Unsettling Comments from the Ontario Courts re the Settled Law of Trademarks and Parallel Importation

The Ontario courts have made some unsettling comments suggesting that the Canadian trademarks law is “unsettled” on the issue of parallel imports or grey marketing. Ironically, like the leading Canadian case on parallel imports discussed below, this also appears to be a case about chocolate bars. The comments were made in the context of an attempt by the parallel importers to defend against the enforcement of March 2006 settlement agreements on the basis that the settlement agreements were in restraint of trade and, therefore, void.

In  Mars Canada Inc. v Bemco Cash & Carry Inc. 2016 ONSC 7201 (CanLII), Justice F. L. Meyers of the Ontario Superior Court stated that:

[8] …. The law is unsettled as to whether a Canadian trade-mark holder can prevent third parties from selling products bearing the Canadian company’s trade-marks which are legitimate goods sourced from a foreign parent or affiliate of the Canadian trademark holder. …

The motions judge goes on to state:

[10] The parties argued at some length about the current state of the law concerning grey marketing in Canada and whether, in particular, a Canadian trade-mark holder is entitled to enforce its trade-marks to prevent sales in Canada by third parties of genuine product purchased from the trade-mark holder’s foreign parent company. I have not found it necessary to resolve that issue as part of the resolution of the motion before the court.

The Ontario Court of Appeal recently repeated this comment in an appeal of the foregoing decision in Mars Canada Inc. v. Bemco Cash & Carry Inc., 2018 ONCA 239:

[4]          …The law is unsettled as to whether a Canadian trademark holder can prevent this activity.

With respect, there is nothing that is “unsettled” about this question. Nor was anything unsettled even back in March 2006 (when the settlement agreements were entered into) about whether Canadian trademark law can be used to “thwart” parallel imports, which are by definition legitimate products put on the market by a trademark owner in another country. The answer was and is clearly “no” – except perhaps in very rare factual situations where the imported product may be of a materially different character or quality than the Canadian product and consumers get to buy a very different product from that which they expected. Usually, these grey market cases involve identical products – even from the very same ultimate source – that were acquired outside of the “official” or “authorized” channels of trade. While such parallel trade might displease the Canadian trademark owners or exclusive licensee or distributor who wishes to lessen competition and raise prices in the Canadian market, trademark law does not give them any such power.

The well-known 2007 Supreme Court of Canada decision in  Euro-Excellence Inc. v. Kraft Canada Inc., [2007] 3 SCR 20, involved the parallel importation of Toblerone and Côte d’Or chocolate bars concerning which Kraft sought unsuccessfully to “thwart” parallel importation by using copyright law instead of trademarks law. Kraft was the trademark owner in that case and if it could have used trademark law, it surely would have done so. It was represented by a very sophisticated IP litigation firm.

I made the prevailing arguments in that case in the SCC on behalf of the intervener Retail Council of Canada. Kraft tried to use copyright law because it knew that trademarks law wouldn’t work and was a non-starter. In fact, Kraft’s very experienced counsel told INTA, the major American based International Trademark Association, in a June 23, 2006 letter to encourage it to intervene in the SCC, that:

In light of the limitations imposed by legal authorities on enforcement of trade-mark rights in cases of parallel importation, Section 27(2) is very important to intellectual property right holders.

Indeed, as the trial Judge, whose decision was eventually overturned, noted that, even though it was not contested that Kraft owned the trademark, it did not try to invoke trademark law in its attempt to thwart the parallel importation of its chocolate bars. Instead, it developed an interesting strategy, alleging that the importation infringed its copyright in the artwork on the chocolate bars wrappers:

 [4] Kraft has developed an interesting strategy in an effort to thwart Euro Excellence's

distribution of these chocolate bars in Canada. To better appreciate the strategy, I should first say what it has not done. If it put distribution restrictions on Euro Excellence's supplier, it has not invoked them. Nor does it rely on trade-mark protection, although it alleges, and it is not contested, that it is the owner in Canada of the trade-marks "Côte d'Or" and "Toblerone". What it has done is take Canadian licensing rights in the artworks on the chocolate bar wrappers which have been copyrighted in Canada. It does not seek to enjoin Euro Excellence from distributing Toblerone and Côte d'Or chocolate bars. Rather, it seeks to enjoin it from distributing the copyrighted artwork on the wrappers. The idea is that the cost of re-wrapping or covering over the copyrighted artwork would act as a major disincentive...(emphasis added)

Kraft Canada Inc. v. Euro Excellence Inc. (F.C.), 2004 FC 652

(highlight and emphasis added)

Here is a comment I wrote for LSUC in 2008 shortly after the decision.

Even a trademark “owner” cannot use trademarks law to stop parallel importation. There are no developments since the Kraft case of which I am aware that would suggest otherwise.  I would be very interested in hearing from any expert counsel or academic who believes otherwise. Notwithstanding some obiter dicta in the Smith & Nephew, any attempt to change ownership of Canadian trademarks in favour of a Canadian subsidiary so as to enhance the chance of a more positive outcome in a grey marketing case is fraught with risks that include the potential loss of distinctiveness of the trademark and income tax issues.

The law was also clear before the Kraft decision.  See also:

·       Consumers Distributing Co. v. Seiko, [1984] 1 S.C.R. 583

·       Coca-Cola Ltd. et al. v. Pardhan et al. (1999) 85 C.P.R. (3d) 489 Affirming 77 C.P.R. (3d) 501 (FCA)

·       Smith & Nephew Inc. v. Glen Oak Inc. et al.; Beiersdorf Ag, Necessary Party (1996) 68 C.P.R. (3d) 153.

It is worth noting that this Bemco litigation – which has a very long and voluminous record – arises from a settlement agreement entered into in March, 2006 – at the very time when leave to appeal to the Supreme Court of Canada was being sought in the Kraft case. Perhaps Bemco settled in 2006 based upon perceived uncertainty about whether copyright law could be used to “thwart” parallel importation of chocolate bars. I don’t know and can only speculate.

