Attention, shoppers. As the Canadian dollar rises, so does the tide of grey goods in this fair country. Consumers blithely stock up on chocolate, face cream, watches and ketchup, as tension builds in the marketplace. Brand owners are challenging the legality of these parallel imports, which buck licensed channels of distribution to generate profit. Should the lowest price really become the law? The question remains unanswered as Canadian courts grapple with the task of drawing the line between free and fair competition. A general reluctance to prevent grey marketing permeates Canadian case law. However, the Supreme Court of Canada in Euro-Excellence Inc. v. Kraft Canada Inc. [2007] SCC 37 has bolstered the arsenal of local brand owners in Canada with the availability of copyright law as a weapon against grey goods.

“Grey goods,” the “grey market” and “grey marketing”

Grey Goods

Grey market goods differ from “black market” or counterfeit goods, the sad knock-offs and shoddy wares that have infiltrated our economy and are a whole subject onto themselves. Rather, grey market goods are legitimately branded wares not intended for sale in Canada, yet imported and sold here outside the authorized Canadian distribution chain. The legality of their sale is a subject of great debate.

Causes of Grey Marketing

Grey marketing, also known as “parallel importation”, shines a spotlight on the conflict between the territorial protection of intellectual property rights and the rise of globalization in the world economy. Tension exists between Canada’s adherence to international agreements which promote the international free movement of goods and services, and the territorial nature of its intellectual property rights.

Proponents of grey marketing argue that it helps to achieve the lowest possible retail price in Canada for branded products. Opponents argue that the practice is inherently unfair, since grey marketers profit from goodwill built up by legitimate local manufacturers and distributors. In addition, grey marketing threatens to depreciate this goodwill, particularly where health and safety concerns arise through improper storage and handling. The grey market chocolate bar causing salmonella poisoning affects the reputation of the brand and its authorized distributors. But the grey marketer will likely carry on unnoticed, as Canadian consumers have little awareness of the distribution chain that imports grey goods.

Many circumstances tempt businesses to engage in grey marketing. A chief motivator is the availability of brand-name goods outside of Canada at substantially lower prices than those available in Canada through authorized distribution chains. A number of market phenomena are at play, including: currency fluctuations, different international pricing policies and promotions, differing regional supply and demand; and dumping in foreign markets. With the rising loonie, grey marketing seems poised to gain ground in Canada. Local rights-holders will need effective mechanisms to stem this tide.

The Use of Intellectual Property Rights to Block Grey Marketing

Brand owners frequently attempt to assert intellectual property rights to block grey marketing. Depending on the circumstances, this could include actions for trademark, copyright, patent or industrial design infringement; passing off and actions for packaging and labelling violations.1

Trademark Law as an Option for Preventing Grey Marketing

Historically, brand owners have relied primarily on registered or unregistered trademark rights in their efforts to combat grey marketing. Although grey marketers are clearly selling and distributing trademarked products in Canada without the permission of the local rights-holder or authorized distributor, passing off and infringement actions have been met with mixed success. As such, trademark law is now seen as an uncertain tool in preventing grey marketing. As discussed below, this uncertainty has encouraged local rights-holders to explore copyright law as a more useful alternative.

Common Law of Passing Off

The Supreme Court of Canada signalled that the tort of passing off cannot be used to prevent grey marketing per se in its decision Consumers Distributing Co. Ltd. v. Seiko Time Canada Ltd. (1984), 1 CPR (3d) 1. In this case, the authorized Canadian distributor of Seiko watches was unsuccessful in preventing an unauthorized dealer from selling the imported ‘grey’ watches. The unauthorized dealer sold the watches in original packaging but with an ineffective international warranty. The authorized distributor was successful in restraining the unauthorized dealer from holding themselves out as an authorized dealer of Seiko watches. The injunction merely forced the unauthorized dealer to post notices wherever the watches were sold to indicate that they were not an authorized dealer and, as such, the warranties were ineffective. On the key issue in the case, the Supreme Court of Canada held that, in the absence of confusion, the law of passingoff could not be used to prevent the unauthorized dealer from competing with the authorized distributor. Importantly, the Supreme Court of Canada cautioned that registered trademark rights were not under consideration in this case.

Infringement of Statutory Trademark Rights

Unfortunately, plaintiffs asserting registered trademark rights have also not had the degree of success that they expect from Canadian trademark litigation. Sometimes, our courts have considered a registered trademark right to be an effective tool to prevent grey marketing, but not always. In H. J. Heinz Co. of Canada Ltd v. Edan Foods Sales Inc. (1991), 35 CPR (3d) 213, the Federal Court granted an interlocutory injunction to restrain a grey marketer of ketchup products. The plaintiff was the assignee of a registered trademark in Canada, which it had obtained from a US parent company. The plaintiff manufactured its HEINZ ketchup at its Leamington plant using Canadian-grown tomatoes. The defendant, an Ontario corporation, imported its ketchup products from the plaintiff’s US parent company and this ketchup was of a slightly different formulation than that sold by the plaintiff. The defendant had taken care to re-label its ketchup to include the French language and to advise consumers that the ketchup was “imported by Edan Food Sales, Inc.” Nevertheless, the plaintiff succeeded in arguing that it had the registered rights for the mark in Canada and that the sale of imported ketchup under the same brand would cause confusion with its distinctly “Canadian” ketchup. The court was persuaded that the imported ketchup could depreciate the value of the plaintiff’s goodwill and cause irreparable harm to third parties, such as Canadian tomato farmers.

