Federal Court reduces utility of Section 7(a) applications

In Canadian Copyright Licensing Agency v Business Depot (2008 FC 737, June 13 2008), the Federal Court has reduced the utility of Section 7(a) applications under the Trademarks Act.

 

In 2007 the Canadian Copyright Licensing Agency (Access Copyright) sued Business Depot, a retailer operating under the name Staples (among others), for copyright infringement perpetrated through its photocopy service. At the same time, Access Copyright issued a press release announcing the action and identifying Business Depot as the defendant. As one of the counterclaims in the action, Business Depot argued, under Section 7(a) of the act, that the release discredited its business. Section 7(a) provides that "no person shall make a false or misleading statement tending to discredit the business, wares or services of a competitor".

 

Upon application, the prothonotary struck out the Section 7(a) claim without leave to amend. The decision was appealed to the Federal Court. The court dismissed the appeal, accepting both grounds of invalidity proposed by the prothonotary.

 

The first of these grounds was that Access Copyright was not a competitor of Business Depot. While the initial basis for rejection was insufficient pleading, the court went further, disallowing amendments to rectify the pleadings because "the parties are clearly not in the same business and could not be described as competitors". The court admitted that "there is no definition of 'competitor' in the Trademarks Act, and there is no definitive case law on the issues". Nonetheless, it held that competitors "must compete with [each other] in the marketplace". Instead of being a competitor, Access Copyright simply provided permissions to individuals or organizations wishing to make reproductions of copyrighted works - a function that the court likened to costs incurred in the course of business, such as rent.

 

The decision recognizes that while Access Copyright would clearly lose or gain profit based on Business Depot's actions, "this would not be sufficient to consider that they are competing with each other". However, it left open the question of whether licensors may also be considered competitors in other circumstances. By requiring claimants to plead and prove true competition, this restriction both reduced the utility of Section 7(a) and created a new line of defence against it. The difficulty will arise in drawing a line to decide where the actions of one party (which harm the profitability of another) will be considered competition.

 

The court also rejected the appeal because the statement was related to the intellectual property of Access Copyright, and not of the claimant (Business Depot). The court ruled that claims should be limited to circumstances where the intellectual property of the claimant is impugned because Section 7(a) is limited to 'rounding out' the Trademark Act. This followed the decision of the Supreme Court in MacDonald v Vapor Canada ((1977), 66 DLR (3d) 1), where Section 7(e) was struck down for being unconstitutional on the grounds that it went further than the acceptable scope of federal power.

 

In arguing the counterclaim, Business Depot relied on a line of patent decisions in which the claimants had been publicly attacked by third parties, such as Riello Canada Inc v Lambert ([1986] 3 FTR 23 9 CPR (3d) 324). In Riello, the impugned statement concerned the scope of the defendant's patent (and not the claimant's). In the present case, the court rejected the analogy. It distinguished the patent cases and reiterated that the impugned statement must concern the intellectual property of the claimant in copyright cases. This rejection signalled a second narrowing of the utility of Section 7(a). At least where copyrights are concerned, infringing statements will give rise to claims only where they attack the IP rights of the claimant.

 

Both these restrictions on the use of Section 7(a) reduce its utility. Claimants must now be able to demonstrate that the party making a statement is a competitor and, in copyright cases, that the statement regards their own rights.