Lafrenière J. of the Federal Court, acting as a Referee in a reference under Rule 153(1) of the Federal Courts Rules,SOR/98-106 (“Rules”), recently issued an interim report on the quantification of profits made by Travelway Group International Ltd. (“Travelway”) through the sale of travel accessories including luggage (the “Infringing Products”) that were passed off as products made by Wenger S.A. (“Wenger”).
Background
Wenger, known for its Swiss army knives that it made famous over 100 years ago, adopted the below logo, which was incorporated into three logos registered as trademarks in Canada (the “Wenger Marks”).
Travelway produces travel-related items, such as luggage, which it sells at several retailers, including Walmart Canda Corp. (“Walmart”).
The litigation between the parties has a long history. In 2013, Wenger brought an application alleging that Travelway infringed two of their registered trademarks, and requesting that Travelway’s own trademark registrations for the impugned trademarks be expunged. This application was originally dismissed by the hearing judge on the ground that misrepresentation, a necessary element of a passing off action, was not made out, as confusion had not been established. Wenger appealed this decision.
In 2017, the Federal Court of Appeal (“FCA”) allowed the appeal and found that trademark infringement and passing off had both been established by Wenger. The FCA granted the injunction prohibiting Travelway from using the impugned trademarks and remitted the matter back to the hearing judge to determine, amongst other issues, whether Travelway’s registrations for the impugned trademarks should be expunged and whether Wenger can elect to recover an accounting of Travelway’s profits or the damages Wenger suffered.
In 2019, the matter came back before the hearing judge again. This time, she held that Travelway’s trademark registrations should be expunged, and she denied Wenger’s right to elect an accounting of profits on the basis that section 19 of the Trademarks Act, RSC, 1985, c. T-13 (the “Act”) entitled Travelway to the profits associated with the use of its own registered trademarks while they had been registered. The hearing judge included in that decision, however, a proviso at paragraph 45 stating:
“If I am wrong and the Applicants are entitled to monetary compensation for the past, I am of the view that it should take the form of an accounting of Travelway’s profits, as sought by the Applicants, rather than an award of damages. Travelway has received, through its wrongful conduct, profits that should accrue to the Applicants.”
Wenger appealed this decision, and in 2020, the FCA held that an accounting of profits was indeed the appropriate remedy. The FCA ordered that a reference be held to determine the profits that Travelway made as a result of passing off.
Issues
There were three main issues to be decided at the reference: whether s. 19 of the Act was a complete answer to the amount of profits that Travelway had to disgorge to Wenger, whether there was a causal link between the use of the impugned trademarks by Travelway and the sale of the Infringing Products, and what expenses could Travelway deduct when calculating profits.
Section 19 of the Trademarks Act
Travelway argued that it could avail itself of the protection afforded by s. 19 of the Act because its registrations were in full force and effect while Travelway sold the Infringing Products. Lafrenière J., however, held that Travelway was estopped from making such an argument at the reference because: (1) this issue was previously raised by Travelway and decided in the prior 2020 FCA decision; (2) the prior decision was final; and (3) the parties in both proceedings were the same.
Causation
With respect to the burdens of proof, Lafrenière J. found that Wenger was required to prove Travelway’s total revenues from the sale of the Infringing Products, and that the burden then shifted to Travelway to prove the expenses to be deducted from the revenues, and which portion of its profits was not made as a result of the misrepresentation (akin to a determination of apportionment).
On the issue of causation, Travelway argued that there had been no determination on whether the profits claimed by Wenger were the result of any misrepresentation by Travelway and that the profits to be disgorged must only be those proven to be causally attributable to the misrepresentation (i.e., the use of the impugned trademarks). In response, Wenger argued that an order by the Court for an accounting of profits necessarily entails a finding of causation and that the onus is thus on the infringer to prove any costs that it claims should be deducted from the sales number. Lafrenière J. disagreed with Wenger, stating that the key issue in the reference was not whether Travelway was at fault but rather whether it made any profits as a result of actual confusion caused by its conduct. Lafrenière J. further found that there was no evidence of actual confusion before the Court thereby permitting causation to be argued at this quantification phase of the proceeding.
Travelway relied on the evidence of two witnesses, one a long-term employee of Walmart and the other a marketing expert, to support its position that its misrepresentation had little to no effect of customers’ purchasing decisions of the Infringing Products.
