Date: 20060407
Docket: T-1821-02
Citation: 2006 FC 453
Ottawa, Ontario, April 7, 2006
PRESENT: The Honourable Mr. Justice Harrington
BETWEEN:
KRAFT CANADA INC.
KRAFT FOODS SCHWEIZ AG and
KRAFT FOODS BELGIUM SA
Applicants
and
EURO EXCELLENCE INC.
Respondent
REASONS FOR ORDER AND ORDER
[1] When this matter first came before me, I held that by selling and otherwise dealing in certain lines of Toblerone and Côte d'Or chocolate bars Euro Excellence was breaching Kraft Canada's copyright in copies of artistic works displayed on the chocolate bar wrappers. I identified these as the Toblerone bear within a mountain and the Côte d'Or elephant. I ordered Euro Excellence to cease and desist, or at least to render non-infringing any package design elements before selling the bars in Canada. I also awarded Kraft:
"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 interest on the judgment award at a commercial rate, being 1% above the average Canadian prime rate."
[2] I also awarded costs.
[3] Euro Excellence appealed. The appeal was dismissed with respect to the injunctive relief, and costs. An application for leave to appeal to the Supreme Court of Canada is currently pending. However, as regards damages the Court of Appeal held:
"The appeal is allowed in respect of paragraphs 3, 4 and 5 of that judgment. Those paragraphs are set aside and the matter is referred back to the Trial Judge for retermination of those paragraphs having regard to the reasons for judgment herein."
[4] There was one set of reasons delivered by Madam Justice Desjardins, concurred in by Mr. Justices Noël and Pelletier.
[5] This is what the Court of Appeal had to say about damages:
[63] Subsection 35(1) of the Act provides:
| Liability for infringement
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Violation du droit d'auteur : responsabilité
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| 35. (1) Where a person infringes copyright, the person is liable to pay such damages to the owner of the copyright as the owner has suffered due to the infringement and, in addition to those damages, such part of the profits that the infringer has made from the infringement and that were not taken into account in calculating the damages as the court considers just.
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35. (1) Quiconque viole le droit d'auteur est passible de payer, au titulaire du droit qui a été violé, des dommages-intérêts et, en sus, la proportion, que le tribunal peut juger équitable, des profits qu'il a réalisés en commettant cette violation et qui n'ont pas été pris en compte pour la fixation des dommages-intérêts.
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| [Emphasis is mine.]
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[Je souligne.]
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[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.
[6] I conducted a pre-hearing conference with the parties in order to work out a viable procedure with respect to clarification and redetermination and to schedule a hearing date. It was obvious at the conference that the parties did not share the same interpretation of the Court of Appeal's reasons. Kraft was of the view that the matter was straightforward. All I had to do was shed light on certain confidential information which had been placed before me at the hearing, and which, for that matter, was also in the material before the Court of Appeal. On the other hand, Euro Excellence was of the view that the issue of damages should be reconsidered in its entirety and stated that it intended to bring forward new evidence.
[7] Consequently, I ordered that Kraft first file and serve its motion record with respect to clarification and redetermination of damages. Euro Excellence would file a motion record in reply, and a second motion record with respect to its intention to introduce new evidence. Finally, Kraft would file a motion record in reply to Euro Excellence's motion.
[8] The two motions were heard together. I stated at the outset of the hearing that if Euro Excellence's motion with respect to new evidence was allowed, then Kraft would have the right to introduce its own affidavit evidence and to cross-examine. It followed that a decision on Kraft's motion for redetermination of damages would be premature. However, I have come to the view that no new evidence should be allowed, and redetermine that Kraft be awarded damages in the amount of $300,000, with interest thereon from 29 October 2002 to 3 May 2004, calculated at the annual rate of 5%,. This works out to $22,684.93. I also award simple interest on the sum of $322,684.93 at a commercial rate, being 1% above the average Canadian prime rate from 3 May 2004 until payment. However, I understand that the said sum of $300,000 had been paid to Kraft Canada at some point following my judgment, and then returned to Euro Excellence following the judgment of the Court of Appeal. To the extent that Kraft had Euro Excellence's money in hand, Euro Excellence must be given credit with respect to interest, mutatis mutandis.