However, the law on trademarks and grey marketing/parallel imports seemed very clear at the time, as shown above, which is why Kraft had chosen to frame its litigation as a copyright case. I make no comment on the underlying issues concerning the Bemco settlement agreements or the ensuing litigation in which it was apparently been argued that the settlement agreements were in a “restraint of trade”.

Speaking generally, and not about this case in any way, there are potential issues regarding settlement agreements involving intellectual property that can raise serious antitrust and pubic interest issues. This has become quite obvious in “pay for delay” cases involving generic drugs, such as FTC v. Actavis that went to the US Supreme Court.

I reiterate that I make no comment on whether or not the 2006 agreements made commercial or legal sense at the time. However, they were apparently negotiated by sophisticated parties with experienced counsel. Courts are normally very reluctant to set aside such agreements, and that seems to be the conclusion reached here after much obviously expensive and complex litigation concerning which I make no comment, except for the following.

For whatever reasons, the Ontario Superior Court and now the Ontario Court of Appeal have recently stated that the law concerning trademarks and parallel imports is “unsettled”.  This is of some concern if other parties and counsel begin to believe that perfectly legal commercial activity involving grey marketing may now be illegal or even arguably so under Canadian trademarks law. The fact that the Ontario courts in this very protracted Bemco litigation seem to believe and feel the need to state that the law regarding trademarks and parallel imports is “unsettled” is in itself unsettling.

HPK

Speech From the Throne 2013 – Will We Really Get Price Parity on Consumer Goods with the USA? IP Law is a Key Issue.

Yesterday’s  Speech from the Throne (#SFT13) contained two items that will require detailed consideration of amendments or clarifications of existing Canadian intellectual property law and amendments or clarifications to the anti-counterfeiting Bill C-56 from the previous session – or whatever it is numbered if and when it is resuscitated.

#SFT13 says:

·         “Our Government will ...Take further action to end geographic price discrimination against Canadians."
·         “And our Government will take additional action to protect Canadian consumers. Canadians are tired of hidden fees. They deserve to know the real cost of paying by debit or credit card. And they should not be charged more in Canada for identical goods that sell for less in the United States.”

Achieving these goals requires dealing with some extremely complex issues that have bedevilled courts and legislatures for decades. The elephant in the room is the issue of “parallel imports” or “grey market” goods – namely perfectly legitimate and authentic products that have been legally made and put on the market outside of Canada and which can be imported into Canada at a cheaper price than that demanded by the so-called “exclusive” distributor.  These good are by no means whatsoever “counterfeit” or “pirate” in any sense.

Despite the complexity of the “parallel imports” issue in terms of copyright law, some propositions are very simple.

Truly “free” trade cannot permit the imposition of “private tariffs” in the form of IP laws that permit geographic price discrimination or market segmentation. That would allow copyright law to become an unintended “instrument of trade control”, in the words of retired Justice Fish of the Supreme Court of Canada, and a very effective and unregulated “private tariff”.

Canada has explicit provisions in its Copyright Act regime that permit and encourage just such a regime for books. The situation for goods other than books is more complicated.

In 2007, the Supreme Court of Canada in the Kraft decision allowed a victory for the importer of “parallel import” or “grey market” Toblerone chocolate bars, largely based upon arguments that I made on behalf of the Retail Council of Canada. For a number of reasons, including the complexity of the decision and the issue itself, that victory has not been fully understood, even by some those importers who might benefit from it. Here’s an analysis I did for the Law Society of Upper Canada in 2008 that’s still useful.

Here is a summary of where the law now stands:

1. The sui generis book regime in the Copyright Act works well to keep out commercial scale importation of parallel imports and my much missed “remainder” fine art books, but is ineffective to stop personal importation by travellers and by Canadians who cross-border shop from the comfort of their own home or with their smart phone via electronic commerce in very large quantities.
2. Trade-marks law is ineffective to stop parallel imports.
3. In theory, copyright on elements of packaging and labelling can be used to exclude parallel imports if the copyright is assigned to a Canadian entity that is different than the foreign entity that made the packaging.
4. However, there’s a very good chance that such an assignment will trigger one or more of the following unintended and unfortunate consequences:

• Undesirable corporate and tax law consequences
• “Loss of distinctiveness” resulting in invalidity of trade-mark registrations
• Defence and Counterclaim allegations in any vigorously fought litigation relating to sham transactions, copyright misuse, abuse, and/or various Competition Act issues. (I have raised such allegations in a test case proceeding which then fizzled and never went forward).

Thus, copyright law – other than in respect of books – is essentially a toothless tiger when it comes to excluding legitimate parallel imports. But a lot of supposedly well-informed importers don’t get that, for the reasons stated above and for other reasons, which I won’t go into here.

Therefore, clarification of the law would be useful and maybe even essential. Even experienced IP lawyers have been baffled by it for decades. It is little wonder, then, that many of their clients and even the general counsel of their clients often don’t understand it. Maybe Parliament needs to make it sufficiently clear in simple terms so that even a copyright lawyer can understand it. I look forward to helping to find the appropriate language.

In the case of books, unless we want to keep an arguably anachronistic, anomalous and clearly protectionist regime that guarantees higher prices to Canadian consumers and higher profits to Canadian “exclusive distributors” but little else in terms of benefits to Canada, it is essential that the Copyright Act be amended. Otherwise, we are certain to continue have higher book prices overall in Canada than the USA, unless the current market forces of Amazon and others put Canadian exclusive distributors and some publishers out of business, which would not be a desirable result. As for the rest of Canadian copyright law, clarifying language seems necessary for the reasons stated above.

The anti-counterfeiting Bill C-56 – which may or may not get revived in the new session – has countless confusing references that deal with parallel imports.  While the intention seems benign, the result may not be. Much more scrutiny and simplification may be required to ensure consistency with the Speech from the Throne statements.

