D'OR and TOBLERONE chocolates, respectively, registered copyrights in Canada in the artistic category covering various aspects of the brands' packaging. Two exclusive licence agreements were registered the same day, granting Kraft Canada the exclusive right to produce, reproduce, and adapt the copyrighted material for the purpose of manufacturing, distributing or selling the products in Canada.

Relying on these copyrights, Kraft Canada asked Euro Excellence to cease and desist from distributing the grey market products in Canada. Euro Excellence refused, which led to Kraft's lawsuit.

The Reasoning of the Court

The principal reasons for judgment were written by Rothstein J. (Binnie J. and Deschamps J. concurring), with a very brief concurring judgment written by Fish J. As discussed in greater detail below, Bastarache J. (writing for himself, Charron J. and LeBel J.), concurred in the result, but did so using an approach that differed markedly from that of Rothstein J.

In the view of Rothstein J., the case turned on a straightforward application of the provisions governing secondary infringement, which are set out in s. 27(2)(e)1 of the Copyright Act. Rothstein held that the purpose of that provision was to ensure that Canadian copyright holders receive their "just rewards," even where they do not hold the copyright abroad. The statute protects Canadian copyright holders against parallel importation by deeming, in certain circumstances, that there is an infringement of copyright in Canada even where the imported works did not infringe copyright laws in the country in which they were made. Without this protection, a foreign copyright holder who could cheaply manufacture the relevant work abroad could flood the Canadian market with the work, thereby significantly devaluing the Canadian copyrights.

However, for Kraft Canada to succeed in its claim for secondary infringement, it had to show that Euro Excellence imported works that would have infringed copyright if they had been made in Canada by the persons who actually made them. In the present case, it was the copyright owners (Kraft Belgium and Kraft Switzerland) that had made the works which were subsequently imported into Canada by Euro. It was therefore necessary to establish that Kraft Belgium and Kraft Switzerland (which were the licensors/owners of the copyright in the chocolate-bar logos) would have infringed the copyrights of their licensee (Kraft Canada), if the chocolate-bar wrappers had been made by Kraft Belgium and Kraft Switzerland in Canada.

Rothstein J. held that Kraft Canada could not succeed in its claim for secondary infringement because it was impossible for the owner of a Canadian copyright (even though it had contractually agreed not to exercise that right) to infringe its own copyright. Although Kraft Canada, as an exclusive licensee, has a property interest in the copyright that enables it to sue third parties for infringement, the Kraft parent companies retain a residual ownership interest in the copyright that prevents an exclusive licensee from suing them for infringement. Thus, even if Kraft Belgium or Kraft Switzerland had violated the terms of its exclusive licensing agreement with Kraft Canada, and produced the chocolate-bar wrappers in Canada, Kraft Canada's recourse against the Kraft parent companies could not include an action for copyright infringement: Kraft Canada's only remedies would lie in an action for breach of contract.

Fish J. agreed with the reasons of Justice Rothstein, but drafted his own brief concurring reasons expressing (without deciding) "grave doubt whether the law governing the protection of intellectual property rights in Canada can be transformed [in the way that Kraft Canada urged] into an instrument of trade control not contemplated by the Copyright Act."

The reasons of Bastarache J. share little with the reasons of Rothstein J. except concurrence in respect of the disposition of the appeal. Bastarache J. expands on Fish J.'s "grave doubt" about the use of intellectual property rights as an instrument of trade control. Bastarache J. held that the Copyright Act should not be interpreted as protecting all economic benefits from all types of labour, and, in particular, the protection offered by copyright cannot be leveraged to include economic interests that are only tangentially related to the copyrighted work.

Accordingly, Bastarache J. refused to find that the sale of a chocolate bar with a copyrighted logo on its wrapper is equivalent to the sale of that copyrighted work. "Simply put, . [t]he work, qua work, is merely incidental to the consumer good, and thus the sale of the latter cannot be said in any real sense to be a sale of the former. While it is true that a logo affixed to a package can play an essential role in the sale of that package, that is the role of the logo as a trade-mark, not as a copyright."

