Access International Automotive Ltd. v. Volkswagen Canada Inc., 2001 FCA 79

Date: 20010321

Docket: A-403-99

Citation number: 2001 FCA 79

CORAM:        ROTHSTEIN J.A.

SHARLOW J.A.

MALONE J.A.

BETWEEN:

                              ACCESS INTERNATIONAL AUTOMOTIVE LTD.

                                                                                                                                            Appellant

                                                                        - and -

                                               VOLKSWAGEN CANADA INC.

                                                                                                                                        Respondent

                                                                        - and -

                VOLKSWAGEN AG, VOLKSWAGEN MEXICO SA and AUDI AG

                                                                                                                                       Third Parties

Heard at Calgary, Alberta, February 13, 2001

JUDGMENT delivered at Ottawa, Ontario, March 21, 2001

REASONS FOR JUDGMENT BY:                                                                  SHARLOW J.A.

CONCURRED IN BY:                                                                                     ROTHSTEIN J.A.

                                                                                                                                 MALONE J.A.

Date: 20010321

Docket: A-403-99

Citation number: 2001 FCA 79

CORAM:        ROTHSTEIN J.A.

SHARLOW J.A.

MALONE J.A.

BETWEEN:

                              ACCESS INTERNATIONAL AUTOMOTIVE LTD.

                                                                                                                                            Appellant

                                                                        - and -

                                               VOLKSWAGEN CANADA INC.

                                                                                                                                        Respondent

                                                                        - and -

                VOLKSWAGEN AG, VOLKSWAGEN MEXICO SA and AUDI AG

                                                                                                                                       Third Parties

                                                 REASONS FOR JUDGMENT

SHARLOW J.A.

This is an appeal by Access International Automotive Ltd. ("Access International") from the order of a Motions Judge (reported at (1999), 174 F.T.R. 161, [1999] F.C.J. No. 1016) dismissing an appeal from an order of a Prothonotary (reported at (1999), 171 F.T.R. 311, [1999] F.C.J. No. 529). The Prothonotary had allowed a motion made by Volkswagen Canada Inc. ("Volkswagen Canada") to strike out certain paragraphs of the Statement of Defence and Counterclaim filed by Access International.

This case began with the filing of a statement of claim by Volkswagen Canada on February 25, 1998. I summarize as follows the facts alleged in the statement of claim.

Volkswagen and Audi automobiles, parts and accessories are manufactured by two German corporations, Volkswagen AG and Audi AG, and a Mexican corporation, Volkswagen Mexico SA.    Volkswagen Canada is a wholly owned subsidiary of Volkswagen AG. Since its incorporation in 1952, Volkswagen Canada has been responsible for the sale and service of Volkswagen and Audi automobiles in Canada. Volkswagen Canada has spent decades selling and advertising Volkswagen and Audi automobiles in Canada and has created a market for such vehicles in Canada by ensuring that the automobiles, parts and accessories that it sells in Canada are of a uniform quality. Volkswagen Canada is the only entity in Canada authorized by Volkswagen AG, Audi AG and Volkswagen Mexico SA. to import Volkswagen and Audi automobiles, parts and accessories.

Access International imports into Canada for sale parts and accessories that bear, or are packaged in material that bears, the Volkswagen logo (VW) or the Audi logo (four rings). These parts and accessories originate from a source other than Volkswagen Canada and therefore outside the authorized distribution channels in Canada for such products. Access International sells the Volkswagen and Audi parts and accessories, or by way of trade exposes or offers them for sale, and distributes them for the purposes of trade. All of these activities have been carried on without the consent or authority of Volkswagen Canada.

In June of 1996 Volkswagen AG, the first owner of the copyright in the Volkswagen logo, assigned the Canadian copyright to Volkswagen Canada. In July of 1996 Audi AG, the first owner of the copyright in the Audi logo, assigned the Canadian copyright to Volkswagen Canada. Volkswagen Canada registered both copyrights as the owner.

On or about August 1, 1996, Volkswagen Canada put Access International on notice of its ownership of the Canadian copyright in the Volkswagen logo and the Audi logo, and requested that Access International cease dealing in parts and accessories bearing either logo, except parts and accessories that were purchased from Volkswagen Canada or from a party that obtained them from Volkswagen Canada.

Volkswagen Canada pleads that the importation and sale of Volkswagen and Audi parts and accessories by Access International since August 1, 1996 is an infringement of its copyright. Volkswagen Canada seeks a number of remedies, including a permanent injunction, delivery up of all infringing materials, damages and an accounting.

