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

Date: 20051219

Docket: A-258-04

Citation: 2005 FCA 427

CORAM:        DESJARDINS J.A.

NOËL J.A.

PELLETIER J.A.

BETWEEN:

                                                      EURO EXCELLENCE INC.

                                                                                                                                            Appellant

                                                                           and

KRAFT CANADA INC.

KRAFT FOODS SCHWEIZ AG

and

KRAFT FOODS BELGIUM SA

                                                                                                                                      Respondents

                                   Hearing held at Montréal, Quebec, September 14, 2005.

                                Judgment delivered at Ottawa, Ontario, December 19, 2005.

REASONS FOR JUDGMENT:                                                                             DESJARDINS J.A.

CONCURRED IN BY:                                                                                                       NOËL J.A.

                                                                                                                                 PELLETIER J.A.

Date: 20051219

Docket: A-258-04

Citation: 2005 FCA 427

CORAM:        DESJARDINS J.A.

NOËL J.A.

PELLETIER J.A.

BETWEEN:

                                                      EURO EXCELLENCE INC.

                                                                                                                                            Appellant

                                                                           and

KRAFT CANADA INC.

KRAFT FOODS SCHWEIZ AG

and

KRAFT FOODS BELGIUM SA

                                                                                                                                      Respondents

                                                    REASONS FOR JUDGMENT

DESJARDINS J.A.

[1]                This case addresses the issue of parallel importation, also known as the "grey market" (see W. Lee Webster, "Restraining the gray marketer policy and practice" (1987), 4 C.I.P.R. 211).

[2]                The expression "grey market" or "gray market" generally refers to goods that are imported contrary to the wishes of the copyright holder or an authorized importer in a specific territory. It refers to goods which, as a general rule, are legitimately marketed in the foreign market, but whose presence in the local market is under a shadow because of alleged infringement. For this reason it is referred to as the "grey market" rather than the black market, in which copyright is infringed, and the white market, where there is no copyright infringement (W.L. Hayhurst Q.C., "Intellectual property as a non-tariff barrier in Canada, with particular reference to 'grey goods' and 'parallel imports'" (1990), 31 C.P.R. (3d) 289, at p. 298).

[3]                The issue in this case is whether the respondent Kraft Canada Inc. (KCI), which has held an exclusive licence since October 2002 to produce, reproduce and distribute for Canada the copyright in the CÔTE D'OR elephant and the TOBLERONE bear within the mountain, may, under subsection 27(2) of the Copyright Act, R.S. 1985, c. C-42 (the Act), compel the appellant, Euro Excellence, to cover over the CÔTE D'OR elephant and the TOBLERONE bear within the mountain, which are reproduced on the wrappers of the CÔTE D'OR and TOBLERONE products sold by it. Euro Excellence imports those products from an unnamed source in an unnamed European country and distributes them in Canada. KCI does not dispute that the products in issue are genuine.

[4]                Although the CÔTE D'OR elephant is also impressed within the CÔTE D'OR chocolate itself, KCI does not seek to prevent Euro Excellence from continuing its importing and distribution of those products. KCI submits that Euro Excellence is free to do so, provided, however, that it respects KCI's copyright in the packaging.

[5]                Euro Excellence has appealed from a decision of the Federal Court of Canada (Kraft Canada Inc. et al v. Euro Excellence Inc., [2004] 4 F.C.R. 410, 2004 FC 652, Harrington J.) granting a permanent injunction ordering it to cease selling, distributing, exposing or offering for sale copies of the protected works (the CÔTE D'OR elephant and the TOBLERONE bear within the mountain). Mr. Justice Harrington pointed out that KCI was taking issue not with the product sold, but rather with the illustrations appearing on the wrappers (paragraph 3 of his reasons). In order to maintain some semblance of peace and order, he did not require Euro Excellence to recall product which had already left its control or to deliver up its inventory to KCI (paragraph 64 of his reasons). Mr. Justice Harrington instead required the appellant to cover over the artwork on the packaging, price lists and other material prior to selling, distributing, exposing or offering for sale CÔTE D'OR and TOBLERONE confectionary products, and in particular chocolate bars.

[6]                Euro Excellence was ordered to pay the sum of $300,000, calculated in proportion to the profits made, under section 35 of the Act.

