The Counterfeiting Problem 

publication 

Winter 2007 - (Real Estate Brief Winter 2007)

Real Estate Brief Winter 2007
The sale of counterfeit goods in Canada is a growth industry that, apart from the harm it wreaks upon the rights of intellectual property owners, results in annual losses of hundreds of millions of dollars from the legitimate economy and government revenues, not to mention the serious health and safety issues it presents to consumers, particularly in the fields of electrical products and pharmaceuticals.1 The International Intellectual Property Alliance in February 2006 recommended that Canada be maintained on a watch list of countries considered to have lax attitudes and laws concerning intellectual property protection, and noted the continued prevalence of counterfeit product in the Canadian retail market.2 In particular, Canada is recognized as a leading nation in the surreptitious production of DVDs of pirated films sourced from hand held video recordings of movies released to Canadian theatres,3 a fact which will not be lost on anyone who strolls through certain markets in Toronto, Montreal and Vancouver.

Efforts at curbing the sale of counterfeit goods have traditionally been directed at the retailers trading in the infringing products. However, intellectual property owners frustrated by the vast scale of the counterfeiting problem and the expense of dealing with multiple individual market retailers who may have no assets and often disappear before the case against them can be heard by a court have started asking the courts in various countries to find landlords liable for the infringing acts of their retail tenants. Canadian commercial landlords should take notice of this trend and conduct themselves in an appropriate manner to avoid being named as defendants in intellectual property infringement actions.

The Louis Vuitton Cases

At the forefront of a series of recent attacks on landlords has been Louis Vuitton Malletier SA ("Louis Vuitton"), the famous French handbag designer, and a favourite target of counterfeiters. After discovering sales of counterfeit Louis Vuitton products by retailers at markets in New York, Beijing and Australia, Louis Vuitton notified the various landlords about the infringing activities of their respective leasehold tenants and asked the landlords to take steps to prevent sales of infringing products on their properties. Investigators subsequently determined that infringing sales continued out of the same locations notwithstanding the prior notification and cease and desist requests issued to the retailers and their landlords. Louis Vuitton then proceeded to sue and named the landlords as defendants, claiming that the landlords were contributorily liable for the retailers' infringement of Louis Vuitton's intellectual property rights.

New York

In the New York case, Louis Vuitton argued that the landlord was wilfully blind to the full extent of the ongoing infringing activities taking place on its properties and that the landlord benefited financially from the sales of the counterfeit goods through the collection of rent, amounting to a complicit "unlawful alliance" with the infringing retailer lessees. In March 2005 the U.S. District Court for the Southern District of New York issued a preliminary injunction requiring the New York landlord to: (i) evict any tenants selling counterfeit goods; (ii) submit to random inspections of the stores to identify infringers; and (iii) require tenants to sign leases in which they agree not to sell counterfeit products.4

Beijing

In April 2006, in separate decisions, both the Beijing Higher People's Court and the Beijing Second Intermediary Court found against the persons renting to the infringing retailers in the respective Chinese cases. In the first case, the court noted that once the landlord became aware of the infringing activities, there existed an obligation on it to take action to stop the infringing activities on its premises. In failing to do so, the landlord was held to have facilitated the continuation of the infringement and the court awarded damages against the landlord.

In the second case, the non-retail defendant was not strictly speaking the landlord, but instead a sublessor who had acquired the right to the use of the premises from the owner and subsequently rented out the space to the infringing retailers. After receiving Louis Vuitton's notification concerning the infringement by the retailers, the sublessor took positive action against the retailers by having them sign a letter prohibiting the sale of unauthorized famous brand goods on the premises. Additionally, the sublessor fined some of the infringing retailers and even evicted one. However, notwithstanding the sublessor's actions, the court held the sublessor liable after being presented with evidence that the retailing of counterfeit products from those premises had continued unabated.5

Australia

The Federal Court of Australia saw matters differently, however and, on November 7, 2006, dismissed Louis Vuitton's trademark infringement suit against the landlord of market stalls in Carrara. Louis Vuitton had alleged that the landlord had infringed the Louis Vuitton trademarks because the conduct of the infringing retailers was undertaken with the concurrence of the landlord and pursuant to their common design; with knowledge of the past infringements, the landlord permitted the infringing retailers to continue to trade at the premises with the common goal of achieving success for the market through the success of the individual retailers occupying the stalls.6 However, the court was not convinced that the concept of contributory liability could be stretched to encompass the facts of the case.

