A Directive from the Federal Court of Appeal

The Federal Court of Appeal has firmly stated the law concerning the standard of review on appeals to it, the liability of directors and shareholders for corporate liability and awarding damages where the extent of infringement and the harm it caused is difficult to establish, Patel v. Dermaspark Products Inc. 2025 FCA 145.

The Federal Court decision Dermaspark Products Inc. v. Patel 2023 FC 388

The Federal Court decided that the appellants, the corporate operating entity and the sole shareholder and directing mind of the corporation (the Sole Shareholder) were liable, jointly and severally, in the amount of $45,000, representing statutory damages of $5,000 for copyright infringement, $20,000 for trademark infringement, passing off, depreciation of goodwill and unfair competition, and $20,000 for punitive damages. The Federal Court also awarded pre-judgment and post-judgment interest of 2% above the prime rate, compounded half yearly. 

The plaintiff (respondent) is the manufacturer and distributor of facial treatment products and a related machine regulated by Health Canada. The Federal Court found that the appellants used a counterfeit machine and counterfeit products—products said to be those of the respondents but were not—and counterfeit advertising contrary to the Trademarks Act, and the Copyright Act.

The Federal Court repeatedly found the Sole Shareholder, the main witness for the appellants, not worthy of belief. The Federal Court found that her evidence regarding the counterfeit machine she bought and used and her communications with the respondents could not be relied on because her evidence was inconsistent, evasive and evolving. Often findings of credibility of a key witness cast a long shadow over a case and, as far as the Federal Court was concerned, that was true in this case. 

The Federal Court found that the appellants knew or should have known that the machine they were using was counterfeit. They were aware of the respondents’ machine and its price but went to a third-party online site to buy another machine for one-fifth of the price of the respondents’ machine and should have been alerted to the risk this was a counterfeit product. The Sole Shareholder was reckless in her purchase and ignored red flags that would have alerted a reasonable buyer to inquire or to not purchase the machine. She was aware of the price of the respondents’ genuine products, and she wanted them to enhance the services to her clients but did not want to pay that price.

The Federal Court noted the damages were not the sort that could be proven concretely, such as by looking at receipts. They include more intangible things but important things, such as the respondents’ reputation and goodwill. Using counterfeit machines and counterfeit products, alongside the distribution of literature purporting to be that of the respondents, had the potential to harm reputation and goodwill. The Federal Court found such harm present and added that it was difficult to determine the extent of infringement and the harm it caused.

The Appeal

The Standard of Review

To succeed on appeal, the appellants must show an error in law, an error in an extricable question of law on an issue of mixed fact and law, or palpable and overriding error on a question of fact or a factually suffused question of mixed law and fact.

Appellate courts bandy around the phrase “questions of mixed fact and law” but seldom define it. Questions of mixed fact and law are those where appellate courts apply the law to the facts including discretionary questions where courts apply legal standards to a set of facts.

When legal questions predominate or fundamentally taint a question of mixed fact and law this is “an extricable question of law”. When there is an extricable question of law, the appellate court can examine that question of law and decide it on a standard of correctness—i.e., with no deference at all to the trial court.

Where legal questions are not extricable, i.e., do not predominate or fundamentally taint the question of mixed fact and law—where the question of mixed fact and law is factually suffused or the facts predominate—the appellate court can interfere only for palpable and overriding error.

Palpable means obvious and overriding means capable of changing the result of the case. As a practical matter, these two things seldom happen together. Trial judges rarely make obvious factual errors that can change the result of the case. Reversal on this ground is rare. 

Palpable and overriding error is a highly deferential standard of review. When arguing palpable and overriding error, it is not enough to pull at leaves and branches and leave the tree standing. The entire tree must fall.

Damages

The appellants argued that the respondents did not prove damages and, alternatively, the Federal Court erred in its award of damages. The Federal Court made findings concerning damages.

These findings are factual in nature, cannot be set aside based on the evidentiary record and the standard of palpable and overriding error.

As a matter of law, the Federal Court correctly concluded that where the extent of infringement and the harm it caused is difficult to establish, lump sum damages (sometimes misdescribed as nominal damages), estimated as best as one can, may be appropriate.  Damages of this sort can only be awarded where there is some evidence on which it can be concluded that the claimant sustained damage and some evidence as to the nature of the damage. That standard was more than met here. 

The Personal Liability of the Sole Shareholder

The Appellants argued that the Federal Court ignored key evidence which was a palpable and overriding error. This argument was dismissed.

As a matter of law, the mere non-mention of evidence, without more, does not qualify as palpable and overriding error. Trial courts benefit from a rebuttable presumption they considered and accessed all the material placed before them. Also, an appellate court must remember the task of a first-instance court in drafting reasons. Reasons are best when they distil and synthesize, not when they try to be encyclopedic in recording every syllable of a multi-day trial.

The Federal Court was painstaking in its examination of the relevant evidence and made clear factual findings amply supported by the evidence, much of it set out in its reasons for judgment.

The leading case in the Court on the possible liability of directors and shareholders for a corporate liability is Mentmore Manufacturing Co. v. National Merchandise Manufacturing Co. (1978), 40 C.P.R. (2d) 164 (F.C.A.). The general rule is that the Court is bound by an earlier decision on point and must follow it. Although the decision was decided nearly a half-century ago, it continues to be applied without question in the Federal Court system.

Mentmore established the following test:

…there must be circumstances from which it is reasonable to conclude that the purpose of the director or officer was not the direction of the manufacturing and selling activity of the company in the ordinary course of his relationship to it but the deliberate, wilful and knowing pursuit of a course of conduct that was likely to constitute infringement or reflected an indifference to the risk of it.

A review of the case law shows that Mentmore remains good law. The Federal Court of Appeal has not modified or qualified Mentmore in any way. Mentmore has not been overtaken by later Supreme Court authority and Mentmore is consistent with the principles set out in later decisions of the Supreme Court of Canada.

The Federal Court did not misunderstand the Mentmore test and application of the test to the facts of this case. This was a question of mixed fact and law suffused by facts and the Federal Court did not commit a palpable and overriding error.  It relied on an entire constellation of facts that were admissible under the Mentmore test.

Comment

It remains to be seen what prompted this vigorous response from the court other than the it’s statement that many young practitioners graduated from law schools that did not instruct them on the standard of review.

It would have been helpful to have mentioned the decision of the UK Supreme Court which refused to follow Mentmore see Directors Liability for Corporate Infringement  Directors Liablity for Corporate Infringement but it does not seem that this decision was brought to the attention of the Court.

If you have questions, please contact me at mckeown@gsnh.com 

John McKeown

Goldman Sloan Nash & Haber LLP

480 University Avenue, Suite 1700 

Toronto, Ontario MSG 1V2

Direct Line: (416) 597-3371

Fax: (416) 597-3370

This article is of general nature and is not intended to provide specific legal advice as individual situations will differ. Specialist advice should be sought about your specific circumstances. 

A version of this article originally appeared in the Law360 Canada published by LexisNexis Canada Inc.