INDU Committee Report

The term “counterfeiting” is commonly used to refer to a broad range of intellectual property (IP) rights infringements, including both trademark and copyright infringements. Technically, “counterfeiting” refers only to cases of trademark infringement, whereas “pirating” refers to copyright infringement. Often, different types of IP rights infringements overlap. For example, music piracy infringes copyright as well as trademark protection. Fake toys are often sold under a different name but infringe the design protection of the toy.^[1]

According to the WTO Agreement on Trade-related Aspects of Intellectual Property Rights (“the TRIPs Agreement”), counterfeiting and piracy are defined as follows:

(a) counterfeit trademark goods shall mean any goods, including packaging, bearing without authorisation a trademark which is identical to the trademark validly registered in respect of such goods, or which cannot be distinguished in its essential aspects from such a trademark, and which thereby infringes the rights of the owner of the trademark in question under the law of the country of importation;

(b) pirated copyright goods shall mean any goods which are copies made without the consent of the right holder or person duly authorised by the right holder in the country of production and which are made directly or indirectly from an article where the making of that copy would have constituted an infringement of a copyright or a related right under the law of the country of importation.^[2]

In a recent report, the Canadian Anti-Counterfeiting Network (CACN) used the terms “counterfeiting” and “piracy” interchangeably to refer to unauthorized knock-offs of legitimate products.^[3] The Committee, in this report (unless stated otherwise) uses the TRIPS definitions of “counterfeiting” and “piracy.”

The House of Commons Standing Committee on Industry, Science and Technology (“the Committee”) began hearings on counterfeiting and piracy on 25 April 2007 and held four meetings on the issue; the Committee’s focus was on the economic impact of these two types of IP violations. At about the same time, the House of Commons Standing Committee on Public Safety and National Security also began a study of counterfeiting and piracy. The focus of its study was on the health and safety impacts of these activities.

This report focuses on seven main policy issues that were raised during the Committee’s hearings and presents recommendations to the Government of Canada on each issue. The goal of the Committee’s recommendations is to help improve IP protection and enforcement in Canada, and reduce the incidence of counterfeiting and piracy activities. 

Counterfeiting of trademarked goods started as a localized industry focused on the copying of high-end designer products such as watches, handbags, and golf clubs. These “knock-off” goods were priced at a small fraction of the retail value of the “real thing” such that neither fraud nor significant economic harm resulted.^[4] Both vendor and purchaser generally knew that these goods were knock-offs, and, for the most part, there were no ensuing losses of sales incurred by the manufacturer of the high-end, designer product. In such cases, designer products and their much cheaper unauthorized copies were operating in two distinct markets such that neither product substitution nor degradation of product quality (from that implied by the trademark) occurred.

Today, the counterfeit products industry has developed into a sophisticated global business involving the manufacturing and sale of counterfeit versions of a large range of low- and high-end goods, including electrical products, batteries, cigarettes, alcoholic beverages, golf clubs, automobile parts, motorcycles and pharmaceuticals. In addition to the counterfeiting of trademarked products, IP theft also involves the piracy of copyright products in both digital and analogue formats (e.g., books, music, video and software).

Although once viewed by the casual observer as a “victimless crime” and a problem only for rich countries, today counterfeiting and piracy pose a number of societal concerns across developed and developing countries alike. Anecdotal evidence presented to the Committee suggest that the sale of counterfeit and pirated products is adversely affecting the sale of legitimate products – in effect, “bad” products are driving out “good” products – profits and investments of and by reputable manufacturers are decreasing as a consequence, counterfeit products are injuring people or causing adverse health effects, and organized crime is involved. Moreover, tax revenue losses can no longer be assumed to be insignificant.

The Committee attempted to obtain data on the size and extent of the counterfeit and pirated products “industry.” The manufacture, import/export and sale of counterfeit and pirated products are, by their very nature, “black market” activities, and a black market cannot be measured with precision: people do not self-incriminate and some companies do not want to publicize a counterfeiting or piracy problem since it may adversely affect their brands.  For these reasons, statistics on counterfeit and pirated products are, at best, very crude estimates based on suspected and/or seized counterfeit and pirated goods (a best-guess multiplicative factor is often used to obtain the global estimate).

