Counterfeit Goods

Counterfeit goods, colloquially known as "fakes" or "knock-offs", are goods purporting to be something they are not. Counterfeit goods reproduce, in whole or in part, an intellectual property right (typically a trademark or a copyright), without authorization from its owner/manufacturer, in order to trade on that owner's goodwill and reputation, and expropriate the investment made by the owner of that intellectual property right. Any commodity to which an intellectual property adds value is vulnerable to counterfeiting. High-end luxury goods are typically top of mind, but counterfeit goods also include business-to-business goods (electronic components and automotive parts), consumer products (pharmaceuticals, cosmetics, toys, footwear, toothbrushes, make-up, contact lenses, eyewear, toothpaste, shampoos, batteries, holiday lights, DVDs, etc.) and even consumables, like rice, ginseng, mushrooms and alcohol. Counterfeit goods also include goods that indicate an incorrect geographic origin of such goods. Each of these types of counterfeit goods have been found in Canada.

As a result of amendments to the Trademarks Act in June 2019, Canada has significantly expanded protection of geographical indications, in line with the European Union's approach to geographical indications. It is now a violation of the Trademarks Act to adopt a protected geographical indication identifying wine, spirits, agricultural products and food, which such protected indications being granted on application to the Canadian Intellectual Property Office. That said, the United States Mexico Canada Agreement, which was agreed upon in or around October 2018, and entered into force on July 1, 2020, may require additional amendments to the Trademarks Act to provide greater transparency into the process to obtain geographical indication status. It is notable that the June 2019 amendments to the Trademarks Act removed the requirement that a trademark be used by its owner in order for it to register; as a result, brand owners can obtain trademark protection and enforce such rights against infringers prior to launching their products in Canada, however, this still would require proof of use and reputation in the mark among Canadian consumers, through spillover advertising or otherwise. It should also be noted that use in Canada is still required within three years of registration or the mark will be vulnerable to administrative cancellation proceedings, which can now be initiated by the Canadian Intellectual Property Office.

Recently, Justice Gleason of the Federal Court of Appeal expressly recognized the seriousness of dealing in counterfeit goods, as reflected in the following passages of his decision in Chanel S. de R.L. v. Lam Chan Kee Co., [2016] F.C.J. No. 368 (F.C.A.) at para. 25.

[T]he repeated sale of counterfeit goods is serious misconduct worthy of sanction and justifies damages awards that are high enough so as to deter the defendant and others from engaging in such reprehensible conduct...this kind of theft constitutes a very serious offence, more serious than a theft of some other material or property because it strikes at the heart of what differentiates a progressive, creative society [that protects intellectual property rights] from one that is [and does] not.

Civil Causes of Action

While there is no civil cause of action in Canada that expressly recognizes "counterfeit goods", civil enforcement is achieved applying principles of trademark law and/or copyright law.

Dealing in counterfeit trademarked goods is prohibited, but requires trademark owners to establish, on a balance of probabilities, the constituent elements of an action for trademark infringement, passing-off or depreciation of goodwill (Trademarks Act, R.S.C. 1985, c. T-13, ss. 7, 19, 20 and 22). It is notable that the June 2019 amendments to the Trademarks Act removed the requirement that a trademark be used by its owner in order for it to register; as a result, brand owners can obtain trademark protection and enforce such rights against infringers prior to launching their products in Canada, however, this still would require proof of use and reputation in the mark among Canadian consumers, through spillover advertising or otherwise. It should also be noted that use in Canada is still required within three years of registration or the mark will be vulnerable to administrative cancellation proceedings, which can now be initiated by the Canadian Intellectual Property Office.

Upon a successful finding of infringement, passing-off or depreciation of goodwill, the trademark owner is entitled to claim the remedies found at s. 53.2(1) of the Trademarks Act, including an injunction, recovery of damages or profits and an order for the destruction of the counterfeit trademarked goods.

Similarly, dealing in “pirated works” (the more typical term of art used in association with counterfeit goods that infringe copyright) can be stopped if the copyright owner establishes, on a balance of probabilities, the constituent elements of an action for copyright infringement (Copyright Act, R.S.C. 1985, c. C-42, ss. 3 and 27).