While recognizing the difficulties in determining whether a work is merely incidental to a consumer good, Bastarache J. stated that his interpretation was necessary to protect the essential balance that lies at the heart of copyright law, and to ensure that copyright protection is not allowed to extend beyond the legitimate interests of copyright holders. Bastarache J. suggested some factors that could be useful in determining when a work is merely incidental to a consumer good, such as the nature of the product, the nature of the protected work and the relationship of the work to the product. In short, "if a reasonable consumer undertaking a commercial transaction does not think that the copyrighted work is what she is buying or dealing with, it is likely that the work is merely incidental to the consumer good."

On this reading of the Copyright Act, the sale of a chocolate bar with a copyrighted logo would not found a claim for secondary copyright infringement, as any transactions related to the chocolate bar would not be considered to be transactions in respect of the copyrighted work. Therefore, Kraft's claim for secondary infringement fails, regardless of whether or not an exclusive licensee has standing to sue the owner/licensor for copyright infringement. In obiter, however, Bastarache J. expressed his opinion that the language of the Copyright Act made it perfectly clear that an exclusive licensee given the sole and exclusive right to a copyright can enforce such rights against the owner in a claim of copyright infringement, rather than simply as a claim for breach of contract.

The differences in reasoning between the two main judgments allowing the appeal are all the more interesting because both Rothstein J. and Bastarache J. claim to be adopting the same approach to statutory interpretation, namely that "the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament".

Despite starting from the same principle of statutory interpretation, the two end up in very different places. Rothstein J. argues that Bastarache J. has substituted his own policy preference for that of Parliament. For Rothstein J., once every party admitted that the logos resulted from the exercise of skill and judgment, and are therefore legitimate subjects of copyright, then limits to the protection of copyright must be prescribed by Parliament. Noting that the incidental approach advocated by Bastarache J. is similar to the Australian approach, Rothstein J. also noted that the Australian approach was prescribed by statute, and not by judges.

Finally, Rothstein J. noted that the Copyright Act expressly permits a single work to be the subject of both copyright and trade-mark protection. Thus, as Parliament has authorized concurrent copyright and trade-mark protection for labels, until it provides otherwise, the courts are bound to conclude that a logo on a chocolate bar wrapper can receive concurrent trade-mark and copyright protection.

The dissenting reasons of McLachlin C.J. and Abella J. were delivered by Abella J. The dissent clearly identified the two main issues before the Court as being (1) whether a copyrighted work, where it is printed on the wrapper of a consumer product, is being sold or distributed; and (2) whether an exclusive licensee in Canada is afforded protection, by the Copyright Act, where the infringing material is produced by the owner/licensor of the copyright.

On the first issue, Abella J. agreed with Rothstein J. that there is nothing in the Act to endorse a restrictive definition of the word "sell." "When a product is sold, title to its wrapper is also transferred to the purchaser. The Act is indifferent as to whether the sale of the wrapper is important to the consumer." Abella J. expressed her discomfort with inviting a case-by-case judicial exploration of whether a logo is incidental to a product or not, and agreed with Rothstein J. that there is no scope for a judicially created limit to the protection of a copyright holder based on what might or might not be a legitimate economic interest.

However, on the question of whether an exclusive licensee can claim protection against secondary infringement when the copyrighted work was produced by the owner/licensor, she disagrees with Rothstein J., noting "an exclusive license which would not prevent others, including the owner-licensor, from performing the acts addressed in the licensing agreement, would no longer be exclusive. It would also render meaningless the statutory definition found in s. 2.7 of the Copyright Act of an exclusive licensee as the holder of rights "to the exclusion of all others including the copyright owner."

It is interesting to note that it appears that Kraft had actually managed to persuade a majority of the Supreme Court justices both that the Copyright Act could support a claim for infringement in relation to the sale of chocolate bars that have a copyrighted logo on its wrapper, and that an exclusive licensee can sue the owner of the copyright for copyright infringement. Yet it still lost the case because it could not get the same majority of judges aligned on each of the issues.

At the Intersection of Intellectual Property and Competition Laws

The significant splits in reasoning in this case (and the strange alignment of reasoning on the two key issues) make it difficult to clearly characterize the state of the law following this decision. Nevertheless, the case is interesting for the fact that it is the second case in recent years in which the SCC discussed the scope of intellectual property protection, and in particular the extension of intellectual property rights beyond their statutory limit to allegedly control market behaviour, in each case without reference to the Competition Act or the principles that underlie its application.