The Committee therefore accepts the witnesses’ reliance on a 1998 Organisation for Economic Co-operation and Development (OECD) study that puts the trade in counterfeit and pirated goods at about 5% of world trade,^[5] which, if still appropriate in 2007, would be somewhere between US$350 billion and US$600 billion. In Canada, the Canadian Manufacturers & Exporters estimates that the counterfeit industry is valued at C$20 to 30 billion annually, or 2% to 3% of Canada’s merchandise imports and exports combined.^[6]

The current high level of activity in counterfeit and pirated goods can be attributed to a number of factors: (1) advances in technology; (2) increased international trade and emerging markets; and (3) more products that are attractive to copy, such as software and branded clothing. Counterfeiters can realize large profit margins by substituting cheaper inputs and circumventing critical production techniques in the manufacture of sophisticated products whose quality, safety and/or performance cannot be ascertained by the consumer – and sometimes even by experts – prior to purchase. The trademark, which may bestow a premium stream of profit on its rights holder, thus provides a quality-assurance service for the consumer, but it may also signal activity susceptible to counterfeiting in the absence of criminal enforcement. Furthermore, the low detection rate (resulting from a combination of little enforcement activity and potential legislative deficiencies) combined with minimal fines upon conviction are, not surprisingly, treated as an additional, speculative “cost of doing business,” rather than as deterrent. Folding the shell corporation (i.e., a company with no tangible assets) and re-emerging under a different corporate banner is a common strategy upon conviction; the testimony heard by the Committee suggested that recidivism was high.

Obtaining estimates of Canada’s economic losses resulting from counterfeiting and piracy is even more difficult than quantifying the economic value of the activity because the cause-and-effect relationship between the sale of a counterfeit or pirated product and the loss in sales of the authorized product is difficult, if not impossible, to establish with an acceptable degree of confidence. Moreover, the loss of sales and profit does not fully describe society’s losses from counterfeiting and piracy. The Committee was told that counterfeiting and piracy results in job losses in the manufacturing and retailing sectors, lower levels of research and development, and reduced investment and lower tax revenues.

In terms of losses to specific Canadian industries, one witness estimated that losses from software piracy exceeded C$730 million in 2005, resulting in 32,000 job losses and C$345 million in tax losses. Another witness suggested that the annual consumer spending loss in Canada due to film piracy in 2005 was approximately C$270 million, while the loss of tax revenues due to film piracy in Canada in 2005 was approximately C$41 million. Some counterfeit products, such as counterfeit medicines, also pose a health and safety risk because they may contain an incorrect dose, the wrong ingredients, dangerous additives, or no active ingredients at all, which could result in potentially serious health risks to patients. Furthermore, unsafe and dangerous electrical products may cause property damage and may also have life‑threatening effects.

The Committee believes that improvements in the statistical tracking and study of counterfeiting and piracy are possible if further resources are allocated to this undertaking. In terms of statistics on the Canadian IP enforcement system, the Committee recommends:

That the Government of Canada establish an annual reporting system to provide statistics on the efficacy of the Canadian intellectual property enforcement system.  In particular, the reporting system should track:

1. The number of open RCMP counterfeit and piracy investigations and approximate length of time that these investigations have been open;
2. the number of charges laid and criminal sentences obtained against counterfeiters and pirates;
3. the number of counterfeit and pirated shipments that have been seized by the Canada Border Services Agency (CBSA);
4. the country of origin of the counterfeit or pirated goods; and
5. the approximate value of the counterfeit or pirated goods seized.

Intellectual property laws confer a bundle of exclusive rights upon authors and inventors for a limited period, allowing them to better exploit their works and invention. The rationale for the creation of such rights is that they facilitate and encourage the pursuit of innovation (i.e., increase the profitability associated with innovation by discouraging unauthorized copies from entering the marketplace and competing with the original) and the disclosure of knowledge into the public domain for the common good (i.e., thereby reducing secrecy as a profit-making strategy and permitting others to improve upon the innovation). The IP right is the only industrial tool that rewards the innovator commensurate with the innovation’s commercial prospects. 

In Canada, the following federal laws and regulations, which are administered by the Canadian Intellectual Property Office (with the exception of the Plant Breeders’ Rights Act), relate to the protection of IP:^(7]

• Patent Act;
• Patented Medicines (Notice of Compliance) Regulations;
• Copyright Act;
• Trade-marks Act;
• Industrial Design Act;
• Integrated Circuit Topography Act; and
• Plant Breeders’ Rights Act.

In terms of controlling counterfeiting and piracy specifically, other pertinent federal legislation includes the Food and Drugs Act, the Customs Act, the Canada Border Services Agency Act and the Criminal Code.

