The Limitations of a Norwich Order: Parallel Imports, “Grey Market” Goods and the Impacts of Serialization

Cara Parisien [1] and Irina Boldeanu[2]
ROBIC, LLP
Lawyers, Patent and Trademark Agents

On June 22, 2020, the Superior Court of Québec rendered its decision in Coty Inc. v Costco Wholesale Canada Ltd.[3], in which it was called upon to rule on the issuance of a Norwich order. This decision highlights the highly contentious issue of parallel imports and “grey market” goods, as well as the importance of an effective system to trace products throughout the distribution chain.

The plaintiff Coty Inc. (“Coty”) is a manufacturer of perfumes and other cosmetic products which are sold in more than 130 countries throughout the world. Coty Canada Inc. (“Coty Canada”), like Coty’s other subsidiaries, was the exclusive supplier of Coty products in its respective country. Coty and its subsidiaries worked with a limited number of distributors who, under the terms of their contracts, could only resell Coty products to authorized retailers. The defendant Costco Wholesale Canada Ltd. (“Costco”) was not one of Coty’s authorized retailers and had been reselling genuine Coty products to consumers for an amount equivalent to a 50% reduction on the suggested retail price. According to Costco, these products were parallel imports either by Costco or by its suppliers and were thus obtained from the “grey market”.

The term “grey market” refers to goods that are procured outside Canada without infringing the owner’s intellectual property rights in that territory and that are subsequently imported and sold in Canada without the consent of the owner of the Canadian intellectual property rights. By bypassing the established distribution chain, the reseller can often procure the goods at a lower cost and can therefore afford to undercut the sales prices offered by other market players. The concept of exhaustion of intellectual property rights and its application in Canadian trademark law means that the owner of a trademark will in theory[4] have no legal recourse against a seller in Canada who has legitimately acquired its products abroad.

In the present case, despite Costco’s lack of liability, the plaintiffs suspected that one of their distributors had breached its contractual obligations. They were therefore seeking a Norwich order, which would compel Costco to disclose the identity of its suppliers who had allegedly sold Coty products without its authorization.

A Norwich order is a form of pre-trial remedy whose purpose is to identify the perpetrators of an alleged misconduct. It may be ordered at the discretion of the court when five cumulative criteria are met: (1) a bona fide claim against the unknown wrongdoer, (2) the person to be examined for discovery must be involved in a non-negligible way in the litigation, (3) the only practical source of the pursued information is the aforementioned person, (4) the public interest in disclosure outweighs invasion of privacy concerns, and (5) reasonable compensation shall be paid for the costs of the interrogation.

The Court proceeded to analyze the conditions and ultimately concluded that Coty had not met its burden of proof. First, the Coty products sold by Costco were sourced not only from Canada but also from Australia, the United Arab Emirates and Brazil, the latter country having more than 2.5 million door-to-door salespeople with no such restrictions in their contracts. According to the Court, it was therefore perfectly conceivable that the Coty products sold by Costco could originate from a third party abroad who had not committed any fault or breach of contractual obligations towards the plaintiffs.

The Court also found Coty’s evidence that Costco was the only practical source of the information sought to be insufficient. In this regard, the Court noted that if Coty had equipped itself with an effective tracking system for its products to ensure the complete traceability of each unit throughout the production and distribution chains, it could have more easily identified the alleged wrongdoer.[5] Despite Coty’s practice of applying production codes and lot numbers to its products, this strategy still had not enabled it to retrace the chain of custody of the products sold by Costco.

One of the known means of ensuring product traceability is product serialization. Serialization mechanisms are used as early as the product manufacturing stage, where a unique identifier is assigned to each good, such as an alphanumeric code, barcode or even an RFID tag. This, combined with the frequent capture of product location and the efficient exchange of data between trading partners, ensures better visibility and control of the supply chain.

Various laws govern product serialization in the pharmaceutical industry across the globe in order to address matters such as drug theft and counterfeiting, unauthorized parallel supply chains, and patient health and safety issues. However, the benefits of full supply chain visibility extend far beyond the pharmaceutical industry, including protecting the rights of intellectual property owners and limiting parallel imports and “grey markets”.