In any event, these Speech from the Throne items cannot be achieved without considerable attention to IP details.

No doubt, the lawyers and lobbyists who would like to preserve the “private tariff” of IP to prevent real free trade and to geographically segment the Canadian market for price discrimination purposes are already hard at work to thwart the Government’s intention and to recover from their failed attempt in the Kraft case to hijack copyright law for this purpose.

And last but not least, let’s hope that the #CETA and #TPP agendas don’t derail the perfectly laudable sentiments in #SFT13.

In that connection, beware of the predictable efforts from the US Government and lobbyists representing American interests who will take their frequent posture of “do as we say, not as we do”. The US Supreme Court recently clarified in the Kirtsaeng decision that copyright law cannot be used to stop the parallel importation of goods – indeed the case was about books – largely based upon a “parade of horribles” that would result had it ruled otherwise.

As I occasionally explicitly reiterate, the views expressed on this blog are solely my own.

HPK

Nifty Shades of Gray Marketing: A Split US Supreme Court - Majority Believes that Things Go Better with Coke

The U.S. Supreme Court yesterday delivered what is likely one of the most important copyright decisions from any court anywhere anytime. In a dramatically divided but decisively 6-3 decision in Kirtsaeng v. John Wiley, it held that copyright law could not be used to prevent the parallel importation into the USA of works lawfully made outside of the USA. In other words, legally made works can be bought and sold and resold on the “grey” (or “gray” for those not in the Commonwealth) market, according to common sense. As the EFF says, if "you bought it,you own it"'. If you own it, you can resell it. After the “first sale”, the copyright owner’s rights in the physical object are “exhausted” – hence the frequent reference to the doctrine of “exhaustion”.

In other words, copyright law will not be available to do what trade-marks law has also failed to do, which is to serve as a tool of international trade control, price discrimination, market segmentation and restraint of trade with respect to legitimately made goods for which the copyright owner has been paid and in respect of which the “first sale” has been made. Things are somewhat different in the EU - but that is not a jurisdiction that Canada would rush to emulate in this respect.

To be absolutely clear, the copies in question were not piratical or counterfeit. The American copyright owner got paid for these products manufactured abroad, with their permission. However, the quest to control the resale after the first sale, to control the channels of distribution and the pricing of the imported copies of these products into the USA, and to generally assert a right to control sale after “first sale” and to take advantage of higher American “what will the market bear” pricing was denied. As the EFF says, “You bought it – you own it”. It’s not quite that simple – but it’s now very close indeed. Basically, the owner of a copyrighted product can do with it what he or she wishes, other than copy it or infringe moral rights or break TPMs, where applicable.

The decision applies to all copies lawfully made anywhere – whether the product is a book, a chocolate bar, a wrist watch, a plane, train or automobile. It applies whether it is the product itself that is protected by copyright (i.e. books, in this case) or merely the packaging, labelling or other incidental aspect of the product. It should be noted that Canada has an elaborate sui generis regime to prevent the parallel importation of books – because book publishing has always been highly protected in Canada.

The Kirtsaeng decision could have important ramifications for Canada. It is consistent with the result of the six year old Supreme Court of Canada decision in Euro-Excellence v. Kraft, which involved copyright in a small logo on the packaging of Toblerone chocolate bars (I should disclose that I made the prevailing argument on behalf of an intervener, the Retail Council of Canada, in that case). The argument was highly technical, but essentially entailed that a copyright owner cannot infringe its own copyright. That argument carried the day in the only way that could have worked at the time – given the very inadequate record below. The two top courts of Canada and the USA have come to the same bottom line for most practical purposes, namely that copyright law will be ineffective to “thwart” parallel imports of grey goods – which are, by definition, legitimate. I’ll write a more detailed blog comparing the Kirtsaeng case with Canada’s Kraft case in the near future. 

It should be noted that some believe that the execution on paper of an assignment of copyright to a Canadian entity will entitle it to block parallel imports in accordance with the Kraft decision. However, such a tactic may very well backfire if adequately resisted. Such an assignment may be subject to attack as a sham or an abuse of copyright and may trigger unwelcome and unexpected tax consequences. More about this in the future. For now, see my comment prepared for the Law Society of Upper Canada. For practical purposes, copyright law is not a very practical way to block parallel importation into Canada.
 
The US decision is important to Canada for many reasons – not least of which is the imminent debate on Bill C-56, the anti-counterfeiting legislation, which includes several sometimes inconsistent references to parallel imports that could possibly have unintended or unforeseen results. Also, there can be little doubt that the lobbyists have already begun to work on Congress and the USTR to “undo” a result that some of their clients will find very difficult to accept. Such a development is a threat to Canada and other countries involved in trade negotiations with the USA, unless the negotiators stand their ground.

Kirtsaeng was a foreign student from Thailand studying in the USA. He figured out that he could import perfectly legitimate text books in English printed abroad and purchased by his friends and family in Thailand and resell them in the USA at a lower price than other channels. The profits from his little cottage industry import business helped finance his education. This is what most would consider to be free trade, competition and otherwise normal, entrepreneurial, and competitive capitalism His profits helped to finance his American university studies. The well-known publishers John Wiley decided to stamp out this very small challenge to the legacy business model of price discrimination based upon a tortured and technical result that been in place if not easily enforced as the result of lower court and two recent but inconclusive Supreme Court decisions itself over the years.

As is so often the case when copyright owners get excessively zealous in their quest for absolute control, multiple and layered payments, double-dipping and other excesses – they sometimes get more than they ask for. In this case, Wiley and an impressive alliance of amici representing the US copyright establishment went after a foreign grad student working his way through college. They must have been very pleased when a jury whacked him with $600,000 in statutory damages. But he appealed and Wiley and its supporters got a resounding defeat in the US Supreme Court that will be seen as a huge setback in the legacy book publishing, movie, music, entertainment, and more unenlightened quarters of the software sectors.

