In Euro-Excellence Inc. v. Kraft Canada Inc. (2007 SCC 37), an oddly split 7-2 decision handed down on July 26, 2007, the Supreme Court of Canada has issued an important decision relating to the ability to use copyright to prevent parallel importation of grey market goods into Canada.
Canada's highest court overturned lower court decisions that had held that grey marketing could be prevented by granting an exclusive copyright licence to a Canadian entity in artistic works -- logos -- displayed on product packaging.
However, in so doing, the Court has clearly left the door wide open to copyright owners to use another strategy to prevent parallel importation: granting Canadian entities an assignment of copyright, rather than an exclusive licence, in the work.
Kraft Foods Schweiz AG and Kraft Foods Belgium SA make TOBLERONE and COTE D'OR chocolate bars in Switzerland and Belgium, respectively. For several years, Kraft Canada Inc. has been their exclusive Canadian distributor. Euro-Excellence was the former authorized Canadian distributor for COTE D'OR chocolate bars. Even though Kraft Canada was the exclusive licensed Canadian distributor, Euro-Excellence continued to import and sell in Canada genuine TOBLERONE and COTE D'OR chocolate bars that were purchased from an unnamed source in Europe.
In an attempt to prevent Euro-Excellence's activities, the Kraft parent companies registered copyright in Canada, as artistic works, in the logos displayed on the chocolate bar wrappers. Additionally, Kraft Canada was granted an exclusive license to produce and reproduce the artistic works in Canada.
Both the Federal Court and Federal Court of Appeal held that that Euro-Excellence's importation and distribution of the artistic works in Canada was in violation of Kraft Canada's rights as an exclusive licensee, and constituted secondary infringement contrary to section 27(2)(e) of the Canadian Copyright Act.
The Supreme Court disagreed, and allowed the appeal, in a decision that reflects widely divergent views by various judges.
Four of the seven judges that allowed the appeal had no difficulty finding that copyright subsisted in the logos, and that parallel importation of the bars would have consituted secondary copyright infringement if the copyright had been assigned to Kraft Canada.
However, as an exclusive licensee, Kraft Canada was not in a legal position to prevent Euro-Excellence's sale of grey market bars.
Writing for the group of four judges, Mr. Justice Rothstein adopted a "purposive approach" and stated that:
"The copyright itself was not assigned to Kraft Canada. Therefore, to accept the Kraft companies’ argument, this Court would have to find that copyright owners can infringe their own copyright if they have licensed copyright to an exclusive licensee despite their retention of the copyright. In my view, the Copyright Act does not permit exclusive licensees to sue the copyright owner-licensor for infringement of its own copyright. If KFS or KFB had reproduced Kraft labels in Canada in violation of its licensing agreement with Kraft Canada, Kraft Canada’s only remedy would lie in breach of contract and not in copyright infringement. Because a copyright owner cannot be liable to its exclusive licensee for infringement, there is no hypothetical infringement and thus no violation of s. 27(2)(e) in this case by Euro-Excellence."
In contrast, three other judges that granted the appeal were not troubled by Kraft Canada's status to take action as an exclusive licensee. Rather, this group, led by Mr. Justice Bastarache, adopted a policy-based approach that is rather difficult to reconcile with the plain language of the Copyright Act, and was of the view that no legitimate economic interest was being served by allowing copyright to be used in this manner. Specifically, the "merely incidental presence" of the copyrighted works on the wrappers of the chocolate bars did not bring the chocolate bars within the protections offered by the Copyright Act.
This group of judges therefore seemed to accept the use of copyright by an exclusive licensee to prevent parallel importation of grey market goods, but only if the copyrighted work is central or integral (presumably such as in the case of software, music or movies), rather than merely incidental or ancilliary, to the product itself.
Finally, the two judges in the minority that upheld the lower courts' decisions essentially considered this to be a matter of simple and narrow statutory interpretation that should not incorporate policy-driven considerations. To this group, led by Madam Justice Abella, the Copyright Act clearly supported Kraft Canada's ability as an exclusive licensee to prevent Euro-Excellence's activities.
Furthermore, copyright clearly subsisted in the logos:
"To inject an exception for logos on the basis that they are "incidental" would be to introduce unnecessary uncertainty, inviting case-by-case judicial explorations into the uncharted area of what is "merely" incidental, "somewhat" incidental, or not incidental at all. Such an approach also takes insufficient account of the reality that many products are, to a significant extent, sold on the basis of their logo or packaging."
The Court's differing views on grey marketing has resulted in a situation that is not black and white.
This is particularly unfortunate as a recently strengthened Canadian dollar may result in an increased flow of parallel imports into Canada.
Nevertheless, it does seem that assigning copyright to a Canadian entity -- rather than just granting an exclusive licence -- can be used to block importation of grey market goods. However, before adopting this strategy, several factors should be considered carefully, including:
- will there be any negative tax consequences associated with assigning the copyright to a Canadian entity?
- is there, from a corporate perspective, concern about potentially losing control over the copyright by granting an assignment?
- if the artistic work is a logo, will transferring the copyright in the logo to a Canadian entity (while the trademark rights in the logo are retained by the foreign parent corporation) have the unintended effect of rendering the trademark invalid due to a lack of distinctiveness? This is a matter yet to be fully resolved by a Canadian court.
- are there any trademark remedies available? For instance, is there a material difference with the quality of the goods that are manufactured for the Canadian market such that an action can be brought for passing off?
- are there any other statutory remedies available? Does the packaging fully comply with Canada's packaging and labelling provisions?
Mark K. Evans and Geneviève M. Prévost, Toronto