Thursday, December 1, 2016

Are Damages an Element of a Claim under Section 7 of the Trade-marks Act?

Excalibre Oil Tools Ltd v Advantage Products Inc 2016 FC 1279 Manson J
            2,264,467 / 2,373,734 / 2,386,026 / torque anchor

E Mishan & Sons, Inc v Supertek Canada Inc 2016 FC 986 Hughes J
            2,779,882 / Industrial Design 146,676 / expandable garden hose

Tuesday’s post provided the background to the threats claim brought under s 7(a) of the Trade-marks Act, and yesterday’s post discussed the safe harbour for purely informative communications. Today’s post discusses the proposition, agreed to by counsel in Supertek 2016 FC 986 [7] and affirmed by Hughes J [28], that “Damages are . . . an essential element in a claim under section 7(a) of the Trade-marks Act.” Manson J put it somewhat differently, and more accurately, in Excalibre: “It is settled law that evidence of actual or potential damage is a necessary element for finding liability under section 7" [286, my emphasis]. The difficulty with this proposition, particularly in Hughes J’s formulation, is that if resulting loss is an element of the tort, then the plaintiff is not entitled to an injunction to restrain false statements discrediting its wares, and perhaps not even its costs in the action, unless loss has already been suffered. This is a very strange proposition. Certainly, a plaintiff is not entitled to a monetary award unless it has proven its loss, but why should a plaintiff be helpless to prevent false statements from discrediting its wares simply because it had the good sense to act promptly? Surely it is better to prevent the loss from happening in the first place than to provide relief after the fact.

In the context of s 7(a) the proposition that damages are an element of the claim is apparently based, at least in part, on the SCC’s statement in S. & S. Industries Inc. v. Rowell [1966] SCR 419, 424, aff’g 44 CPR 260 (Ex Ct) cited by Hughes J in Supertek, [7], that:

The combined effect of ss. 7(a) and 52 of the Trade Marks Act is to create a statutory cause of action for which damages may be awarded if a person is damaged by false or misleading statements by a competitor tending to discredit the claimant's business, wares or services. The essential elements of such an action are:

1. A false or misleading statement;

2. Tending to discredit the business, wares or services of a competitor; and

3. Resulting damage

But this does not say that resulting damage is an essential element of the claim. It says only that it is essential to a cause of action “for which damages may be awarded.” Injunctive relief was not at issue in S. & S. Industries: it had not even been requested at first instance (44 CPR 260, 262), and as the SCC explained in the second sentence of the decision, the issue in the SCC was “whether, even though the appellant's patent was invalid, the respondent had succeeded in establishing a claim for an award of damages” (422, my emphasis).

Further, as the SCC explained, “The Act imposes no penalty by way of fine or imprisonment for a breach of this provision [s 7(a)], but s. 52 [now s 53.2(1)] provides as follows:

52. Where it is made to appear to a court of competent jurisdiction that any act has been done contrary to the provisions of this Act, the court may make any such order as the circumstances require including provision for relief by way of injunction and the recovery of damages or profits. . .

On a straightforward reading of both the Act and the SCC decision, the “breach of this provision” is established on the basis of two statutory elements (1) “a false or misleading statement,” (2) “tending to discredit the business, goods or services of a competitor.” The third element, a showing of actual loss is required only to establish an entitlement to the remedy of damages pursuant to s 52.

This is how Strayer J understood S. & S. Industries in his decision in Riello Canada Inc v Lambert (1986) 9 CPR(3d) 324 (FCTD). After finding that the statements in question were false and tended to discredit the wares of the competitor, he explained, at 339-40:

To establish liability for damages, of course, it is (as noted in the S. & S. case, supra at p. 197) necessary to prove some loss resulting from the wrongful act. As the question of proof of damages in this case has been left for determination on a reference, I have no basis upon which I could decide at this point that damages had occurred. This therefore represents a finding that the defendant has made false or misleading statements within the meaning of s. 7(a) of the Trade Marks Act and if, on a reference, actual loss by the plaintiff is proven, then such loss must be compensated by the defendant in the form of damages payable pursuant to s. 53 of that Act.
            . . .
It is not necessary to prove loss to obtain an injunction under s. 53, however, and on the basis of the defendant's past acts contrary to para. 7(a) of the Trade Marks Act, I will enjoin him from further such acts.

To emphasize, Strayer J granted an injunction without any basis for deciding that damages had occurred. This reaffirms that, in Strayer J’s view, resulting damage is not an element to a claim under s 7(a), but only to a claim for damages. In Excalibre the issue was not crucial. Even though the damages portion had been bifurcated, Manson J there was sufficient evidence for him to conclude that damages had been established [289], so the result would have been the same even if he had not considered damages to be an element. But Manson J’s approach nonetheless contrasts with Strayer J’s holding granting an injunction in the absence of any basis for finding that damages had occurred. No doubt there is a question as to whether a reference respeting damages should be ordered in the absence of any evidence of actual loss, but that question properly turns on the Federal Courts Rules regarding references, not on whether damages are an element of the claim.

