Franchisors run the risk of having their goods, systems and/or services copied by unscrupulous persons who attempt to compete with the franchise by offering a product with a similar look or “get up.” In addition to the difficulties that franchisors may face in establishing either copyright infringement or the tort of passing-off, they also often face uncertainty when seeking to recover damages for these claims.

A recent decision by the Nova Scotia Court of Appeal in Manitoba v. Parks(2703203 Manitoba Inc. v. Parks, [2007] N.S.J. No. 128 (NSCA), [“Manitoba v. Parks”]) appears to confirm that both general and punitive damage awards are available to franchisors in intellectual property cases, provided that franchisors can provide sufficient evidence to support their claims. The franchisor in this case, 2703203 Manitoba Inc. (Manitoba Inc.), offers franchisees the opportunity to distribute copies of a publication called the “Coffee News.” Manitoba Inc.’s founder, Jean Daum (Daum), developed Coffee News to ensure that all publications appear the same and have exactly the same format, colour, and font style. The publication is highly recognizable and has won numerous awards.

The publication is distributed as a free newsletter to consumers through coffee shops and other establishments. Franchisees are granted a geographical area in which to distribute Coffee News. They download the content from Manitoba Inc.’s website, arrange for the printing and distribution of the newsletter, and sell advertising to local businesses. The geographic area(s) that franchisees work in are set out clearly in the franchise agreement.

Purchase of Franchises and Distribution of Competing Publication

Daum refused to deal with Ross Parks (Parks), the appellant. Parks had taken part in negotiations to buy out another franchisee at an unconscionable price. However, Parks teamed up with Lloyd Smith (Smith), also a defendant, and bought Coffee News franchises in Nova Scotia. Despite the great lengths to which Smith and Parks went to hide the nature of Parks’ involvement, Daum eventually learned that Smith was just the “front man” for the franchises and that Parks was the true owner and manager.

In fact, Parrcom, a company owned by Parks, was distributing a competing publication called the “Flying Cow.” This publication was identical to Coffee News except for the masthead and editorial. Because Flying Cow was so similar to Coffee News, there was evidence that franchisees, advertisers and consumers thought that it was the same (or a related) publication. Copyright Infringement

Manitoba Inc. brought a claim that the defendants had infringed its copyrights and committed the tort of passing off. Manitoba Inc. sought an injunction to prevent the defendants from continuing to publish Flying Cow, and for both general and punitive damages. K.P. Richard, J. of the Nova Scotia Supreme Court found that the defendants had infringed Manitoba Inc.’s copyright and were guilty of passing-off. He awarded all of the injunctive relief requested and restrained the defendants from continuing to publish Flying Cow in its current or similar form. However, Parks could publish Flying Cow if he changed its form. Manitoba Inc. was also awarded general damages of $139,000, punitive damages of $100,000 and costs.

Court of Appeal

The Nova Scotia Court of Appeal upheld the lower court’s findings of copyright infringement and the establishment of the tort of passing off; finding that there was ample evidence that copyright was infringed, that the defendants acted deliberately to confuse the public about the relationship between the two publications; and that the public was actually confused. However, it allowed the appeal in part and reduced the general and punitive damages. Punitive Damages Reduced

Punitive damages were reduced to $40,000. The court reasoned that $100,000 was too high and that the trial judge did not apply the proper “rationality” test for punitive damages as set out by the Supreme Court of Canada in Whiten v. Pilot Insurance [2002] S.C.R. 595, [“Whiten”]. The rationality test must be applied to both the necessity of awarding punitive damages and the quantum of the damages. Although the court agreed that the behaviour of the appellants was deceptive, it found that the trial judge erred in restricting his analysis to the “level of blameworthiness” of the appellants and neglecting to consider other fundamental principles, including the fact that Daum was a sophisticated entrepreneur and not particularly vulnerable. The trial judge’s award had overshot its purpose.

General Damages Award Upheld

The court found that the award achieved the requisite objective of a “broadly equitable result.” Although evidence in support of the amount claimed was extremely thin, it was unchallenged at trial and could not be attacked on appeal. The court recognized the difficulty victims of copyright infringement or passing off face in proving damages precisely, and noted that an infringer can’t escape liability as a result. The award was maintained, with a minimal reduction of $4000 to recognize monies already received in small claims court.

While this result is favourable for franchisors, the court emphasized that the general damages award was maintained at least in part due to the failure of the appellants to challenge evidence of damages at trial. The court placed great reliance on the testimony of witnesses and deferred to the trial judge’s findings about the evidence of witnesses at trial. In addition, the court refused to be lenient with the appellants merely because they had, by their own choice, been unrepresented by counsel at trial.

Evidence of Damages

If franchisors want to be sure that damages will be awarded and upheld on appeal, they should ensure that they have proper evidence (including records and receipts) detailing actual damages suffered, and be able to show that these damages were related directly to the infringement or passing-off. When asking for punitive damages, franchisors should be aware that courts will apply the “rationality” test from Whiten in determining the amount of these damages. Franchisors should not expect to receive amounts in excess of what is necessary to achieve the objectives of this type of award.