[7]                Mr. Justice Harrington then issued an initial directive, on June 9, 2004 (Kraft Canada v. Euro Excellence Inc. (2004), 33 C.P.R. (4th) 242, 2004 FC 832), followed by a second, on September 3, 2004 ((2004), 35 C.P.R. (4th) 193, 2004 FC 1215), in which he stated that he was satisfied with the stickers used by Euro Excellence to cover over the CÔTE D'OR elephant and the TOBLERONE bear within the mountain on the wrappers of the products imported into and distributed in Canada.

[8]                By cross-appeal, the respondents ask the Court to vary the wording of the permanent injunction to prohibit the appellant expressly from importing and possessing those works for the purpose of engaging in one of the acts contemplated by paragraphs (a) to (c) of subsection 27(2) of the Act.

          I. THE FACTS

[9]                The essential facts of this case are described at paragraphs 13 to 20 of the Trial Judge's reasons as follows:

¶ 13 Kraft Foods Belgium S.A. of Halle, Belgium manufactures the Côte d'Or line of confectionary products in Europe. In 1993, it authorized Euro Excellence Inc. to act as a Canadian distributor. This led to an exclusive Canadian distribution contract which lasted for three years, ending in December 2000. Two reasons for non-renewal are advanced. Kraft claims that while Euro Excellence successfully marketed Côte d'Or in Quebec, it made little inroads in the rest of Canada. Euro Excellence claims that Kraft was acting in a predatory manner, wanted to take advantage of its contacts and goodwill and is trying to sacrifice it on the altar of multinational integration.

¶ 14 Kraft Canada Inc. began distributing the Côte d'Or line pursuant to contract in 2001. In fact, it had an earlier contract to distribute Côte d'Or which went back to 1990, but it never acted upon it. In early 2001, Euro Excellence was still distributing Côte d'Or products. Kraft was not particularly concerned as it assumed it was selling off accumulated inventory, but soon came to realize that it was selling new product from another source.

¶ 15 Furthermore, Euro Excellence began to parallel import Toblerone chocolate bars, which Kraft Canada Inc. had been distributing in Canada since 1990. What has particularly galled Kraft is that Euro Excellence's supplier is also providing it with the so-called "Golden" bars. These bars, which I understand are considerably larger than the normal bars, are intended to be sold only in duty free shops. In fact, the manufacturer, Kraft Foods Schweiz AG of Geneva, has never made them available to Kraft Canada Inc. As a result, Euro Excellence distributes a broader range of Toblerone products, which may give it some advantage in the marketplace.

¶ 16 It is not difficult to see that the dispute was escalating. Kraft claims that Euro Excellence is piggy-backing on its advertising, which gives it a market advantage, is adding cheap stick-on labels which detract from the first-class nature of the product, has not complied with all relevant Canadian packaging and labelling legislation and regulation, and indeed could have created a health hazard and put Kraft at risk for not "Canadianizing" the French list of ingredients. In one instance, an ingredient was identified as "fruits secs" which apparently is broad enough in Europe to cover nuts, while the term would not be construed that way in Canada.

¶ 17 In contrast, Kraft Canada Inc. says it takes extreme care to provide a first-class product in terms of packaging. In some instances the packaging at the European plants is done to its own specifications, or very professional, unnoticeable labels are affixed so as to conform to Canadian law.

...

¶ 18 In order to thwart Euro Excellence, in October 2002, Kraft Foods Belgium S.A. registered the three Côte d'Or copyrights in Canada in the artistic category. The author was identified as one Thierry Bigard. The same day a licence agreement between it and Kraft Canada Inc. was also registered. The licence gave Kraft Canada Inc.:

... the sole and exclusive right and license in the Territory to produce, reproduce and adapt the Works or any substantial part thereof, in any material form whatever, and to use and publicly present the Works in association with the manufacture, distribution or sale in Canada of confectionary products, including, but not limited to, chocolate.

¶ 19 The same day, Kraft Foods Schweiz AG registered the Toblerone bear within the mountain as copyright in the artistic category and registered a similar licensing agreement with Kraft Canada Inc.

