Consumers Distributing Co. v. Seiko

Supreme Court of Canada

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The judgment of the Court was delivered by Estey J.–

The respondent instituted an action in the Supreme Court of Ontario to restrain the defendant-appellant from marketing Seiko watches in Canada, at least for so long as the appellant is not an authorized dealer of the respondent. The Seiko watch is a quartz watch manufactured by, or on behalf of, K. Hattori & Company Limited in Japan and marketed by Hattori around the world through a distribution system consisting of authorized distributors and, in turn, their authorized dealers. In Canada the authorized distributor is the respondent whose parent company, Seiko Time Corporation, performs a like role in the Seiko distribution system in some or all of the United States. Seiko Time Corporation, in turn, is a wholly-owned subsidiary of Hattori. Thus the respondent is owned and controlled by Hattori through Hattori’s American distributor. Hattori is the registered owner of the trade mark “Seiko” with reference to the wares “watches, clocks, time recorders, switching means, and parts thereof”. The trade mark was renewed on June 30, 1976, after the respondent had been appointed as an authorized distributor by Hattori for Canada (by letter of June 23, 1975). The letter from Hattori appointed its sub-subsidiary the

… exclusive distributor of “SEIKO” watches and clocks in Canada, and as such has the sole right to distribute “SEIKO” watches and clocks in Canada to authorized dealers and to appoint such dealers in Canada.

Hattori did not appoint the respondent a registered user of the trade mark under the Trade Marks Act, R.S.C. 1970, T-10, nor is Hattori, the owner of the trade mark, one of the plaintiffs in this action. The respondent, of course, has not appointed the appellant, Consumers Distributing Company Limited, as an authorized Seiko dealer in Canada.

Some time in 1978, the appellant began to import Seiko watches and sell them in the retail market. These watches had been obtained lawfully from a source outside Canada, which, according to the record, is an authorized distributor of Hattori but who was selling Seiko watches outside the authorized distribution network, that is to say, to others, such as the appellant, who were not authorized Seiko dealers. The record refers to this distributor as a “diverter”. The watches, it is agreed, originate with Hattori or its authorized manufacturer and supplier in Japan, and reach the appellant in the original packaging, along with a warranty issued in the name of Hattori, and a user’s booklet. In short, these watches are identical with the Seiko products distributed by the respondent.

The warranty, packaged in the individual containers in which the watches reach the appellant, is described in the record as a warranty for the distribution and sale of Seiko watches in the United States. The guarantee reads:

Your SEIKO Quartz watch is guaranteed for one year from the date of purchase.

The warranty document goes on to notify the purchaser that repair service is available only “at SEIKO Service Centers listed on the following page”. One of the Service Centers so listed is:

Canada

285 YORKLAND BOULEVARD, WILLOWDALE, ONTARIO M2J 1S8 Tel: (416) 496-2221–TELEX: 06-966801 CABLE: TORSEIKO TORONTO

This is apparently the address of the respondent’s place of business.

It is relevant to note that the Certificate of Guarantee accompanying each watch as received by the respondent was issued under the name of Hattori and provides as follows:

We certify that your SEIKO watch was manufactured by the SEIKO industrial group, and is guaranteed for one year from the date of purchase. Within that period, repair service is available without charge against defects in materials and workmanship, excluding damage caused by accidents or lack of care. If your SEIKO watch needs servicing, please take it or send it to the nearest authorized SEIKO service center or agent, stating date of purchase and nature of service required.

The certificate then concludes with the following notice:

IMPORTANT

…

2. This certificate is not valid unless properly filled out by the dealer.

The warning is differently phrased in the instructions contained in the booklet received by the appellant with the watches in question (and passed along to the retail purchasers). It is said to be Guarantee Form 101, which is a Hattori form for use in the United States. This warranty reads as follows:

To qualify for service under the warranty, present your watch together with the warranty repair coupon, page 13 of this booklet, properly filled in by the authorized SEIKO dealer from whom the watch was originally purchased, or other proof of date of purchase, to any member of the SEIKO Worldwide Service Network.

The repair arrangements are, according to the evidence at trial, available at the Service Center only if the booklet is completed by an authorized dealer at the time of sale. The repair centers are told by the respondent to reject other watches. The record indicates that, apart from watches sold in Canada, there is no certain way for the respondent to determine whether the watch was actually sold by an authorized dealer somewhere in the world. The respondent bears the cost of servicing the warranty for watches sold in Canada. The respondent apparently has the right to reimbursement from Hattori for the cost of service of watches sold by authorized dealers elsewhere, but in practice has not exercised this right. The record is silent as to whether the respondent has sought reimbursement from Hattori for the performance of the guarantee in respect of Seiko watches sold by the appellant, or others, who were not authorized Seiko dealers.

In the result it is clear that, while the source of the diverted watches sold at retail in Canada by the appellant is not revealed, the uncontested evidence is that these watches came from within the Seiko worldwide distribution system through a vendor outside of Canada, that the watches are genuine Seiko watches produced by Hattori or its suppliers, and that the appellant is not an authorized Seiko dealer appointed by the respondent for the sale of Seiko watches in Canada.