Intellectual property rights are private rights found in both the common law and in federal statutes. When transgressed, the individual rights holder is responsible for enforcing them through civil proceedings. In terms of the Trade-marks Act and the Copyright Act specifically, both allow rights holders to obtain remedies by way of damages, interlocutory or final injunctions, and the return of goods in the event a court finds in the rights holder’s favour. Similarly, both Acts empower rights holders with the ability to commence civil proceedings seeking a court order directing the Canada Border Services Agency (CBSA) to detain suspected counterfeit or pirated goods at the border. However, with regard to this last measure, rights holders have had difficulty in obtaining the necessary information for a court order prior to the arrival of a shipment. The Committee heard that for this reason, the court order has been used, on average, less than once a year and only five times in the last eight years.

Since copyright law is purely statute-based, disparities between trademark and copyright law exist. For example, under the Copyright Act, but absent from trademark law, there are pre-set damages – the Copyright Act contains statutory damages of between $200 and $20,000 per infringement; the actual amount awarded is at the discretion of the court based on the intent of the infringer. Thus, when somebody is proven to have violated the Copyright Act, the Actprovides for the court to award damages without proof of actual damages sustained by the rights holder. This is not the case when a violation under the Trade-marks Act has been proven. Furthermore, the RCMP and Crown prosecutors will take action only pursuant to the Copyright Act, and not the Trade-marks Act, because there are no criminal dispositions in the Trade-marks Act, which means the Crown must prove that a fraud occurred and lay charges under the Criminal Code. Finally, the RCMP has no authority to seize criminal proceeds under the Copyright Act.

Parliament has already deemed some activities involving counterfeit and pirated goods to be sufficiently harmful at the societal level to warrant criminal sanction. There are longstanding provisions in the Criminal Code prohibiting persons from forging trademarks and possessing equipment for the purpose of forging trademarks. There are also criminal prohibitions in the Copyright Act for various commercial activities involving pirated goods, such as selling, renting, offering for sale or rent, exhibiting or distributing for the purpose of trade, or importing for the purpose of sale or rent.

The Customs Act permits the CBSA to detain goods that are prohibited, controlled, or regulated by any Act of Parliament. However, there is no legislation that specifically identifies counterfeit or pirated goods themselves as prohibited, controlled, or regulated. Under the Copyright Act, the pirated goods themselves are not prohibited; rather, the offence is against a person who knowingly makes, sells, or imports the goods for sale.

Many of the witnesses that appeared before the Committee suggested that Canada’s laws are generally adequate to deal with ordinary infringement, but not counterfeiting and piracy. The vast majority of these witnesses argued for reform of all of the Acts discussed in this section by criminalizing more counterfeiting and piracy activities. However, this Committee recognizes that criminal law is public law and deals with behaviour believed to constitute an offence against society as a whole or to a government’s authority and legitimacy. The decision to criminalize counterfeiting and piracy activities that have traditionally been addressed civilly should not be taken lightly. While openly acknowledging that definitive proof of the degree of societal harm caused by these activities does not exist and will never be forthcoming, the Committee recognizes that the harm to society from counterfeiting and piracy does warrant criminal status.

The Committee believes that further criminal sanctions should be added to Canada’s legal framework for IP protection in order to combat counterfeiting and piracy. It therefore makes the following recommendations:

That the Government of Canada enact legislation that clearly defines trademark counterfeiting as a specific criminal offence under the Trade-marks Act.

That the Government of Canada create a criminal offence for manufacturing, reproducing, importing, distributing and selling counterfeit goods.

That the Government of Canada make the manufacture, sale, and distribution of fake labels of authenticity an offence in the Criminal Code.

That the Government of Canada enact legislation clearly defining offences for commercial circumvention activities and making persons who distribute pirated digital works and who manufacture and/or distribute circumvention devices for commercial gain liable.

That the Government of Canada remove the Copyright Act from the list of excluded Acts contained in the Regulations Excluding Certain Indictable Offences from the Definition of "Designated Offence" (Proceeds of Crime).

In addition, the Committee strongly endorses the Government of Canada’s recent move to criminalize the unauthorized camcording of a movie in a movie theatre.^[8]

The Committee is also of the opinion that civil remedies for counterfeiting and piracy could be improved.  For this reason, it makes the following recommendations:

That the Government of Canada strengthen civil remedies for counterfeiting and piracy infringements.

That the Government of Canada make provisions for the imposition of personal liability for the directors and officers of a corporation that engages in counterfeiting or piracy, and shareholder liability if it is a shell corporation.

Finally, in terms of improvements to the legal framework to protect IP and fight counterfeiting and piracy, the Committee believes that damages and penalties should either be increased or, in some cases, introduced, in order to act as an effective deterrent against these activities.

That the Government of Canada introduce administrative monetary penalties for the importation and exportation of counterfeit and pirated goods. The penalties should be set sufficiently high to act as an effective deterrent.

That the Government of Canada increase damages and penalties under the Copyright Act.