In November 2005, the SCC held in Kirkbi AG v. Ritvik Holdings Inc. (2005 SCC 65) that the maker of LEGO brand interlocking bricks could not use "the law of passing off and of trade-marks . to perpetuate monopoly rights enjoyed under now-expired patents." With its LEGO patents expired, and faced with competition from new entrants with "similar if not identical products," including Mega Bloks Inc. (Mega Bloks, formerly Ritvik Holdings Inc.), Kirkbi AG (Kirkbi) had sought to prevent competition from third parties selling similar bricks by asserting trade-mark rights over the pattern of studs on the bricks. Having failed to succeed in registering such trade-mark rights in Canada, it asserted unregistered rights, raising the question as to whether the sale by Mega Bloks of its competing product caused confusion with Kirkbi's unregistered mark.

In framing the issue, LeBel J., writing for the Court, warned of the risk that "the search [by intellectual property rights holders] for continuing protection of what they view as their rightful property" could lead to "discarding basic and necessary distinctions between different forms of intellectual property and their legal and economic functions." While recognizing that "[t]he operation of the market relies extensively on brands" and that the "[t]he goodwill associated with [brands] is considered to be a most valuable form of property," LeBel J. stated that "a mark must not be confused with the product - it is something else, a symbol of a connection between a source of a product and the product itself." As applied to trade-mark and patent law, the "basic and necessary" distinction is safeguarded by the "doctrine of functionality," the root of which LeBel J. described as "a concern to avoid overextending monopoly rights on the products themselves and impeding competition, in respect of wares sharing the same technical characteristics."

While the specific issues before the Court in the Kraft case differed from those in Kirkbi, common to both cases was an attempt to use intellectual property rights to protect against competition in a manner that allegedly exceeded the proper limits of the intellectual property in question. In Kirkbi, the Court as a whole concluded that Kirkbi's attempted use of trade-mark law did in fact exceed these limits. Only a minority of the Court took a similar view in Kraft, led by Bastarache J. (with LeBel and Charron JJ concurring), whose finding that the "incidental presence of . copyrighted works on the wrappers of chocolate bars does not bring the chocolate bars within the protections offered by the Copyright Act" would appear to stem from the same desire to protect the "basic and necessary distinction" between different forms of intellectual property rights as was expressed by the Court in Kirkbi. "If trade-mark law does not protect market share in a particular situation," Bastarache J. noted, "the law of copyright should not be used to provide that protection, if that requires contorting copyright outside its normal sphere of operation. The protection offered by copyright cannot be leveraged to include protection of economic interests that are only tangentially related to the copyrighted work."

Notwithstanding the fact that both Kirkbi and Kraft involved allegations of using intellectual property for anti-competitive purposes, the Competition Act was pleaded in neither case and the Court made no reference in either case to the Competition Act or to competition law principles. To the extent that the issues before the Court are properly addressed within the narrow confines of the applicable intellectual property statutes, this is not - from a legal perspective - problematic. However, to the extent that the Court's approach to these statutes reflects, consciously or otherwise, an attempt to manage the intersection of intellectual property and competition laws, such an oversight could lead to inconsistencies insofar as a purely intellectual-property-based approach may lead to different results than would an analysis involving the application of competition law principles. As applied to the Kraft case, for example, a competition-law-based analysis of whether the requirement by Kraft that its exclusive licensees sell only in their respective territories ("market restriction" as defined in section 77 of the Competition Act) was substantially lessening or preventing competition would have included the definition of relevant product and geographic markets, and whether the conduct resulted in injury to competition within the relevant market for the chocolate bars, and not just injury to a single competitor. Attempts to "protect" competition that do not adhere to such a framework could have the unintentional result of impeding rather than protecting competition, for example by encouraging intra-brand competition without regard to possible adverse effects on incentives for inter-brand competition.

Footnote

1 Section 27(2)(e) provides: "It is an infringement of copyright for any person to (a) sell or rent out, (b) distribute to such an extent as to affect prejudicially the owner of the copyright, (c) by way of trade distribute, expose or offer for sale or rental, or exhibit to the public, (d) possess for the purpose of doing anything referred to in paragraphs (a) to (c), or (e) import into Canada for the purpose of doing anything referred to in paragraphs (a) to (c), a copy of a work.that the person knows or should have known infringes copyright or would infringe copyright if it had been made in Canada by the person who made it."

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