[9] My reasons are as follows.
[10] As mentioned in my first set of reasons, I am of the view that Kraft Canada is entitled to damages in the form of an accounting and payment of Euro Excellence's profits in respect of the sale of products bearing the Côte d'Or and Toblerone copyrighted works. Kraft had an option. It could claim damages, including profit damages, as contemplated by Section 35 of the Copyright Act, or statutory damages in accordance with Section 38 thereof. It opted for Section 35. Section 35(1), as noted by Madam Justice Desjardins, provides that the person who infringes copyright is liable to pay such damages as the owner thereof has suffered and in addition such part of the profits that the infringer has made from the infringement that were not taken into account in calculating those damages. However, Section 35(2) goes on to provide a special rule:
| (2) In proving profits,
(a) the plaintiff shall be required to prove only receipts or revenues derived from the infringement; and
(b) the defendant shall be required to prove every element of cost that the defendant claims.
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(2) Dans la détermination des profits, le demandeur n'est tenu d'établir que ceux provenant de la violation et le défendeur doit prouver chaque élément du coût qu'il allègue.
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[11] I had proceeded on the basis that Kraft had proved the receipts or revenues derived from the sale of the Côte d'Or and Toblerone chocolate bars. The gross sale records were provided to me under seal as they were subject to a confidentiality order issued by Prothonotary Morneau. I was reluctant to disclose those gross sales in paragraph 67 of my reasons. However, they have now been disclosed openly in the Federal Court of Appeal, and they are not disputed. The gross sales from 28 October 2002, the date on which Euro Excellence was formally called upon to cease and desist, and 24 March 2004 were $2,874.702, 21. The hearing had also proceeded on the basis that Euro Excellence had not proven any element of costs. That is now contested as there had been attached to an affidavit of André Clemence, the president of Euro Excellence (which affidavit was before me at the time of the hearing), invoices relating to a labelling machine which had cost $32,431.27.
[12] Recognizing that it was not taking the position that the chocolate bars themselves infringed upon its copyright, and that an allocation of the profits deriving from the chocolate bars as opposed to the wrappers had to be made, Kraft proposed that the profit/damages attributable to the infringement be fixed at somewhere between 10 and 25% of the gross sales (i.e. between $287,470 and $718,675). Euro Excellence submitted that no damages should be awarded or that they be limited to a few thousand dollars which was the price Kraft Canada paid to obtain a Canadian licence with respect to the copyrighted works. However, I had understood Euro Excellence to say that if I nevertheless intended to award damages in the form of profits that it had made from the infringement, then it agreed they should be within the said 10 to 25% range of the gross sales.
[13] Being of the view that taste ultimately prevails and that the chocolate bars were more important than the wrappers, I was of the view that the damages should be at the low end of the scale. Considering that a 10% award would have given a very precise figure that might have provided competitors some insight into Euro Excellence's business, that the sales records were not current right up to the day of the judgment and that I was not going to extend injunctive relief to order Euro Excellence to recall product that was already in the distribution chain or to deliver up its then current inventory to Kraft, I considered an award of $300,000 to be fair and reasonable. I thought so then. I think so now.
[14] Kraft submits that this should bring an end to the matter. It submits that all the Court of Appeal required of me was to explain the gross sales records. The matter is not that straightforward. After all, the Court of Appeal also had the gross sales before it. It pointed out that Euro Excellence had submitted that the agreement was that the profit margin was about 25% of the gross sales, so that an award of $300,000 was about 42% of the overall profit, a figure it considered "totally arbitrary". The Court also noted Euro Excellence's submission that I had not deducted the cost associated with the labelling machine. Finally the Court also directed that interest also be reviewed "...so that this matter can be considered in its entirety." Consequently, I intend to review all aspects of damages.
WHAT WAS AGREED?
