Lessons from a Baby Diaper Pail Case
While Canadian law generally recognizes the principle of separate corporate personality, thus shielding parent companies from liability for their subsidiaries' actions, this treatment is not without exceptions. The case of Munchkin, Inc. v. Angelcare Canada Inc., 2024 FCA 156, serves as a recent reminder of Canadian courts holding a foreign parent company responsible for its Canadian subsidiary's patent infringement in Canada. In this case, Munchkin, Inc., a U.S.-based parent company, was found liable for the patent-infringing activities of its Canadian subsidiary, Munchkin Baby Canada, Ltd., even though the parent Munchkin, Inc. operated entirely outside Canada.
Piercing the corporate veil
When considering a parent company's liability for its subsidiary's actions, the concept of piercing the corporate veil often comes to mind. The landmark case of Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. 1996 CanLII 7979 (ON SC), 28 O.R. (3d) 423 (Gen.Div.), established a two-part test that must be met to pierce the corporate veil:
- Complete Domination and Control: The parent company must have complete domination and control over the subsidiary, rendering it a "mere puppet" that cannot function independently. This requires more than just ownership or shared directors.
- As a Shield for Fraudulent or Improper Conduct: The subsidiary must have been established or used for the purpose of shielding fraudulent or improper conduct.
For example, in United Canadian malt Ltd. v. Outboard Marine Corp., 2000 CanLII 22365 (ON SC), while not a patent case, the court allowed a claim against a U.S. parent company to proceed for its Canadian subsidiary's environmental contamination. The court agreed with the plaintiff that the U.S. parent controlled the subsidiary, managed the contaminated property, and had moved assets out of the subsidiary, leaving it unable to pay any judgment.
Direct Liability and Party in "Common cause"
In Munchkin, Inc. v. Angelcare Canada Inc., the court's decision did not involve piercing the corporate veil. Instead, the parent company was found directly liable, as a party in "common cause" with its Canadian subsidiary. The findings by the court are heavily dependent on the particular facts in this case. Nevertheless, the factual situations in this case are not rare for many foreign companies which often have minimum presence in Canada through their subsidiaries, thus warranting further examination.
The patent infringement claims were made under six of Angelcare's patents. These patents cover the design and function of diaper pails and refill cassettes, in particular features such as the configuration of cassettes for installation, dispensing systems for soiled diapers, and clearances for proper pail alignment. Munchkin is a competitor of Angelcare. Munchkin designed its cassettes to be compatible with Angelcare's diaper pails and refill cassettes and were to target the same consumers as replacements. Munchkin's cassette and diaper pails were sold by its Canadian subsidiary Munchkin Baby Canada, Ltd. in Canada through Canadian retailers to Canadian consumers.
At trial, Angelcare Canada Inc v Munchkin Inc, 2022 FC 507, the Federal Court found that Munchkin Baby Canada, Ltd., did not have in-house designers. Instead, Munchkin, Inc. designed all of the products distributed by its Canadian subsidiary for the targeted market segment in Canada. It also found that Munchkin, Inc. did not differentiate between marketing decisions for the U.S. markets and for the Canadian markets, particularly regarding the compatibility of its refill cassettes as replacements for Angelcare's products.
The court rejected Munchkin, Inc.'s argument that its actions did not constitute infringement of Canadian patents because its actions took place outside of Canada. Instead, the court found that Munchkin, Inc. was directly liable for infringement in Canada. The parent company and its Canadian subsidiary were found to be effectively collaborated or acted in concert in the patent infringement. Overall, the factors contributed to the court's finding include, although the parent operated outside Canada:
- parent company's control over the subsidiary's operations in Canada
- parent company's involvement in the design of infringing products distributed in Canada
- parent company's making decisions that directly impact the subsidiary's marketing activities in Canada
The U.S. parent was thus held to be in "common cause" with its Canadian subsidiary and directly liable for its Canadian subsidiary's infringement in Canada.
The trial court's decision was affirmed by the Federal Court of Appeal. As emphasized by the Federal Court of Appeal, "a person cannot avoid liability for infringement by setting itself up outside Canada, and then making arrangements from there that result in infringement of a patent in Canada." The key was whether by having common cause with a Canadian actor, the parent directly involved in the infringing activities. The Federal Court of Appeal concurred that the parent company was indeed liable.
Key take-aways
Although not involving piecing the corporate veil, the principles underlying this doctrine are still instructive. The Federal Court's finding that Munchkin, Inc. exerted significant control over Munchkin Canada's operations resonates with the first prong of the Transamerica test. Had Angelcare alleged and proven that Munchkin, Inc. used this control for a fraudulent or improper purpose, piercing the corporate veil might have been a viable option.
This case is a reminder that a foreign company cannot avoid liability for patent infringement in Canada merely by establishing a Canadian subsidiary. It must also ensure that its actions conducted outside Canada do not contribute to or facilitate any potential infringement by its subsidiary. To mitigate the risk of liability for patent infringement in Canada, a foreign parent company should:
- Establish its subsidiary as genuinely independent, which can be demonstrated, for example, by the subsidiary having independent management, separate finances, and making its own decisions;
- Maintain clear separation between the parent and subsidiary companies, with clearly defined roles and responsibilities of the parent and subsidiary;
- Avoid exercising excessive control over the subsidiary's operations, particularly regarding the design, manufacturing, and marketing of potentially infringing products;
- Carefully document any agreements or arrangements between the parent and subsidiary to avoid giving the appearance of common cause or joint liability.
For further readings, the trial court's decision can be found here; the decision of the Federal Court of Appeal can be found here.
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.