False or Misleading Statements that Discredit a Competitor

Pleadings define each party’s case. They frame the litigation and set out the material facts said to support the causes of action or defences presented. A party may move to strike an opposing pleading where it fails to disclose a reasonable cause of action or a tenable defence. 

The Facts

HBI Canada manufactures and wholesales smoking accessory products. It distributes its products (the “HBI Canada Products”) to authorized distributors, resellers, dealers, and retailers, who in turn sell them to Canadian consumers. Smoke Arsenal is also a wholesale distributor of smoking accessory products. 

HBI Canada commenced an action against Smoke Arsenal, alleging infringement of its copyright, trade dress, and trademark rights through the importation, manufacture, sale, and distribution in Canada of smoking accessory products using “HBI” in association with products that purported to be HBI Canada Products when they were not.

Smoke Arsenal delivered a statement of defence asserting, among other things, misuse of copyright. It also filed a counterclaim alleging that HBI Canada had sent letters to Smoke Arsenal’s customers containing false or misleading statements contrary to subsection 7(a) of the Trademarks Act. 

Subsection 7(a) of the Trademarks Act prohibits any person from making a false or misleading statement tending to discredit the business, goods, or services of a competitor. A statement may contravene the provision even if it is merely misleading without being false. Neither malice nor knowledge of falsity is required to be shown. 

HBI Canada moved to strike portions of Smoke Arsenal’s pleadings on the basis that they failed to plead sufficient material facts to disclose a reasonable defence or counterclaim. An Associate Judge of the Federal Court held that there were insufficient material facts pleaded to support the misuse of copyright defence and struck it with leave to amend. The motion was dismissed in relation to the alleged false or misleading statements. Zoe International Distributing In. v. Smoke Arsenal Inc. 2024 FC 2087 (CanLII). HBI Canada appealed to a Judge of the Federal Court. 

The Appeal

The appeal concerning the misuse of copyright defence was dismissed. Zoe International Distributing Inc. v. Smoke Arsenal Inc. 2026 FC 792. The Associate Judge correctly concluded that a novel but arguable defence should not be struck at the pleadings stage. A recent decision of the Federal Court of Appeal addressing the same defence supported that conclusion. 

The appeal on the false or misleading statements issue was allowed, although Smoke Arsenal was given leave to amend again. The Judge said that subsection 7(a) of the Trademarks Act has three essential elements: (1) a false or misleading statement; (2) a tendency to discredit the business, wares, or services of a competitor; and (3) resulting damage. The provision, however, is limited to false or misleading statements made about a trademark or other intellectual property owned by the claimant. 

There is an important difference between “discrediting” a claimant’s intellectual property and making statements “about” the intellectual property. A claim under subsection 7(a) of the Trademarks Act requires the latter. The impugned letters sent by the plaintiff to the defendant’s customers contained, at most, statements about the defendant’s businesses. While a negative statement about a business may also have the effect of discrediting associated intellectual property, that is insufficient to bring the claim within the Trademarks Act. Subsection 7(a) must be construed narrowly so that it respects the constitutional division of powers between Parliament and the provincial legislatures. 

Comment

The decision is a useful reminder that pleadings must set out the material facts necessary to support the claim or defence advanced. Otherwise, the litigation may become sidetracked by disputes over the sufficiency and form of the pleadings rather than the merits. 

We can assist organizations with litigation concerning trademarks and copyright and help avoid the type of dispute that occurred in this case.

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John McKeown

Loopstra Nixon LLP.  

130 Adelaide St W Suite 2800Toronto, Ontario, M5H 3P5Canada

 jmckeown@LN.Law

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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. Copyright © John Mckeown, All rights reserved. To unsubscribe to the IP Update please send me an email at jmckeown@Ln.Law

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