[15] The parties both submit that there was an agreement announced during the hearing before me, but they disagree as to what it was. I am now two years older and hopefully a little wiser. This matter was heard during my first year on the bench. If something like this ever happens again, rest assured I will insist upon a written agreement, signed, sealed and delivered!
[16] Kraft's recollection as set out in its memorandum before the Court of Appeal, and reproduced by Madam Justice Desjardins in her reasons, and subject to what I have already said, reflects my own recollection of the agreement. To repeat, Kraft said at paragraph 123 of its 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.
[17] Euro Excellence's recollection of the hearing on 30 March 2004 was that it had admitted that the gross profit realised on the sale of the chocolate bars in question was about 25% of gross sales. Furthermore, the burden remained on Kraft to establish which part of that 25% was made from the infringing chocolate bar wrappers, as opposed to the chocolate bars themselves. It failed, and so should be awarded nothing.
[18] Euros Excellence appreciates that there may have been a misunderstanding in that Kraft's solicitors were arguing in English, and its solicitors were arguing in French.
[19] Either there was an agreement or there was not. Apart from the parties' recollection of the hearing on 30 March 2004, there is some logic, based on the record, to an agreement on a percentage of gross sales. After all, the gross sales were in the record. The profit margin was not. Since Euro Excellence proved no elements of costs to be deducted from its gross sales, or at most some $32,000, there is no proof of Euro Excellence's profit margin. Attached to an affidavit Mr. Clemence swore in December 2002 was a letter he wrote to a Kraft affiliate in June 2000 in which he said that Euro Excellence's gross profit on Côte d'Or products was about 35%, and varied in accordance with currency exchange rates. Although that affidavit was before me at the hearing, its purpose had been to set out Euro Excellence's relationship with Kraft. It was not argued with respect to profit damages. In any event, the letter proves nothing, and does not even cover the timeframe in question, which only began when Kraft called upon Euro Excellence to cease and desist in October 2002.
[20] There is no basis whatsoever to hold that Kraft agreed that Euro Excellence's gross profit was some $700,000, subject to an allocation between the chocolate bars themselves and the wrappers.
[21] I will proceed on the basis that there was no agreement, simply a proposal by Kraft that such part of Euro Excellence's profits derived from the infringement be fixed at somewhere between 10 and 25% of the gross sales of 2,874.702,21.
[22] As Kraft made no attempt to prove special damages, we are left, in accordance with Section 35 of the Copyright Act, to determine the profits Euro Excellence made from the infringement.
[23] The first step is to determine the gross revenues derived from the infringement. Since the infringement was limited to the depiction of the bear within the mountain and the elephant on the chocolate bars, it is obvious that not all of the gross revenue from the sales "derived from the infringement". Euro Excellence submits that the onus fell upon Kraft to establish a causal link between the breach of copyright and the revenues. It failed to do so and therefore is entitled to no part of the profit.
[24] Euro Excellence is wrong.
[25] Section 35 of the Copyright Act reflects the equitable remedy of an account of profits. This is what Mr. Justice Hugessen, speaking for the Federal Court of Appeal, had to say in an appeal from an order of Mr. Justice Addy in Reading & Bates Constructions Co. v. Baker Energy Resources Corp., [1995] 1 F.C. 483 at page 495.
[17] The findings of Addy J. that an accounting of profits pursuant to a patent infringement is like an accounting by one found guilty of misappropriation or misuse of property are applicable in the present instance:
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Where the defendant, as in the present case, has been found at fault and has been ordered to account, that obligation to account rests without reservation entirely on him. There exists no onus whatsoever in this respect on the owner of the property. The judgment obliges the defendant to account for the full amount of all revenue received from the use of the property. Negligent or willful failure to declare any such amounts might well render the infringer guilty of contempt of court. The amount so declared becomes payable to the rightful owner of the property and is subject to be reduced only by such bona fide expenses or disbursements as the infringer can by positive evidence establish as having been actually incurred in the case of a claim for damages the onus rests with the plaintiff. [See Note 9 below]
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[18] Having said that, it becomes obvious that in cases where a defendant claims that part of the profits accounted for did not result from the infringement, the burden is on that defendant to prove his right to apportionment and the absence of a causal link between that portion of the profits and the infringement.
