When innovation meets the law, the results are often surprising.
Now consider Pirate Joe's, a business located in the upscale Kitsilano neighborhood of Vancouver, B.C.. I will let them describe their business model in their own words:
Pirate Joe's is an unaffiliated unauthorized re-seller of Trader Joe's products (we are being sued). We stock what we are asked to stock by Trader Joe's lovers who don't always have the time (or a car or a passport) to head south to Bellingham (the nearest Trader Joe's). We buy retail from Trader Joe's then import everything legally and add Canadian compliant ingredient and nutrition facts labels. We have to pay the rent and the help (and the label supplier) so prices are higher than at Trader Joe's. We have no set markup - every product we carry has different import and transport issues so we kinda just wing it until it seems fair to you and also makes business sense to us. If something seems overpriced, please tell us - we're sensitive about it. ;-)
Trader Joe's has no locations in Canada. Canadians who live in British Columbia's Lower Mainland can access the store at 2410 James Street, Bellingham, Washington or the many located further south in the Seattle metropolitan area. But this requires them to travel, to have a passport, to brave the line at customs, to use American money, etc. Pirate Joe's will do all that for them, and allow them to buy in comfort using Canadian money in Kitsilano.
One way Trader Joe's could look at this is they were getting a free ride into the Canadian market. Pirate Joe's paid them exactly what they would have been paid had the same customers all driven down to Bellingham and bought the products there. If Trader Joe's wanted to enter Canada, it would have to deal with export and import issues, Canadian labeling issues, Canadian taxes, Canadian employment law, the foreign exchange issue, and the price of Vancouver real estate, to name just a few. Instead, they just make sales at retail to Pirate Joe's, owe him nothing for the service of advertising their products in Canada in the best possible way, or for affixing Canadian labels to the goods, handling the taxes, leasing space, putting up a website or anything else.
Instead, Trader Joe's sued Pirate Joe's in federal court in Seattle.
And, so far, has lost.
Pirate Joe's is actually just an assumed name of Michael Norman Hallatt, who is a Canadian citizen with permanent residency in the United States. Thus, Trader Joe's could sue him in the United States and in federal court.
The basic claim was a Lanham Act claim. This is the main trademark act in the United States, but the question that Judge Marsha Pechman had to answer was whether it has extraterritorial impact. In other words, in these circumstances, did the purchase of these goods in the United States at full retail price and importation, legally according to Canadian customs, into Canada violate American law?
Under Ninth Circuit precedent, a Lanham Act claim can have extraterritorial effect under a three prong test:
- The defendant's action creates some effect on American foreign commerce
- The effect is sufficiently great to present a cognizable injury to plaintiff under the Lanham Act
The interests of and links to American foreign commerce are sufficiently strong in relation to those of other nations to justify an assertion of extraterritorial authority.
The court determined, on a motion to dismiss, that Trader Joe's could not meet these tests. The court relied on a Ninth Circuit decision involving a fight between Mike Love and Brian Wilson, both former Beach Boys. Wilson had had a CD that included covers of old Beach Boys hits distributed with the Daily Mail in England to promote his "Smile" album and concerts. Love, who had the right to the Beach Boys trademarks, sued. But the Ninth Circuit found that any injury to him was not in the American market. Similarly, Trader Joe's could not show that it was injured at all in the American market, since it had received literally as much money as it would have if Pirate Joe's customers had crossed the border and bought the goods in Bellingham.
A far more interesting question would be what would happen if Trader Joe's wanted to open stores in Canada. But that would represent issues of Canadian law that should be decided by Canadian courts. Here, Judge Pechman's decision that Pirate Joe's is not damaging Trader Joe's in the United States seems correct.
How can Pirate Joe's survive, given that it obviously has to mark up Trader Joe's prices significantly to cover its costs and some profit? The answer lies in the price differential between the United States and Canada. A decade ago, I spent a month in Canada when the Canadian dollar was at about 62 cents U.S. Now it is essentially par, but Canadian prices have risen, not fallen, as the value of their dollar has increased. So Canadians are just used to paying one-third or more higher prices for the same goods in the U.S. Add in the convenience and cachet of the Trader Joe's goods available on a store shelf in Kitsilano, and the business model makes some sense.