¶ 20 Euro Excellence was called upon to cease and desist distributing product with the Côte d'Or script, elephant and red shield, and the Toblerone bear within the mountain. It has refused to do so. Although the Côte d'Or elephant is also impressed within the Côte d'Or chocolate itself, Kraft has made it clear that it is not trying to stop Euro Excellence from selling the chocolate, only from distributing it within wrappers which contain the artistic works registered as copyright.

II. THE DECISION UNDER APPEAL

[10]            At trial, Euro Excellence asserted technical defences based on the Act itself, and also defences based on the equitable jurisdiction of the Federal Court. It also argued the constitutional limits that it contended apply to the statutory provisions in issue, as well as limits relating to public policy.

[11]            Euro Excellence argued that the mountain, bear, elephant, CÔTE D'OR script and red shield are not original illustrations and accordingly are not entitled to copyright protection. Euro Excellence also argued that the chain of title leading to KCI's licence for CÔTE D'OR was defective. In the case of TOBLERONE, the chain of title was not disputed, but the nature of the work was. The appellant questioned the originality of a work depicting a snow-covered mountain, with some of the snow in the shape of a bear.

[12]            In equity, Euro Excellence argued that an injunction could not issue because KCI did not have clean hands. Euro Excellence contended that KCI was a predator trying to take advantage of the goodwill and contacts that Euro Excellence, which had previously been an exclusive distributor of the CÔTE D'OR line in Canada, had developed. Euro Excellence contended that the respondents' sole purpose was to interfere with its business.

[13]            Euro Excellence added that the statutory provisions regarding copyright must be interpreted narrowly so as not to impinge upon provincial jurisdiction in relation to property and civil rights.

[14]            On the question of public policy, the appellant argued that copyright cannot be used to create a monopoly that would infringe upon a free market exchange of goods.

[15]            The Trial Judge rejected all of Euro Excellence's arguments.

[16]            Three separate copyrights were asserted in respect of CÔTE D'OR. One is an elephant facing to the right with its trunk curled up. The second is the style of script used to spell "CÔTE D'OR". The third is a red shield which serves as a background to both the elephant and the CÔTE D'OR script.

[17]            The Trial Judge accepted the evidence that Thierry Bigard, in his capacity as creative director of the European office of Landor Associates in Paris, was responsible for the design of the new CÔTE D'OR visual identity in 1998. Policy at Landor Associates was that any rights which arose from the creative efforts of employees were owned by Landor, as the employer. Once that hurdle was overcome, the chain of ownership from Thierry Bigard through Landor through to various Kraft companies was faultless.

[18]            Relying on the decision of the Supreme Court of Canada in CCH Canadian Ltd. v. Law Society of Upper Canada, [2004] 1 S.C.R. 339, 2004 SCC 13">2004 SCC 13 (CCH), the Trial Judge concluded that the CÔTE D'OR elephant on the wrappers was original because it resulted from an exercise of skill and judgment. Although the elephant had appeared on the CÔTE D'OR brand since at least 1906, and in all likelihood owed its inspiration to a postage stamp from Guinea, the designers had produced a number of drawings of the elephant before settling on their choice. The design obtained resulted from intellectual effort and deserved copyright protection as an original work.

[19]            However, the Trial Judge was of the opinion that the same could not be said of the CÔTE D'OR script and red shield. The written text was a mere change of font, which did not enjoy the benefit of copyright, nor was there anything original about the red shield, and it was not deserving of copyright protection.

[20]            On the question of the TOBLERONE bear within the mountain, the Trial Judge held that even if the mountain represented Mont Cervin and the bear was the symbol of the canton of Berne, Switzerland, where the chocolate bars are manufactured, the work was nonetheless original, even if it was not abstract art.

[21]            The Trial Judge rejected Euro Excellence's arguments regarding the alleged business practices adopted by the respondents.

[22]            On the constitutional arguments, the Trial Judge was of the opinion that the language of the Act, which is a matter under federal jurisdiction, had to be given full force and effect, and that the offence set out in subsection 27(2) of the Act did not impinge on provincial jurisdiction in relation to property and civil rights. He also rejected Euro Excellence's arguments alleging a violation of public policy.

