After a long and convoluted history of litigation between the parties, the Federal Court of Appeal granted an accounting of profits to the applicant for passing off by the defendant. The profits were to be determined by way of a reference. In keeping with the history, the reference was hotly contested. Group III International Ltd. v. Travelway Group International Ltd. 2024 FC 119
An Accounting of Profits
The parties agreed that the issue to be revolved on the reference was the profits owed by the respondent arising from the sale in Canada of all goods bearing the infringing trademarks and their variants from the date of first sale to the date of last sale. The critical question on the reference was not whether respondent was at fault, but rather whether the respondent made any profits because of actual confusion created by its conduct.
An award of damages differs fundamentally from an accounting of profits. A claim for damages focuses on the plaintiff’s loss while an accounting of profits looks at the benefit or advantage that a defendant obtained from its infringing activities. The Judge at first instance declined to grant the applicant’s request for a reference on damages and chose instead to award an accounting of profits. Any damages that may have been sustained by the applicant as a result of passing off, such as depreciation or damage to the value of goodwill in its trademarks or unfair trading on its reputation, were not relevant.
The Supreme Court of Canada has laid out a three-step test to be applied in an accounting of profits. At step 1, the court should calculate the actual profits earned by selling the infringing products. At step 2, the court should try to isolate the value of the infringement. At step 3, the court should subtract the value of the infringement from the actual profits to determine the amount to be disgorged.
The full cost method is the appropriate approach to be applied to determine the costs to be deducted in an accounting of profits, “absent some exceptional or compelling circumstance or persuasive expert evidence to the contrary in a particular case.”
If no benefits were unlawfully gained because of the use of trademarks found to be confusing, there are no profits to be disgorged. The rights holder only has the right to that part of the infringer’s profit which are causally attributable to the infringed right. In an accounting of profits, it must first be shown that the infringer’s profits are causally related to the acts of infringement, and then the appropriate quantification or apportionment of profits attributable only to the infringing activity must be determined.
The applicant is required to prove only to the respondent’s revenue from sales of the infringing products. The burden then shifts to respondent to establish, based on the usual evidentiary standard of a balance of probabilities, which part of its profits from the sales of the infringing products was not made because of the misrepresentation.
Causality
The respondent relied on the evidence of two witnesses to support its claim that their infringement had little to no effect on customers when deciding to purchase the infringing products. The applicant filed conflicting evidence, and the experts disagreed on the importance of brands and logos at the purchase stage of the products.
The experts agreed that goods can generally be categorized based on four product types: convenience, shopping, speciality, and unsought goods. The categorization of products depends on multiple factors, including branding strategy. One must look at the entire product to determine where it falls on the spectrum of convenience good to specialty product.
The Judge did not accept the respondent’s expert opinion that “the impact of brand elements such as logos, and in particular more abstract logos like symbols, is not a driver of purchase decisions for shopping goods such as luggage and travel accessories”. This was, as stated by the applicant’s expert, an implausible proposition. This broad and sweeping conclusion flies in the face of generally accepted principles of marketing and the purpose of trademark protection. There can be little doubt that some people buy goods based on logos.
The Judge accepted the evidence of the respondent’s expert that the consumer decision-making process and the level of consumer purchase involvement will depend heavily on the product type and that the infringing products fall under the category of shopping goods. The opinion that the impact of brand elements such as logos and symbols on sales of shopping goods is low compared to factors such as price, perceived quality and product placement seemed to the Judge to be sensible and well-supported by the academic marketing literature relied on.
Confusion must be determined by reference to persons who are likely to purchase these wares. Here over 80% of sales of the infringing products were made through Walmart retail stores.
The Walmart buyer responsible for the luggage and travel accessories department testified. She stated that brand was not a consideration for her when purchasing inventory to sell because Walmart’s data showed that brand was not a consideration for consumers shopping at their stores. The typical Walmart customers have “restricted disposable income” and are “very price conscious.” The Judge was ready to infer that the use of the infringing marks and its false claims of Swiss-ness had little effect on the decision-making of the great majority of customers who purchased luggage at Walmart during the accounting period at issue. Few were misled as to the source of the goods. Her evidence confirmed one of the main conclusions of the respondent’s marketing expert. The applicant called no evidence to rebut this evidence.
Apportionment
The requirement for a causal link between infringement and profit typically requires that the profit be apportioned between that which is attributable to the infringement and that which is not.
The respondent called an accounting expert specialized in the field of assessing monetary compensation, particularly in intellectual property cases. His expertise extended to calculating profits made as a result of an infringement.
The respondent established, on a balance of probabilities, that a reasonable estimate of the degree of causation between the sales of the infringing products at Walmart and the respondent’s profits fell within a range of 5% (based on the evidence of the respondent’s marketing expert and the Walmart buyer) and 25% (based on evidence of the respondent’s accounting expert.) The Judge accepted the midpoint of 15%. In addition, given evidence of the respondent’s marketing expert, the impact of brand elements on sales of shopping goods is low, the Judge said the estimate of 15% should also apply to sales of the Infringing Products at other stores.
The Respondent’s Costs
The parties filed conflicting expert reports concerning the calculation of the respondent’s profits and whether at the full cost method should be applied. The Judge concluded that full cost approach applied.
The Judge also made rulings concerning specific expenses. He remitted the final calculation, to be done in accordance with his decision, to the parties and their accounting experts.
Comment
When the respondent decided to infringe the applicant’s trademarks it must have thought it was commercially advantageous to use the marks. The respondent was a relatively sophisticated seller who would understand the market for its goods and how to effectively market them.
In the subsequent accounting of profits, the respondent took the implausible position that the impact of brand elements such as logos, and in particular more abstract logos like symbols, was not a driver of purchase decisions for shopping goods such as luggage and travel accessories”.
Perhaps more weight should have been given to what the respondent did rather than what it said after the fact.
Comment
Section 45 provides a summary procedure for clearing “dead wood” from the Register of Trademarks. It is not intended to resolve contentious issues between competing commercial interests.
If you have questions, please contact me at mckeown@gsnh.com
Goldman Sloan Nash & Haber LLP 480 University Avenue, Suite 1600 Toronto, Ontario M5G 1V2 Direct Line: (416) 597-3371 Fax: (416) 597-3370 Email: mckeown@gsnh.com
These comments are of a general nature and not intended to provide legal advice as individual situations will differ and should be discussed with a lawyer.
A version of this article originally appeared in the Law360 Canada published by LexisNexis Canada Inc.
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