In May 2012, the Canadian Food Inspection Agency (CFIA) published a report called The Improved Food Inspection Model: The Case for Change which outlined the agency's current approach to food inspection, the context for a new food inspection approach, and the proposed components of an improved food inspection model.
The report explains that when CFIA was first established in 1997, it brought together food inspection programs from different federal departments with diverse inspection approaches. As a result, CFIA currently administers eight, separate food inspection programs including:
- fish and seafood
- fresh fruits and vegetables
- imported and manufactured food
- processed products (including honey)
Without a standardized food safety inspection model, CFIA has struggled to provide consistent oversight of all regulated food. According to the CFIA report:
Having eight food programs has resulted in the development and use of different risk management frameworks, inspection methods, and compliance verification and enforcement approaches. This challenges the CFIA to manage risks consistently across different types of establishments and different foods. It creates situations in which foods of similar risks may be inspected at different frequencies or in different ways. The eight food programs also result in industry having to meet multiple and different requirements that are challenging to address.
The challenge of maintaining eight different inspection programs coupled with changing methods of global food production, processing and distribution has necessitated the development of an improved and standardized food inspection model.
Earlier this month, CFIA drafted a proposal for a single food inspection model based on risk and prevention of non-compliance that would replace the eight food inspection programs the agency currently operates. The new model has five key components:
- Licensing/registration – A licensing and registration requirement for regulated parties that import or export food or that manufacture or process food for trade between provinces;
- CFIA oversight – Varying levels of CFIA oversight that would be based on the level of risk;
- Inspection – A systems approach to inspection that would assess the preventative control plans and procedures of regulated parties to ensure that food is prepared safely and complies with regulations;
- Compliance and enforcement – One common compliance and enforcement strategy for food; and
- System performance – Mechanisms to evaluate the CFIA’s inspection program for consistency, effectiveness and performance.
CFIA is hopeful that an updated food inspection system will benefit the food industry in a number of ways. For instance:
Inspection modernization will improve market access and give Canadian companies the flexibility to design controls that demonstrate their operations and products comply with all relevant federal standards. It will also create a more level playing field for businesses by streamlining the inspection process into a single system and eliminating the need for businesses to address multiple requirements.
In addition, the new model is also intended to increase transparency thus providing consumers with greater confidence in the safety and wholesomeness of their food.
The CFIA is seeking comments from the public including consumers and industry stakeholders until October 31, 2012 on the proposed draft model and intends to organize extensive outreach activities with CFIA inspectors, consumer associations, industry, and federal, provincial and territorial government counterparts in the fall.
Maple Leaf Foods is Canada's largest food processor, and as the name implies, it traces its history a long way with our neighbor to the north. It has always prided itself on its food safety procedures.
Last year, as was widely reported, more than 20 people all across Canada died from listeriosis traced to one of Maple Leaf's processing plants in Toronto. A huge recall of Maple Leaf products was ordered. Recently, the company settled class action cases for a reported $27 million.
Perhaps Maple Leaf thought that put it all behind them. Hardly. A Thomson-Reuters article described how Maple Leaf considers itself well-placed in the current economic environment. The story is 11 paragraphs long. Five of the paragraphs tell the company's story. Six of the paragraphs, including the lead paragraph and the final five, are concerned in whole or in part with the listeriosis outbreak, plus a new recall of frankfurters and hot dogs.
People have long memories. The article in today's Wall Street Journal that peanut butter sales in the four weeks ending February 21 dropped 13.3% compared to the same period last year is just another indication of that.
In the article, appears the following:
"The Canadian Double-Down"
"At a January 2008 products liability symposium, a well-regarded New York City plaintiffs’ attorney stood before a room of lawyers and in-house counsel. The topic of his presentation was, in part, to forecast the next direction of mass tort litigation. His message to those listening was clear. 'Canada is next.' "
The article goes on to explain that the threshold for mass tort class actions in Canada may now be lower than in the U.S.: "in certifying the class, the [Canadian] court was not troubled by the fact that class members could not prove a present physical injury or a 'foreseeable and recognizable psychiatric illness' as a result of the alleged product defect."
The bottom line advice in the Bloomberg article, as it has been in this blog, is that businesses (especially those in the food industry) need to continue to re-double efforts at risk avoidance and crisis management. As courts outside the U.S. become more open to mass tort claims, exposure for businesses selling products internationally only amplifies.