I summarize as follows the facts alleged by Access International in its statement of defence and counterclaim. Access International is an Alberta corporation that, for the past 20 years, has been in the business of importing automobile parts and accessories for sale in Canada. As part of its business, it imports products that bear, or are packaged in materials that bear, the Volkswagen logo or the Audi logo. Access International acquires the Volkswagen and Audi parts and accessories from manufacturers who are authorized by Volkswagen AG to produce and sell them on the open market. They are acquired by Access International already bearing the logos on the product itself or the packaging. Access International claims that such importation is lawful.

Access International further says that Volkswagen Canada has had actual knowledge of these activities of Access International since at least 1986. In 1991, Volkswagen Canada demanded that Access International cease its business activities with respect to the importation and distribution of Volkswagen and Audi parts and accessories, but then did nothing until it issued a further such demand in 1996 after acquiring the copyright.

Access International denies that it has infringed any copyright of Volkswagen Canada.    Access International argues that Volkswagen Canada, in acquiring the copyright for the logos and then attempting to use its copyright to prevent Access International from importing genuine Volkswagen and Audi parts and accessories, is abusing the copyright.

The pleadings of Access International that are the subject of Volkswagen Canada's motion to strike read as follows:

                                                       Statement of Defence

2.           [...] In addition, the Plaintiff's actions and, by implication, those of Volkswagen AG seek to unduly limit, restrain, prevent or lessen the trade in genuine Volkswagen and Audi parts and accessories, which actions breach the provisions of the Competition Act.

15.      Access reiterates that the Plaintiff is solely owned by its German parent corporation, Volkswagen AG, and that its purported copyright in the VW logo and FOUR RINGS LOGO was derived directly or indirectly from Volkswagen AG.

16.       The Plaintiff and, by implication, Volkswagen AG, seeks to make use of its copyright and alleged exclusive distribution right, the existence of which is specifically denied by Access, in order to:

a.          limit unduly the facilities for transporting, supplying, storing or dealing with genuine Volkswagen and Audi parts and accessories;

b.         restrain or injure unduly trade and commerce in relation to genuine Volkswagen and Audi parts and accessories; or

c.         prevent or lessen, unduly, competition in the purchase, sale, transportation or supply of genuine Volkswagen and Audi parts and accessories.

17.                 Access pleads and relies upon section 32 of the Competition Act and states that the actions of the Plaintiff constitute unlawful acts designed solely to interfere with and cause damage to the business of Access.

                                                             Counterclaim

1.                 [...] Volkswagen Canada Inc., in bringing the within action against Access, attempts to use its newly acquired copyright in order to unduly limit, restrain, prevent or lessen the trade in genuine Volkswagen and Audi parts and accessories. These actions on the part of Volkswagen Canada Inc. contravene the provisions of the Competition Act. [...]

7                  In attempting to use its copyright in the VW logo and FOUR RINGS LOGO to prevent Access from carrying on its legitimate business, the Plaintiff seeks to use its copyright in a manner not contemplated under the Copyright Act breaches the Act [sic]

WHEREFORE THE PLAINTIFF BY COUNTERCLAIM CLAIMS:

a.         for a permanent injunction pursuant to section 32(2)(b) of the Competition Act enjoining Volkswagen Canada Inc. from carrying out or exercising any or all of the terms or provisions of any agreement, arrangement or licence which would interfere with or obstruct the lawful business activities of Access [...].

These statements can be struck only if it is plain and obvious or beyond doubt that they do not disclose a basis for a defence or counterclaim: Hunt v. Carey Canada Inc., [1990] 2 S.C.R. 959. In determining this question, the facts alleged in the statement of defence and counterclaim must be presumed to be true.

All of the paragraphs that Volkswagen Canada seeks to strike relate to section 32 of the Competition Act, the relevant parts of which read as follows:

The Prothonotary allowed the motion to strike the pleadings and did not grant leave to amend. He noted that section 32 of the Competition Act permits the Federal Court to grant a remedy for certain uses of a copyright, but only if the result of the use is to unduly lessen or prevent competition. He concluded that, without a finding by the Federal Court of undue consequences of the stipulated kind and following the stipulated procedure, starting with an information exhibited by the Attorney General, section 32 cannot be used as the basis of a defence or counterclaim in a copyright infringement action.

Access International appealed the decision of the Prothonotary. That appeal was dismissed by the Motions Judge. Access International now appeals the decision of the Motions Judge.

