False Claim of Exclusive Distributorship results in Injunction and Forced Recall of Grey Market Goods

In Canada, “grey market goods” (also known as “parallel imports”), are genuine goods that enter the Canadian market through a trade channel or other location without the approval of the foreign manufacturer or its authorized Canadian distributor(s). Assuming such goods are genuine, the sale in Canada of grey market goods has been held not, in itself, to infringe a registered trademark or constitute passing off. Put differently, because Canadian courts have adopted the law of “international exhaustion”, grey market goods may typically be imported and sold in Canada without violating the manufacturer’s or distributor’s trademark rights in Canada.

However, in a recent Federal Court decision, the Court granted a manufacturer and its distributor an interlocutory injunction preventing a local Scarborough, Ontario grocery wholesaler from selling genuine goods that were re-labelled by the wholesaler to falsely claim it was the “exclusive distributor in Canada” when it was not.

The Backstory

I-MEI is a Taiwanese food manufacturer, which makes dry packaged desserts, as well as rice balls, beverages, and frozen treats. TFI Foods is the exclusive Canadian distributor for I-MEI, having spent about a decade investing in its distribution relationship and in marketing and promoting I-MEI’s product lines in Canada.

In mid-June 2020, TFI discovered eleven retailers in suburban Toronto were carrying genuine I-MEI products bearing a printed label that falsely identified Every Green International as the exclusive distributor for the I-MEI products in Canada. Every Green is a grocery wholesaler focused on Asian food products. I-MEI has never authorized Every Green to distribute its products in Canada, nor to place the labels at issue on the I-MEI products.

Manufacturer and Exclusive Distributor seek Injunction

After serving Every Green with a Statement of Claim, I-MEI and TFI brought a motion for an interlocutory injunction to which Every Green did not respond. Despite its failure, the Court was required to ensure that granting the injunction was just and equitable in all the circumstances. It concluded it was.

In order to obtain an interlocutory injunction,  a conjunctive three-part test must be satisfied, namely (i) there be a “serious issue to be tried” (i.e. that the moving party’s case be neither frivolous nor vexatious, which is to be assessed based on the evidence filed on the motion), (ii) irreparable harm will be suffered if the injunction is not granted (which must be proved by clear and non-speculative evidence), and (iii) the balance of convenience favours granting the injunction.  The Court held that I-MEI and TFI had satisfied these requirements and granted the injunction. Several key holdings are discussed below.

Hearsay Evidence Acceptable on a Motion

The Federal Courts Rules require affidavits be confined to facts within the affiant’s knowledge. However, the Court held that on this injunction motion there was no reason to draw an adverse inference from the fact that one affidavit was sworn by TFI’s owner and President that included information from a TFI sales representative and individuals at I-MEI who could have sworn their own separate affidavits. Rather, the Court held that “such facts on information and belief are acceptable on a motion”.

False statements may constitute a misrepresentation for passing off

In support of the injunction, TFI and I-MEI relied on sections 7(a), 7(b), 19 and 22 of the Trademarks Act, as well as sections 36 and 52 of the Competition Act. The Court focussed on section 7(b) of the Trademarks Act and concluded that TFI and I-MEI had established a serious issue to be tried, namely that a false statement can constitute passing off if it causes or is likely to cause consumer confusion.

The Court held that TFI’s and I-MEI’s evidence readily established the existence of valid registered trademarks owned by I-MEI, and the existence of goodwill associated with those trademarks. As I-MEI was a party to the action and motion, it did not consider whether TFI shared “in the reputation and goodwill” associated with I-MEI’s trademarks. The Court concluded that by Every Green affixing its label falsely claiming to be the “exclusive distributor” of I-MEI’s products, its false statement pertained to I-MEI’s trademark, constituted a misrepresentation for passing off under section 7(b) of the Trademarks Act, and was likely to cause consumer confusion. The Court also noted there was a serious issue that the misrepresentation was deceptive both to retailers and the purchasing public.

As TFI and I-MEI had not pleaded section 7(a) nor that Every Green’s statements tend to “discredit their business, goods or services”, the Court could not consider the section 7(a) allegation as a serious issue for the purposes of the injunction test. The Court also dismissed the claims based on the Competition Act, because the Federal Court of Appeal recently held that a violation of the “Act provides a statutory remedy of compensation for loss, damage, and costs, but not for equitable remedies” and that “its reasoning would appear to apply equally to the equitable remedy of an injunction.”

Harm to the reputation and goodwill in a trademark is irreparable

The uncontested evidence on the motion was that Every Green’s conduct resulted in retail customers questioning why both TFI and Every Green were claiming to be I-MEI’s exclusive distributor, and retailers were purchasing product from Every Green based on the false representation that Every Green is the exclusive distributor for Canada. The Court concluded that in the absence of evidence to the contrary, it was satisfied I-MEI would suffer irreparable harm to the reputation and goodwill in the I-MEI trademark by the continued presence in the market of false labels on I-MEI products naming Every Green as I-MEI’s exclusive Canadian distributor.

The Court also accepted that the reputational harm is heightened by inaccuracies in the ingredient list and nutritional facts of Every Green’s labels, which might reflect poorly on the quality of I-MEI’s products and business. The Court was less interested in the loss of sales and market share that TFI would experience, instead focussing on the harm to I-MEI.

Where your false statements cause you economic harm, you have no one to blame but yourself…

The Court noted that there was no evidence of any harm that Every Green would suffer if the injunction is granted and it was prevented from falsely holding itself out as I-MEI’s exclusive distributor. As any resulting economic harm Every Green might suffer from the injunction would result from its own conduct in making the false “exclusive distributor” statements, the balance favoured TFI and I-MEI.

The Takeaway

While the Court’s reasoning is consistent with prior cases, the Court granted a somewhat uncommon remedy. In particular, it was not prepared to give Every Green the right to re-label and then sell through the “grey market” products, but rather ordered Every Green to immediately stop sales and recall all products bearing the offending label from all Every Green distributors and retailers. As Every Green’s sales to date occurred based on its misrepresentation of exclusive distributorship, the Court required all unsold or recalled products be preserved subject to agreement with TFI and I-MEI or a further Court order. While Every Green could appeal the decision, as it did not respond to the injunction motion, it appears unlikely that an appeal will be filed.