The Gray Blog

The Supreme Court of Canada today reversed the lower court’s decision in Euro-Excellence Inc. v. Kraft Canada Inc. The Court explained that “[f]or KCI to succeed, it must show that Euro imported works that would have infringed copyright if they had been made in Canada by the persons who made them.” However, in the case of KCI, the products at issue were Toblerone bars bearing copyrighted works which where first manufactured and sold in Europe by the Licensors and owners of the copyrights. The Court reasoned that under section 27(2)(e) of the Copyright Act KCI as a licensee may not sue the owners of the copyrights for copyright infringement. Its only remedy is for breach of contract. Accordingly, no cause for copyright infringement exists against the legitimate purchaser.

This result is different from that previously reached in the United States in the case of Quality King Distributors, Inc. v. L’Anza Research International, Inc. (a case in which the Gray Blogger was amicus counsel) In Lanza the US Supreme Court ruled that where the manufacturing and sale of a product bearing a copyrighted work takes place abroad, such a sale does not take place under the laws of the US and the sale does not, therefore, constitute a valid first sale so as to exhaust the copyright owner’s rights.

This decision also delineates  a difference between US and Canadian law regarding licensor liability.  Under US law a licensor can be liable to the exclusive licensee for copyright infringement, if the licensor exercises rights that it has previously exclusively licensed.

The Euro-Excellence decision promises to keep different parallel market standards in the two neighboring countries for the foreseeable future.

On July 23, 2007, the Supreme Court of Canada announced that that it will deliver its decision on Euro-Excellence, Inc. v. Kraft Canada, Inc. tomorrow July 26, 2007. This is a case which, if sustained, will allow the exclusion of parallel market products which bear registered copyrights from the Canadian marketplace. Although the reasoning is different, the result would be similar to that of the Lanza decision in the United States. In anticipation of this important decision the Gray Blog felt that it was worth reviewing the issues involved and the history of the case.

The case began in 2004 when Kraft Canada, Inc. (KCI) brought suit against Euro-Excellence, Inc. (Euro), a former exclusive distributor, alleging copyright infringement under section 27(2)(e) of the Canadian Copyright Act. Based on the importation by Euro of Toblerone chocolate bars (the Gray Blogger’s favorite chocolate) bearing registered artistic copyrights. The copyrights at issue were the Toblerone bear in mountain design which was registered by Kraft Foods Schweiz in 2002 and the Cote d’Or elephant design which was registered by Kraft Foods Belgium in 2002. Both of these designs were licensed exclusively to Kraft Canada.

Section 27(2)(e) states in relevant part:

27. (1) It is an infringement of copyright for any person to do, without the consent of the owner of the copyright, anything that by this Act only the owner of the copyright has the right to do.

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

(a) sell or rent out,

(b) distribute to such an extent as to affect prejudicially the owner of the copyright,

(c) by way of trade distribute, expose or offer for sale or rental, or exhibit in public,

(d) possess for the purpose of doing anything referred to in paragraphs (a) to (c), or

(e) 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.

(3) In determining whether there is an infringement under subsection (2) in the case of an activity referred to in any of paragraphs (2)(a) to (d) in relation to a copy that was imported in the circumstances referred to in paragraph (2)(e), it is irrelevant whether the importer knew or should have known that the importation of the copy infringed copyright.

The trial court concluded that the defendant infringed KCI’s copyrights and awarded $300,000 in damages. The Federal Court of Appeal denied the appeal but referred the matter back to the trial court for a re-calculation of damages. The critical language in the Appellate Court’s ruling states:

[R]eproductions of protected works that are made outside Canada, even by the copyright holders KFB and KFS, may not be imported into Canada by Euro Excellence for the purpose of doing anything referred to in paragraphs 27(2)(a) to (c), without there being a secondary infringement of KCI’s copyright, because KCI has an exclusive right of reproduction for Canada, even as against KFB and KFS, and Euro Canada knew that KCIs exclusive rights in the two works had been registered for Canada.