Volkswagen Canada relies on the decision of Addy J. in Eli Lilly and Co. v. Marzone Chemicals Ltd. (1976), 29 C.P.R. (2d) 253 (F.C.T.D.), affirmed [1977] 2 F.C. 104, 14 N.R. 311, 29 C.P.R. (2d) 255 (F.C.A.). This was a patent infringement action. The defendant alleged in its statement of defence that the patent owner should not be entitled to the relief claimed because it had participated in a conspiracy, contrary to paragraphs 31(1)(a), (b) and (c) of the Combines Investigation Act, R.S.C. 1970, c. C-23 as then in force, to unduly limit competition in the patented product. The defendant also counterclaimed for damages. At that time, section 31.1 of the Combines Investigation Act permitted a claim for compensation to be made by any person who suffered loss or damage as a result of conduct contrary to section 32.

The patent holder sought to strike the parts of the statement of defence and counterclaim that were based on section 32 of the Combines Investigation Act. The motion was dismissed. With respect to the counterclaim for damages, Addy J. said that section 31.1 of the Combines Investigation Act permitted a claim for damages for a breach of section 32 whether or not proceedings had been taken or a conviction entered under that provision.

This case is distinguishable from Eli Lilly because here there are statutory preconditions that would preclude Access International from claiming a remedy for a breach of section 32 of the Competition Act. The remedy sought by Access International in the counterclaim is substantially the remedy in paragraph 32(2)(b). Therefore, to permit the counterclaim to stand would be to permit Access International to benefit from a statutory remedy without adhering to the statutory preconditions. On that basis, I agree with the Prothonotary and the Motions Judge that paragraphs 3, 4, 5 and 7(a) of the counterclaim should be struck without leave to amend. In that regard, I note that the proposed amendment merely removes the reference to section 32 of the Competition Act and is not a substantive change.

Different considerations apply, however, to Access International's defence. In Eli Lilly, Addy J. indicated that the section 32 allegations in the statement of defence should not be struck because it was arguable that section 31.1 afforded a defence to the infringement claim. He went on to say this:

A more cogent reason, however, is that the plaintiffs are seeking equitable relief and must come into the Court with their hands clean. Should they in fact be in breach of the Combines Investigation Act, as alleged in para. 9 of the statement of defence, this would constitute a most valid reason for refusing injunctive relief although the allegations might well not constitute a defence to a claim at law.

It seems to me that Addy J. was leaving open the possibility that, even if a remedy would be barred by a failure to meet statutory preconditions, that same failure would not necessarily bar an equitable defence. This leaves open the question as to whether conduct by a copyright owner that is described in subsection 32(1) can form the basis of a defence to a claim for equitable relief for infringement of the copyright.

I take it to be undisputed that the remedies sought by Volkswagen Canada in this case include equitable relief, and that it is open to Access International to allege that Volkswagen Canada should be denied such relief because it does not come to the Court with "clean hands". An unclean hands defence can be made out if, but only if, there is a sufficient connection between the subject matter of the claim and the equitable relief sought. This was explained as follows by Schroeder J.A. in City of Toronto v. Polai, [1970] 1 O.R. 483 (C.A.) (affirmed without discussion of this point, [1973] S.C.R. 38">[1973] S.C.R. 38):

The maxim "he who comes into equity must come with clean hands" which has been invoked mostly in cases between private litigants, requires a plaintiff seeking equitable relief to show that his past record in the transaction is clean: Overton v. Banister, (1844), 3 Hare 503, 67 E.R. 479; Nail v. Punter (1832), 5 Sim. 555, 58 E.R. 447; Re Lush's Trust (1869), L.R. 4 Ch. App. 591. These cases present instances of the Court's refusal to grant relief to the plaintiff because of his wrongful conduct in the very matter which was the subject of the suit in equity. The maxim must not be interpreted and applied too broadly as, e.g., against a plaintiff who had not led a blameless life. In Dering v. Earl of Winchelsea (1787), 1 Cox 318, 29 E.R. 1184, Lord Chief Baron Eyre stated at pp. 319-20:

It is argued that the author of the loss shall not have the benefit of a contribution; but no cases have been cited to this point, nor any principle which applies to this case. It is not laying down any principle to say that his ill conduct disables him from having any relief in this Court. If this can be founded on any principle, it must be, that a man must come into a Court of Equity with clean hands; but when this is said, it does not mean a general depravity; it must have an immediate and necessary relation to the equity sued for; it must be a depravity in a legal as well as in a moral sense. In a moral sense, the companion, and perhaps the conductor, of Mr. Dering, may be said to be the author of the loss, but to legal purposes, Mr. Dering himself is the author of it; and if the evil example of Sir Edward led him on, this is not what the Court can take cognizance of.