Proceedings were instituted by the respondent in January 1979 wherein the respondent sought two forms of injunction as follows:

(a) an interlocutory and a permanent injunction restraining the Defendant from acquiring, advertising and selling “Seiko” watches;

(b) in the alternative, an interlocutory and a permanent injunction restraining the Defendant from holding itself out as an authorized dealer of the Plaintiff by advertising and selling “Seiko” watches as internationally guaranteed;

…  

An interlocutory injunction was issued in the month of February 1979, and modified in the month of March, whereunder the appellant, until trial or other final disposition of the action:

(a) was restrained from holding itself out as an authorized dealer of the respondent by advertising and selling Seiko watches as internationally guaranteed;

(b) was ordered to post a permanent notice in all showroom catalogues and on counters where the appellant displayed Seiko watches, as well as in any future advertising for those purposes, to the effect that the defendant was not an authorized dealer, that the Seiko watches sold by the appellant had not been purchased from the respondent and were not internationally guaranteed by the respondent; and,

(c) was ordered not to issue or distribute any Seiko warranty booklets. (This provision does not appear in the permanent injunction issued after trial.)

The actual form of notice directed in the amended injunction to be posted by the appellant was as follows:

Consumers Distributing is not one of the ‘authorized dealers’ appointed by Seiko Time Canada Ltd. to market Seiko watches in Canada. The Seiko watches sold by Consumers Distributing consist of models although similar to those distributed in Canada by Seiko Time Canada Ltd. or by Seiko distributors in other parts of the world are not purchased from Seiko Time Canada Ltd. and are not ‘internationally guaranteed’ by Seiko Time Canada Ltd. which has refused to honour any form of Seiko guarantee accompanying our Seiko watches.

The matter proceeded to trial in April 1980 and evidence was then taken as to the effect in the market place of the sale of Seiko watches by the appellant on the business of the respondent, and of the confusion occasioned by the appellant’s activities, both within the respondent’s distribution network and amongst the buying public at large. There was no evidence of any confusion amongst the members of the buying public after compliance began on March 31, 1979 by the appellant with the interlocutory injunction set out above which commenced on March 31, 1979.

At the opening of trial, the appellant took the position that it was agreeable to the interlocutory interim injunction being made permanent. The appellant further abandoned any argument that watches sold by the appellant would qualify for servicing within the warranty period by the respondent so long as the warranty repair coupon on p. 13 of the warranty booklet was duly completed by showing “other proof of date of purchase”. Judgment at trial was granted in favour of the respondent as follows:

1. A permanent injunction was ordered restraining the appellant from:

…holding itself out as an authorized Seiko dealer of the Plaintiff by advertising and selling “Seiko” watches as internationally guaranteed;

2. The appellant was permanently enjoined from:

…advertising or selling “Seiko” watches in Canada;

3. Damages in the amount of $5,000 were awarded to the respondent.

On appeal to the Court of Appeal, the appellant took no appeal against the injunction described in paragraph 1 above or from the award of damages, confining the appeal entirely to the injunction described in paragraph 2 above.

The Court of Appeal judgment was given by endorsement on the record [(1981), 128 D.L.R. (3d) 767, at p. 768]:

Appeal dismissed with costs for the reasons given by the trial Judge and in particular the conclusion he reached that the product marketed by the plaintiff was not simply a watch alone. We are satisfied that in this case an injunction merely in the terms of para. 1 of the judgment would allow the appellant to continue trading on the good will of the plaintiff and would permit a deception of the public.

While the statement of claim framed the action on the basis of false representation, or holding out by the appellant that it is an authorized dealer of the respondent, as well as passing off contrary to the Trade Marks Act, s. 7(c) and contrary to the Combines Investigation Act, R.S.C. 1970, c. C-23, s. 36(1)(a) and (c), the position taken by the respondent in this Court has been confined entirely to the action in tort of passing off. The respondent puts its position both on the basis of the classic action in passing off, as well as in the modern variation of that action, sometimes referred to in the cases as the “extended version” of the doctrine of passing off. In taking this position, the respondent relies upon a series of findings by the learned trial judge to the general effect (and particulars shall be mentioned later) that the Seiko watch, as marketed by the respondent, is a composite or packaged product consisting of four elements:

1. the watch;

2. the point of sale service and instruction booklet;

3. the warranty properly filled out by an authorized dealer; and,

4. the after sale service.

Consequently, the trial judge concluded [(1980), 112 D.L.R. (3d) 500] that, by marketing the bare watch without the other three elements, the appellant was creating confusion in the market place and damage to the goodwill, which the respondent had built up on the sale of its complete or composite product through its extensive distribution and service network. The trial judge found that the appellant, on the other hand, was not advertising or selling this product, but was simply selling the bare watch with the result, “That confusion in the eyes of the public is likely… .” The basis of the plaintiff-respondent’s success at trial is the finding that the respondent established goodwill in connection with the Seiko watch by reason of the sale and distribution of that product in the manner outlined above. The respondent did so by means of service centers, sales training programs, the appointment of “only fine jewellery stores or large department stores” as authorized dealers, and the expenditure of “a substantial amount of its money annually for national advertising and has financially aided its authorized dealers in local advertising undertaken by the dealers”. The respondent’s success is indicated in the financial statements in the record. On the other hand, the trial judge found that the appellant had no point of sale or adjustment service for its customers, no repair facilities, and carried a small line of only eleven models of the Seiko watch as against 250 models carried by authorized dealers. The learned trial judge went on to find that:

It was this product with all its components which developed the reputation of Seiko in Canada and the goodwill which thereby arose between the plaintiff, its dealers and the consuming public.

In contrast to the product so marketed by the respondent, the learned trial judge found:

The defendant is not advertising or selling this product as the defendant has no sales personnel knowledgeable about this watch, has no point-of-sale service, cannot deliver a valid warranty, and offers no after-sale service. I find that the product advertised and sold by the defendant is a different product. The defendant is not an authorized dealer and cannot complete the warranty booklet. That confusion in the eyes of the public is likely, is clear. Accepting the fact that the very watch and warranty booklet being sold and distributed by the defendant are of those of K. Hattori, the plaintiffs product is nonetheless a different product because of the various items comprised in the plaintiffs product.