As noted, Manson J stated that “It is settled law that evidence of actual or potential damage is a necessary element for finding liability under section 7" [285]. He relied on not on S. & S. Industries, but rather on BMW Canada Inc v Nissan Canada Inc, 2007 FCA 255 [35], where the FCA held that “Actual or potential damage is a necessary element in finding liability under paragraph 7(b),” and then went on to say that “A bifurcation order does not relieve the appellant from the necessity of proving the existence of damage as an element of his cause of action” [36]. To the extent that there is an inconsistency between Riello and Excalibre v API, there is also an inconsistency between Riello and BMW v Nissan; and, dare I say, between S. & S. Industries and BMW v Nissan.

This conflict can be easily resolved on the basis that BMW v Nissan dealt with s 7(b), while the other cases, including S. & S. Industries, all dealt with s 7(a). Manson J noted, “This statement [in BMW v Nissan] about the necessity of evidence proving damages has been extended to the analysis under 7(a),” citing Uview Ultraviolet Systems Inc v Brasscorp Ltd, 2009 FC 58 [240]. With respect, Uview provides nothing more than a bare assertion to the effect that the need to establish damages extends across all of s 7(1), and it is very doubtful that it was so intended. The paragraphs are substantively distinct. As the SCC noted in S. & S. Industries, 425, s 7(a) is based not on the common law, but on Article 10bis of the Paris Convention. In contrast, s 7(b) is a codification of the common law of passing off: Kirkbi AG v Ritvik Holdings Inc 2005 SCC 65, [23], and the primary authorities cited in BMW v Nissan dealt with the traditional elements in the common law of passing off. To hold that a traditional element in the tort of passing off has been somehow imported into a statutory provision with its basis in treaty, not the common law, simply by reason of both rules appearing as difference paragraphs of the same section, is not supportable. We might as well say that confusion in the mind of the public is a requirement under paragraph (a) because it is a requirement under paragraph (b). Therefore, there is no conflict between S. & S. Industries and BMW v Nissan; that BMW v Nissan held that damages is an element under s 7(b), in no way implies it is also an element under s 7(a).

While that is enough to deal with s 7(a), I can’t help but go on to note that BMW v Nissan is problematic even as applied to s 7(b). Again, it seems perverse that a plaintiff faced with wrongful competition from a rival using a confusing mark, should be denied injunctive relief because it has acted promptly to defend its rights. And that is not the law. The reference to “potential damage” is important. On this point the FCA cited Ciba-Geigy Canada Ltd v Apotex Inc [1992] 3 SCR 120, [32], citing Lord Oliver’s statement of the law in Reckitt & Colman Products Ltd. v. Borden Inc., [1990] 1 All ER 873 (HL) at 880, [1990] RPC 341. What Lord Oliver said is this (my emphasis):

Third, he must demonstrate that he suffers or, in a quia timet action, that he is likely to suffer damage by reason of the erroneous belief engendered by the defendant’s misrepresentation that the source of the defendant’s goods or services is the same as the source of those offered by the plaintiff.

This cannot possibly be construed as holding that proof of damage is required to obtain an injunction, as Reckitt was in fact a quia timet action, and the defendants had not marketed any of the infringing products (RPC 352). Not only was there no evidence of actual damages, there clearly was no actual loss, because no allegedly infringing product had been marketed. The trial judge nonetheless granted an injunction and (RPC 368) and this was affirmed both in the Court of Appeal and the House of Lords. Thus it is perfectly clear that damage is not an element of the tort of passing off, and by extension a claim under s 7(b), in the sense that it is not necessary to show actual loss in order to establish a right to an injunction. While the FCA in BMW v Nissan did note that “potential damage” was an element, it went on to say that “In this case, there was no evidence before the trial judge demonstrating damages and no finding of damages. It was not open to the trial judge to presume damages.” But the trial court in Reckitt did grant an injunction in the absence of any proof of damages, relying only on the fact that the proposed launch of the infringing product “would inevitably entail passing off” (RPC 367).

I would add that the decision under appeal in BMW v Nissan 2007 FC 262 was odd, in that MacKay DJ dismissed BMW’s claim under s 20 of the Trade-marks Act on the basis that there was no likelihood of confusion as to the source of the wares [FCA 5], while at the same time allowing a claim for passing off under s 7(b) on the basis that use of the defendant’s mark caused a likelihood of confusion as to the source of the wares [6]. The FCA reversed on the primary basis that there was no evidence to support a finding that the marks asserted by BMW had been used so create an association between the mark and the wares sufficient to make them unregistered marks within s 2 of the Act [28]. The remarks regarding the need to establish damages was perhaps a way of reinforcing this point, because evidently use of a confusing mark cannot lead to damages if consumers do not associate it with the plaintiff’s wares.

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