5 Mar
2014

Counterfeiters face stiff penalties

Gowling WLG Canada

Co-published


Every few years the Office of the US Trade Representative (USTR) publishes the Special 301 Report, which reviews the global state of IP rights protection and enforcement and ranks countries depending on how effectively the USTR believes their laws allow for the protection and enforcement of IP rights. In 2011 the USTR put Canada on the Priority Watch List – comprising the lowest-ranking countries – and commented that the “United States encourages Canada to provide for deterrent-level sentences to be imposed for [IP rights] violations”. 

After the passage of the Copyright Modernisation Act in 2012 (which amended the Copyright Act) and the introduction of the first Combating Counterfeit Products Act Bill in Spring 2013 (Bill C-56), the USTR downgraded Canada to the Watch List in the 2013 Special 301 Report and stated that the:

United States supports Canada’s commitment to address the serious problem of pirated and counterfeit goods entering our highly integrated supply chains and urges Canada to expand the legislation to also provide authority for its customs officials to take action against goods in-transit."

The recent jurisprudence summarised below strongly suggests that Canada currently provides an increasingly high level of deterrence for IP rights violations. But is it enough? Coupled with legislative changes to the Copyright Act in 2012 and the further legislative changes on the horizon, it will be interesting to see where Canada ranks in the next Special 301 Report.

Decisions
Recently, the Newfoundland and Labrador Court of Appeal sentenced a counterfeiter to two months in prison for selling counterfeit products. Shortly before that, the Federal Court of Canada awarded Twentieth Century Fox Film Corporation punitive damages of C$10 million against a defendant offering entire episodes of The Simpsons and Family Guy for viewing online. 

Criminal case
In the recent criminal case of R v Strowbridge (2014 NLCA 4) the Newfoundland and Labrador Court of Appeal sentenced Mr Strowbridge to a two-month custodial sentence for selling counterfeit brand name razor blades, sports apparel bearing counterfeit insignia and counterfeit hair styling flat irons. Strowbridge was observed selling the items from a vehicle situated on the side of the road in Paradise, Newfoundland, and C$500 worth of items were seized. The sentencing judge noted that Strowbridge had previously been observed by police selling similar counterfeit items on several occasions and had been warned by the police to discontinue. In addition, in 2009 a representative of the authorised distributor of the flat irons had observed Strowbridge selling counterfeit flat irons and warned him to stop. 

Strowbridge was sentenced for seven offences, including:

  • selling copyrighted products in violation of Section 42(1)(b) of the Copyright Act, for which he received a sentence of 180 days and a fine of C$5,000; and
  • selling trademarked goods without authority in violation of Section 408 of the Criminal Code, for which he received 180 days' imprisonment concurrent to his sentence for the Copyright Act violation. 

Strowbridge was also sentenced for two counts of fraud (unrelated to the IP rights infringements) and breaches of prior probation orders. Strowbridge appealed the sentences, arguing that the length of imprisonment and size of the fine for his IP-related offences were disproportionate to his activities. 

The appeal court agreed, quashing the C$5,000 fine and reducing the six-month sentence to two months. In reducing the sentence, the appeal court noted that there were no reported decisions in the province of Newfoundland in respect of the trademark and copyright offences and went on to review decisions from other jurisdictions, including Ontario, British Columbia and New Brunswick. After reviewing the jurisprudence, the appeal court noted that the sentences in similar cases often did not impose a custodial sentence, even when the sales of counterfeits were much higher than those seized from Strowbridge, and that the typical sentences included conditional sentences and/or imposition of fines. In reaching its conclusion, the appeal court also noted that the value of the goods seized was approximately C$500 and that Strowbridge’s operation appeared to be “marginal and unsophisticated”. The appeal court distinguished between Strowbridge’s operation and those of other offenders that import and/or manufacture counterfeit products in large quantities and then sell the products in established commercial marketplaces rather than from the trunk of a car on the side of a highway.

The appeal court reduced the sentence for the trademark and copyright offences to two months’ imprisonment, to be served consecutively to the sentences for fraud and breach of probation orders. The appeal court also allowed Strowbridge’s appeal of the C$5,000 fine on the basis that a fine is appropriate only if the offender can pay (Section 734(2) of the Criminal Code), and Strowbridge did not have the resources to pay the fine. From the decision, it appears that if Strowbridge had had the funds to pay the fine, it would not have been quashed on appeal. 

The decision is a useful reminder that criminal offences do exist for counterfeit activity and that Canadian courts are prepared to convict offenders.  However, it appears that the majority of convictions result in a fine and/or conditional sentence, rather than a custodial sentence, which may reduce the overall level of deterrence for such offences.  It is also unknown from the R v Strowbridge decision to what extent the sentences for fraud and the breach of probation orders influenced the sentencing judge and the Court of Appeal in imprisoning Mr. Strowbridge.  

While the appeal court in R v Strowbridge was prepared to impose a custodial sentence, it is clear that the rate of convictions in Canada is low and disproportionate to the extent of counterfeiting activity. In this respect, it is noteworthy that the Combating Counterfeit Products Act (Bill C-8, which is almost identical to the earlier Bill C-56), which is currently progressing rapidly through the legislative process, includes provisions to amend the Trademarks Act to introduce new criminal offences for dealing in or with counterfeit goods. The penalties include fines of up to C$1 million and custodial sentences of up to five years. The additional offences are likely to provide broader enforcement powers for law enforcement agencies. As a result, the criminal conviction rate may increase in the future and more severe punishments are likely to provide an extra level of deterrence. 

Furthermore, the Combating Counterfeit Products Act will create a system to allow trademark and copyright owners to file a request to the Canadian Border Services Agency to detain commercial shipments suspected of containing counterfeit goods. The absence of such a system in Canada was highlighted by the USTR in the 2013 Special 301 Report. 

Civil damages award
The Federal Court of Canada recently issued a civil damages award in the Twentieth Century Fox Film Corporation decision. In that case, Twentieth Century Fox Film Corporation asserted that the defendant, Mr Hernandez, offered at least 700 entire episodes of The Simpsons and Family Guy for viewing on his websites. The Federal Court awarded Twentieth Century Fox C$10 million in statutory damages, C$500,000 in punitive and exemplary damages and C$78,575 in costs (plus interest). In addition to the monetary award, the court issued an injunction restraining Hernandez from further infringing Twentieth Century Fox’s copyright in The Simpsons and Family Guy, and ordered him to deliver up to Twentieth Century Fox all copies of the programmes and related documents and materials in his possession. 

Comment
These recent court decisions and the efforts being made by the federal government to amend IP rights legislation indicate that Canada is likely to become a more challenging jurisdiction for counterfeiting activities in the future.

For further information please contact:

Gowling WLG Canada

This is a co-published article whose content has not been commissioned or written by the IAM editorial team, but which has been proofed and edited to run in accordance with the IAM style guide.