Earlier in his judgment, the learned trial judge had found:

Persons acquiring Seiko watches from Consumers could well believe that they were buying the “product” offered by an authorized Seiko dealer and that Seiko Time Canada had so authorized Consumers.

The judgment at trial strays somewhat from this theme, as regards the right to use the word “Seiko”, when the Court observes:

This plaintiff has established to my satisfaction that it has business or goodwill in the use of the name “Seiko” as developed through its marketing practices which is worthy of protection even though it does not own this name. It is nonetheless one of a class entitled to make use of the distinctive name “Seiko” as descriptive of its product and this is a valuable part of the goodwill which has been generated to the plaintiff by the method of marketing which it has employed.

It was the marketing technique or scheme which, in the end, appears to have given rise to the recognition of the right in the respondent which was to be protected by the injunction which issued. The judgment concluded:

In the present case I find:

(1) by holding out, as it has in its catalogue and stores, that the watches being advertised or sold by it are Seiko watches (i.e., including all the components which I have found have become attached to that name) the defendant is misrepresenting the product it is selling to the consuming public;…

The respondent is, of course, not a registered user nor an assignee of the trade mark, Seiko, and the distribution of a trade marked product lawfully acquired is not, by itself, prohibited under the Trade Marks Act of Canada, or indeed at common law. In passing, it should also be observed that the finding as to the four elements in the respondent’s product appears to be based upon a duplication between the warranty and the after sales service, elements three and four. The after sales service is provided during warranty without charge unless the watch is known by the respondent’s staff to have been sold outside the authorized distribution system. Thereafter, service is presumably based on normal charge for service. There seems to be no valid distinction between the warranty properly filled out and the after sales service. Indeed, if Hattori assumed the cost of the performance of the warranty issued at the time of the initial sale of the watch by Hattori, no issue would have arisen here, except possibly the question of a right accruing by reason of the point of sale activity by the respondent’s authorized dealer. It is difficult to find the origin of such a right in law, and indeed, none was advanced by the respondent.

The time which concerns us, in the analysis of the marketing practices of the parties to this appeal, divides itself into two periods. The first period commences with the beginning of sales by the appellant of Seiko watches, by catalogue and in the stores of the appellant, and ends with the issuance of the interlocutory injunction on February 14, 1979, or at the latest, March 20, 1979, when it was revised. The second period continues thereafter up to and including the trial. It is not contested by the appellant that the Seiko watches, complete with warranty and packaging, all as received from the unknown distributor, were sold to the public in the first period without any notice that the warranty included in the box with the watch and issued over the name of Hattori, may not be enforceable in Canada, and that it sold these watches to the public in Canada without any notice that the appellant was not an authorized dealer of the respondent or of Hattori. The appellant conceded at trial that the injunction claimed in the statement of claim, paragraph 16(b) (and described above as the first injunction in the judgment at trial), whereby the appellant was permanently enjoined and restrained from “…holding itself out as an authorized [Seiko] dealer of the Plaintiff by advertising and selling “Seiko” watches as internationally guaranteed;” should continue permanently. Neither has the appellant appealed from the award of $5,000 damages, relating, as that award apparently did, to the sale of these watches during period one.

In this Court, the appellant argued that no evidence was introduced at trial to show that, after the injunctions of February and March 1979, any confusion was created in the market place by the conduct of the appellant in selling the bare Seiko watch in the manner permitted under the interim injunction. The respondent did not direct this Court to anything in the record which might be described as evidence to the contrary. Counsel for the appellant asserted that this submission was made in the Court of Appeal below. That court may have been responding to that argument when it stated:

…an injunction merely in the terms of para. 1 of the judgment would allow the appellant to continue trading on the goodwill of the plaintiff and would permit a deception of the public.

This conclusion, however, is entirely unsupported in the evidence.

What, then, is the issue now presented by this appeal? It is said by the appellant that the only complaint made by the respondent, which is supported by evidence, is that Seiko watches were presented for sale to the Canadian public, under circumstances wherein that public was aware that these watches were not supported by an international guarantee by the respondent, and that the appellant was not an authorized dealer of the respondent. The respondent contends, nonetheless, that sales, even in these circumstances, do indeed result in confusion or deception of the public, and accordingly, argues that the unlimited injunction, prohibiting sales of Seiko watches by the appellant under any circumstances or conditions, is a valid exercise of the authority of the Court, under the doctrine of “passing off.

From a factual viewpoint, the position advanced by the respondent, if it should be adopted, would have the following consequences:

1. The Canadian public would be deprived of the right, or option, to purchase the Seiko watch, a product of Hattori of Japan, on the alternative basis that the watch would be unsupported by the marker’s warranty; and,

2. A monopoly would be effectively established by the application of the doctrine of passing off in these circumstances, equivalent to that normally authorized by the issuance of a patent of invention under the Patent Act of Canada, except that here the monopoly would be for an unlimited term.

These startling results themselves call for an examination of the principles of tort law to determine whether or not there is indeed, in these circumstances, room for the application of the doctrine of passing off, sometimes referred to as a branch of injurious falsehood. The common law principles relating to commerce and trade generally proceed on the basis of a recognition of perceived benefits to the community from free and fair competition. This is variously illustrated in the older authorities, for example, in Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co., [1894] A.C. 535 (H.L.), per Lord Macnaghten, at p. 565:

The true view at the present time I think, is this: The public have an interest in every person’s carrying on his trade freely: so has the individual. All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and therefore void.