[23]            Citing Canadian and Australian case law, the Trial Judge concluded that subsection 27(2) of the Act applied. He added (para. 60 of his reasons) that there was nothing to prevent the appellant from replacing the wrappers or otherwise covering over the copyrighted material. He granted KCI:

[TRANSLATION]

1. A permanent injunction restraining Euro Excellence Inc., its affiliates, officers, directors, employees, agents and all those under its control, or any one of them, from selling, distributing, exposing or offering for sale any copies of the artistic works, namely packaging design elements identified as the Toblerone bear within a mountain and the Côte d'Or elephant, herein identified in whole or substantial part:

2. A permanent injunction requiring Euro Excellence, its affiliates, officers, directors, employees, agents and all those under its control, to render non-infringing any packaging design elements, price lists or other paraphernalia before selling, distributing, exposing or offering for sale any Toblerone or Côte d'Or confectionary product, including chocolate bars;

3. Damages in the amount of $300,000;

4. Pre-judgment interest thereon from 29 October 2002 to the date of judgment, calculated at the annual rate of 5%;

5. Post-judgment on the judgment award at a commercial rate, being 1% above the average Canadian bank prime rate;

6. Costs.

III. THE APPEAL IN THIS COURT

[24]            In this Court, Euro Excellence reiterated the arguments that it made before the Trial Judge.

[25]            In our view, because the Trial Judge did not commit any error in respect of the questions addressed above, except perhaps on two of them, we decided to hear the respondent on those two questions specifically, which we stated as follows:

A.         By acting as it did, did Euro Excellence violate subsection 27(2) of the Act?

B.          If so, should a determination of the profits be made, as the Trial Judge did?

[26]            I will address these two questions.

[27]            I will then dispose of the cross-appeal.

IV. ANALYSIS

[28]            Before beginning the analysis with respect to the two questions stated above, we should clarify some of the details regarding the products sold and the packaging of those products, and the licences held by the respondents.

[29]            KCI imports confectionary products and distributes them in Canada under the name Jacobs Suchard Canada. Since January 1, 2001, Jacobs Suchard Canada has held an exclusive distribution licence, which was brought to the attention of Euro Excellence. The licence reads as follows:

[TRANSLATION] This is to confirm that since January 1, 2001, Jacobs Suchard Canada has been the sole company authorized to import Côte d'Or products into Canada directly from the production plants. In fact, Côte d'Or is manufactured in Belgium under Kraft Europe.

[A.B., vol. I, p. 133, para. 21, and p. 152]

[30]            Kraft Foods Belgium SA (KFB) manufactures the products sold under the trade-mark CÔTE D'OR. Kraft Foods Schweiz AG (KFS) manufactures the products sold under the trade-mark TOBLERONE. The confectionary products sold by KCI in Canada come only from KFB and KFS plants in Europe (affidavit of Marilyn I. Miller, "category business director", KCI, A.B., vol. I, at p. 131, para. 14). KCI and KFB are affiliates whose parent company is Kraft Foods Inc. (A.B., vol. III, p. 720 and vol. IV, p. 822). While the evidence is not specific on this point, there is also reason to assume that the same is true of KFS. The Trial Judge noted (see para. 17 of his reasons, reproduced above) that KCI takes care to provide a first-class product in terms of packaging. In some instances the packaging at the European plants is done to its own specifications, or special labels are affixed so as to conform to the Food and Drugs Act, R.S.C. 1985, c. F-27, the Consumer Packaging and Labelling Act, R.S.C. 1985, c. C-38, and the Weights and Measures Act, R.S.C. 1985, c. W-6.

[31]            KCI markets nine CÔTE D'OR products, while Euro Excellence markets over forty. KCI has created five specific packaging formats for Canada, for five of the nine CÔTE D'OR products it sells. For the four other CÔTE D'OR products, KCI applies a sticker to the packaging used by the manufacturer (A.B., vol. I, p. 136, paras. 36(a) and (b)).

[32]            For the TOBLERONE product, KCI repackages the products it receives from KFS so that it complies with the Canadian legislation referred to above.