The misconduct charged against the plaintiff as a ground for invoking the maxim against him must relate directly to the very transaction concerning which the complaint is made, and not merely to the general morals or conduct of the person seeking relief; or as is indicated by the reporter's note in the old case of Jones v. Lenthal (1669) 1 Chan. Cas. 154, 22 E.R. 739: "... that the iniquity [sic] must be done to the defendant himself."

This Court has recently considered two cases involving the propriety of pleadings alleging some interplay between anti-competitive conduct and a claim for relief for infringement of a statutory monopoly. The first is Procter & Gamble Co. v. Kimberley-Clark of Canada Ltd. (1990), 29 C.P.R. (3d) 545 (F.C.A.), a patent infringement case. The defendant sought to include in its statement of defence a paragraph alleging that the patent holder had disentitled itself from equitable relief because it had sold its patented products at unreasonably low prices or below cost for the purpose of substantially lessening competition and eliminating the defendant as a competitor, contrary to the Competition Act, S.C. 1986, c. 26. The Motions Judge allowed the amendment, but this Court reversed his decision on the basis that these allegations could have no bearing on the defence or on the patent holder's claim for equitable relief. Hugessen J.A., speaking for the Court, said:

For past conduct to be relevant to a refusal of equitable relief under the "clean hands" doctrine, relief to which the party would otherwise be entitled, such conduct must relate directly to the subject matter of the plaintiff's claim, in this case their patent: see City of Toronto v. Polai (1969), 8 D.L.R. (3d) 689, [1970] 1 O.R. 483 (C.A.). Here not only must the alleged predatory pricing be unrelated to the patent (what wrong is done if the holder of a legal monopoly prices his products below their cost and who suffers thereby?), but the plaintiff's recovery of the defendant's profits would actually be reduced by the alleged practice.

On these facts, the plaintiff's ownership of the patent, which was the basis of the patent infringement claim, was independent of any predatory pricing practices it might have adopted. Therefore, there was no relationship between the alleged wrongful conduct and the patent rights that formed the basis of the plaintiff's claim for an equitable remedy.

The second case is Visx Inc. v. Nidek Co. (1995), 68 C.P.R. (3d) 272 (F.C.T.D.), affirmed (1996), 209 N.R. 342, 72 C.P.R. (3d) 19 (F.C.A.). This also was a patent infringement action. The patents related to excimer lasers used for eye surgery. The defendant pleaded in its statement of defence that the patents were unenforceable or void because the patent holder had used its patent rights to attempt to extract fees and royalties for surgical procedures, and to impose oppressive licence conditions, which was alleged to be an undue restraint of trade contrary to section 32 of the Competition Act. The plaintiff sought to strike out the pleadings relating to the Competition Act. The defendant argued that the pleadings should not be struck because they formed the basis of an argument that the plaintiff's behaviour disentitled it to equitable relief for patent infringement. The Prothonotary ordered the pleadings struck, and the Motions Judge agreed, substantially adopting the same reasons in the Procter & Gamble case (supra).

Visx and Procter & Gamble are two examples in which the alleged breaches of the Competition Act by a patent holder did not cast any shadow on the patent rights themselves. Therefore, there was no relationship between the alleged unlawful behaviour and the equitable remedy sought by the patent holder that could support an unclean hands defence.

The Motions Judge concluded that the same could be said of this case, with the result that there was no hope of a successful unclean hands defence. I must respectfully disagree. In this case, Access International wishes to argue that the assignment of copyright in the VW and Audi logos to Volkswagen Canada is conduct described in subsection 32(1) of the Competition Act, because the result of Volkswagen Canada's obtaining the copyright was to unduly limit or prevent competition in authentic Volkswagen and Audi parts and accessories. This allegation is quite different from the allegations considered in Visx and Procter & Gamble. In my view, it is at least arguable that in this case there is a sufficient relationship between the copyright and the unclean hands defence that the equitable remedy might not be granted.

I see nothing in any of the cases to which we were referred, or in section 32 itself, that suggests that such an argument is bereft of all hope of success.

For these reasons, I would allow the appeal except as it relates to the counterclaim, so that the second sentence of paragraph 2 and paragraphs 15, 16 and 17 of the statement of defence will remain in the pleadings. As success is divided, each party will bear its own costs.

Karen R. Sharlow

J.A.

"I agree

Marshall Rothstein J.A."

"I agree

Briane Malone J.A."