Court rules fundamental difference between copyright licence and assignment

In an oddly split Supreme Court of Canada decision, Euro-Excellence Inc. v. Kraft Canada Inc., a 7-2 majority overturned lower court decisions and allowed a Quebec company, Euro-Excellence, to continue importing grey-market goods.

However, the two groups of judges that formed the majority came to this conclusion for starkly different reasons.

Kraft Canada Inc. is the exclusive distributor of the popular Toblerone and Cote d’Or chocolate bars in Canada for its parent companies Kraft Foods Belgium and Kraft Foods Schweiz (the manufacturers of the bars). Despite this, Euro-Excellence continued to import and distribute the same genuine chocolate bars (made by Kraft in Europe, but obtained from an unknown European supplier).

In order to allow Kraft Canada to take legal action, the parent companies registered the logos on the wrappers in Canada as copyrighted artistic works, and gave Kraft Canada the exclusive licence to these copyrighted works.

When Euro-Excellence refused to stop the parallel importation of the chocolate bars, Kraft brought an action alleging copyright infringement under s. 27(2) of the Copyright Act. The Federal Court sided with Kraft Canada and ordered Euro-Excellence to pay $300,000 in damages and to cover up the logos on the bars with stickers. The Federal Court of Appeal upheld this decision.  

Four Supreme Court judges that formed one majority group found that the logos were legitimate subjects of copyright under the Copyright Act. But they ruled against Kraft Canada finding that, under the statute, the exclusive licensee does not have the right to sue or prevent the importation of products that come from the copyright owner.

Writing for this group, Justice Marshall Rothstein implied that they would have sided with the Kraft companies if the parent companies had assigned copyright to Kraft Canada, instead of giving it an exclusive licence.

“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.”

The second majority group of three judges, led by Justice Michel Bastarache, sided with the two dissenting judges on one key point - all these judges found that an exclusive licensee has the right to sue the owner-licensor of the product.

The dissenting judges found in favour of Kraft Canada. But the second majority group found in favour of Euro-Excellence, deciding that the copyrighted logos are merely incidental to the product and therefore not covered by the protections of the Copyright Act. The dissenting judges and the first majority group strongly disagreed with this interpretation, saying there is no basis for it in the statute.

“I don’t think I’ve ever seen a Supreme Court of Canada decision where there were so many differing views as to an issue of law that’s statutory,” says one of Kraft’s lawyers, Ken McKay, a partner at Sim Lowman Ashton & McKay in Toronto.

He notes the Kraft legal team was able to prove there was copyright protection in the packaging logos, and Kraft would have won the case if there had been an assignment of rights.

So why wasn’t the copyright assigned to Kraft?
“From our point of view, there wasn’t a difference between exclusive licence and assignment for the purposes of what we were trying to achieve,” he says. “And obviously a trial judge and three court of appeal judges agreed with us.”

He said there’s nothing in the decision that precludes Kraft from taking action again if it is assigned copyright of the logos.

Mark Evans, a partner at Smart & Biggar, an intellectual property and technology law firm in Toronto, says the Supreme Court has preserved the status quo in terms of copyright protection.

Prior to this case, in situations of parallel importation, a Canadian subsidiary could assert copyright infringement based on copyrighted artistic works if they were assigned the copyright of these works, he says. Then this case came along, which was similar, but different, and the Supreme Court ultimately determined there is a fundamental difference between a licence and assignment.

“And by implication, they’ve made it clear that the status quo jurisdiction still is good. If there had been an assignment to Kraft Canada, that would have been good enough to take action successfully.”

“It would be a mistake for Canadian importers to see this judgment as being a green light that means they can always import grey-market goods.”

Brian Gray, a partner and member of Ogilvy Renault LLP’s intellectual property group in Toronto, says that it does appear that an exclusive licensee can sue the copyright owner. Five of the Supreme Court judges came to that conclusion, although three of them were speaking in obiter at the time, he says.

But the safer route to attempting to block the importation of grey goods in this situation is clearly to assign the copyright, he says.

This case was unusual, he says, because the two majority groups of judges made strange bedfellows to concur in the result for completely different reasons.

“This shows the difficulty of making generalizations when it comes to parallel importation issues,” he says.

Over the last 15 years or so, Canada has not seen many parallel importation cases because the value of Canadian dollar was so low that Canadian importers couldn’t make money by buying goods less expensively outside of the country and bringing them back into Canada, says Evans.

“Now, however, with the strong Canadian dollar, I expect that we are going to see heightened likelihood of Canadian importers going out and buying grey goods and bringing them back into Canada. So I think this case clarifies the law and it’s also timely from an economic standpoint.”

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