[33]            KCI was unable to produce any order form filled out by Euro Excellence to establish the origin of the products sold by Euro Excellence (cross-examination of Marilyn I. Miller, A.B., vol. III, p. 670, at p. 744). KCI asked Euro Excellence to establish the origin of the products sold but Euro Excellence refused to reply (cross-examination of André Clémence, president of Euro Excellence, A.B., vol. III, p. 466, at pp. 479-481 and 577; cross-examination of Marilyn I. Miller, A.B., vol. III, p. 670, at pp. 742, 743, 744, 745, 755 bis., 756 and 823) or simply said that it did not understand the question as it was worded (cross-examination of André Clémence, A.B., vol. III, p. 466, at p. 564, line 13 et seq.).

[34]            The respondents do admit that the chocolate sold by the appellant is genuine TOBLERONE and genuine CÔTE D'OR. The Trial Judge concluded (para. 1 of the reasons for judgment) that Euro Excellence purchases "from an unnamed source in an unnamed European country, imports and distributes them in Canada in their European wrappers, with a label affixed in an effort to conform to Canadian packaging regulations". However, there is nothing in the evidence to show the exact origin of the copies of the protected works on the packaging of the products marketed in Canada by Euro Excellence (cross-examination of Marilyn I. Miller, A.B., vol. III, p. 670, at p. 743, lines 2 to 5, line 25 et seq.).

[35]            The respondents pointed out that they have registered their copyright and cited their rights under the Act (s. 53 of the Act) and under contracts that have been signed between them.

[36]            KFB owns the copyright, registered on October 25, 2002, in the titles CÔTE D'OR (A.B., vol. I, p. 48), CÔTE D'OR SHIELD (A.B., vol. I, p. 52), and CÔTE D'OR ÉLÉPHANT (A.B., vol. I, p. 55).

[37]            KFS owns the copyright in the work "TOBLERONE MOUNTAIN", which was registered in Canada on October 25, 2002 (A.B.., vol. I, p. 98).

[38]            Also on October 25, 2002, KCI registered two documents, both entitled "Copyright Licence Agreement". Those documents were signed on October 9, 2002. They granted KCI exclusive licences for Canada in respect of the copyright held by KFS and the copyright held by KFB. The relevant terms of those licences are as follows:

2.01      The Licensor grants to the Licensee the sole and exclusive right and license in the Territory to produce, reproduce and adapt the Works or any substantial part thereof, in any material form whatever, and to use and publicly present the Works in association with the manufacture, distribution or sale in Canada of confectionery products, including, but not limited to, chocolate;

2.02       The Licensee shall have no right to sublicense any rights granted to it pursuant to this Agreement, or to consent to the use by any Person of the Works, without the prior written consent of the Licensor;

                                                                                                        [Emphasis is mine.]

                                                              [A.B., vol. I, p. 101, at p. 103; p. 120, at p. 122.]

[39]            Section 2.7 of the Act confirms that KCI's exclusive licences give it the exclusive right to produce and reproduce the protected works (s. 3 of the Act) in Canada, to the exclusion of the two copyright owners, KFB and KFS:

[40]            Euro Excellence received notification of the existence of the two exclusive licences on October 28, 2002 (A.B., vol. I, p. 142, para. 47, and p. 226). Accordingly, since October 28, 2002, to the knowledge of Euro Excellence, KCI has been the only person in Canada authorized to produce and reproduce the works in respect of which it holds exclusive copyright licences, even as against the copyright owners, KFB and KFS.

[41]            The copyright owners, KFB and KFS, have no active role in these proceedings. They appear herein only to meet the requirements of subsection 36(2) of the Act.

[42]            I will now address the first question.

A.         By acting as it did, did Euro Excellence violate subsection 27(2) of the Act?

1. The Law

[43]            Subsection 27(2) deals with secondary infringement of copyright. A defendant may in fact be deemed to have infringed copyright even if he or she has not personally produced or reproduced the protected work.

[44]            Subsection 3(1) and subsections 27(1), (2) and (3) of the Act read as follows:

[45]            We must also consider the definition of the word "infringing" in section 2 of the Act:

[46]            The final sentence of the last paragraph of that definition clearly states that a copy of a work protected in Canada that is distributed outside Canada may be an infringing copy when it is imported into Canada. The French version is not as clear, in that it uses the expression "reproduction" rather than "importation", but the reference to paragraph 27(2)(e), which deals only with importing, gives it the same meaning as the English version. The French version, on the other hand, makes it very clear that apart from the case contemplated by paragraph 27(2)(e), there is no infringement when the copy is made with the consent of the owner of the copyright in the country where the copy was made.