However, Wiley and other American copyright owners in various legacy and IP maximalist sectors believe that they are entitled to segment markets, practice international price discrimination and to charge what the market will bear in various geographic markets. Canadians are familiar with having to pay higher prices than Americans for precisely the same product – in part because not all Canadian importers are as aggressive as they could be in sourcing the perfectly legitimate “grey market” for “parallel imports” that would save their customers money and earn themselves greater profit.  Young Mr. Kirtsaeng, however, was undeterred. He succeeded in slaying the giant that even mighty CostCo had failed to successfully confront in the 2010 US Supreme Court in the 2010 CostCo v. Omega case.

At the risk of seriously oversimplifying  some complex jurisprudence and its consequences, the Americans have now caught up to Canada and perhaps even passed it for the moment with respect to “international exhaustion”, free trade and a judicial distaste for using IP laws for purposes for which they were never intended. Like, the Canadian decision, the US Court today was sharply divided – although the result and the splits are much clearer in the US case. The 6-3 arithmetic speaks for itself in this instance.

As per the Court’s summary, BREYER, J., delivered the opinion of the Court, in which ROBERTS, C. J., and THOMAS, ALITO, SOTOMAYOR, and KAGAN, JJ., joined. KAGAN, J., filed a concurring opinion, in which ALITO, J., joined. GINSBURG, J., filed a dissenting opinion, in which KENNEDY, J., joined, and in which SCALIA, J., joined except as to Parts III and V–B–1.

Note the additional shades of grey added by the Kagan + Alito concurrence and the partial reservation of Scalia's concurrence with Ginsburg and Kennedy.

Court watchers will immediately note that this alignment has nothing to do with traditional “liberal” v. “conservative”  or partisan appointment divide. Nor can it be said to reflect any “activist” v. “strict constructionist” divide. If anything, it may portend an emerging meeting of the minds of of a “purposive” and “libertarian” approach to intellectual property – and the solid rejection of the “maximalist” copyright views that one had come to expect from Justice Ginsburg, normally considered to be a “liberal” on other issues.

The result is not surprising for any who heard the oral argument – which featured a “parade of horribles”–  including why consumers and users’ rights in everything ranging from library books to used cars was on the line, if the overreaching position of Wiley and its supporters had been accepted. In the end, even the Government’s lawyer admitted that Kirtsaeng and his amici supporters’ list of “horribles” was “worse” (i.e. presumably even more horrible) than the alternative list.

The result is effectively a stinging rejection by her colleagues of Ginsburg, J.’s widely noted “obiter dicta” in the Quality King case a few years earlier. That case involved shampoo products that had been made in the USA, shipped abroad and imported back. She provocatively opined by way of obiter dicta in a concurrence that:

This case involves a “round trip” journey, travel of the copies in question from the United States to places abroad, then back again. I join the Court’s opinion recognizing that we do not today resolve cases in which the allegedly infringing imports were manufactured abroad. See W. Patry, Copyright Law and Practice 166—170 (1997 Supp.) (commenting that provisions of Title 17 do not apply extraterritorially unless expressly so stated, hence the words “lawfully made under this title” in the “first sale” provision, 17 U.S.C. § 109(a), must mean “lawfully made in the United States”); see generally P. Goldstein, Copyright §16.0, pp. 16:1—16:2 (2d ed. 1998) (“Copyright protection is territorial. The rights granted by the United States Copyright Act extend no farther than the nation’s borders.”). (emphasis added)

This time around, Wiley relied upon a passage from the majority in Quality King. In Breyer, J.’s words:

We cannot, however, give the Quality King statement the legal weight for which Wiley argues. The language “lawfully made under this title” was not at issue in Quality King; the point before us now was not then fully argued; we did not canvas the considerations we have here set forth; we there said nothing to suggest that the example assumes a “first sale”; and we there hedged our statement with the word “presumably.” Most importantly, the statement is pure dictum. It is dictum contained in a rebuttal to a counterargument. And it is unnecessary dictum even in that respect. Is the Court having once written dicta calling a tomato a vegetable bound to deny that it is a fruit forever after? (Emphasis added)

As for her controversial passage mentioned above, Justice Ginsburg admitted that her comment in Quality King was “dictum” but went on to say that “I disagree with the Court’s conclusion that this dictum was ill considered.”

Kagan, J. in her concurrence indicated that if Congress views yesterday’s decision “as a problem”, “it should recognize Quality King—not our deci­sion today—as the culprit.

The Kirtsaeng decision gets very technical, as inevitably do all decisions on parallel imports if adequately briefed and reasoned. It goes into great depth  based upon the interplay of key sections of the US legislation. But, in the end, it all boiled down to the common sense interpretation of five words: “lawfully made under this title”. In the end, the Court agreed with Kirtsaeng that this phrase was not subject to geographic limitation and applied to copies lawfully made abroad.

There is already much speculation about whether this decision could be a premonition of a surprise outcome in the pending Bowman v. Monsanto case about whether and how the “exhaustion” doctrine applies to patented seeds.

The importance of yesterday’s decision cannot be over stated. Two of the judges on the US Supreme Court who have long shown a great interest in copyright law and are both regarded as “liberals” on the Court have seriously split with each other. The split is symbolic in many respects of the overall state of affairs in copyright law, in which everyone professes to believe in “balance”, as long it is their own definition of balance. The result will be very inconvenient for the USTR in its trade negotiations in the TPP, where the Americans will find it virtually impossible – though it has rarely stopped them before – to say “Do as we say, not as we do”. No doubt, the lobbyists will be hard at work in that forum in order to “policy shop” a prohibition against parallel imports back into the US congress – but that won’t be easy, to say the least.

