Canada: Demystified: USMCA's Intellectual Property Provisions On Damages For Trademark Counterfeiting

The provisions of the United States–Mexico–Canada Agreement (USMCA) – known as the Canada-United-States-Mexico Agreement or CUSMA in Canada – have attracted considerable attention due to their perceived impact on the Canadian legal and business landscape.

One noteworthy aspect of the USMCA is the digital trade provisions' implication that Canadian web platforms may not be liable for the content posted by third parties. For more information, see our November 2018 Blakes Bulletin: Demystified: USMCA's Digital Trade Provisions on ISP Liability in Canada.

This bulletin discusses the impact of Article 20.82.7. This section provides that:

"In civil judicial proceedings with respect to trademark counterfeiting, each Party shall also establish or maintain a system that provides for one or more of the following:

  1. pre-established damages, which shall be available on the election of the right holder; or
  2. additional damages."

A footnote to paragraph (b) of this section indicates "For greater certainty, additional damages may include exemplary or punitive damages."

Some commentators have suggested that Parliament can comply with Article 20.82.7 by amending the Trade-marks Act to establish a system of statutory damages for trademark counterfeiting, akin to the statutory damages provisions contained in the Canadian copyright statute. Other commentators have suggested that Parliament need not amend its laws to comply with Article 20.82.7, as punitive damages are already available in trademark counterfeiting cases.

However, an analysis of Article 20.82.7, within the context of the other IP provisions of the USMCA, indicates that Canada's ability to rely on its current law for compliance with Article 20.82.7 depends on whether the current approaches to awarding pre-established and punitive damages by Canadian courts can be said to constitute a "system" of damages.

SYSTEM OF PRE-ESTABLISHED OR PUNITIVE DAMAGES REQUIRED

The text of Article 20.82.7 differs in one small but significant way from the text of provisions preceding and following it. Article 20.82.7 requires each party to the USMCA to "establish or maintain a system" that provides for pre-established damages or additional damages in civil judicial trademark counterfeiting proceedings.

The requirement in Article 20.82.7 for a system stands pointedly in contrast to the requirements in Articles 20.82.1 to 20.82.5, 20.82.10, 20.82.12 to 20.82.16, and 20.82.18 that each party merely ensure that its "judicial authorities have the authority" to make certain orders and to consider certain factors.

The requirement to ensure that "judicial authorities have the authority" to make certain orders and consider certain factors can arguably be met by establishing or maintaining statutory or common law judicial authority to make those orders and consider those factors. Accordingly, Articles 20.82.1 to 20.82.5 and others can likely be met by maintaining the status quo, where such authority already exists in Canadian statutory or common law.

By way of contrast, Article 20.82.7 requires a system of pre-established damages or additional damages, as opposed to "judicial authority" for such damages. The USMCA does not contain a definition of a system. Nor, it should be noted, do other treaties such as the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) or the USMCA's predecessor, the North American Free Trade Agreement (NAFTA). However, a plain reading of the text suggests that a system, particularly when viewed in contrast to the requirement for "judicial authority," entails a more structured and regimented framework than the mere existence of the authority or discretion to make certain orders or consider certain criteria.

The requirement to establish or maintain a system is thus arguably more burdensome than the obligation to provide for a judicial authority. A system implies less individual discretion and sui generis analysis in favour of stricter requirements, mechanisms and procedures. Therefore, when assessing Parliament's ability to rely on current Canadian statutory and/or common law for compliance with Article 20.82.7, it may not be sufficient to show that current common law or statutes allow for the awarding of pre-established damages and additional damages. Rather, Canada's ability to maintain the status quo could depend on whether current law can be said to set out a "system" for awarding such damages.

ARE CANADA'S CURRENT PRE-ESTABLISHED DAMAGES AND ADDITIONAL DAMAGES AWARDS "SYSTEMS"?

This article will assess whether current common law and/or statutory approaches to pre-established and additional damages can be considered to be systems for the purposes of the USMCA.

It may be helpful to begin by highlighting a current damages scheme that most likely constitutes a system. Section 38.1 of the Canadian Copyright Act (Act) provides for pre-established statutory damages for copyright infringement. The Act allows copyright holders to elect to receive an award of damages per infringing activity (instead of general damages, an accounting of profits, etc.), assessed using a scale established by the Act. Further, the Act sets out limitations on when statutory damages may be awarded and establishes criteria to be considered when deciding the per-infringement award. This statutory scheme most likely constitutes a system for the purposes of the USMCA and could likely be relied upon to comply with Article 20.82.6, which imposes identical requirements for pre-established or additional damages in copyright law.

Common Law Establishes a System of Pre-Established Damages for Trademark Counterfeiting

Neither the current provisions of the Trade-marks Act, nor the changes to the Trade-marks Act due to take effect in 2019, establish a scale of damages for trademark counterfeiting akin to the system set out in the Copyright Act. Accordingly, Canadian statutory law does not provide a system of pre-established damages for trademark counterfeiting, and cannot be relied on for compliance with the USMCA.

That said, Canadian common law provides what is arguably a system of pre-established damages for trademark counterfeiting. Federal Court jurisprudence has established a conventional scale for the quantification of damages in cases concerning trademark counterfeiting.