[47]            Subsection 27(2) of the Act, in its present form, entered into force on September 1, 1997. Before it was amended, that provision had remained virtually unchanged since it was initially enacted in the 1921 Copyright Act, proclaimed in force in 1924, although the subsection was numbered separately. The subsection as it appeared in the Revised Statutes of Canada, 1985, c. C-42, was as follows:

[48]            The 1997 amendment therefore replaced the words "any work that ... infringes copyright or would infringe copyright if it had been made within Canada" with the words "a copy of a work ... that the person knows or should have known infringes copyright or would infringe copyright if it had been made in Canada by the person who made it" (italics added).

[49]            The addition of the words "by the person who made it" is a significant change.

[50]            Before the words "by the person who made it" were added to the text, they had already been included by the Canadian case law. The leading decision on this subject is Clarke, Irwin & Co. v. C. Cole & Co. Ltd., [1960] O.R. 117 (H.C.) (Clarke), in which Mr. Justice Spence examined copyright infringement under subsection 17(4) of the 1952 Copyright Act, R.S.C. 1952, c. 55, which was worded virtually identically to subsection 27(4) of the 1985 Act, reproduced above.

[51]            The plaintiff in Clarke was the exclusive world-wide owner of the copyright in a book. The plaintiff had sold the exclusive right to publish the work in the United States to another party, Henry Holt & Co. Inc. The defendant had purchased copies of the American edition, published by Henry Holt & Co. Inc., from an American dealer, and imported them into Canada to sell them on the Canadian market.

[52]            Mr. Justice Spence examined the British and Australian case law concerning the United Kingdom's Copyright Act, 1911 (on which the Canadian provision was modelled) and the Report on Copyright by the Royal Commission on Patents, Copyright, Trade Marks and Industrial Design (the Ilsley Commission) (Ottawa, Queen's Printer, 1958). Relying on those authorities, Mr. Justice Spence concluded that "the words 'would infringe copyright if it had been made in Canada' mean when applied to the present situation, that the work would infringe copyright if it had been made within Canada by others than the plaintiff including Holt [the authorized US publisher]".

[53]            In Clarke, Mr. Justice Spence cited the following passage from the Ilsley Commission Report with approval (taken from page 91 of the English version of the Report and page 102 of the French version).

[54]            This passage from the Ilsley Commission Report dealt with the provision relating to the remedy for importing prohibited copies (former section 27 and present section 44) and not the provision concerning secondary infringement by importing (former subsection 17(4) and present paragraph 27(2)(e)). In Clarke, however, Mr. Justice Spence extended the application of that reasoning to secondary infringement by importing.

[55]            The decisions of the courts that followed merely applied Clarke, supra. See: Roy Export Co. Establishment v. Gauthier (1973), 10 C.P.R. (2d) 11 (F.C.T.D.); Godfrey, MacSkimming & Bacque Ltd. et al. v. Coles Book Stores (1973), 13 C.P.R. (2d) 89 (H. C. Ontario); Fly by Nite Music Co. v. Record Wherehouse Ltd., [1975] F.C. 386 (F.C.T.D.); A & M Records of Canada Ltd. et al. v. Millbank Music Corp. Ltd. et al. (1984), 1 C.P.R. (3d) 354 (F.C.T.D.); Les Dictionnaires Robert Canada SCC et al. v. Librairie du Nomade Inc. (1987), 16 C.P.R. (3d) 319, [1987] F.C.J. No. 1 (QL) (F.C.T.D.). In all those cases, in order to establish the secondary infringement of their copyright in relation to an imported product, the plaintiffs proved that they had the exclusive right to use the copyright in question in Canada and that the copies imported by the defendants had not been produced by the plaintiffs.