Ironically, Justice Ginsburg was explicitly very concerned about the future of US trade negotiations and treaties that are still only a glint in the USTR’s and various lobbyists’ eyes – a concern which many might find seriously out of place in a judgment of the  US Supreme Court: 

Quality King left open the question whether owners of U. S. copyrights could retain control over the importation of copies manufactured and sold abroad—a point the Court obscures, see ante, at 33 (arguing that Quality King “significantly eroded” the national-exhaustion principle that, in my view, §602(a)(1)embraces). The Court today answers that question with a resounding “no,” and in doing so, it risks undermining the United States’ credibility on the world stage. While the Government has urged our trading partners to refrain from adopting international-exhaustion regimes that could benefit consumers within their borders but would impact adversely on intellectual-property producers in the United States, the Court embraces an international-exhaustion rule that could benefit U. S. consumers but would likely disadvantage foreign holders of U. S. copyrights. This dissonance scarcely enhances the United States’ “role as a trusted partner in multilateral endeavors.” Vimar Seguros y Reaseguros, S. A. v. M/V Sky Reefer, 515 U. S. 528, 539 (1995).

In any case, her reference to the Vimar decision is misplaced, since the comment to which she apparently refers says that “courts should be most cautious before interpreting its domestic legislation in such manner as to violate International agreements”. In fact, not only are there no existing multilateral international treaties or agreements that prohibit international exhaustion. The TRIPS agreement expressly permits countries to come to their own conclusions on this issue. The fact that the USA may now want to forbid international exhaustion via future treaties should be of no relevance whatsoever to the US Supreme Court.

An aspect of this decision – which will be elevated no doubt to “sky is falling” proportions – is the often heard suggestion that US publishers, entertainment companies, software developers etc. may become reluctant to supply English language products to developing countries at lower prices for fear of seeing them shipped back to the USA as parallel imports. That argument may once have had some serious merit – but is increasingly moot as so many of these types of products are now provided digitally – and often controversially with DRMs of various stripes attached, including regional coding. This opens up a whole new debate about sale v. lease, and the future of TPMs, etc.  Moreover, the emergence of mega e-commerce entrepreneurs such as Amazon and the eBay phenomenon mean that the sustainability of price discrimination models is in serious doubt anyway. Finally, if students and other consumers in developing countries cannot get their needs for English language products legally satisfied at reasonable prices, they may resort to recourse to readily available online illegal sources and their governments may turn a blind eye except for token efforts at enforcement. That is simply a realistic observation. Don’t shoot the messenger.

The debate about domestic and international exhaustion has been going on for over a century. It is far from exhausted. But yesterday’s decision is a great victory for free traders and those who believe in the majesty and the wisdom of the common law (Lord Coke, no less who was referred to at length) and the role of the judiciary.

In closing, here’s the passage referring to Lord Coke (1552 to 1634) – which legal scholars will no doubt find to be delightful:

The “first sale” doctrine is a common-law doctrine with an impeccable historic pedigree. In the early 17th centuryLord Coke explained the common law’s refusal to permitrestraints on the alienation of chattels. Referring to Littleton, who wrote in the 15th century, Gray, Two Contributions to Coke Studies, 72 U. Chi. L. Rev. 1127, 1135 (2005), Lord Coke wrote:

“[If] a man be possessed of . . . a horse, or of any otherchattell . . . and give or sell his whole interest . . .therein upon condition that the Donee or Vendee shallnot alien[ate] the same, the [condition] is voi[d], because his whole interest . . . is out of him, so as he hath no possibilit[y] of a Reverter, and it is against Trade and Traffi[c], and bargaining and contracting betwee[n] man and man: and it is within the reason ofour Author that it should ouster him of all power given to him.” 1 E. Coke, Institutes of the Laws of England §360, p. 223 (1628).

A law that permits a copyright holder to control the resale or other disposition of a chattel once sold is similarly “against Trade and Traffi[c], and bargaining and contracting.” Ibid.

With these last few words, Coke emphasizes the importance of leaving buyers of goods free to compete with each other when reselling or otherwise disposing of those goods. American law too has generally thought that competition, including freedom to resell, can work to the advantage of the consumer. See, e.g., Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U. S. 877, 886 (2007) (restraints with “manifestly anticompetitive effects” are per se illegal; others are subject to the rule of reason (internal quotation marks omitted)); 1 P. Areeda & H.Hovenkamp, Antitrust Law ¶100, p. 4 (3d ed. 2006) (“[T]he principal objective of antitrust policy is to maximize consumer welfare by encouraging firms to behave competitively”).

The “first sale” doctrine also frees courts from the administrative burden of trying to enforce restrictions upon difficult-to-trace, readily movable goods. And it avoids the selective enforcement inherent in any such effort. Thus, it is not surprising that for at least a century the “first sale”doctrine has played an important role in American copyright law. See Bobbs-Merrill Co. v. Straus, 210 U. S. 339 (1908); Copyright Act of 1909, §41, 35 Stat. 1084. See also Copyright Law Revision, Further Discussions and Comments on Preliminary Draft for Revised U. S. Copyright Law, 88th Cong., 2d Sess., pt. 4, p. 212 (Comm. Print 1964) (Irwin Karp of Authors’ League of America expressing concern for “the very basic concept of copyright law that, once you’ve sold a copy legally, you can’t restrict itsresale”).

The common-law doctrine makes no geographical distinctions; nor can we find any in Bobbs-Merrill (where this Court first applied the “first sale” doctrine) or in§109(a)’s predecessor provision, which Congress enacted a year later. See supra, at 12. Rather, as the Solicitor General acknowledges, “a straightforward application of Bobbs-Merrill” would not preclude the “first sale” defense from applying to authorized copies made overseas. Brief for United States 27. And we can find no language, context, purpose, or history that would rebut a “straightforward application” of that doctrine here.

Yes – remembrances of the basic great principles of the common law do go better with Lord Coke.