If upheld, the appellate Court’s ruling would allow brand owners to bar parallel market imports by adding copyright content to product packaging. The Gray Blog will watch and report on the Supreme Court’s decision in this important case.

Special thanks to Howard Knopf for information regarding this case. Howard participated in the lawsuit as counsel for the Retail Council of Canada, a pro-parallel market group.

The Gray Blogger just returned for the USPTO China Road Show.  The program was a huge success drawing nearly 400 registrants.  The speakers from various firms and agencies were very well informed and provided useful insight on the complex problems and opportunities of protecting Intellectual Property in China.  The key takeaway lesson was to plan your IP strategy and take steps to protect your intellectual property before you make public disclosure of your intent to do business in China.  If you wait until you have begun production or distribution, you are already too late.

All in all the presentation was very rewarding and I highly recommend that you consider attending if you have any interest in the subject.  The USPTO will be conducting two additional road shows in the coming year in the mid-west and in California.  Special kudos to Susan Anthony and Conrad Wong, both of the USPTO, and to their team, for running a very professional program.

The Second Circuit has published an opinion which was previously filed under seal in Zino Davidoff S.A. v. CVS Corp., 2007 WL 1933932 (S.D.N.Y. July 2, 2007). The court grant international fragrance manufacturer Davidoff & Cie, a Swiss company, preliminary injunctive relief against CVS Corp., the multi-state pharmacy operator, preventing the further sale of parallel market and counterfeit COOL WATER fragrances. The decision, although an interim order, is significant for furthering the position that decoding by removal of UPC codes constitutes a material alteration since “(i) it restricts Davidoff’s ability to identify and remove counterfeit goods; (ii) it undermines Davidoff’s ability to identify, inspect and, if necessary, recall defective product.” The Court found that these considerations were sufficient to establish a likelihood of confusion and stated that “Plaintiff’s witnesses persuasively testified that the decoded gray-market fragrances make detection of counterfeit products far more difficult, as counterfeiters have become more sophisticated in packaging fake COOL WATER products.”

The Court also rejected CVS’s argument that the UPC system should not be protected because there are superior alternatives, such as date stamping the products. The Court disagreed and ruled that the law does not require that Davidoff adopt the most effective quality control procedures possible, as courts are reluctant to inject themselves into such business judgments. It is not clear whether CVS offered its own track back scheme for these products.

The goods at issue involved allegedly commingled counterfeit and parallel-market bottles of COOL WATER fragrance. Pursuant to a TRO, beginning in January 2007, Davidoff conducted inspections of CVS’s inventory of COOL WATER products. In total, Davidoff’s inspectors examined 33,369 units of COOL WATER fragrances. Of these, 836 units were identified as counterfeit and 16,600 units were found to be decoded gray-market products.

From the brand owner’s perspective, this decision constitutes an important victory since it prevents decoding. Decoding is a key element in preventing the brand owner from retaliating against the original reseller who sold the goods into the parallel market.

From the parallel market perspective, this decision could effectively undermine distribution of genuine coded products in the parallel market. Moreover, by rejecting the availability of alternative product tracking schemes, the Court does not seem to allow much room for maneuvering.

We will continue to monitor.

The Moscow News Weekly reports on a crackdown by the government of the Russian Federation against gray market electronics. In an effort to re-engineer the current market, the government is temporarily discontinuing import duties on digital cameras and cellular phone components while, on the other hand, Russian Customs begins recording the serial numbers of all laptops and other digital devices imported into Russia. The goal is to encourage domestic assembly and to discourage cheap parallel market imports which presently constitute a substantial majority of Russian imports.

In an effort to show their support for this new policy initiative, some of the largest chain stores in the nation have signed a declaration circulated by the Russian Association of Trading Companies and Manufacturers of Consumer Electronics and Computers (RATEK),committing to purchase goods from authorized suppliers.  Some experts have expressed doubt in the policy’s effectiveness.
For the full article click here.