2. Application of the Law to the Facts

[56]            There is no direct evidence that identifies the person who reproduced the protected works, in Europe, on the packaging of the products marketed in Canada by Euro Excellence. The Trial Judge undoubtedly inferred from the facts before him that those copies of the protected works had been produced in Europe under a licence other than KCI's, because absent evidence to the contrary KCI is presumed not to have overstepped the limits of its licence. Accordingly, that reproduction, which was apparently done in Europe by KFB and KFS or under licences granted by them, does not violate the Act, having regard to the terms of the last paragraph of the definition of "infringing" ("contrefaçon") in section 2 of the Act:

[57]            However, the importing of the protected works for sale, etc., in the circumstances described in paragraph 27(2)(e) of the Act, is a secondary infringement, for the reasons that follow.

[58]            In CCH, supra, paragraph 81, the Supreme Court of Canada quoted Mr. Justice Rothstein of this Court with approval ([2002] 4 F.C. 213, paragraph 271) and said that three elements must generally be proven to ground a claim for secondary infringement: (1) that there has first been a primary infringement of copyright; (2) that the secondary infringer must have known or should have known that he or she was dealing with a product of infringement; and (3) that the infringer did something listed in subsection 27(2) of the Act. The Supreme Court of Canada added, at paragraph 82: "Absent primary infringement, there can be no secondary infringement."

[59]            However, initial infringement of copyright need not be proven in the case of paragraph 27(2)(e) of the Act. In the case of a copy that has been imported in the circumstances covered by paragraph 27(2)(e), the final paragraph of the definition of "infringing" ("contrefaçon") in section 2 of the Act recognizes that infringement has occurred:

[60]            That being said, in the case of a product that is imported in the circumstances covered by paragraph 27(2)(e) of the Act, subsection 27(2) itself provides that secondary infringement occurs when the things listed in paragraphs 27(2) (a) to (c) are done, when the production or reproduction of the work in question would be an infringement if the copy had been made in Canada by the person who made it. Accordingly, reproductions of protected works that are made outside Canada, even by copyright holders KFB and KFS, may not be imported into Canada by Euro Excellence for the purpose of doing anything referred to in paragraphs 27(2) (a) to (c), without there being a secondary infringement of KCI's copyright, because KCI has an exclusive right of reproduction for Canada, even as against KFB and KFS, and Euro Excellence knew that KCI's exclusive rights in the two works had been registered for Canada.

[61]            There has therefore been secondary infringement of KCI's copyright by Euro Excellence.

[62]            I will now address the second question.

B.          If so, should a determination of the profits be made, as the Trial Judge did?

[63]            Subsection 35(1) of the Act provides:

[64]            At paragraph 67 of his reasons, the Trial Judge fixed the profits derived from the infringement in the amount of $300,000. He characterized that sum as damages. The Trial Judge explained his reasoning as follows:

¶ 67 ... Euro Excellence's gross sales were provided subject to a confidentiality order, and the parties agreed that should damages be awarded they should be within an agreed percentage range of the gross sales. With that in mind, I fix Kraft Canada Inc.'s damages in the amount of $300,000.

[65]            The appellant argued that the Trial Judge erred in his application of the principles relating to the delivery up of profits. In the appellant's submission, the parties were heard and the appellant admitted, at the hearing, that the appellant's profit margin on the sale of the products in issue was about 25 percent. Accordingly, the appellant submits, the Trial Judge's finding that the appellant was liable for about 42 percent of the profits attributable to the sale of the TOBLERONE and CÔTE D'OR products was totally arbitrary.

[66]            The appellant further argued that the Trial Judge failed to deduct the costs it had incurred, in particular the costs associated with the labelling machine (A.B., vol. II, tab 21, p. 236, para. 38, and pp. 352-354).

[67]            The respondents submit, at paragraph 123 of their memorandum:

123. In the instant case, however, it was expressly agreed by both parties at the hearing of the Application that the benefit derived by Euro Excellence from its infringement fell within an agreed-upon range of between 10% and 25% of gross revenues. During the relevant period (October 28, 2002 to May 3, 2004), those gross revenues were no less than $2.8 million.

[68]            The record shows nothing to indicate how the respondents can say that during the relevant period, from October 28, 2002, to May 3, 2004, "those gross revenues were no less than $2.8 million". Moreover, what the appellant is talking about is its profit margin on the products in issue.

