Federal Court strikes Competition Act and Trademarks Act claims relating to import and sale of grey goods in Canada

In Toyota Jidosha Kabushiki Kaisha (Toyota Motor Corporation) v. Marrand Auto Inc., 2024 FC 1776, the Federal Court considered a motion by the defendant to strike a statement of claim containing allegations in respect of grey market goods advanced under sections 52 and 74.01(1)(a) of the Competition Act, and sections 7(b), 7(c) and 22 of the Trademarks Act.

The Court struck the entirety of the statement of claim with leave to amend in accordance with the Court’s reasons. This decision provides guidance on how to frame allegations relating to the import and sale of grey goods in Canada.

Grey market goods, also known as “parallel imports,” are genuine goods legally sold in a foreign jurisdiction that enter the Canadian market without the approval of the trademark owner and/or an authorized Canadian distributor. The grey goods at issue were genuine Toyota parts bearing the TOYOTA trademark.

The defendant was the owner and consignee of the shipment containing the Toyota parts that was detained for suspected counterfeiting at the border. The plaintiff did not allege that the Toyota parts sold by the defendant were counterfeit or originally put into commerce without consent of the trademark owner.

The following is a summary of the claims advanced by the plaintiff and the Court’s decision with respect to each.

Sections 52 and 74.01(1)(a) of the Competition Act

The Competition Act claims were struck without leave to amend.

With respect to section 52, the Court noted that this section prohibits a person from knowingly or recklessly making a representation to the public that is false or misleading in a material respect. This section does not impose a duty to disclose, nor does failure to disclose a material fact, result in a breach of this section. There were no allegations in the claim the defendant had made false or misleading representations.

The section 74.01(1)(a) claim related to deceptive marketing practice was struck because breaches of this provision must be pursued by the Commissioner of Competition. They cannot be pursued under section 36 of the Competition Act.

Section 7(b) of the Trademarks Act

As articulated by the Supreme Court in Ciba-Geigy v Apotex Inc., the test for passing off under section 7(b) requires a plaintiff to establish:

1. The existence of goodwill.
2. Deception of the public due to a misrepresentation.
3. Actual or potential harm to the plaintiff.^[1]

The plaintiff advanced three theories to support its claim for passing off:

1. The way the goods are shipped.
2. That the goods were damaged in transit.
3. The absence of a Toyota warranty.

With respect to (i), the Court was not persuaded that non-compliance with shipping and handling requirements could amount to a breach of section 7(b). The plaintiff would have to show deception of the public, and the Court did not believe that customers would be aware of such requirements and would not know at the time of purchase if the manner of shopping was authorized or not. As such, this allegation was struck without leave to amend.

With respect to (ii), the Court found that it was at least arguable that damaged and unsafe car parts bearing TOYOTA branding, being presented to a consumer expressly or by implication as being the same quality as what would be sourced from a Toyota dealer, could constitute a misrepresentation under section 7(b). In reaching this conclusion, the Court relied on its earlier decision in TFI Foods,^[2] in which the misrepresentation resulted from the defendant affixing a label to grey goods that falsely stated it was the exclusive Canadian distributor.

Notwithstanding this finding, the Court noted that the claim as drafted did not include material facts alleging that the Toyota parts sold by the defendant were damaged in shipment and unsafe. Thus, the plaintiff was granted leave to amend to rectify the claim to include such material facts.

With respect to (iii), the plaintiffs’ allegations were found to be novel and not doomed to fail despite the Supreme Court’s decision in Seiko.^[3] Associate Justice Horne noted that the issue of implied warranty was not considered in Seiko, nor had the reasoning in Seiko been applied in such a manner. The Court therefore granted the plaintiff leave to amend to include allegations of misrepresentation based on implied warranty.

Section 7(c) of the Trademarks Act

The section 7(c) claims were struck without leave to amend.

Section 7(c) is a codification of the common law action of “passing off by substitution,” and therefore, deals with substitution of goods, not confusion. As held by the Court, this case did not involve the substitution of goods that originate from one source with goods that originate from another source. The Toyota parts at issue were genuine merchandise sourced from the original manufacturer.

The Court further noted that the plaintiffs were simply attempting to repeat the same allegations of misrepresentation relating to warrant and damage under section 7(c) as they had made with respect to 7(b). Such an approached was seen as running afoul of the presumption against redundancies in the legislation. Simply stated, section 7(b) already prohibits misrepresentations to consumers.

Section 22 of the Trademarks Act

Section 22 provides a cause of action for depreciation of goodwill attaching to a trademark. To be successful, a plaintiff must prove, on a balance of probabilities that:

1. The registered trademark was used by the defendant in connection with wares and services.
2. The trademark is sufficiently known to have significant goodwill attached to it.
3. The defendant’s use of the mark is likely to have an effect on that goodwill.
4. The defendant’s actions are likely to depreciate the value of the plaintiff’s goodwill, i.e. damage.^[4]

The plaintiff’s allegation of depreciation of goodwill related to the sale of damaged goods by the defendant. Specifically, the allegation was that Toyota parts damaged during transport would not be the same as authorized parts sold by the plaintiffs to consumers. The Court held that sale of damaged goods by the defendant was distinguishable from simple resale of undamaged goods, would constitute “use” of a trademark, and could depreciate goodwill associated with a trademark. As such, this allegation was not struck.

The plaintiffs had a separate depreciation of goodwill allegation relating to an implied warranty. The Court struck this allegation on the basis that whether a warranty was in place or not does not impact the quality of the good itself.