Copyright infringement in the context of tangible goods necessitates careful consideration of the commodity itself (i.e., is it a useful article), because of an exception that does not recognize copyright in useful articles that are manufactured in quantities greater than 50, such as clothing designs, jewelry and the like. In a recent decision of the Federal Court, subsistence of copyright and substantial copying was established, however, the Court determined there had been no infringement of copyright because the copyrighted works were “useful articles” that had been reproduced more than 50 times throughout the world (Corocord Raumnetz GMBH v. Dynamo Industries Inc., [2016] F.C.J. No. 1403 (F.C.)).

Upon a successful finding of copyright infringement, a copyright owner may be entitled to remedies found at ss. 34(1), 35 (1) and 38.1(1) of the Copyright Act, such as an injunction, damages and/or accounting of profits and an order for destruction or delivery up. The Copyright Act provides the option of electing statutory damages per copyrighted work infringed (rather than damages and an accounting of profits).

With respect to damages, it is notable that the USMCA requires that there be “pre-established damages” (i.e., statutory damages) for infringement of intellectual property rights, and that such damages be both deterrent and fully compensatory for the harm caused by the infringement.

At present, there is no such corresponding right to statutory damages in the Trademarks Act. However, it may not be necessary for an express right to statutory damages to be added into the Trademarks Act in order for Canada to comply with the USMCA’s above-noted requirements for statutory damages. Specifically, the USMCA requires one or more of pre-established damages or additional damages for intellectual property infringement, and it is always available to a plaintiff in a civil proceeding of any nature, including intellectual property infringement, to claim exemplary/punitive damages.

Despite the Trademarks Act not expressly providing a right to statutory damages, a line of cases involving counterfeit goods in the Federal Court have awarded minimum compensatory damages, in fixed amounts. In some cases the Court has awarded damages per trademark infringed; however, in the majority of cases, damages have been awarded on a per act of infringement basis, using a multiplier. The amounts awarded vary depending upon the nature of the counterfeiter’s business and have increased over time to account for inflation, as follows:

• itinerant vendors $4,250;
• fixed location retailers $8,000; and
• importers/wholesalers/distributors $30,000 (Chanel S. de R.L. v. Lam Chan Kee Co. at paras. 36–41).

These awards, referred to as minimum compensatory damages (“MCD”), arose from cases in which defendants delivered absolutely no documents to substantiate their manufacture and sale of counterfeit goods, making it difficult to quantify the extent of the actual damages sustained. Mr. Justice Pelletier, then of the Trial Court, stated in Ragdoll Productions (UK) Ltd. v. Jane Doe, [2002] F.C.J. No. 1232 (F.C.) at para. 37:

It is always open to a defendant to prove the extent of its trade in counterfeit goods and to seek to have damages assessed on the basis of its actual sales. But where vendors keep no records, it does not lie in their mouths to say that the plaintiff has no evidence by which to prove the damages flowing from their business operations.

The Federal Court is now calculating damages in counterfeiting cases using a multiplier of the fixed minimum compensatory damages times the number of instances of infringement. Canadian courts have also held that minimum compensatory damage awards are available for losses suffered by both trademark owners and exclusive licensees/distributors (Harley-Davidson Motor Company Group, LLC v. Manoukian, [2013] F.C.J. No. 219 (F.C.)). As a result, two plaintiffs can double the damages awarded.

The Federal Court has also issued default judgments against defendants engaged in the wholesale and retail sale of counterfeit merchandise from various flea market locations. The damages awarded were based on the application of an award of minimum compensatory damages, per instance of infringement, which totaled in the millions of dollars. In Guccio Gucci SPA and Gucci America Inc. v. Bobby Bhatia, the defendants were found to have dealt in counterfeit Gucci merchandise on at least 24 occasions. Despite the service of numerous cease and desist letters and notwithstanding the seizure of counterfeit Gucci merchandise by the police following the execution of a criminal search warrant, the wrongful conduct had persisted. The Court quantified damages as 24 × $29,000 (MCD), totalling $696,000, and awarded that to the intellectual property owner. The equivalent amount was awarded on the same basis to the exclusive licensee of the intellectual property owner. Separately, punitive damages were awarded to each plaintiff in equal amounts. The same concept was applied in Louis Vuitton et al. v. Bhatia, yielding different monetary award based on the number of occurrences and additional copyright infringement claims.

