Friday, April 26, 2013

The Cost of Selling Outside the Network

Friday, April 26, 2013
Case Considered – Beyond The Rack Enterprises Inc. v. Michael Kors 2013 FCA 107

This is an appeal by Beyond The Rack from a decision of Justice Manson that confirmed Prothonotary Milcyznski’s decision to dismiss a motion to strike a portion of Michael Kors’ Statement of Claim. Specifically, Beyond The Rack sought to strike the allegations of trade-mark infringement and passing off in Michael Kors’ statement of claim.

Michael Kors is a manufacturer of high end bags and apparel for women and men. Beyond The Rack is an online retailer that allows shoppers to purchase luxury branded goods at steep discounts.

Michael Kors brought this action against Beyond The Rack alleging that Beyond The Rack infringed Michael Kors’ trade-mark by using it without authorization and in association with counterfeit products. Michael Kors’ basis for this allegation is that Michael Kors sells its products exclusively through authorized distributors, and Beyond The Rack is not one.

Beyond The Rack responded by stating that the goods it sold were authentic, and they obtained them, directly or indirectly, from authorized distributors of Michael Kors products. Beyond The Rack rebutted that this exercise was a mere fishing expedition to determine the source of Beyond The Rack’s inventory.

In commencing the motion to strike the portion of the Statement of Claim relating to trade-marks, Beyond The Rack argued that the material facts to substantiate the allegations were missing.

The Court of Appeal dismissed the appeal and confirmed the lower decisions. It agreed that since Beyond The Rack was outside the network of authorized distributors, the authenticity of the Michael Kors branded products Beyond The Rack sells is a triable issue.

If Beyond The Rack is truly selling authentic Michael Kors products, Beyond The Rack should be successful at trial on this issue. This decision, however, will likely expose Beyond The Rack to examination of its supply chain, as well as the costs associated with preparing the relevant documents and affidavits for this issue. But that just may be the cost of selling outside the network.

By Jahangir Valiani