HPK

Rev. March 20, 21 2013

Happy Birtday to ipwars.com and Warwick Rothnie

Happy 6th Birthday to Warwick Rothnie's blog. He is the extraordinary practitioner/scholar in Oz, who wrote what I believe is the first major monograph on parallel imports, and a brilliant book it was - and still is! It was invaluable to me in the Kraft case in the Supreme Court of Canada.

Come up soon from down under and pay us a visit!

Best,

Howard

ACTA, “Ex Officio” Enforcement, and Parallel Imports

In the latest ACTA leaked text, it’s disappointing to see that Canada is endorsing the following proposal on “ex officio” border enforcement, This refers to the giving of power to border officials to detain suspect goods on their own initiative on the basis of suspected IP infringement, without the need of a prior court order.

Here’s the text that Canada supports (see draft Article 2.7):

[Aus/Can/Sing: 1. Each Party shall provide that its customs authorities may act upon their own initiative, to suspend the release of or detain suspected counterfeit trademark goods or suspected pirated copyright goods with respect to imported goods including suspected counterfeit trademark goods or suspected pirated copyright goods admitted to, withdrawn from, or located in free trade zones. Each Party may provide its customs authorities the same authority as the foregoing provision of this Article in respect of exported and in-transit goods that are suspected counterfeit trademark goods or suspected pirated copyright goods.]

This is very unwise for many reasons:

• A judgment call about whether a particular product is “legal” or not is very often far from clear. For example, running shoes or handbags may be made “illegally” on the same assembly lines as the “real” product “after hours” and be identical in all physical respects to the “real” product. How is the border official supposed to make the determination as to whether the goods are “legal” or not?

• In the case of parallel imports (which by definition are perfectly legitimate and neither fake nor counterfeit), the factual and legal issues are extremely complex. The US Supreme Court is about to hear a case about whether perfectly legitimate Omega watches with a small copyrighted logo engraved on the back can be imported into the US by Costco. Some of the smartest lawyers and judges in the USA are bitterly divided over how this case should turn out. In Canada, we had the Kraft case involving Toblerone chocolate bars, which resulted in a victory for the parallel importer and a complex judgment from a very divided Supreme Court of Canada (I was counsel for the Retail Council of Canada, whose intervener’s arguments prevailed in the result). There was, of course, immediate speculation about how to get around the judgment but the subsequent court cases of which I am aware have settled or, in the case in which I was involved, fizzled.

• If the best lawyers and judges have to struggle intellectually about whether perfectly legitimate parallel import goods can be legally imported, are we ready to allow border guards with no legal education, and with no prior judicial oversight to make this initial determination and potentially tie up millions of dollars worth of merchandise for great lengths of time, forcing the importer to go to court to get the goods released?

• Border officials will inevitably be “educated” and provided with information about suspect shipments by those who may have a vested interest in keeping out parallel imports and may even have an interest in causing serious inconvenience to a legitimate competitor.

• The recent wrongful seizure of generic aids medicine in the Netherlands was vivid proof that empowering border officials to make difficult IP decisions can lead to serious and even potentially fatal consequences.

• Somebody should pay for the economic losses resulting from wrongful seizures. Who will that be?

• What remedies will there be for abuse or misuse of the “ex officio” system by competitors?

• What if the result of a wrongful seizure of medicine results in harm to health and safety?

• The empowering of “ex officio” action is simply not necessary in Canada. Justice Roger Hughes of the Canadian Federal Court (who had decades of successful experience in IP enforcement before his elevation to the bench) eloquently made this point at the 2008 Fordham Conference. He said that those seeking such a change should “stop whining” and just “roll up their sleeves” in order to use the current system, . The current system of obtaining a court order works perfectly well, he said, if only IP owners would do the necessary paper work. He regularly signs these orders when the proper documentation is presented.

• There is no reliable evidence that Canada has serious problems with the importation or transshipment of counterfeit or pirated goods. Those who claim to have “evidence” of such problems are often those who are opposed to the pro-competitive effect of perfectly legitimate parallel imports.

• As the late Sir Hugh Laddie and others have repeatedly pointed out, one of the most convenient places in the world to easily buy cheap counterfeit goods is the streets of New York. There is no such flagrant activity on Canadian streets.

Nobody supports or defends fake counterfeit or pirated goods. By definition, parallel imports are neither of these - though they are and probably forever will be viewed as controversial by those who oppose real free trade and vigorous competition.

However, one does not need to set up a system that will predictably catch lots of dolphins in the net and do little to stop shark activity, of which there is much talk and little evidence in any case.

Once again, we need to question why Canada would push for a policy that will very likely harm Canadians by fixing something that isn’t broken and has long worked perfectly well.

HK

Kraft v. Euro -Excellence #2 Settled

The sequel involving the same parties to the 2007 Kraft v. Euro-Excellence case decided in the Supreme Court of Canada has been settled, according to a press release from Kraft, which describes this as an “important copyright case.” The press release says that “The Judgment is important as it supports the rights of owners of copyright in Canada to stop distributors from selling products without the consent of the owner of copyright in the product packaging.”

This, of course, is not correct. A consent judgment, which this was, reflects a settlement between the particular parties involved, which is usually made on a business decision basis. Such a judgment clearly affects those parties but does not have a legally binding precedential effect on the rest of the world. This particular litigation never really got off the ground and was at a very preliminary stage.

Kraft’s current theory following the 2007 Supreme Court decision is that calling a piece of paper an “assignment” rather than an “exclusive license” will enable the blocking of the parallel importation of chocolate bars and other non-copyrightable products based upon copyright in some element of the packaging or labelling. However, this strategy has not resulted in any reasoned decision blocking parallel imports to date in Canada.

In fact, any party now being sued for copyright infringement in respect of the parallel importation of legitimate goods based upon an “assignment” strategy involving an element of packaging or labelling should know that there are arguable defences available based upon such doctrines as copyright misuse, as explicitly mentioned and left open by the Supreme Court in its 2007 decision.