Unfortunately, other brand owners have not had the same degree of success. In fact, the leading decision from the Federal Court of Appeal on this issue takes a much different view of grey marketing practices. In Smith & Nephew Inv. v. Glen Oak Inc. (1996), 68 CPR (3d) 153 (FCA), the plaintiff was the Canadian licensee for NIVEA face cream products in Canada and the products it sold were formulated for the Canadian market. The defendants imported and distributed ‘grey’ NIVEA products that they sourced from a Mexican company which was affiliated with the world-wide owner of the NIVEA mark. Thus, both the products of the plaintiff and the defendant were manufactured with the approval of the same trademark owner, although the Mexican products were not intended to be sold in Canada (the Mexican face-cream contained formaldehyde). The plaintiff asserted infringement and passing-off based on its status as licensee of a trademark registration, but failed at both the Federal Court and Court of Appeal levels. The courts were of the view that once the worldwide trademark owner had authorized the release of goods into commerce anywhere in the world, neither it nor its licensees could complain about the subsequent resale of those goods in any market, including Canada. While the action was commenced by a licensee and not a registered owner, the reasoning and conclusion in this case are unhelpful to those seeking to restrain grey marketing in Canada under trademark law.

In sum, the question of grey marketing in the face of a registered trademark right has never been considered by the Supreme Court of Canada, but decisions from the Federal Court and Court of Appeal make it clear that trademark law is uncertain in terms of its ability to act as a tool to prevent grey marketing activities. Trademark actions will be highly fact-specific and success cannot be easily predicted. This uncertainty is plainly what led the plaintiffs in the Kraft Case to explore other avenues of legal protection.

The “Kraft Case” [Euro-Excellence Inc. v. Kraft Canada Inc.]

Facts

Kraft Foods Belgium SA2 and Kraft Foods Schweiz AG3 make Côte d’Or and Toblerone chocolate bars respectively, in Belgium and Switzerland. Kraft Canada Inc.4 has distributed Toblerone bars in Canada as the exclusive Canadian distributor since 1990. Kraft Canada has been an authorized Canadian distributor of Côte d’Or bars since before 1997 and it became the exclusive distributor in 2001. In 1993 Euro-Excellence Inc.5 was an authorized distributor of Côte d’Or bars. In 2000 EuroEx was terminated as an exclusive distributor of these bars. In 2000, EuroEx began importing and distributing in Canada genuine Côte d’Or bars and in 2001 they began to do the same for Toblerone bars.

Beginning in 2001, Kraft Canada was the exclusive licensed Canadian distributor of both Côte d’Or and Toblerone bars. Notwithstanding these exclusive agreements EuroEx continued to import and distribute the bars.

In 2002, Kraft Belgium and Kraft Schweiz registered their Côte d’Or (elephant) and Toblerone (mountain peak) logos, respectively, in Canada as copyrighted works in the artistic category. The copyright in these works was licensed to Kraft Canada by way of exclusive license agreements. Armed with these copyrighted works Kraft Canada called upon EuroEx to cease and desist distribution of any product to which the copyrighted works were affixed. When EuroEx refused to comply, Kraft Canada brought the action that culminated in the Supreme Court’s decision of July 26, 2007.

Kraft Canada attempted to restrain EuroEx from using the logos by way of an action for “secondary infringement” under section 27(2)(e) of the Copyright Act which states:

It is an infringement of copyright for any person to …(e) import into Canada for the purpose of …[selling] … a copy of the work…that the person knows or should have known infringes copyright or would infringe copyright if it had been made in Canada by the person who made it.

In order to succeed in proving secondary infringement under this section, Kraft Canada was required to establish that (a) copyright subsisted in the logos; (b) sale of the chocolate bars was also sale of the logos for the purposes of section 27(2); (c) it would be an infringement if the logos were made in Canada by the person who made them outside of Canada.

Judicial History

Kraft Canada was successful at both the Federal Court and the Federal Court of Appeal and was awarded damages and an injunction restraining EuroEx from selling, distributing, exposing or offering for sale any copies of the copyrighted logos. EuroEx appealed the decision to the Supreme Court of Canada, asserting two main challenges: (1) it argued that the logos in question were merely “incidental” to the chocolate bars and therefore the mere sale of a chocolate bar should not be viewed as also being a ‘sale’ of the associated packaging elements (such as the copyrighted logos in question); and (2) it also argued that there would be no “theoretical” infringement of the copyright (as required by section 27(2)) because the companies that had actually made the bars (Kraft Belgium and Kraft Schweiz) remained the owners of copyright in the logos in question. Accordingly, if in theory these companies had made the bars in question in Canada then, according to EuroEx, these companies would merely breach their exclusive license agreement with Kraft Canada and would not infringe copyright within the meaning of section 27(2).

