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The Federal Court of Appeal recently upheld an injunction against a distributor of "gray market" goods, based on a claim of copyright infringement. Gray marketing refers to the legal importation of genuine goods into a country through an unauthorized distributor. A gray market is said to develop where goods intended for sale in one country end up in another country through an unauthorized distribution channel.

Côte d'Or and Toblerone chocolate bars are manufactured in Europe by Kraft Foods Belgium S.A. ("Kraft Belgium") and Kraft Foods Schweiz AG ("Kraft Switzerland"), respectively, and distributed in Canada under a distribution agreement with Kraft Canada Inc. ("Kraft Canada").

Euro Excellence, a Québec distributor, had distributed the Côte d'Or brand of chocolate bar under contract with Kraft Belgium, but that agreement expired in 2000. Euro Excellence continued to distribute the Côte d'Or bars after expiry of that agreement, and also began to distribute the Toblerone bars. These products were obtained outside of Canada from an unknown supplier.

In order to prevent the parallel importation of the Côte d'Or and Toblerone chocolate bars by Euro Excellence, Kraft Belgium obtained copyright registrations for elephant, script and red shield artwork that appears on the packaging of the Côte d'Or bars; for the Toblerone brand, a copyright registration was obtained for a mountain in which a bear is discernable within the image. Kraft Belgium and Kraft Switzerland immediately entered into exclusive licensing arrangements with Kraft Canada for the use of these works. Euro Excellence was notified that Kraft Canada now held the exclusive right to the works in Canada. When Euro Excellence refused to stop distributing the bars in Canada, Kraft sought an order blocking the importation of products bearing the copyrighted works.

The trial judge awarded Kraft Canada a permanent injunction restraining Euro Excellence from distributing, exposing or offering for sale any copies of the Côte d'Or elephant or Toblerone bear-within-a-mountain works. A similar injunction required Euro Excellence to render non-infringing any material in their possession before selling, distributing, exposing or offering for sale any Toblerone or Côte d'Or product. Damages of $300,000 were awarded. Euro Excellence appealed.

On appeal, the Court considered two issues raised by Euro Excellence: (1) Whether Euro Excellence violated s. 27(2) of the Copyright Act, and (2) If so, whether a determination of the profits of Euro Excellence should be made.

Subsection 27(2) of the Copyright Act deals with secondary infringement of copyright. A person may infringe copyright even if he or she does not personally reproduce the copyrighted work. There was no evidence in this case concerning who reproduced the copyrighted works. Assuming that the packaging was reproduced in Europe by Kraft Belgium and Kraft Switzerland, that reproduction of the works would not violate the Copyright Act. However, the Court of Appeal concluded that the importation of the works into Canada for sale by Euro Excellence is a secondary infringement of copyright under s. 27(2)(e) of the Copyright Act.

Finally, with respect to the determination of the profits of Euro Excellence, the Court of Appeal concluded that the record was incomplete, set aside the trial judge's decision with respect to that issue, and referred the matter back to the trial judge for determination.

Euro Excellence has appealed this decision. Leave to appeal to the Supreme Court of Canada was granted on May 18, 2006.

See Euro Excellence, Inc. v. Kraft Canada Inc., 2005 FCA 427

The complete decision can be found on the Federal Court of Appeal website:
http://decisions.fca-caf.gc.ca/fca/2005/2005fca427.shtml

Prepared by Christopher G. Tortorice