[26] See also Beloit Canada Ltee v. Valmet Oy (1994) 55 C.P.R. (3d) 433, [1994] F.C.J. No. 682 (QL); Lubrizol Corp. v. Imperial Oil Ltd. (1996) 71 C.P.R. (3d) 26 and Bayer Aktiengesellshaft v. Apotex Inc. (2001) 10 C.P.R. (4th) 151.
[27] Some elements of cost are obvious, but not proved: the costs of purchasing the bars in Europe, transportation, warehousing and distribution. Since Euro Excellence chose not to identify its supplier, it would have had considerable difficulty in proving its purchase price. Kraft would have been entitled to invoices and proof of payment.
[28] Somewhat serendipitously, there was some evidence of cost, $32,431.27 relating to a labelling machine. I do not consider this cost significant when compared to gross revenue in excess of $2.8 million. The evidence shows that in addition to Toblerone and Côte d'Or, Euro Excellence was distributing Côte d'Or product not subject to copyright in the wrappers and confectionary products supplied by others. There is no evidence that the labelling was limited to the infringing wrappers. No element of depreciation based on proper accounting principles was offered. Even if I were to deduct the labelling cost, and I do not think that one penny thereof should be deducted, I am left with gross sales in excess of $2,874,702.21 less expenses of $32,431.27 or income of $2,842.270.94.
THE NEW EVIDENCE
[29] The new evidence takes the form of an affidavit of André Clemence, Euro Excellence's president, sworn 3 March 2006. As regards expenses, he states that in order to render the wrappers non-infringing, he had to order a special machine which with related equipment and accessories cost some $183,771.21. This cost cannot be deducted. First of all, it was not incurred over the time period in question, which was from October 2002 through to May 2004. Furthermore, one can hardly charge Kraft with costs Euro Excellence incurred so as to avoid continuing its infringement of Kraft's copyright!
[30] Euro Excellence unsuccessfully tried to bring this evidence before the Court of Appeal. Mr. Justice Pelletier dismissed the motion pointing out that any question of the cost of reconditioning did not relate to my decision of 3 May 2004.
[31] As to an apportionment of the profit, Mr. Clemence testified that he bought four Côte d'Or chocolate bars that very day in a grocery store in Montreal. Two had been distributed by Euro Excellence, and so the elephant logo was hidden. The other two were presumably distributed by Kraft as the logo was visible. Both were being sold at the same price. He went on to say that Euro Excellence's sales following the steps it took to cover over the copyrighted material were comparable to earlier sales. He added that Euro Excellence's net profit prior to my judgment of 3 May 2004 was in the range of 6%.
[32] The Federal Court of Appeal dealt with the admissibility of new evidence in Frank Brunckhorst Co. v. Gainers Inc. A-161-93, [1993] F.C.J. No. 874 (QL). In speaking the Court, Mr. Justice MacGuigan said the Court should be satisfied that the new evidence "...(1) must not have been discoverable before the end of the hearing appealed from by reasonable diligence, (2) must be credible, and (3) must be practically conclusive of an issue on the appeal."
[33] As to the net profits, that evidence was certainly available prior to the hearing. Euro Excellence chose to ignore Section 35(2) (b) of the Copyright Act. As to the subsequent events, I have nothing further to add with respect to the cost of buying machines to remedy the infringement.
[34] As to the inference that there is no value in the copyrighted work in the wrappers because the chocolate bars with the elephant covered up are sold at the same price and that there has been no diminishing in Euro Excellence's sales, I say this:
[35] That evidence, so-called, is useless. The Court would need expert evidence comparing sales of Toblerone and Côte d'Or with other brands over a period of time and a proper survey. The purchase of 4 chocolate bars, no matter what might come out if Mr. Clemence were to be cross-examined, is of no assistance to the Court.