It is also quite possible, where appropriate, to convert any summary “application” brought by a plaintiff in these circumstances into a full-fledged “action” in order to ensure that all viable defences and counterclaims can be asserted.

My detailed comment on the 2007 Supreme Court decision can be found here. As I said in the conclusion of that comment:

Moreover, if lower courts are somehow persuaded to come to a different overall result than the one reached by the SCC, one can certainly expect pressure for an immediate amendment to restore the status quo ante of free trade and competition in the Canadian marketplace, unimpeded by assertions of copyright in mere elements of packaging material.

HK

More on Euro-Excellence v. Kraft

I’ve just done a short talk on the Supreme Court of Canada’s important Kraft decision (in which I was involved) for a LSUC CLE programme on February 28, 2008 in Toronto. Here’s my brief paper.

Here’s a bit of the bottom line in that paper.

The doors have now been opened to new issues such as copyright abuse or misuse, or the argument that copyright law cannot be used to limit free trade in articles not protected by copyright. Other arguments are also open. Current and future potential plaintiffs contemplating the use of copyright law to bar parallel imports of consumer products not protected by copyright may wish to be careful about what they wish for.

HK

Kraft #2 - Richard Gold's Op-Ed

With the author's blessing, here's the whole piece. And it's very good indeed. Bravo, Richard!
*********************************

COPYRIGHT LAW
How the Grinch stole chocolate

E. Richard Gold
Globe and Mail (Toronto)
December 19, 2007, p. A25

-----------------------------------------------------------------------


E. RICHARD GOLD Director, Centre for Intellectual Property Policy,
McGill Faculty of Law

Who's the Holiday Grinch? I nominate Kraft Canada for trying to
deprive Canadian children of chocolate bars.

This month, Kraft Canada sued a small Montreal company, Euro-
Excellence, for the second time after having lost its first case last
summer before the Supreme Court of Canada. The Competition Bureau needs to stop this abuse.

Euro-Excellence imports Toblerone and Cote d'Or chocolate bars from Europe. It pays full price to Kraft Canada's European parent company, the manufacturer of the bars. Kraft wants to stop the importation of its bars into Canada to keep prices here high. Cote d'Or bars sell for about half the price in France than they do in Canada.

Kraft is also trying to keep the Canadian market starved for chocolate by reducing the flavours it allows into the country, again leading to higher prices from Canadian consumers. At a time when Canadians are already paying too much for imports due to the high Canadian dollar, this smacks of exploitation.

Kraft is relying on a section of Canada's Copyright Act that has nothing to do with chocolate. The section aims at preventing the importation of illicit copies of books, CDs and other creative works into Canada from countries where musicians and authors receive no payment. Kraft says Euro-Excellence is violating Kraft's copyright in its logo when Euro-Excellence imports chocolate bars into Canada.

Kraft lost this case after having dragged Euro-Excellence through the courts for the past five years. Not satisfied with a ruling against it from the nation's highest court, Kraft has started another suit, presumably knowing that Euro-Excellence probably does not have the resources for another fight. This is exactly the kind of misuse of the law that judges say is undermining the public's respect for the justice system.

Kraft is trying to get around the Supreme Court's decision through a technical legal change in the relationship between Kraft's parent company in Europe and itself. The only reason for this change - from an exclusive licence to an outright sale of the Canadian rights in the logo - was to sue Euro-Excellence. What is particularly offensive is that the Federal Court of Appeal indicated only a few years ago that this sort of manoeuvre could well violate Canada's competition laws. When the only reason behind the transfer of copyright is to prevent competition from other importers, the transfer is suspect.

Nonetheless, Kraft did exactly this.

While Euro-Excellence could fight the case and, given the law, win, it is unfair to make this company pay all the expenses of a second long court battle to protect Canadian consumers. And make no mistake: It is Canadian consumers who lose when international companies such as Kraft prevent the importation of perfectly legitimate, fully paid products available on the international market. Free trade was designed to bring more competition and better value to consumers. Kraft's action seeks to prevent this.

If Kraft succeeds, customs officials will have to add chocolate bars to the list of items that cannot be brought into Canada. I must admit to a personal interest: Last month, I imported four Cote d'Or chocolate bars from France. If Kraft is right in its argument, then I have breached copyright law and customs officials should have seized them. Absurd.

While access to chocolate bars at reasonable prices may not be Canada's highest priority, the precedent Kraft is setting is deeply worrisome. Kraft and other international corporations are large and profitable because of the openness of world markets. It undermines public confidence in trade and in the fairness of the market when these same companies bully small competitors out of the market to maintain artificially high prices. The Competition Bureau needs to send a message to Kraft and other international companies contemplating similar anti-competitive practices that their conduct is not welcome here.

********************

Kraft Redux

Richard Gold has an excellent op-ed in today's Globe and Mail, unfortunately buried behind a pay wall.

Kraft is suing Euro Excellence - again. Here's part of what Richard said:

Kraft is trying to get around the Supreme Court's decision through a technical legal change in the relationship between Kraft's parent company in Europe and itself. The only reason for this change - from an exclusive licence to an outright sale of the Canadian rights in the logo - was to sue Euro-Excellence. What is particularly offensive is that the Federal Court of Appeal indicated only a few years ago that this sort of manoeuvre could well violate Canada's competition laws. When the only reason behind the transfer of copyright is to prevent
competition from other importers, the transfer is suspect.

Nonetheless, Kraft did exactly this.

While Euro-Excellence could fight the case and, given the law, win, it is unfair to make this company pay all the expenses of a second long court battle to protect Canadian consumers. And make no mistake: It is Canadian consumers who lose when international companies such as Kraft prevent the importation of perfectly legitimate, fully paid products available on the international market. Free trade was designed to bring more competition and better value to consumers. Kraft's action seeks to prevent this.

