Exhaustion of patent and trademark rights in Canada

Do you know what the 'exhaustion' of intellectual property rights means? Or that the law in this area governs whether the import of genuine IP-protected goods is lawful or not?

If your business is involved in or interested in the movement into Canada of goods protected by an intellectual property right, then you need to understand what the law on 'exhaustion' of the relevant right is in Canada. In fact the law on exhaustion depends on which intellectual property right is concerned.

The term exhaustion refers to the law governing whether an intellectual property right (such as a registered trademark or a patent) can be enforced by way of an infringement action, against the sale of genuine goods originally placed on the market in another country and then parallel imported into Canada.

Canada's patent and trademark legislation does not provide for a statutory defence called 'exhaustion' in the way that is found in many other countries. Rather, in Canada, when we refer to exhaustion we use the term in a generic way, the legal questions at play being slightly different: generally speaking the principles governing the assessment of infringement are applied irrespective of the geographical origin of the goods. This is a 'common law' approach, with principles very much in keeping with those applied historically in the UK (indeed still today, to some extent), and in Australia. The approach is international in nature but potentially subject to restrictions on the facts.

Canada's 'exhaustion' regime therefore governs (among other things) rules on parallel imports of genuine goods into Canada - what genuine goods can be imported and from where. Here is some more detail:

Patents

In Canada, there is no statutory provision addressing the concept of "patent exhaustion". Nonetheless, the common law in Canada supports the basic principle that a purchaser of a patented product acquires an implicit right to use the product without restriction.^[1] Indeed, Canadian courts have equated the rights acquired by a purchaser of a patented product with an implied license.^[2] There are, however, exceptions.

In particular, when a patentee sells a patented product, ownership of that product is transferred to the purchaser. Accordingly, subject to any agreed upon restrictions, the purchaser has the exclusive right to do as it wishes with the product without fear of infringing the patent, and the patentee no longer has any rights with respect to that product.^[3] Where there are restrictive conditions imposed by a patentee on a purchaser or licensee, those conditions may run with the products if they are brought to the attention of the purchaser at the time the product is acquired by the purchaser.

The key question, therefore, is whether the product was sold with or without restrictions. If no restrictions were imposed, the purchaser acquires general property rights over the product and the patentee's rights are effectively exhausted with respect to that product. Where the patentee does not communicate to purchasers any restrictions on the use of its products that would override the implicit right or license to use, the purchaser is free to proceed to use the product without restriction.^[4]

Practically speaking, it is presently open to a patentee to assert patent infringement in the event that a purchaser of the patentee's products violated any applicable restrictions. Such a patent infringement assertion would be in addition to any contractual claims the patentee may possess.^[5]

One additional and somewhat related issue under Canadian law is the distinction that is drawn between "repair" of a patented product, and "reconstruction" or "remanufacture" of a patented product. A lawful purchaser of a patented product is permitted to repair that product; however, such a purchaser will infringe the patent where the "repair" amounts to a reconstruction.^[6] Thus, even where a purchaser lawfully acquires a product from a patentee without any restrictions, further activities by the purchaser may constitute patent infringement if the further activities are remanufacturing in nature.

Trademarks

In Canada, the Trademarks Act does not expressly provide for exhaustion, but the courts nevertheless apply it as a principle in their judgements. Under the Act, the owner of a trademark registration covering "hiking boots", for example, is protected against third parties also selling in Canada hiking boots branded with the same mark (or a trademark that is confusingly similar). However, once a specific pair of boots bearing the mark has been sold by the brand owner to its initial buyer (e.g. the brand owner's wholesaler), Canadian courts do not generally view subsequent resale of that pair of boots by the initial buyer or third parties as offending the brand owner's trademark rights,^[7] even if the resale is carried out against the brand owner's wishes.^[8]

Further, Canadian courts generally follow the principle of international exhaustion. This means that even if the initial sale of a pair of hiking boots by the brand owner occurred outside of Canada (e.g. in the US), exhaustion still usually applies when that specific pair of boots is imported into and resold in Canada. As a result, it can be difficult to prevent third parties from buying a brand owner's authentic / branded products in other countries and then reselling them in Canada without authorization. The courts do not view these "grey market" goods / "parallel imports" as inherently offensive to trademark rights because the goods involved are authentic.^[9]