Later, in Attorney General of Australia v. Adelaide Steamship Co., [1913] A.C. 781, Lord Parker of Waddington, discussing this same principle, stated, at p. 794:

Monopolies and contracts in restraint of trade have this in common, that they both, if enforced, involve a derogation from the common law right in virtue of which any member of the community may exercise any trade or business he pleases and in such manner as he thinks best in his own interests.

There are well-known and important exceptions to this general rule where the law countenances, and indeed sometimes imposes, restrictions on this right to free competition and trade, including restrictions imposed by purchasers of goodwill upon vendors, deceitful trade practices calculated to injure others, defamation of trade and profession, improper or unfair use of trade information of a former employee, the protection of trade secrets, monopolies granted by patent including Letters Patent on inventions, and statutory monopolies or regulated trades and professions. Any expansion of the common law principles to curtail the freedom to compete in the open market should be cautiously approached. This must be the path of prudence in this age of the active legislative branch where the community’s trade policies are under almost continuous review. This by no means calls for judicial abdication of the role of adjusting the common law principles relating to proper trade practices to the ever-changing characteristics and techniques of commerce. Reticence to curtail this general rule, however, is found even in Erven Warnink BV v. J. Townend & Sons (Hull) Ltd., [1979]|2 All E.R. 927, where Lord Diplock stated, at p. 933:

…but in an economic system which has relied on competition to keep down prices and to improve products there may be practical reasons why it should have been the policy of the common law not to run the risk of hampering competition by providing civil remedies to everyone competing in the market who has suffered damage to his business or goodwill in consequence of inaccurate statements of whatever kind that may be made by rival traders about their own wares. The market in which the action for passing off originated was no place for the mealy mouthed: advertisements are not on affidavit; exaggerated claims by a trader about the quality of his wares, assertions that they are better than those of his rivals, even though he knows this to be untrue, have been permitted by the common law as venial ‘puffing’ which gives no cause of action to a competitor even though he can show that he has suffered actual damage in his business as a result.

In the most recent edition of Salmond on Torts (17th ed.), at pp. 400-01, the learned author discusses passing off in these terms:

149. INJURIOUS FALSEHOOD: PASSING OFF.

To sell merchandise or carry on business under such a name, mark, description, or otherwise in such a manner as to mislead the public into believing that the merchandise or business is that of another person is a wrong actionable at the suit of that other person. This form of injury is commonly, though awkwardly, termed that of passing off one’s goods or business as the goods or business of another and is the most important example of the wrong of injurious falsehood, though it is so far governed by special rules of its own that it is advisable to treat it separately. The gist of the conception of passing off is that the goods are in effect telling a falsehood about themselves, are saying something about themselves which is calculated to mislead. The law on this matter is designed to protect traders against that form of unfair competition which consists in acquiring for oneself, by means of false or misleading devices, the benefit of the reputation already achieved by rival traders. Normally the defendant seeks to acquire this benefit by passing off his goods as and for the goods of the plaintiff….[Emphasis added]

At page 403, the learned author examines the basis for the concept of passing off:

The courts have wavered between two conceptions of a passing-off action–as a remedy for the invasion of a quasi-proprietary right in a trade name or trade mark, and as a remedy, analogous to the action on the case for deceit, for invasion of the personal right not to be injured by fraudulent competition. The true basis of the action is that the passing off injures the right of property in the plaintiff, that right of property being his right to the goodwill of his business.

He concludes, at p. 404:

Indeed, it seems that the essence of the tort lies in the misrepresentation that the goods in question are those of another;…

The role played by the tort of passing off in the common law has undoubtedly expanded to take into account the changing commercial realities in the present-day community. The simple wrong of selling one’s goods deceitfully as those of another is not now the core of the action. It is the protection of the community from the consequential damage of unfair competition or unfair trading. Professor Fleming, in his work the Law of Torts (6th ed.), reviews this development at p. 674:

The scope of the tort has been increasingly expanded to reach practices of “unfair trading” far beyond the simple, old-fashioned passing-off consisting of an actual sale of goods accompanied by a misrepresentation as to their origin, calculated to mislead the purchaser and divert business from the plaintiff to the defendant.

and the learned author later resumes the discussion at p. 676:

But not all harmful competition is unfair or unlawful. Most important, the countervailing public interest in free competition often demands priority: most prominently in the claim to use one’s own surname honestly in business even at the cost of some confusion with a competitor, and in the use open to all of generic and descriptive, as distinct from fanciful, terms unless they have acquired a so-called secondary meaning by exclusive association with the plaintiff. [Emphasis added]

The learned author of Prosser, The Law of Torts (4th ed.), also discusses passing off as a species of unfair competition, at pp. 957-58:

One large area of unfair competition is what may be called for lack of a better generic name false marketing, which used to be called “passing off,” and still quite often goes by that designation. It consists of the making of some false representation to the public, or to third persons, likely to induce them to believe that the goods or services of another are those of the plaintiff. This may be done, for example, by counterfeiting or imitating the plaintiffs trade mark or trade name, his wrappers, labels or containers, his vehicles, the badges or uniforms of his employees, or the appearance of his place of business. The test laid down in such cases has been whether the resemblance is so great as to deceive the ordinary customer acting with the caution usually exercised in such transactions, so that he may mistake one for the other. The older rule was that there must be proof of a fraudulent intent, or conscious deception, before there could be any liability, and this is still occasionally repeated; but the whole trend of the later cases is to hold that it is enough, at least for purposes of injunctive relief, that the defendant’s conduct results in a false representation, which is likely to cause confusion or deception, even though he has no such intention.