[69]            Given that the record is less than satisfactory on this point, and in the interest of justice, I have no choice but to refer the matter back to the Trial Judge so that he can clarify the parties' submissions and redetermine the profits derived from the infringement. I also direct that the interest be reviewed, so that this matter can be considered in its entirety.

V. THE CROSS-APPEAL

[70]            KCI seeks an order of the Court prohibiting Euro Excellence from possessing the products in issue or importing them into Canada for the purpose of doing anything referred to in paragraphs 27(2)(a) to (c) of the Act.

[71]            The Trial Judge did not refer to that request, although it was set out in the application for the injunction (A.B., vol. I, p. 37, at p. 39). He dismissed a motion to that effect made by KCI after judgment was pronounced (Kraft Canada Inc. v. Euro Excellence Inc. (2004), 33 C.P.R. (4th) 242, 2004 FC 832, paras. 1 to 5). He explained his decision as follows, at paragraphs 1 and 4 of his reasons:

¶ 1       ... Since subsection 27(2) of the Copyright Act declares that it is an infringement of copyright for a person to possess or to import into Canada copyrighted works for those purposes, Kraft submits that I inadvertently omitted to include possessing and importation in the order. That is not the case. I deliberately excluded possession and importation from the order.

...

¶ 4      ... It is not contrary to the Copyright Act to import into Canada and to possess Toblerone and Côte d'Or chocolate bars in wrappers which display the copyrighted artistic works. What is important is the purpose for which they are imported and possessed. A traveller who brings a Toblerone or Côte d'Or chocolate bar into Canada, eats it here, and discards the wrapper is not in violation of the Act. I did not intend to prohibit Euro Excellence from importing and possessing the chocolate bars in their original wrappers. I certainly did not say that the wrappers had to be rendered non-infringing in Europe. As long as Euro Excellence renders the wrappers non-infringing, whether it does so in Canada or elsewhere, before it sells, distributes, exposes or offers for sale the product in question, it will not be in violation of section 27(2) of the Copyright Act.

[72]            At the hearing in this Court, KCI conceded that it is not necessary prohibit the acts set out in paragraphs 27(2)(d) and (e), given that the Trial Judge granted the injunction in respect of the acts set out in paragraphs 27(2)(a), (b) and (c). Accordingly, because Euro Excellence may not sell, distribute or offer the protected works for sale, Euro Excellence may also not possess or import them for the purpose of selling, distributing or offering them for sale.

[73]            The relief sought in the cross-appeal is therefore superfluous. The cross-appeal should be dismissed.

VI. CONCLUSION

[74]            I would dismiss the appeal in respect of paragraphs 1, 2 and 6 of the judgment of the Trial Judge. I would allow the appeal in respect of paragraphs 3, 4 and 5, set aside the decision of the Trial Judge in respect of those paragraphs, and refer the matter back to him for redetermination in respect of those paragraphs having regard to the reasons set out above.

[75]            I would dismiss the cross-appeal.

[76]            I would not award costs, given the divided success.

                                                                                                                                "Alice Desjardins"              

                                                                                                                                                      J.A.                          

"I concur.

     Marc Noël J.A."

"I concur.

     J.D. Denis Pelletier J.A."

Certified true translation

Peter Douglas

                                                  FEDERAL COURT OF APPEAL

                            NAMES OF COUNSEL AND SOLICITORS OF RECORD

DOCKET:                                                                         A-258-04

STYLE OF CAUSE:                                                         EURO EXCELLENCE INC.

and KRAFT CANADA INC.

KRAFT FOODS SCHWEIZ AG and

KRAFT FOODS BELGIUM SA

PLACE OF HEARING:                                                   Montréal, Quebec

DATE OF HEARING:                                                     September 14, 2005

REASONS FOR JUDGMENT:                                     DESJARDINS J.A.

NOËL J.A.

PELLETIER J.A.

DATE OF REASONS:                                                     December 19, 2005

APPEARANCES

François Boscher                                                                 FOR THE APPELLANT

Pierre-Emmanuel Moyse

Timothy M. Lowman                                                           FOR THE RESPONDENTS

Ken McKay

SOLICITORS OF RECORD

François Boscher                                                                 FOR THE APPELLANT

Montréal, QC

Sim, Hughes, Ashton & McKay LLP          FOR THE RESPONDENTS

Toronto, ON