Bittersweet news on grey market goods

The Supreme Court of Canada has rendered its decision in Kraft Canada Inc v Euro Excellence Inc (2007 SCC 37) and denied the ability of an exclusive copyright licensee to use the copyright that subsists in the artwork on product packaging to prohibit the importation of grey market goods into Canada. This decision appears to maintain the status quo in the treatment of grey market goods in Canada and removes a potential means by which brand owners and their designees may control distribution channels.

In this case, Kraft Canada Inc (KCI), the exclusive distributor in Canada of TOBLERONE and CÔTE D'OR chocolate bars for its related companies Kraft Foods Belgium SA (KFB) and Kraft Foods Schweiz AG (KFS), sued Euro Excellence Inc, a former Canadian distributor, for copyright infringement in artistic works that appeared on the product wrappers of genuine TOBLERONE and CÔTE D'OR chocolate bars obtained from an unnamed source in Europe. Prior to commencement of the proceedings, KFB and KFS had registered Canadian copyrights on certain elements of the artwork on the product wrappers and, under a registered licence agreement, granted KCI exclusive rights in the works as used in association with confectionary products. KCI alleged that the distribution in Canada of TOBLERONE and CÔTE D'OR products by Euro Excellence constituted secondary infringement of copyright in the artwork on the product wrappers contrary to Section 27(2)(e) of the Canadian Copyright Act, which provides that it is an infringement to import a 'work' into Canada for sale if it would infringe a Canadian copyright.

Both lower courts found copyright infringement in the importation and sale by Euro Excellence of the genuine European products in the wrappers displaying the protected artwork.

The trial judge, citing the decision of the Supreme Court of Canada in CCH Canadian v Law Society of Upper Canada ([2004] 1 SCR 339), found that designs on the TOBLERONE and CÔTE D'OR packaging met the threshold of originality required for copyright protection and concluded that Section 27(2)(e) applied to restrain Euro Excellence from importing and distributing the goods.

The Federal Court of Appeal agreed (see Copyright may help to prevent parallel imports). Justice Desjardins, writing for the court, also cited CCH Canadian for the proposition that three elements must generally be proven to ground a claim for secondary infringement:

• the copy must be the product of primary infringement;
  
  
• the secondary infringer must have known or should have known that he or she is dealing with a product of infringement; and
  
  
• the secondary dealing must be established - that is, there must have been a sale.
  

However, Desjardins went on to note that, with respect to Section 27(2)(e), proof of an initial infringement was not required because in the case of a copy imported under the circumstances set out in that section, the Copyright Act recognizes the importation itself to be an act of infringement. Desjardins also emphasized that to make out a claim of secondary infringement, the exclusive right to assert the copyright must be vested in someone other than the manufacturer of the grey goods. Applying these principles to the facts of the case, Desjardins found that because reproduction in Canada by anyone other than KCI of the copyrighted designs on the product packaging would have infringed copyright in Canada and because Euro Excellence knew of KCI's exclusive rights in the works, the importation of the products bearing the designs constituted secondary infringement under Section 27(2)(e).

In a seven-two split decision in which the majority was further split four-three, the Supreme Court overturned the lower court decisions to find that the Canadian Copyright Act could not be used to prohibit the parallel importation of TOBLERONE and CÔTE D'OR chocolate bars into Canada.

Justice Rothstein, writing for four members of the majority, began by stating that the case turned on a "straightforward application of [Section] 27(2)(e) of the Copyright Act" and noted that Section 27(2) represented "Parliament's intention to ensure that Canadian copyright holders receive their just rewards even where they do not hold copyright abroad". Quoting the three-part test for secondary infringement established in CCH Canadian, Rothstein noted that Section 27(2)(e), unlike Sections 27(2)(a) to (d), requires only hypothetical primary infringement and ruled that in order to make out the claim under Section 27(2)(e), KCI was required to demonstrate that "the impugned works imported and distributed by Euro Excellence would have infringed copyright if they had been made in Canada by the persons who made them in Europe". However, because the persons who made the copies of the works in Europe were KFB and KFS - that is, the respective owners of the copyrights - Rothstein noted that acceptance of this argument "would mean that KFB and KFS have infringed their own copyrights - a proposition that is inconsistent with copyright law and common sense" because "[b]y definition, no person can simultaneously be owner and infringer of copyright". Accordingly, Rothstein ruled that because a copyright owner could not be liable to its exclusive licensee for infringement, there was no hypothetical infringement and thus no violation of Section 27(2)(e) in this case by Euro Excellence.