It is difficult, at first blush, to bring the conduct of the appellant within the concept of passing off. The appellant is selling precisely the same watch, coming from the same source, as the respondent. The watch is protected by a guarantee not in the respondent’s name but in the name of the maker, Hattori. The quality of the product must have some bearing on the respondent’s success and consequent development of business and goodwill in the trade. The watches sold in each branch of the trade, of course, were only and always those of Hattori. The respondent purports to bring itself within the classic definition of the doctrine by associating with the watch features which are unique to the selling technique employed by the respondent. The respondent is able to do this, so the argument goes, because of its contractual relationship with the supplier of Seiko watches, Hattori, which in turn supplies the respondent with the power of limiting the manufacturer’s warranty to watches sold by dealers authorized by the respondent. Axiomatically, the appellant and persons (such as Woolco and K-Mart) who, according to the evidence, carry on a like business, are unable to merchandise the watches in this manner, as they are not authorized dealers. The problem facing the respondent is that the logical extension of this proposal grants to a vendor, in the position of the respondent, a monopoly on the sale in Canada of a product to the same extent as it would enjoy if the product were subject to a patent of invention issued to the respondent under the Patent Act of Canada. A second cul-de-sac into which such a submission necessarily leads is that the common law, in its personal property sector, would thereby be recognizing a right to entail and control the sale of personal property, however legitimately acquired, where another person, in the position of the vendor, was also marketing the identical item of personal property. Such a principle is foreign to our law. This right to control resale would, it follows, flow not only to the respondent and all others upon whom the manufacturer wishes to bestow this protection, but to the manufacturer Hattori which, on terms presumably satisfactory to itself, released these watches into the distribution stream which eventually carried them to the appellant. Ironically, the manufacturer, with the profits from its sale of these watches in its pocket, could then, if this is the law, restrain the appellant from reselling these watches. A third consequence would be an inevitable collision between such a result, on one hand, and the common law doctrine with respect to restraint of trade and free competition, on the other hand.

The style of marketing employed by the respondent might, indeed, have produced market goodwill in the respondent in relation to its establishment, and in the business and undertaking carried on by its authorized dealers. Efficiency, organization and energy no doubt will always, when coupled with what the record describes as an essentially good and sound product, produce a competitive edge, sometimes referred to as goodwill. Here, that commercial truism, if permitted, would run away with the principle of passing off. The appellant, put in its worst light, is offering to the Canadian public the alternative of buying a genuine Seiko watch unsupported by a manufacturer’s warranty. Presumably, the appellant is able to offer a watch in such condition at a lower price than some or all of the authorized Seiko dealers, and this is one possible source of anxiety on the part of the respondent. That is not to say that the respondent would not have a legitimate trade interest in stifling this competition because of the inconvenience, if not added cost, arising in the respondent’s business at its repair depots. There, the respondent, according to the record, has received for repair under a claimed warranty right, “spurious” watches, that is, Seiko watches which had been sold outside the Seiko distribution network. No doubt there is some cost in rejecting these applications for service. There is, however, no evidence on the record that any such activity occurred during what we have referred to above as the second period when the interim injunction was extant. Nor is any argument made that the respondent cannot recover such warranty service costs from Hattori.

If anything further need be said to distinguish the commercial activity of the appellant from that condemned by the rule in passing off, attention should be drawn to the fact that the passing off rule is founded upon the tort of deceit, and while the original requirement of an intent to deceive died out in the mid-1800’s, there remains the requirement, at the very least, that confusion in the minds of the public be a likely consequence by reason of the sale, or proffering for sale, by the defendant of a product not that of the plaintiffs making, under the guise or implication that it was the plaintiff’s product or the equivalent. See: Millington v. Fox (1838), 3 M. & Cr. 338, at p. 352; Perry v. Truefitt (1842), 6 Beav. 66, at p. 68, 49 E.R. 749, at p. 750; Cellular Clothing Co. v. Maxton & Murray, [1899] A.C. 326, at p. 334. Here, nothing of that nature is present. Indeed, once the interim injunction commenced to operate, it is difficult to understand how the watch-buying public would purchase a watch from the appellant and leave their premises with the idea that Hattori, or its agent the respondent, or its agents the authorized dealers, would somehow service the watch. Indeed, the injunction was designed by the respondent and adopted by the Court below for that very purpose. The article of commerce sold by the contending parties hence is identical. The peripherals of presentation of the product to the public, in some circumstances, might support some exclusive rights in the market as against others seeking to supply the same product to the market, but in the circumstances of this case, no support in the law for such relief has been exposed.

A moment should be devoted to a discussion of the other element said to distinguish the “product” of the respondent from that of the appellant, and I refer to “point of sale service”. This had to do with the help offered by the jeweller, as an authorized dealer of the respondent, in adjusting the bracelet and in informing the purchaser as to the workings of the watch. There is nothing in the record to indicate that this service was of any commercial value, but in the circumstances, a court should perhaps incline in favour of the plaintiff (here respondent) without emphasis on the onus of demonstration. On the other hand, if this minimal service were deleted from the “package” offered by the respondent, then it is a simple question as to whether sale of a watch with a warranty and sale of the same watch without a warranty is a different product, or whether it is one and the same product. If one were to elevate the point of sale service to the level of being an element of a product, then a quasi-monopolistic protection under the doctrine of passing off would arise in one who adopts any merchandising style, or in the modern vernacular “gimmick”, which had theretofore not been adopted in his neighbourhood by a competitor when selling a “name-brand” product. No case drawn to our attention extends the passing off umbrella to those limits. I therefore conclude that the classic action of passing off is not here available to the respondent.