The Federal Court has also awarded compensatory damages, punitive damages, and an injunction for the advertising and sale of counterfeit goods online. In Lululemon Athletica Canada Inc v Campbell, 2022 FC 194, the defendant, Ms. Campbell, along with others, was found to be advertising and selling counterfeit Lululemon products on Facebook. Despite the service of two cease and desist letters and assurances by Ms. Campbell that the Facebook pages had been deleted, the advertisement and sale of counterfeit Lululemon merchandise on Facebook continued.

After settling with the other defendants, Lululemon brought a motion for summary trial against Ms. Campbell. Although Ms. Campbell did not oppose the motion for summary trial, she did file a statement of defence. Justice Grammond of the Federal Court applied the factors to be taken into consideration when deciding whether a summary trial is appropriate (as set out in Tremblay v Orio Canada Inc, 2013 FC 109 at paragraph 24):

In deciding whether a file lends itself to a summary trial, a judge may consider, among other things, the complexity of the matter, its urgency, the cost of taking the case forward to a conventional trial in relation to the amount involved […], whether the litigation is extensive, whether the summary trial will take considerable time, whether credibility is a crucial factor, whether the summary trial will involve a substantial risk of wasting time and effort and whether the summary trial will result in litigating in slices […]

Justice Grammond concluded that this matter was appropriate for summary trial since: (i) the issues are not overly complex; (ii) Lululemon provided sufficient evidence; (iii) it was unlikely that more evidence would be adduced at a full trial; and (iv) nothing turned on the issue of credibility requiring a full trial to resolve. The Court awarded Lululemon $30,000 in punitive damages and $8,000 in compensatory damages (based on an estimate of $1,000 per Facebook page offering counterfeit merchandise for sale). In cases where there is obvious evidence of trademark infringement, opting for a summary trial as opposed to a full trial could lead to a quicker and less expensive resolution.

Punitive damages can also be awarded in counterfeiting cases if the relevant factors enumerated by the Supreme Court of Canada in Whiten v. Pilot Insurance Co., [2002] S.C.J. No. 19 at paras. 112-113, are met. Justice Snider in Louis Vuitton Malletier S.A. v. Yang (c.o.b. K2 Fashions), [2008] F.C.J. No. 59 at para. 48, summarized those factors, in a counterfeiting case, as follows:

• whether the conduct was planned and deliberate;
• the intent and motive of the defendant;
• whether the defendant persisted in the outrageous conduct over a lengthy period of time;
• whether the defendant concealed or attempted to cover up its misconduct;
• the defendant’s awareness that what he or she was doing was wrong; and
• whether the defendant profited from its misconduct.

The challenges associated with civil counterfeiting cases are less often about proffering evidence of infringement and more often about: (i) ascertaining the identity/location of the counterfeiter who is commercializing the counterfeit goods; (ii) obtaining and/or preserving evidence to establish the scope of the enterprise; and (iii) obtaining a meaningful and enforceable remedy (such as a defendant with exigible assets or presence in a jurisdiction where a court order can be enforced). These challenges are exacerbated by online commerce and the ease by which parties can destroy electronic evidence.

In light of these challenges, motions for extraordinary remedies, including interim or interlocutory injunctions, preservation orders and variants such as Anton Piller Orders, Norwich Orders or Mareva injunctions, are relied upon, subject to the applicable procedural and substantive legal safeguards.

Criminal Offences

On January 1, 2015, criminal offences were added to the Trademarks Act to crack down on the sale of counterfeit goods. It is now an offence to sell, offer for sale or distribute on a commercial scale any goods in association with a trademark if such conduct is or would be contrary to ss. 19 or 20 of the Trademarks Act and the persons knows that:

1. the trademark is identical to, or cannot be distinguished in its essential aspect from, a trademark registered for such goods; and
2. the owner of that registered trademark has not consented to the sale, offering for sale or distribution of the goods in association with the trademark (Trademarks Act, s. 51.01 (1)-(9) of and Copyright Acts. 42 (1)).

The offence provisions also extend to the manufacture, possession, importation and exportation (or attempted exportation) of goods, labels or packaging (and the trafficking of same) bearing the owner’s trademark, without permission, on a commercial scale.

