Another milestone has been reached in a case between tobacco industry giants Imperial Tobacco Canada Limited (“Imperial Tobacco”) and Philip Morris, together with and its Canadian subsidiary Rothmans, Bensons & Hedges (collectively: “Philip Morris”). On March 23, 2015, the Federal Court confirmed that Imperial Tobacco is entitled to elect an accounting of Philip Morris’ profits resulting from the infringement of its rights in the MARLBORO trademark in Canada. This important decision for the parties will also likely become a significant precedent for Canadian litigants as this was the first opportunity in decades for the Federal Court to conduct an in-depth assessment of the issue of entitlement to profits in the trademark context.

By way of background, Marlboro has been the best known and top selling cigarette brand in the world since the mid 1970’s. It is being sold by Philip Morris in more than 160 countries except for Canada where the MARLBORO trademark was assigned to Imperial Tobacco in the 1920’s. Philip Morris introduced on the Canadian market, in 2006, the first cigarette packaging in worldwide history to be sold without any brand name, that is, a packaging intentionally designed to emulate the design elements of its international Marlboro brand packaging but without the “Marlboro” name.

Trademark infringement proceedings were initiated in the Federal Court in 2006 that were concluded with the decision of the Federal Court of Appeal which found that Philip Morris had been infringing Imperial Tobacco’s rights in its MARLBORO trademark, issued a permanent injunction and referred back various issues to the trial judge, including the question of Imperial Tobacco’s entitlement to elect between damages or an accounting of profits. This decision of the Court of Appeal was the Managing Intellectual Property 2012 Canadian Trademark Milestone Case of the Year and was summarized in our July 5, 2012 IP Update.

In his detailed reasons, Mr. Justice de Montigny, noted that both remedies, damages and accounting of profits, are specifically provided for as alternatives in the Trademarks Act. While both remedies are designed to compensate the right holder for the wrongful use of its intellectual property, the underlying principles are very different. An accounting of profits is an equitable remedy, the purpose of which is to compel the wrongdoer to divest earnings to the party who was wronged. This is to be contrasted to damages, the aim of which is to put the injured party in the position it would have been in had the infringement not occurred.

The Court found that while Imperial Tobacco has no presumptive right to an accounting of profits, it should not be denied that option in the absence of any compelling reasons. Referring to well-established equitable defences, the Court reviewed the following considerations:

  • The lack of delay in commencing the proceedings and in bringing the matter to trial were considered to be relevant factors which favoured entitlement to an accounting of profits in this case.  
  • The issue of “clean hands” and the fact that Imperial Tobacco kept selling and promoting its own products, were considered to be relevant and also favoured entitlement to an accounting of profits.  
  • The Court considered the proportionality of an accounting of profits in view of the length and extent of the infringement and the likely benefit of the accounting exercise. However, in this case  the Court considered the alternative, the calculation of damages, to be likely to be equally complex and contentious. Ultimately in this case this factor was considered to weigh neither for nor against an accounting of profits.  
  • The behaviour of Philip Morris was taken into consideration given the deterrence function of the accounting of profits (in addition to its purpose of providing restitution). However, the judge determined that Philip Morris’ conduct in the present matter was not egregious. This was the only factor found to weigh nominally against an accounting of profits.

In addition, the Court addressed two factors or arguments raised by Philip Morris that were essentially found to be ill-founded as lacking legal and evidentiary support:

  • Philip Morris suggested that Imperial Tobacco could never have earned the profits made by Philip Morris from its infringing sales such that it would receive an inequitable windfall from an accounting of Philip Morris’ profits. However, as noted by the judge, the claimant’s damages are not relevant to the question of entitlement since the objective of an accounting of profits is to restore improperly received profits to their rightful owner.  
  • Philip Morris also argued that there was no evidence of “actual confusion” as to source at trial and that the Court of Appeal merely made a finding of “deemed infringement” based on a likelihood of confusion which would weigh against entitlement to profits. The trial judge noted that the decision of the Court of Appeal was “crystal clear”, that its focus was on name association which was found to create confusion as to source and that this liability finding could not be revisited.

In the end, the trial judge found that none of the factors considered precluded an accounting of profits and granted Imperial Tobacco the right to elect either remedy after discovery of Philip Morris. With this legal issue having been determined by the Court, the parties will now be able to proceed to a reference for the determination of the damages or profits to be paid by Philip Morris. Beyond the immediate effect on the parties, this decision will provide considerable guidance for litigants involved in trademark infringement proceedings and considering the issues of monetary remedies and entitlement in the future.