But the respondent goes on to urge that the circumstances here demonstrated fall within a doctrine referred to in argument, and, indeed, in some of the literature on the subject, as the “extended action” in passing off. This doctrine is said to have evolved from the progressive discussions of the action for passing off in three cases in the United Kingdom: A.G. Spalding & Bros. v. A.W. Gamage Ltd. (1915), 32 R.P.C. 273; Bollinger v. Costa Brava Wine Co. (No. 1), [1959] 3 All E.R. 800, [1960] R.P.C. 16, and (No. 2), [1961] 1 All E.R. 561; [1961] R.P.C. 116; and Warnink, supra.

In the Spalding case, the House of Lords considered a course of commercial conduct by a defendant in the marketing of a discontinued product of the plaintiff (soccer balls), as the “improved” product recently brought to the market by the plaintiff. The defendant thereafter sought to rectify any harm done by its first advertisement by a second advertisement, which made reference to a description of the discarded balls using terms which the Court found had been long associated by the public with the plaintiffs product. Lord Parker of Waddington discussed the tort of passing off, at p. 284, as follows:

A cannot, without infringing the rights of B, represent goods which are not B’s goods or B’s goods of a particular class or quality to be B’s goods or B’s goods of that particular class or quality. The wrong for which relief is sought in a passing-off action consists in every case of a representation of this nature.

My Lords, the basis of a passing-off action being a false representation by the defendant, it must be proved in each case as a fact that the false representation was made.

and then described the test to determine the presence of the tort of passing off on the same page as:

…whether the defendant’s use of such mark, name, or get-up is calculated to deceive.

It should be added at this point that “calculated to deceive” means, in the words of Lord Diplock, that such deception or confusion is a “reasonably foreseeable consequence” of the conduct in question. See Warnink, supra, at pp. 932-33.

On the facts of Spalding, the trial judge and the House of Lords concluded that the acts of the defendant were “hardly consistent with fair or honest trade” and concluded: “There is nothing in the subsequent advertisements pointing to a desire on the part of the Defendants to undo the harm they had done by their first advertisements. Indeed, I am not sure that the subsequent advertisements are not so framed as to strengthen a belief induced by the first…[advertisements].”

This is hardly the situation here. The corrective measure was designed by the plaintiff-respondent and adopted by the Court on the interlocutory application of the respondent to enable the buyer to ascertain precisely the terms of the offered sale; and to protect the respondent’s trade pending the disposition of the action. The soccer balls had been discarded by the plaintiff-manufacturer as waste material and excluded from public sale. Here the manufacturer had placed the watches in question in the market stream just as was done by the manufacturer with the watches sold to the public by the respondent.

The principles of passing off were said to have been further expanded or modernized in the United Kingdom in the decision of Danckwerts J. in Bollinger v. Costa Brava Wine Co. (No.l), supra, where the issue was whether plaintiffs associated with the marketing of champagne produced in the district of France bearing that name could obtain an injunction prohibiting the marketing in the United Kingdom of a Spanish wine said to have similar characteristics, under the name “Spanish Champagne”. Unlike the Spalding case, the defendant was not faced with an allegation of marketing the discarded goods of the plaintiff under a deceptive description indicating to the buying public that the goods were regular products of the plaintiff. Moreover, the defendant did not represent that the goods were identical with, or the same as, the goods which the plaintiffs were marketing in the U.K. In Bollinger (No. 1) the defendant advised the public that the wine came not from France but from Spain. The key issue was whether the defendant could arrogate to its wine the word “Champagne”, and thereby succeed to any benefits which had accrued to the plaintiffs by reason of the word “Champagne” having become known in the market as associated with wine produced by the plaintiffs from grapes grown in the District of Champagne in France. In meeting this issue, Danckwerts J. discussed the inclusion of the concept of unfair competition in the action of passing off at p. 805:

The well-established action for “passing off involves the use of a name or get-up which is calculated to cause confusion with the goods of a particular rival trader, and I think that it would be fair to say that the law in this respect has been concerned with unfair competition between traders rather than with the deception of the public which may be caused by the defendant’s conduct, for the right of action known as a “passing-off action” is not an action brought by the member of the public who is deceived but by the trader whose trade is likely to suffer from the deception practised on the public but who is not himself deceived at all.

As to the immediate issue of the right in the plaintiffs to prevent the defendant from using the geographic name, which had been used without any special right or grant in law by the plaintiffs, the Court in finding for the plaintiffs stated at pp. 810-11:

There seems to be no reason why such licence should be given to a person, competing in trade, who seeks to attach to his product a name or description with which it has no natural association so as to make use of the reputation and goodwill which has been gained by a product genuinely indicated by the name or description. In my view, it ought not to matter that the persons truly entitled to describe their goods by the name and description are a class producing goods in a certain locality, and not merely one individual. The description is part of their goodwill and a right of property. I do not believe that the law of passing off, which arose to prevent unfair trading, is so limited in scope.