In Ragdoll Productions (UK) Ltd.v. Jane Doe (Ragdoll), a number of counterfeit goods were seized following the execution of Anton Piller orders (court orders providing the right to search premises and seize evidence without warning). The Federal Court deemed it fairer to both plaintiff and defendant to use a pre-established conventional scale of damages rather than determining the quantum of damages on a "sui generis" basis. In Ragdoll and other cases, the Federal Court has recognized that a counterfeiter's business methods and refusal to fully defend a claim will often make the precise calculation of damages impossible, thus necessitating the use of a pre-established scale of damages.

The Federal Court has applied this pre-established scale of damages in a number of cases where the plaintiff is unable to calculate a precise quantum of losses suffered as a result of the defendant's counterfeiting activities. The gradations in the pre-established scale of damages are based on the characteristics of the defendant's operations. The scale distinguishes between, and assesses a different quantum of damage for, trademark counterfeiting perpetrated by "flea market and transient vendors, fixed retail operations and manufacturers and distributors":

"$3,000 where the defendants were operating from temporary premises such as flea markets, $6,000 where the defendants were operating from conventional retail premises, and $24,000 where the defendants were manufacturers and distributors of counterfeit goods."

In Louis Vuitton Malletier S.A. v. Yang (Yang), the Federal Court applied this pre-established scale of damages. In that case, the Federal Court awarded the plaintiff C$87,000 in damages for 12 instances of trademark counterfeiting. In arriving at this overall figure, the Federal Court adjusted the C$6000-per-infringement figure applicable to retail operations (awarded in 1997) for inflation, concluding that the adjusted amount should be C$7,250 per infringement, resulting in an overall award of C$87,000. For similar counterfeiting occurring in 2018, the overall damage award could be adjusted to approximately C$105,000.

This common law approach to pre-established trademark damages sets out criteria for determining when to use the conventional scale and for determining the award per infringement. The restrictions on judicial discretion in favour of pre-established criteria and rigidity support the argument that the pre-established scale for trademark counterfeiting is a system of damages on which Parliament can largely rely (with a minor addition discussed below) to comply with Article 20.82.7 of the USMCA.

Neither Common Law nor Statute Clearly Establishes a System of Exemplary or Punitive Trademark Damages

Section 53.2 of the Trade-marks Act authorizes courts to provide relief to rights-holders in the form of, among other things, punitive damages. Without further criteria, structure or guidance, however, such authorization is unlikely to be considered a system for the purposes of Article 20.82.7 of the USMCA. Rather, section 53.2 is better understood as the provision of judicial authority, along the lines of what is required in Articles 20.82.1 to 20.82.5 and others as noted above of the USMCA.

The common law approach to punitive or exemplary damages is that it is appropriate to award such damages in exceptional cases for "malicious, oppressive and high-handed" misconduct that "offends the court's sense of decency." The common law has developed general principles relating to punitive damages, establishing relevant factors to consider when assessing whether a party's conduct is deserving of an award of punitive damages. Generally, however, the common law does not set out clear rules for when punitive damages should be awarded, or what the quantum of a damage award should be. Rather, the ultimate decision of whether to award punitive damages and what sum to award is based on the discretion of the court.

The discretionary and principled approach to punitive damages stands in contrast with the more structured approach to pre-established trademark damages and statutory copyright damages. Therefore, it is unclear whether the common law punitive damages scheme can be considered a system for punitive damages governing the trademark counterfeiting context, potentially limiting Parliament's ability to rely on current common law to comply with Section 20.82.7 of the USMCA.

HOW WILL CANADA COMPLY WITH ARTICLE 20.82.7?

It remains to be seen how Parliament intends to comply with Article 20.82.7 of the USMCA. As noted above, commentators have suggested that Canada could comply with the USMCA by establishing a statutory scale of trademark damages or by maintaining the status quo approach to punitive damages. The former is certainly possible and would not represent a major change for brand owners, as a pre-established scale of damages for counterfeiting has been a convention in Canadian law since 1997.

Finally, it may also be possible for Parliament to rely, in large part, on the current common law approach to pre-established trademark damages in order to comply with the USMCA. The common law approach to trademark damages is arguably a system, given its highly regimented approach to assessing when to award such damages, and the quantum to be awarded.

However, this common law scheme may not be fully compliant with the requirements of Article 20.82.7, which requires the pre-established damage award to be available on the election of the rights-holder. Currently, trademark owners do not necessarily have the right to elect between the pre-established scale of damages or actual damages. Rather, the Federal Court has held that the pre-established conventional scale of damages is displaced by evidence of the plaintiff's actual damages – in Oakley, Inc. v. Doe, the Federal Court stated:

"Since the damage award is by definition a conventional amount in the sense that it is fixed by reference to an arbitrary benchmark as opposed to evidence of actual losses, it is subject to being displaced by evidence of actual damages."

Therefore, regardless of whether Canada establishes a new statutory system of damages or relies on the current common law scale, Parliament could be required to establish that the choice between pre-established damages and actual damages is that of the trademark owner.

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© 2018 Blake, Cassels & Graydon LLP.

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