Supreme Court of Canada rules on how copyright law may be used to combat “grey marketing”

August, 2007

The Supreme Court of Canada (“SCC”) released its long-awaited decision in the Euro-Excellence Inc. v. Kraft Canada Inc. case on July 26, 2007, which concerned the use of the Copyright Act[1] as a sword to stop the parallel importation of goods.

Since 1990, Kraft Canada Inc. (“KCI”) has been the exclusive distributor of Toblerone bars in Canada.  Before 1997, KCI was an authorized distributor of Côte d’Or bars in Canada, and in 2001 became their exclusive distributor for Canada.  KCI became the exclusive distributor of Toblerone and Côte d’Or bars upon entering into contracts with Kraft Foods Belgium SA (“KFB”) and Kraft Foods Schweiz AG (“KFS”), which are the parent companies of KCI.  Since 2000, Euro-Excellence has been importing genuine Côte d’Or bars into Canada as an unauthorized distributor.  In 2001, Euro-Excellence began to import genuine Toblerone bars in Canada without authorization as well.  (The Côte d’Or bars and Toblerone bars are hereinafter referred to collectively as the “Bars”.)  Euro-Excellence acquired the Bars legally in Europe as manufactured by KFB and KFS.

Once KCI became the exclusive distributor for the Bars in Canada, it brought the lawsuit against Euro-Excellence alleging secondary copyright infringement because of Euro-Excellence’s importation of the Bars into Canada.  (It is interesting to note that the trial judge proceeded on the assumption that the sole purpose of KFB and KFS registering copyright in the Bars in Canada and then making KCI the exclusive distributor of the Bars was to mount the very attack upon Euro-Excellence which went before the court.)

Secondary copyright infringement is dealt with under section 27(2) of the Act.  The relevant section for this case is section 27(2)(e):

27(2)    It is an infringement of copyright for any person to:

  1. sell or rent out,
  2. distribute to such an extent as to affect prejudicially the owner of the copyright;
  3. by way of trade distribute, expose or offer for sale or rental, or exhibit in public,
  4. possess for the purpose of doing anything referred to in paragraphs (a) to (c), or
  5. import into Canada for the purpose of doing anything referred to in paragraphs (a) to (c),

a  copy of a work, sound recording or fixation of a performer’s performance or of a communication signal 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.

For the case at hand, the SCC asked whether the following infringement had occurred: “It is an infringement of copyright for any person to…import…a copy of a work…that the person knows…would infringe copyright if it had been made in Canada by the person who made it”.

The SCC ruled previously that three elements must be proven to establish secondary infringement: (1) primary infringement; (2) the secondary infringer should have known that he was dealing with a product of infringement; and (3) the secondary infringer sold, distributed or exposed for sale the infringing goods.  With respect to the question as posed by SCC, it was held that section 27(2)(e) does not require primary infringement, but rather hypothetical primary infringement, as section 27(2)(e) does not require actual primary infringement.

In a deeply divided decision, the SCC ruled that Euro-Excellence could continue to import the Bars, as such importation did not constitute copyright infringement under section 27(2)(e).

Four judges held that it would be possible to stop the importation of goods having copyrighted works under section 27(2)(e).  However, in this case, as the Bars were manufactured by KFS and KFB, who own the copyrights licensed to KCI, the four judges ruled that KFS and KFB would not have infringed their own copyright, if they had manufactured such goods in Canada.  Therefore, as KCI could not establish all of the necessary elements for secondary infringement under section 27(2)(e), KCI could not prevent Euro-Excellence from importing the Bars.  However, if KCI were not an exclusive licensee, but rather the owner of the copyright in the Bars, then KCI might have been able to succeed under section 27(2)(e). 

Three judges ruled that no secondary infringement existed because the copyrighted works, i.e. brand logos on the Bars, appearing on product wrappers were merely “ancillary” to the actual Bars being purchased.  An ancillary work is not capable of being infringed under secondary infringement.  However, a non-ancillary work can be infringed under section 27(2). For example, a book would be considered a copyrighted work, whose copyright is non-ancillary, whereas a chocolate bar, on whose wrapper a copyrighted logo appeared, would be considered an ancillary copyrighted work.  (The dissent did express some concern about how one may determine what is and what is not ancillary.)

Two judges in dissent ruled that the case for secondary infringement had been satisfied.  The reason is that the dissent held that the Act permitted an exclusive licensee to assert its rights against even the owner of the copyright; that is, in the case of section 27(2)(e), if the parent companies had made the Bars in Canada, they would have infringed the copyright of the exclusive licensee, KCI, as KCI was an exclusive licensee, whose rights are enforceable under section 2.7 of the Act against all others including the copyright owner.

What does this mean for importers of goods containing copyrighted works?  It is difficult to say based on the divided ruling.  However, all the judges seem to agree that a copyright owner should be able to prevent the import of goods, which are marked with its copyrighted works; in the case of three judges, such statement would be provided that such copyrighted works are not “ancillary” to the goods being imported.

Until the Act is modified to provide for some clarity in this regard, in order to enforce your copyrights under section 27(2)(e), one should be the Canadian copyright owner and the copyrighted work should be non-ancillary.

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Ryan K. Smith is a lawyer and trade-mark agent at Feltmate Delibato Heagle LLP. He specializes in corporate and commercial law with expertise in intellectual property matters including trade-marks, copyrights, privacy, information technology, and confidential information.  You can reach Ryan at rsmith@fdhlawyers.com and (905) 287-2215.

 


[1] R.S. 1985, c. C-42.