Danckwerts J. found the plaintiffs had developed a goodwill or reputation in the market by associating its product with the region of origin. Deliberate employment of this name by another trader for the purpose of enhancing the trade operations of such other trader was, in the Court’s view, the appropriation of another’s right of property, namely his goodwill. This term goodwill is used in the sense that the word was used by Lord Macnaghten in Inland Revenue Commissioners v. Muller & Co. ’s Margarine, Ltd., [1901] A.C. 217, at p. 224: “It is the attractive force which brings in custom.” In reaching this result, the Court in Bollinger relied upon Draper v. Trist, [1939] 3 All E.R. 513, where Lord Goddard stated at p. 526:

In passing-off cases, however, the true basis of the action is that the passing off by the defendant of his goods as the goods of the plaintiff injures the right of property in the plaintiff, that right of property being his right to the goodwill of his business.

That extension of the action of passing off, if it is an extension, does not reach the circumstances of this appeal. In Bollinger, the defendant did not pass off his goods as those of the plaintiffs, but directed attention unfairly to his goods by associating them with those of the plaintiffs, by the deliberate use of a name which had become associated in the market with the goods of the plaintiffs. The desired impression on the mind of the wine-buying public was that the product of the defendant was of the same standard of quality and acceptance as the wine of the plaintiffs. Here, the appellant sold the watches of Hattori under the Hattori trade mark, Seiko, to which the respondent had no more right in law than did the appellant. Had the appellant attempted to sell these watches after removing the Seiko trade mark, other rights would be offended and causes of action against the appellant would arise in someone but, perhaps, not including the respondent. The better analogy here would be to the buyer of a Chevrolet from an authorized dealer or source, who then sells the car without any status of dealership from the manufacturer. Assuming title to the car was lawfully acquired and that no misrepresentation of the condition of the vehicle and the right of warranty was made, would a duly authorized dealer of the manufacturer, or the manufacturer itself, or anyone else, have recourse to injunction to prevent such a sale of the Chevrolet? Clearly not, and the answer is the same whether the car be new or used. See Morris Motors, Ltd. v. Lilley, [1959] 3 All E.R. 737. Different considerations might apply where the action may be founded in trade mark legislation. No authorities were advanced by the respondent where such restriction on disposition of personal property was upheld.

On the return of the action for trial, the plaintiffs succeeded on the finding by the Court that the use of the name “Spanish Champagne” was intended “to attract the goodwill connected with the reputation of the [plaintiffs’] ‘Champagne’ to the Spanish product”: [1961] 1 All E.R. 56.1, at p. 568.

The respondent, and indeed some of the text-writers, find the true version of the “extended passing off doctrine in the more recent judgments of the House of Lords in Warnink, supra. On the facts, it is essentially the same as Bollinger, substituting spirits and sherry for champagne, and substituting Netherland suppliers for the role played by the wine producers of the district of Champagne. The case is useful here, not for its facts or the disposition, but for its discussion of the pathology of the tort of passing off. Indeed, on the facts, it is clearly against the essential position taken by the respondent, for the Court found that anyone truly producing the drink, long established in the United Kingdom market by the Netherland producers and sold under the name Advocaat, could market his product under the name Advocaat. The defendants marketed their product under that name, but it was not made from the same ingredients as the product which the Netherland suppliers had long marketed in the United Kingdom under that name. What was forbidden was the marketing of any other drink under the name Advocaat, or any other name incorporating it such as that used by the defendants “Old English Advocaat”. By analogy, the appellant here could market, under the name Seiko, watches made by Hattori and (barring patent and trade mark considerations) other makers of Seiko watches would not be able to invoke the Warnink judgment. Indeed, Diplock L.J. started with the proposition that the plaintiffs had no cause of action “for passing off in its classic form” (p. 930) because it could not be shown that a purchaser of the defendant’s product “supposed or would be likely to suppose it to be goods supplied” (p. 930) by the plaintiffs. But His Lordship went on to consider the broader application of the action and commented, at p. 931:

Unfair trading as a wrong actionable at the suit of other traders who thereby suffer loss of business or goodwill may take a variety of forms, to some of which separate labels have become attached in English law. Conspiracy to injure a person in his trade or business is one, slander of goods another, but most protean is that which is generally and nowadays, perhaps misleadingly, described as ‘passing off. The forms that unfair trading takes will alter with the ways in which trade is carried on and business reputation and goodwill acquired.

All this apparently started with Spalding, supra, which Diplock L.J. considered (at pp. 932-33) as having established:

…five characteristics which must be present in order to create a valid cause of action for passing off: (1) a misrepresentation (2) made by a trader in the course of trade, (3) to prospective customers of his or ultimate consumers of goods or services supplied by him, (4) which is calculated to injure the business or goodwill of another trader (in the sense that this is a reasonably foreseeable consequence) and (5) which causes actual damage to a business or goodwill of the trader by whom the action is brought or (in a quia timet action) will probably do so.

To the same effect are the comments of Lord Fraser at pp. 943-44:

It is essential for the plaintiff in a passing-off action to show at least the following facts: (1) that his business consists of, or includes, selling in England a class of goods to which the particular trade name applies; (2) that the class of goods is clearly defined, and that in the minds of the public, or a section of the public, in England, the trade name distinguishes that class from other similar goods; (3) that because of the reputation of the goods there is goodwill attached to the name; (4) that he, the plaintiff, as a member of the class of those who sell the goods, is the owner of goodwill in England which is of substantial value; (5) that he has suffered, or is really likely to suffer, substantial damage to his property in the goodwill by reason of the defendants selling goods which are falsely described by the trade name to which the goodwill is attached.

In both reasons for judgment, it is damage to goodwill gained through the “reputation of the type of product” (per Lord Diplock, at p. 937) by reason of its “recognizable and distinctive qualities”.