The Supreme Court of Canada’s Judgment

The Supreme Court of Canada was sharply divided on the resolution of these issues. This division is apparent in the fact that four separate sets of reasoning were issued for the decision, which can be broken down into three major questions.

Question 1: Does copyright subsist in Kraft Canada’s logos?

All nine Justices held that the logos were protected by copyright despite also being capable of functioning as trademarks.

Question 2: Does sale of the chocolate bars constitute ‘sale’ of the copyrighted logos for the purposes of s. 27(2) of the Copyright Act?

Six6 out of the nine Justices held that sale of the chocolate bars constituted sale of the logos for the purposes of section 27(2), holding that there is no basis in law to distinguish between the sale of goods that feature copyrighted elements on their packaging versus the sale of goods that are themselves the subject of copyright protection (such as music or movies).

Three7 out of the nine Justices held that section 27(2) would not be triggered by the sale of products that feature only “incidental” elements that are covered by copyright, such as packaging elements.

Question 3: Theoretically, if Kraft Belgium and Kraft Schweiz had produced the copyrighted works in Canada, then would that infringe copyright (as required) or merely violate the terms of licence (which would be insufficient)?

Five8 out of the nine Justices held that Kraft Canada, as the exclusive licensee of copyright in the logos, would be able to sue the copyright owners for copyright infringement if they were to ever reproduce the logos in Canada without Kraft Canada’s permission.9 Four10 out of the nine Justices held the opposite, that Kraft Canada would have no claim for copyright infringement against Kraft Belgium and Kraft Schweiz in these theoretical circumstances and instead could only sue them for breach of license.

It is important to note that, on this question, all nine Justices appeared to concede that if Kraft Canada had been granted an assignment of the copyright in the logos, then it could sue anyone for copyright infringement, and this requirement of section 27(2) would be fulfilled.

The unusual part of this decision is the outcome. Even though a majority of the Supreme Court of Canada held that Kraft Canada had proved each element of its case, the composition of the majorities differed in relation to each element of the case. Further, because fewer than five members of the court concluded that all three conjunctive elements of section 27(2) were established, Kraft Canada was unsuccessful in the result, the appeal was allowed and EuroEx was permitted to continue distributing the grey market chocolate bars in Canada.

Copyright Law as an Effective Weapon for Policing Grey Marketing

Despite this result, the judgment in Kraft Canada should nonetheless provide valuable assistance for future parties who wish to enjoin the actions of a grey marketer.

It seems clear from a close reading of the decision that, had Kraft Canada been an assignee of the copyrighted logos, then the Supreme Court of Canada would have denied the appeal and restrained the grey marketer. The lesson to be learned for local brand owners is that, wherever possible, they should obtain full assignment of copyrights in Canada as opposed to exclusive licenses.11

Further, even when the local rights holder is a licensee and not assignee, they will be able to take advantage of copyright law when the copyright in question covers the work itself (music, videos etc.); and possibly, even when the copyright relates to an associated element that is something more than “incidental” to the product in question. This is because Justice Bastarache, who raised the issue of “incidental” in his reasons, suggested that section 27(2) could be invoked in appropriate circumstances that satisfy a “reasonable consumer” test. According to this test, if a reasonable consumer looking at the good in question would consider the copyright element in question to be important to his or her purchasing decision then the element could be considered more than incidental and section 27(2) could be invoked.

Conclusions

At least three important points are to be taken from the Kraft Case regarding the use of copyright law to restrain grey marketers. The first point is the Supreme Court of Canada’s finding that copyright can subsist in any product, trademark, logo or packaging element that is the result of skill and judgment and otherwise meets all tests for copyright protection. In other words, copyright and trademark rights can subsist simultaneously.

Secondly, a majority of the Supreme Court of Canada found that when a grey marketer sells a product in Canada bearing an associated copyright element, then the sale of the product itself also constitutes a sale of the copyrighted element for the purposes of section 27(2) of the Copyright Act.

The final point is the Supreme Court of Canada’s willingness to find that section 27(2) can be invoked more easily by local assignees of copyright in associated packaging elements, but also in appropriate circumstances by exclusive licensees of the copyright where the associated element is not merely “incidental” to the product in question.

The Kraft Case should come to be seen as an important tool for local rights-holders in combating grey marketing activities in Canada, where the law of copyright may apply. That the tide of grey goods may be stemmed by something as humble as the drawing of an elephant, or of a mountain peak, may be a heartening change on the horizon for those wishing to end the grey goods era in Canada.

This article first appeared in the 2008 Lexpert®/American Lawyer Media Guide to the Leading 500 Lawyers in Canada