Landlord liability: counterfeit merchandise, vicarious liability and aiding and abetting infringement

As reported previously here, the Federal Court of Appeal earlier this year remitted a decision to the Federal Court to clarify an ambiguity in a judgment issued on summary trial relating to recidivist sale of counterfeit Chanel merchandise.  In the initial decision, the Court had awarded $64,000 in compensatory damages on the basis of four “instances” of infringement, $250,000 in punitive and exemplary damages and $66,000 in costs, jointly and severally against two corporations and an individual, Annie Lam.

Upon redetermination [Chanel S. de R.L. v. Lam Chan Kee Company Ltd., 2016 FC 987], and with reasons and findings that support landlord liability in Canada for the sale of counterfeit merchandise under certain circumstances, the Federal Court upheld the original judgment of $380,000 against all three defendants, including Ms. Lam as the directing mind of the business, owner of the premises and sole party to challenge the judgment.

Personal liability of Ms. Lam

In upholding its original judgment, the Court confirmed that Ms. Lam was indeed personally jointly and severally liable for all four “instances” of infringement, despite an alleged transfer of ownership to her children – which was rejected by the Court in the first instance – and a corporate filing that took place mere days before the final “instance” of infringement, removing Ms. Lam as an officer of one of the corporations, the latter factor being the source of the ambiguity in the underlying judgment.

Ms. Lam’s personal liability for the final instance of infringement was grounded by the Court in: (a) her continued control and profit derived from the business and as landlord of the premises, (b) her personal knowledge of the infringing and illegal activities taking place at the premises, and (c) her failure to prevent the infringing and illegal activities from continuing at the premises.

Given such circumstances, the Court found an ample evidentiary base in the record and compelling legal reasons to find Ms. Lam personally liable for all four instances, on three distinct legal bases:

• by piercing the corporate veil of the two corporations and holding Ms. Lam responsible for the actions of the corporations as the controlling and direction mind (regardless of any formal relationship as officer or director of the corporations);            
• under the principle of vicarious liability flowing from the proximity between Ms. Lam and the corporate defendants; and
• in aiding and abetting the ongoing infringement at the premises, by continuing to treat the business as her own, deriving a financial benefit from the business and failing to take steps to cease the sale of counterfeit merchandise.

The Court specifically rejected that the mere filing of a document purporting to change ownership of a corporation would allow an individual to avoid liability for activities for which they would otherwise be responsible.

Punitive and exemplary damages

In affirming the original $250,000 punitive and exemplary damages award, which both the Federal Court of Appeal and Federal Court recognized as proportionally higher as a ratio to the compensatory damages than in some prior cases, the Court confirmed that the amount was “no higher than necessary to deter the subject defendants’ misconduct”, relying on:

• bad faith conduct over a lengthy period of time;
• the motivation of profit and the need to affect the behaviour of the defendants, as the compensatory damages were likely to be nothing more than a mere licence to engage in the sale of counterfeit merchandise;
• the failure to admit guilt, show remorse and/or cease the activities and instead attempting to transfer assets and blame onto Ms. Lam’s children;
• the defendants’ lack of regard for the legal process;
• the seriousness of this type of intellectual property theft; and
• the need to send “a strong message to other offenders who are likely to engage or have engaged in similar conduct or likely attempts to obscure or conceal their misconduct through the sale of their business or corporate makeover”.

Of particular interest was the Court’s finding of Chanel as a “vulnerable” party for the purpose of awarding punitive and exemplary damages, noting that even if the financial capacity of Chanel was not a concern, “the vulnerability of [Chanel] lies on their incapacity to control the daily sale of counterfeit merchandise which diminishes the value of the goodwill associated with the Chanel trade-marks”.

Landlord liability going forward

It will remain to be seen how far the concepts of vicarious liability and aiding and abetting infringement will play out in a true arms-length landlord and tenant scenario, given that Ms. Lam had a close relationship with the corporations and the business notwithstanding her dual role as owner and landlord of the premises.  However, the courts in recent years have consistently been supportive of expansive and innovative application of established legal concepts in the pursuit of individuals and entities involved in the illegal trade of counterfeit merchandise, given the criminal character of such activities and the recidivist and evasive nature of those dealing in such goods.  The door is certainly open and the concept of landlord liability well formulated to pursue future situations where landlords derive a benefit from the sale of counterfeit merchandise, know that such activities are taking place, and do nothing to prevent such activities from continuing.

Chanel was represented by Karen F. MacDonald.