[36] Furthermore, had it so chosen, Euro Excellence could have brought forth evidence, albeit by expert opinion, as to the value of the wrappers relative to the chocolate bars themselves. Evidence by way of a properly conducted survey is receivable (Beloit, supra, pages 455-458). It does not lie in Euro Excellence's mouth to say that prior to my order it could not have envisaged the possibility of covering over the copyrighted works. That very possibility was put by its own solicitors to Marilyn Miller, a Kraft employee, who was cross-examined on her affidavit in March 2003, almost a year before the hearing. That very possibility was also contemplated in the Australian decision which influenced my thinking: R & A Bailey and Co. Ltd. v. Boccaccio PTY Ltd. et al (1984-1986) 6 IPR 279), which was cited in Kraft's memorandum of fact and law filed in June 2003.
[37] Consequently, I dismiss Euro Excellence's application to introduce new evidence. However, if I am wrong, I place no value thereon.
APPORTIONMENT OF PROFIT
[38] Since Euro Excellence failed to prove its elements of costs, and failed to lead any evidence as to apportionment, it runs the risk the profit/damages be awarded in excess of $2.8 million. Indeed, that is the very reason Kraft says that Euro Excellence leapt at the 10-25% proposal at the hearing. It was a stop-loss. In 91439 CanadaLimitée v. Additions J.C.L. Inc., [1992] F.C.J. No. 41 (QL), Mr. Justice Pinard awarded 100% of the retail price of unsold books which infringed the plaintiff's copyright.
[39] Difficulty in ascertaining a loss is no reason for not giving substantial damages. Some of the authorities were recently reviewed by Mr. Justice de Montigny in Boutique Jacob Inc. v. Pantainer Limited 2006 FC 217 at paragraphs 51 and following.
[40] The agreement at the hearing, which as an "officious bystander" I still think was the agreement advanced by Kraft, saved me the foregoing analysis. However, leaving aside that agreement, Kraft's proposal of 10 to 25% of gross sales, even assuming that proposal to the unilateral, was a reasonable one. In Boutique Jacob, supra, Mr. Justice de Montigny referred to Wood v. Grand Valley Railway Company where Mr. Justice Davies said at 51 S.C.R. 283, page 289:
It was clearly impossible under the facts of that case to estimate with anything approaching to mathematical accuracy the damages sustained by the Plaintiffs, but it seems to me to be clearly laid down there by the learned judges that such an impossibility cannot "relieve the wrongdoer of the necessity of paying damages for his breach of contract" and that on the other hand the tribunal to estimate them whether jury or judge must under such circumstances do "the best it can" and its conclusion will not be set aside even if the amount of the verdict is a matter of guess work.
[41] Doing the best I can in the absence of evidence, the onus on which was on Euro Excellence to bring before this Court, I consider an award of damages of $300,000 representing profit attributable to the infringement to be fair and reasonable.
INTEREST
[42] Euro Excellence made no representations as to interest. I have left interest as it was in my original order. However, if pre-judgment interest should be as of this date then in my discretion I raise the rate accordingly so as to arrive at the same result.
COSTS
[43] I award Kraft one set of costs on these two motions in accordance with Tariff B, Column III, mid-range. I allow an attendance fee for one counsel only. Kraft's other counsel argued its motion for directions to the taxing officer which is the subject of a separate set of reasons and separate order as to costs.
ORDER
UPON motion by Kraft Canada Inc. for a redetermination of the profits derived from copyright infringement in accordance with paragraphs 3, 4 and 5 of the judgment of this Court dated 3 May 2004, having regard to the judgment of the Federal Court of Appeal, and the reasons therefore, dated 19 December 2005;
AND UPON motion by Euro Excellence Inc. to introduce new evidence;
THIS COURT ORDERS that:
1. The motion to introduce new evidence is dismissed.
2. Kraft Canada Inc. is awarded damages in the amount of $300,000 together with interest to 3 May 2004 in the amount of $22,684.93, and simple interest on the sum of $322,684.93 from 3 May 2004 until payment, at 1% above the average Canadian bank prime rate, together with one set of costs.
"Sean Harrington"
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