(emphasis added)

Needless to say, I agree. I successfully made very similar arguments earlier this year in Kraft #1 at the Supreme Court. Kraft, apparently, is determined to attempt to use the Copyright Act to subvert free trade with a result that would resound throughout the Canadian economy and affect countless products to which the act was never meant to apply. Seven out of nine justices clearly had no sympathy for Kraft's position. But Kraft is oblivious.

When a company is as big and rich as Kraft, it seems that it can follow the old maxim: "if at first you don't succeed, try try again."

Let's see what the Courts have to say about this the second time around.

HK

Vaver Live today on Euro Excellence v. Kraft

Tune in for a webcast at 1:00 PM today, Wednesday October 24, 2007 for Prof. David Vaver, formerly from Osgoode Hall Law School and now at Oxford, who will lecture on the SCC’s Kraft’s decision:

Osgoode advises that:

Professor Vaver’s lecture will assess how the Supreme Court is interpreting Canada’s intellectual property laws and how its decisions may affect legislative policy. Among the cases considered will be the Euro-Excellence v. Kraft Canada (2007), where an attempt to use the copyright law to block parallel imports of chocolate bars into Canada was narrowly repelled. The decision, involving four widely divergent opinions, recalls Milton’s lines from Paradise Lost: “Chaos Umpire sits, And by decision more imbroiles the fray By which he Reigns: next him high Arbiter Chance governs all.”

Dr Giuseppina D'Agostino advises that:

By popular demand Osgoode's James Lewtas lecture featuring University of Oxford Professor David Vaver will be webcast live starting at 1:00PM Eastern Time on Oct 24 in Windows Media format.

I am advised that the link to the webcast should be available on the Osgoode Hall Law School homepage and that the event should also be archived online on the Osgoode Conferences and Seminars page.

I must confess that I have a particular interest here. On behalf of my client, the Retail Council of Canada, I presented the arguments at the Supreme Court of Canada that prevailed in this case. Here’s my early summary of the outcome.

With David's well deserved reputation as a renowned scholar, author and teacher of copyright law, his take on this will doubtless be both very interesting and very important.

I truly have no idea of what he will say, but I’m really looking forward to hearing it. And I'm so pleased that I and doubtless others persuaded Osgoode (my alma mater) to do this "live." Thanks, Pina!

HK

Euro v . Kraft - Further Thoughts

Some further thoughts beyond my first take on the Kraft decision of the Supreme Court of Canada delivered July 26, 2007:

1. While it is true that there is much comment about the interesting arithmetic comparing counts of how the four opinions split on the various issues, one thing is quite clear. Seven out of nine judges decisively ruled against Kraft.

2. In terms of arithmetical predictions for future cases based upon various splits on various issues, the law is not based on arithmetic. Otherwise, lawyers wouldn’t have much to do. The bottom line in this case presumably is that the Supreme Court of Canada has ruled - 7/2 - that based on these facts, there is no copyright infringement.

3. Several lawyers have suggested in blogs, law firm web sites, or in media interviews that assignments could now replace exclusive licenses and that the result would be different if Kraft had chosen this strategy. In fact, a Kraft spokesperson was quoted by Bloomberg as saying:

``We believe the outcome would've been in Kraft's favor if we had assignment of copyright,'' Galia said. ``So we do see an opportunity to look at further options.''

4. However, it has long been known that assignments - as contrasted with exclusive licenses - avoid the difficulties with the “hypothetical maker” doctrine as clearly now enunciated by Rothstein, J., with whom three other Justices agreed. Assignments, as opposed to exclusive licences, are “old news”, as they say.

5. So - why has nobody successfully used a strategy involving assignment of copyright in packaging elements before? There have been many reasons - and it’s not my job to set them out here. Let me simply say that any company contemplating such a strategy should make sure that it is getting not only well informed copyright advice, but also good trade-marks, tax, corporate and competition law advice as well - for starters.

6. One thing, however, that is news is that now, based on what we can see from last week’s decision, at least four of the current Justices - and maybe more - might well see through and reject a strategy based on assignments as either copyright abuse or misuse or, as Fish, J. stated, as “an instrument of trade control not contemplated by the Copyright Act.” They may see such a strategy as a blatantly artificial attempt to use copyright in a trade restrictive manner for products not themselves protected by copyright. The abuse/misuse issue was mentioned but not dealt with on the merits in last week’s ruling, which was quite predictable because there was no need to deal with it and there was an insufficient record. But it may be very different next time. It has been expressly mentioned and left open for another day.

7. As I often say, copyright owners must be careful what they wish for. A carefully developed strategy to thwart gray marketing of products not themselves protected by copyright based upon assignments (as contrasted with exclusive licenses) in packaging or labelling elements may well provoke an unintended and unpleasant result (from the owner’s viewpoint) on the copyright abuse/misuse front.

8. There are also several other good arguments not mentioned in the judgment that could sink any attempt to refloat this same ship with slightly different sails. They, too, may be left for another day.

9. As the old cliché about grey marketing goes, the law is rarely black and white. The underlying issue never goes away - which is that some IP owners crave monopolistic exploitation by market segmentation of their alleged rights, while the market place seeks competition and free trade in genuine goods. This issue has been in the Courts since the at least 1871 and nobody expected it to come to an end last week. It has a hydra-like aspect - one cuts off one head and more soon appear. Anyway, the last round went to the parallel importers and free traders - as it seems to more often than not overall, except with respect to books, records DVDs and other products actually protected themselves (and not simply their packaging) by copyright.

10. One can expect much more attention to the issue now with this decision and with a CDN $ dollar approaching par with the US $.

11. And there may be demands that this issue be dealt with by legislative reform - as has happened in Australia and the UK. But that would be extremely controversial.

12. For now, we have a 7/2 judgment and I’m glad to have been on the winning side. Full disclosure - we acted for an intervener supporting the successful Appellant in this case - but these views are purely my own.

HK