Expert Evidence on Causation
Travelway’s marketing expert conducted several behavioural experiments, the purpose of which was to determine the impact of several product attributes on consumers’ decision to purchase luggage and accessories, respectively. An additional experiment evaluated the impact of the product’s country of origin on consumers’ likelihood of making a purchase. Her data showed that the impugned trademarks, and logos generally, had little to no importance to consumers when shopping for luggage and accessories at Walmart. Instead, consumers prioritized attributes such as perceived quality, weight, durability, and size. Based on her experiments and the literature, Travelway’s expert concluded that the use of the impugned trademarks did not cause a difference in sales.
Wenger’s expert countered these findings, claiming they were essentially unreliable “surveys”, and that their “Swiss-ness” was not something that could be assessed reliably. Lafrenière J. accepted Wenger’s expert’s evidence and found that Travelway’s expert evidence was deficient because: the expert was not properly informed of the goodwill acquired by Wenger in its marks; and she conducted her “surveys” using leading questions that would have informed the survey respondents of Travelway’s brand, thus leading to doubt about whether the respondents were representative of the Canadian marketplace. Wenger’s expert also noted that the association between a country and a product could influence one’s perception of that product’s quality, which could have occurred in the surveys conducted by Travelway’s expert.
With that said, while Lafrenière J. agreed with Wenger’s expert that some buyers will make purchases based on branding and logos, he nevertheless found Travelway’s evidence informative regarding how consumer purchasing behaviour changes based on product type, and that brand elements like logos and symbols have less of an impact on sales than do price, quality perception, and placement.
Real World Evidence of Causation
Travelway’s lay witness had been a long-time purchaser for Walmart until her retirement in 2018. Walmart accounted for 80% of the sales of Travelway’s Infringing Products. Her evidence was that brand was not a consideration when purchasing inventory for sale since Walmart had data showing that brand did not influence consumer behaviour, and that price was the main driver of their purchasing decisions. Her evidence was that her purchasing decisions at Walmart were made based on a “decision tree”, which included four loose factors in order of importance: price, quality, colour, and finally brand. She also commented that some brands would be “loathe” to sell at a discount vendor such as Walmart. Lafrenière J. noted that this evidence casts doubt on the finding in the 2017 FCA decision that the parties’ products were sold “largely through the same retail outlets.”
Lafrenière J. also commented on the lack of any expert evidence adduced by Wenger on whether consumers who purchased the Infringing Products were actually confused as to their source because of the use of the impugned trademarks, especially in light of Wenger’s knowledge that Travelway was asserting that there was no causal relationship at play.
Minimal Sales Were Due to the Impugned Trademarks
Based on the evidence as a whole, Lafrenière J. found that Travelway had established on a balance of probabilities that a reasonable estimate of the degree of causation between the use of the impugned trademarks and the sales of the Infringing Products at Walmart was within the range of 5% to 25% such that it was just and appropriate to assess it at the midpoint of 15% across sales at all stores.
Deductible Expenses
Having established causation, Lafrenière J. next focused on the determination of the accounting for profits. Citing the Nova SCC decision, Lafrenière J. set out the three-step test to be applied in an accounting for profits: (1) the court should calculate the actual profits earned by selling the infringing products; (2) the court should attempt to isolate the value of the infringement; (3) the court should subtract the value of the infringement from the actual profits to determine the amount to be disgorged.
Lafrenière J. focused on the first step of the test, calculating the actual profits, given his findings on causality and the “ease with which the amounts in steps 2 and 3 can accordingly be calculated”.
The full-costs method was applied, as first outlined in paragraph 164 of Nova, as no evidence was presented to warrant deviation from it. Wenger’s expert offered an unsupported assertion that Travelway was just a distributor, and therefore did not incur any costs to produce the Infringing Products. Travelway’s expert rebutted this, on the basis that Travelway collaborates with retailers to develop products in partnership with them, which the Lafrenière J. accepted. Lafrenière J. ultimately found that Travelway should be allowed to deduct costs associated with the production, promotion, and sale of the Infringing Products using the full cost or absorption accounting approach.
Lafrenière J. then went through several types of costs allegedly incurred by Travelway (including credit memo discounts, O&M costs, royalties, overhead etc.). Except for professional and consulting costs incurred by Travelway, where Wenger’s expert’s opinion was preferred, Lafrenière J. agreed with Travelway’s expert’s evidence.
Given that the findings in the various types of costs required recalculations of the amount to be awarded to Wenger, Lafrenière J. remitted the matter back to the parties and their accounting experts to run the numbers and report back before a final report is issued.