When Federal Court of Canada Judge Sean Harrington awarded Microsoft $500,000 in statutory damages this month in its long- running battle with a Quebec software reseller, the decision set new milestones for copyright and counterfeiting cases in Canada.

The $500,000 is a drop in the bucket for Microsoft, which has annual revenues of US$10-billion.

But in the Canadian copyright and counterfeiting universe, the award in Microsoft v. 9038-3746 Quebec Inc., 9014-5731 Quebec Inc., et al. is no drop, it’s the whole bucket.

“No Canadian court has previously awarded the maximum statutory damages in a counterfeiting case,” says John Cotter, a litigator with Osler Hoskin & Harcourt in Toronto who, along with Tara James, one of his partners, represented Microsoft in the decade-long dispute with the Quebec companies controlled by Carmelo Cerrelli.

The Copyright Act was amended to include statutory damages in 1997, the year Microsoft started legal action against Mr. Cerrelli and Inter-Plus, a Montreal-based software retailer. Under the new framework, the range of awards is $500-to- $20,000 for each infringed work.

Canadian awards have tended toward the lower end of the scale, but Judge Harrington awarded the software giant $20,000 for each of the 25 types of counterfeit Microsoft products that Inter-Plus bought from questionable sources, and resold.

Justice Harrington also awarded Microsoft another $100,000 in punitive damages from the numbered companies that own Inter-Plus, and $100,000 from Mr. Cerrelli personally — making it the highest punitive damage award in a Canadian counterfeiting case to date.

“These are all important milestones because the counterfeiting problem in Canada is becoming more significant and gaining more prominence and attention,” Mr. Cotter says.

The defendants have already appealed the decision.

“Though we respect the honourable court, it is the belief of the defendants that the award of statutory damages at the highest scale is not supported by the facts of the file,” says Neil Oberman, a partner with Montreal’s Michelin & Associates.

“This is a secondary infringement case,” he says. “My client wasn’t sitting there with a printing press. He acquired the products from the secondary party. Even people who are caught with primary infringement are not slapped with highest scale of damages.”

The judge apparently saw things differently. If anything, he may well have made the damages higher.

“I very much doubt that $500,000 covers a full accounting of the profits the defendants have derived from infringing Microsoft’s rights,” he wrote. He also pointed out that according to subsection 27(3) of the Copyright Act, “it is irrelevant whether the importer knew or should have known that the importation of the copy infringed copyright.”

The decision, handed down Jan. 16, was the culmination of almost six years of legal wrangling.

Chris Pibus, an IP litigator with Gowlings, says the decision is groundbreaking because it demonstrates that Canadian civil courts are willing to support the rights of intellectual property owners by awarding high levels of statutory and punitive damages. But he says at the same time, the decision is a “sad commentary on the abject failure of our criminal justice system.”

Despite investigations and seizures of counterfeit goods from Inter-Plus by the RCMP and Montreal police, no criminal charges were laid against the company or its principal, and Microsoft had to do its own investigation and defend its IP rights under civil law, he points out.

“Microsoft essentially had to do its own investigation, and seek redress through civil litigation, even though counterfeiting is a criminal activity.”

The case dates back to 1997. Alarm bells went off for Microsoft when it received reports that Inter-Plus was selling original equipment manufacturer (OEM) versions of its products on a stand- alone basis. OEM versions are only to be distributed with personal computers or other hardware.

Microsoft notified Inter-Plus that in its view, such sales were contrary to Canadian copyright law. It also warned the retailer that a third of such products distributed in this way in Canada turned out to be counterfeit.

Inter-Plus had its lawyers send some products to Microsoft for analysis; Microsoft pronounced them counterfeit.

The RCMP executed a search warrant at Inter-Plus in November, 1998, and Montreal police did the same in 2000. Both times, CD- ROMs and other products were seized and both times the Crown prosecutor declined to press criminal charges.

In August, 2000, Microsoft took matters into its own hands and filed a civil suit. It gained custody of the items seized by the RCMP. Microsoft had them analyzed and found 394 of the 397 CD-ROMS seized by the RCMP were counterfeit. It has been before the courts ever since.

Despite the monetary awards involved in the decision, Microsoft did not walk away unilaterally victorious.

Mr. Oberman, who acts for Inter- Plus, points out that Microsoft wanted a far-reaching injunction slapped on his clients, preventing them from “dealing in Microsoft products other than those packaged and licensed to Microsoft’s satisfaction.” Justice Harrington refused.

“In effect [Microsoft] is seeking an order that Inter-Plus be kept out of the grey market,” he wrote in his decision. “I decline to do so.”

Mr. Oberman believes what the judge doesn’t say about the grey market — the flow of new goods through distribution channels other than those authorized or intended by the manufacturer or producer — may turn out to be the case’s real contribution to Canadian copyright law.

“Microsoft suggested it had the right to determine how its products were sold and the court did not support that,” he says. “That is an interesting part of the judgment that is groundbreaking in Canada.

“Just because somebody is big and powerful and wealthy does not mean they should tell people how the market should look.”

Mr. Cotter, representing Microsoft, disagrees. “The significant parts of this decision are the statutory damages, the punitive damages, and the personal liability.

“The primary issue in this case was counterfeit product and it is unclear what application if any the comments on grey marketing will have.”

Mr. Pibus, who was not involved in the case, agrees with that interpretation. “The judgment does not really touch the grey market issue in a significant w ay,” he says. “It reflects the typically cautious approach Canadian courts are taking on grey goods.”

The final chapter of this case has not been written, and when it is, it will still be far from the final word on Canadian copyright law, which continues to evolve — albeit, much more slowly than the technologies and products it oversees.

“Intellectual property rights have become prevalent in courts right no w,” says Mr. Oberman. “This case demonstrates copyright law is evolving, and the enforcement of copyright is at the top of people’s agenda.”

(Copyright National Post 2007)