Grey Marketing – Still Not Black and White in Canada
April 6, 2017

by: Tomek Nishijima

Grey marketing, sometimes referred to as “parallel importation”, is the diversion of goods, originally intended for sale only in certain countries, to other countries where they were not intended to be sold. The goods are not counterfeit since they were legitimately marketed and acquired through legal channels abroad, but they are imported from one country and sold in another, typically at a lower price, without the permission of the international brand owner.

From the perspective of consumers and free competition, a grey market situation is not problematic in most cases.  Moreover, given the doctrine of exhaustion or the right of first sale, once the legitimate goods are sold anywhere in the world, the purchaser has the right to import or resell them.

However, from the perspective of the international brand owner, who may have to compete with its own products sold at a lower price, a grey market situation is far from desirable. For instance, it circumvents the normal distribution channels established by the owner resulting in diminished control over how its products are manufactured, produced, marketed (e.g. the packaging and labels), sold and guaranteed in a given jurisdiction. In certain jurisdictions, higher prices may even be justified in view of circumstances such as higher overhead, after-sale services, establishment of distribution network as well as the need to comply with local legislation and regulations. The product itself may also vary slightly from jurisdiction to jurisdiction to suit the local market, for instance, in terms of ingredients and/or chemical composition.

While in certain jurisdictions, such as the U.S., trademark law can be used to curtail grey marketing, in Canada, relying on trademark law has not been met with marked success. Canadian courts seem reluctant to extend a brand owner’s monopoly further than necessary and are mindful that the underlying purpose of trademark law is to protect consumers from confusion as to the source of goods, which is not necessarily an issue when dealing with grey market goods since by definition grey market goods are authentic and ultimately originate from the brand owner.

The Federal Court, however, has been somewhat receptive to the situation whereby a party can establish rights in Canada that are separate and apart from the corresponding rights in other jurisdictions. For instance, such could entail a plaintiff that is not merely a Canadian licensee of the international brand owner, but, as opposed to the parent or a holding company, also owns the relevant Canadian trademark rights. In H.J. Heinz Co of Canada Ltd v Edan Foods Sales Inc (1991), 35 C.P.R. (3d) 213, the Federal Court granted an interlocutory injunction to prevent the defendant from importing ketchup from the U.S. bearing the trademark HEINZ and produced by the plaintiff’s American parent. The plaintiff, the Canadian subsidiary, owned the Canadian trademark rights. In addition though, the evidence also showed that the plaintiff ran its own advertising in print media and television commercials, and furthermore, that its ketchup and packaging differed from that produced by the U.S. parent. The decision therefore leaves open the question as to the extent to which the Canadian trademark holder must distance itself from its parent in order to tackle grey marketing on the basis of trademark infringement.

In Mars Canada Inc v Bemco Cash & Carry Inc, 2016 ONSC 7201, the plaintiff, a wholly-owned, indirect subsidiary and the Canadian arm of the well-known global business operated by its ultimate U.S. parent Mars, Incorporated, sought to stop the defendants from selling in Canada genuine, legitimate MARS branded products purchased in the U.S. The plaintiff, which owned the Canadian trademark rights, sued one of the defendants, Bemco Cash & Carry Inc., in the Federal Court in 2005, but rather than having the Court resolve the issue, the defendant and a related party, GPAE Trading Corp., entered into a settlement agreement with the plaintiff whereby they agreed, inter alia, not to import into Canada, advertise, market, distribute, offer for sale or sell the plaintiff’s foreign MARS branded products.

Fast-forward to the present where GPAE Trading Corp. admitted that it has once again imported the plaintiff’s branded chocolate bars from the U.S. Although the defendants argued that the prior settlement agreement was void for being in restraint of trade, the Court maintained its validity and held in the plaintiff’s favor. The Court addressed the state of the law concerning grey marketing in Canada, but since the issue was ultimately framed and decided upon as a breach of contract, the decision does not resolve the question as to how trademark rights can be asserted to prevent sales in Canada of grey market goods.

The Court, however, pointed out that the grey market goods in question did not respect federal labelling requirements (e.g. the packaging did not display weight in metric units and was missing French language information as well as the required nutritional panel). It also noted that that while the plaintiff’s MARS brand products bear a “nut free” logo, the defendants’ products were not always made in nut-free facilities and did not bear the “nut free” logo. As such, the Court alluded to potential alternative causes of action (other than trademark infringement) to indirectly prohibit grey marketing.

The Mars Canada case is therefore a reminder to international brand owners that in Canada, the issue of grey marketing is not as settled as in other jurisdictions. It does appear though that having the Canadian trademark rights owned by an entity different from the owner of the foreign trademark rights is an important factor in the court’s consideration of the issue from a trademark law perspective. Indeed, based on the Supreme Court of Canada decision in Euro-Excellence Inc v Kraft Canada Inc, 2007 SCC 37, the distinction in ownership between Canadian rights and foreign rights would also appear to be relevant to the same issue from a copyright perspective.

For further information, please contact a member of our firm’s trademarks group.

The preceding is intended as a timely update on Canadian intellectual property and technology law. The content is informational only and does not constitute legal or professional advice. To obtain such advice, please communicate with our offices directly.

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