However, even reselling authentic goods can give rise to liability or injunctive relief if done in a way that is deceptive to consumers. For example, consumers in Canada might associate the brand owner's mark with insulated hiking boots for use in cold weather, if that were the type of product the brand owner had historically sold in the Canadian market. If an unauthorized third party started selling in Canada grey market boots bearing the mark — but designed and intended for use in a warmer climate — without alerting consumers to the differences between the two types of boot,^[10] the brand owner might credibly seek to restrain this behaviour by arguing that consumers are likely to be deceived into buying boots that are materially different from what they wanted and needed.

Another form of deception that can give rise to liability is if the reseller falsely conveys to consumers that it has a relationship with the brand owner such as being its authorized or exclusive distributor. In a recent decision,^[11] the Federal Court of Canada found that falsely claiming to be a brand owner's exclusive distributor can constitute passing off (even though the goods themselves were authentic); in that case, the Court found that the defendant's misrepresentation had deceived consumers and harmed the brand owner's reputation.

There are additional resale situations where trademark exhaustion may not apply, such as where the reseller incorporates the brand owner's product into an entirely new product but the brand owner's trademark remains visible; this can give rise to a finding of infringement if consumers perceive the new product (which does not originate from the brand owner) as being branded by the mark, resulting in confusion as to the source of the new goods.^[12] Therefore, while Canadian courts generally follow the principle of exhaustion, it does not offer unauthorized resellers a bulletproof vest against trademark claims in every situation.

Footnotes

[1] Distrimedic Inc v Dispill Inc, 2013 FC 1043 at para 226.
[2] Signalisation de Montréal Inc. v Services de Béton Universels Ltée, [1992] FCJ No 1151 (FCA). More recently, see Bombardier Recreational Products Inc v Arctic Cat Inc, 2020 FC 946 at para 39.
[3] Eli Lilly & Co v Novopharm Ltd, [1998] 2 SCR 129.
[4] Distrimedic Inc v Dispill Inc, 2013 FC 1043 at para 226.
[5] It is notable that the Canadian approach is in contrast to the findings of the Supreme Court of the United States in Impression Products, Inc. v. Lexmark International, Inc., 137 S.Ct 1523 (2017) where it was held that it did not matter whether the patentee imposed restrictions on post-sale use – the patentee's patent enforcement rights were exhausted and its only potential recourse was by way of a breach of contract claim.
[6] MacLennan v Produits Gilbert Inc, 2008 FCA 35 at para 14. This case involved a patented combination of a saw tooth and tooth holder for attachment to a circular saw disc. The saw tooth was attached to the tooth holder in such a way that it could separate from it in the course of normal wear and tear before the disc was damaged. In concluding that there was infringement, the Court held that the accused infringer's replacement of a key element of the patented combination, namely, the saw tooth, after normal wear and tear constituted reconstruction, not repair.
[7] See e.g., Consumers Distributing Co. v. Seiko Time Canada Ltd. (1984), 1 C.P.R. (3d) 1 (SCC) at para. 18, 26 [Seiko].
[8] This assumes the initial sale by the trademark owner did not impose conditions on the buyer regarding the resale of the goods. The reseller may also face various other legal hurdles that in practice limit its ability to resell the goods, such as labelling laws with which the reseller must comply.
[9] See Smith & Nephew Inc. v. Glen Oak Inc. (1996), 68 C.P.R. (3d) 153 (FCA) at para. 11: "Goods which originate in the stream of commerce with the owner of a trade mark are not counterfeit or infringing goods simply because they may have arrived in a particular geographical market where the trade mark owner does not wish them to be distributed." See also TSI, infra note 11 at para. 26.
[10] In Seiko, supra note 7, there was a difference between the authorized goods and the grey market goods, namely, they had different warranties. However, the defendant was allowed to continue selling the grey market goods. It had taken steps to inform consumers of the difference in warranties.
[11] TFI Foods Ltd. v. Every Green International Inc., 2021 FC 241 [TSI].
[12] H-D U.S.A., LLC v. Varzari, 2021 FC 620.