In dismissing the action, the court noted that no provision of the Trademarks Act 1995 (Australia) "extends civil liability to ‘secondary' tortfeasors" and that Louis Vuitton had based its case on general principles of tort liability as opposed to any specific legislation.7 The court rejected the idea that the landlord shared a common purpose with any of the infringing retailers and found instead that the purpose of the landlord was to conduct an efficient and profitable market, whereas the purpose of each retailer was the successful conduct of his or her stall.8 The court was also satisfied that, in this case, the level of infringing activities that had been previously demonstrated by some of the retailers was not such as to prevent the landlord from reasonably accepting the assurances given by all of the infringing retailers that they would not further infringe after the landlord's representatives delivered to retailers a copy of warning notices from Louis Vuitton and a memo from the landlord advising that the sale of counterfeit products was not permitted and could result in eviction. However, the court did appear to suggest that a landlord might not be entitled to rely on such assurances in cases "of the most blatant misconduct."9 The court concluded by stating that in order to hold the landlord responsible for the retailers' infringements, there would have to have been a concurrence in the act or acts causing damage, not merely a coincidence of separate acts which by their conjoined effect, cause damage, and that in the present case, it would have been necessary to show that the landlord acted in concert with each infringing retailer in committing the tort.10

The Canadian Context

Canadian law recognizes that a person not responsible for direct acts of infringement may nonetheless be liable for the infringing acts if that person: (i) controlled the infringer and authorized, expressly or by implication, the acts of infringement; (ii) induced or procured another to cause infringement; or (iii) was party to a common design, concerted action or agreed upon common action to do acts which prove to be infringements. However, the Ontario Superior Court has recognized that a party who derives benefits from an arrangement with an infringer simply by leasing them premises at which infringement occurs should not by that act alone be considered to have derived benefits from the infringing activities; an unknowing facilitator does not amount to procurement or joint tort-feasance.11

Of the three jurisdictions considered above, Canadian courts would, in a scenario similar to the Louis Vuitton cases, most likely adopt an approach similar to that of the Australian Federal Court when assessing the liability of landlords regarding contributory liability for the infringing acts of retail tenants. However, each case is distinguishable on its specific facts and, given the recent international trend to name landlords as joint tortfeasors, Canadian landlords are well advised to conduct themselves in a commercially responsible manner.

When leasing to commercial tenants, landlords should consider whether it is appropriate in the circumstances to obtain representations, warranties and covenants from the tenant that the tenant will not engage in acts of infringement or the sale of counterfeit goods on the premises. The landlord should also obtain appropriate indemnification in the event the landlord is forced to defend legal proceedings stemming from any infringing activities of the retailer. Additionally, the landlord should retain the right to evict the tenant for engaging in activities that constitute infringement of intellectual property rights or otherwise engaging in the sale of counterfeit goods.

Landlords, upon being notified that their tenants are engaging in infringing activities, are advised to immediately address the issue and assess the scope of the problem with assistance from legal counsel. In cases where it is concluded that the tenant's infringing activity was large in scope, or if the chances of recidivism are likely, the landlord should explore with counsel its ability to terminate the lease. In situations in which the nature of the infringing activity was not large in scale, the landlord should communicate to the tenant in writing that the landlord does not condone such activities, reminding the tenant that such activities are prohibited on the premises and requiring that the activities immediately cease. Landlords should obtain from the tenant reasonable written assurances that the activities will not be repeated.

Landlords who choose to ignore the issue after learning of their tenants' infringing activities run the risk of winding up in court defending themselves against accusations by aggressive IP owners that the landlord was wilfully blind to continuing infringements and that such wilful blindness contributed to the damages suffered by the plaintiffs or profits earned by the infringers to the benefit of the landlord. Although the Australian Federal Court held that the respective purposes of the landlord and tenants in Louis Vuitton were easily distinguishable, in the case of a landlord who continues to receive rent while knowing of the illicit activities of the tenant carried out on the rented premises, it is reasonable that a court could be more easily persuaded that there was a common design and accordingly attach liability to the landlord.

This article appeared in Real Estate Brief Winter 2007.  

1 Underwriters' Laboratories of Canada, Anti-Counterfeit Campaign, http://www.ulc.ca/regulators/anti_counterfeit_campaign.asp
2 International Intellectual Property Alliance, 2006 Special 301: Canada , Issued February 13, 2006 3 Ibid 4 J. Bikoff and P. Jones, "Louis Vuitton injunction: landlords liable in counterfeiting war" July 13, 2005, World Trademark Law Report 5 H. Tsang and F. Lam, "Chinese courts continue attack on landlords" June 21, 2006, World Trademark Law Report 6  Louis Vuitton Malletier SA v. Toea Pty Ltd [2006] FCA 1443 at paragraph 144 and 146, per Dowsett, J. 7 Ibid at paragraph 143 8 Ibid at paragraph 172 9 Ibid at paragraph 169 10 Ibid at paragraph 171 11 Davisco International Inc. v. Protase Separations Inc. et al. [1996] OJ No. 3914 at paragraph 4 per Lax, J. The defendant Gay Lea Foods Co-operative Limited succeeded in dismissing the claims against it for patent infringement on the basis that none of its individual acts as materials supplier, landlord and lender to the infringer were infringing activities and there was not found to be any tacit agreement between them of any combining of efforts to secure the doing of infringing acts.