In arriving at the conclusion that KCI had failed to establish secondary infringement under Section 27(2)(e), Rothstein discussed at length the distinction between an assignment and an exclusive licence of copyright. Finding that Parliament had "clearly manifested its intent to treat exclusive licensees differently from copyright owners and assignees", Rothstein held that unlike an assignee of a copyright, an "exclusive licensee's property interest in the copyright is limited" and that "a contextual reading of the Canadian Act reveals that exclusive licensees lack the capacity to sue the owner-licensor for infringement". Moreover, Rothstein maintained, for the purpose of the Copyright Act the distinction between assignments and exclusive licences was "important and meaningful".

Justice Bastarache, writing for the other three members of the majority, concurred with Rothstein in result but not with his reasoning. Bastarache found that under Section 27(2)(e), an exclusive licensee is able to sue the owner-licensor for copyright infringement. However, in concluding that Section 27(2)(e) did not apply in this case to enable KCI to block the parallel importation of the TOBLERONE and CÔTE D'OR chocolate bars, Bastarache ruled that the presence of the copyrighted works on the product packaging was "merely incidental" to the product and did not bring the works within the protection offered by the Copyright Act as such protection would extend beyond the "legitimate economic interests" of the copyright holder. Grounding his analysis in prior decisions of the Supreme Court that had limited the scope of copyright protection, Bastarache stressed that protection for manufacturers from the importation of counterfeit versions of their products was properly the function of trademark laws and passing off and not Section 27(2) of the Copyright Act.

Bastarache's approach and analysis was expressly rejected by Rothstein, who found that no statutory authority existed for the proposition that incidental works could not receive protection under the Copyright Act. Rothstein observed that "all artistic works receive the protection of copyright if they meet the requisite standards of 'skill and judgment'" and held that Section 64 of the Copyright Act was clear that works can receive concurrent copyright and trademark protection. He further held that, until Parliament provides otherwise, the courts "are bound to conclude that a logo on a chocolate bar wrapper can receive concurrent trademark and copyright protection".

The dissent, written by Justice Abella (Chief Justice McLauglin concurring) also rejected the 'legitimate economic interests' doctrine and 'merely incidental' exception to infringement put forward by Bastarache in his reasons. Abella did agree, however, with Bastarache's conclusion that the Copyright Act gives an exclusive licensee the right to sue for copyright infringement not only against third parties, but against the owner-licensor as well.

Although the Supreme Court has seemingly removed one tool that brand owners may use to challenge the importation of grey goods into Canada, all is not lost for brand owners. Through Kraft Canada, the Supreme Court has confirmed that trademarks and logos on product packaging will attract copyright protection provided that they meet the requisite standards of "skill and judgment" and that this protection can and will subsist concurrently with trademark protection. With respect to parallel importation, although all judges were in apparent agreement that an exclusive licence constitutes the grant of a proprietary interest in the copyright itself, the Kraft Canada decision suggests that an actual assignment of copyright ownership may allow a copyright owner to prevent parallel importation.

Accordingly, when faced with potential grey marketing issues in Canada, in addition to exploring the scope of relief available under the Trademarks Act or other law, brand owners should consider assigning the Canadian copyright in the artistic works appearing on product packaging to a domestic Canadian owner.

Christina Capone Settimi, Cameron MacKendrick, Toronto