The offence provisions of the Copyright Act also make it an offence to knowingly sell, rent, distribute, offer for sale or rent, possess, import for sale or rent, export for sale or rent an infringing copy of a work or other subject-matter in which copyright subsists.

Under both Acts, offences may be prosecuted as summary offences or as indictable offences. The main difference is in the severity of the penalties, as follows:

1. on conviction on indictment, to a fine of not more than $1,000,000 or to imprisonment for a term of not more than five years or both; or
2. on summary conviction, to a fine of not more than $25,000 or to imprisonment for a term of not more than six months or both (Trademarks Act, s. 51.01(6) of and Copyright Act s. 42(2.1)).

Although imprisonment is an available sanction, it is rarely, if ever, imposed or recommended by the Crown. The legislation also permits significant fines, however, the fines imposed tend to be low.

Conviction requires proof beyond a reasonable doubt of the act itself (actus reus) and the subject knowledge of the prohibited act (mens rea). Courts have found that mens rea can be proven by circumstantial evidence, such as prior civil lawsuits, judgments for infringement or possession of previously delivered cease and desist letters.

The Criminal Code, R.S.C. 1985, c. C-46, also contains provisions on fraud, passing-off and forgery involving a trademark, with penalties that include fines and imprisonment.

Prohibition Against Importation and Exportation

The Trademarks Act was amended to prohibits the importation and exportation of goods or their labels or packaging bearing, without the consent of the owner of the registered trademark for such goods, a trademark that is identical to, or that cannot be distinguished in its essential aspects from, that registered trademark (Trademarks Act, s. 51.03).

Contravention of this section of the Trademarks Act does not give rise to remedies under s. 53.2 of the Trademarks Act, but to remedies associated with a border enforcement regime set forth in ss. 51.05-51.09 of the Trademarks Act.

The Copyright Act also prohibits the importation or exportation of copies of a work or other subject matter in which copyright subsists, if made without the consent of the copyright owner in the country where they were produced and they infringe or would infringe copyright had they been made in Canada by the person who is producing them (The Copyright Act, s. 44.01).

There are exceptions to these trademark and copyright offences, including where the goods are imported or exported by an individual in their personal baggage and the number of goods indicate that the goods are intended only for their personal use(The Copyright Act, s. 44.01(s) and Trademarks Act, s. 51.03(2)). Previously, the Copyright Act and Trademarks Act, exempted goods in-transit destined to another country from Canada’s border detention practices. However, these goods are now subject to the legislation, due to the enactment of the USMCA.

Border Enforcement Regime

Each of the Copyright Act and the Trademarks Act create a regime which permits rights holders to request the assistance of Canada Customs in respect to enforcement of their intellectual property rights at the border. The border enforcement regime necessitates commencement of a civil action by the rights holder in order to effect detention beyond the time prescribed by the legislation and/or destruction (Trademarks Act, ss. 51.04-51.1 and Copyright Act, ss. 44.02-44.11). Registered trademark owners and copyright owners can now register their interests with the Canada Border Services Agency and commence proceedings to prevent and/or destroy counterfeit goods (i.e., those bearing a trademark that is identical to, or cannot be distinguished in its essential aspects from, a trademark registered for such goods and those that infringe copyright).

Other Remedies

The Consumer Product Safety Act, S.C. 2010, c. 21, s.7 (a), prohibits the manufacture, import, sale or advertisement of consumer products that are a danger to the health or safety of Canadians. Other prohibitions relate to the packaging, labelling or advertisements of a consumer product in a manner that is false, misleading or deceptive in relation to health and safety or in a manner that is false, misleading or deceptive regarding its certification related to its safety or its compliance with a safety standard or regulation (Consumer Product Safety Act, ss. 9 and 10). This legislation gives broad powers to Health Canada inspectors to enter, inspect, test, seize, detain, order recalls, forfeit, destroy goods and/or issue administrative penalties or fines for those that do not comply with the legislation. A warrant is required if the premise being entered is a personal residence (Consumer Product Safety Act, ss. 21-22).

Materials reproduced with the permission of LexisNexis Canada. http://www.lexisnexis.ca/en-ca/products/practice-advisor.page