Only a moment’s consideration is required to recognize that none of this “extended doctrine” has even a remote connection to the conduct complained of here. The watches are not, in the words of Lord Fraser, “falsely described” (p. 944) by the appellant. Indeed, they are sold under the original, and only, trade mark. Both parties, as vendors, gave the retail buyer a form of guarantee issued by a third party, Hattori. In each case, the buyer faced the enforcement of a guarantee to which the vendor was not a party. There is nothing before us to indicate that the respondent gave the buyer a legally enforceable assurance that its policy of recognition of Hattori’s guarantee would continue through each guarantee period. Likewise there is nothing to show, in a legal sense (albeit hopelessly impractical), that Hattori’s guarantee was not enforceable by any purchaser. There is nothing to show that Hattori was able to recoup, through the respondent’s price to the authorized dealer, the cost of the service of the warranty. Nor is there any evidence that Hattori had or had not done so when making the sale of the watches in question to the appellant’s supplier, wherever and whenever that transaction took place. Finally, there is nothing in the record obliging either Hattori or the respondent to service the warranty issued to the retail purchaser over the name of Hattori.

Another practical consideration is the trade name on all the watches, “Seiko”. These watches were inseparable from the Seiko trade mark in respect of which neither the respondent nor the appellant could acquire any rights. The trade mark itself distinguished the product from all others, and the “goodwill” likewise attached to the trade mark by reason of the inherent quality of the product. The respondent could not acquire a right (which could accrue under Warnink, supra) to prohibit the sale of identical products by others. Can the principles of passing off, either classic or extended, be stretched further by the point of sale activities of the respondent or by the voluntary assumption of the performance of the Hattori covenant of guarantee? This has become academic with the issuance, pending trial, of the interim injunction. The purchaser who buys from the appellant is left to his own devices should his watch require service during the warranty period. A purchaser might attempt to enforce the Hattori guarantee or attempt to obtain repair services elsewhere. That is the assumed risk of the purchaser, undertaken in full knowledge of the salient facts. Without a price benefit, it is difficult to see why a purchaser would take this risk. In any case, it is a transaction which cannot be interrupted by any action in passing off, classic or extended.

The transaction on which this appeal rests should be examined from one additional viewpoint. The record does not contain any contract between Hattori and the respondent with respect to performance of the international warranty. If the respondent is not, in law, bound to perform the Hattori convenant to repair, what assurance is there that, once insulated from any competition by the continuance of the interlocutory injunction, the respondent would continue to honour the Hattori guarantee until the expiration of the successive warranties which commence with each retail sale? This situation exists so long as the respondent honours the Hattori warranty only because it is a wholly-owned subsidiary of Hattori. That consideration would, of course, end if Hattori decided to dispose of its interest in the respondent. In any case, if the respondent’s performance of the guarantee is gratuitous, what cognizance should the Court take of its complaint that the appellant does not do likewise?

On the other hand, if Hattori has secured a convenant from its distributors to perform its warranty in exchange for a price reduction or other consideration, then the remedy lies with Hattori to enforce the convenant against the appellant through the diverter-distributor. If Hattori failed to protect itself in this, or any other way, it would be surprising to find that the law would come to its aid by affording a parallel remedy through Hattori’s wholly-owned subsidiary, the respondent. Indeed, if such a recourse exists, Hattori would then be selling watches to the diverter, without price discount but with the diverter’s covenant to perform the guarantee, and thus would recover a greater profit than Hattori would realize on the sales to its distributor, the respondent. With this profit in hand, Hattori, if the respondent’s submissions carry the day, could then block the sale of such watches by the diverter’s purchasers, and thereby keep its distributors and authorized dealers satisfied. The record is silent as to whether such a price differential exists in the Hattori distribution structure.

Either way, nothing supports the extension of a remedy in the field of passing off to the respondent. Hattori launched these watches into world commerce with a warranty attached in its own name. Hattori has already benefitted from the law by the Court’s making permanent the interlocutory injunction because, in the result, Hattori is thereby freed from the obligation to perform, at least through Canadian facilities, its guarantee to repair during the warranty period. As a practical matter, because of the cost of enforcement relative to the probable cost of repairs to these watches, Hattori is freed of most, if not all, of the warranty cost in respect of sales through the diverter. The courts, in the circumstances of this case, should leave to the retail purchaser and Hattori the settlement of the question as to who is responsible for the performance of the warranty. It is a long jump from there to the judicial recognition of a monopoly in the marketing of these watches in a vendor in the authorized distribution chain, particularly in the absence of trade mark or patent considerations.

The Warnink elements of passing off, at minimum, require an initial misrepresentation calculated to injure the business or goodwill of a trader in the same market, or which may be a reasonably foreseeable consequence, and which causes damage to the other trader. I am unable to find in this record any misrepresentation during the second period, which is essential to found a right in the respondent to enjoin the appellant generally from the selling of Seiko watches in any manner whatsoever. It must be remembered that the second injunction, and the only one under appeal, is expressed in these terms: the defendant (appellant) is “hereby permanently enjoined and restrained from advertising or selling ‘Seiko’ watches in Canada”. To grant such an injunction, a court must conclude that the seller of personal property identified by a registered trade mark owned by a third party may not do so, if someone else is selling that property in some different mode, or with some different characteristic such as here, a one-year warranty to repair. For the reasons already mentioned above, I find no such right in our law.

I do not want to leave this subject, dealing as it does with the marketing of manufactured goods identified by a registered trade mark, without stating that nothing was advanced herein by the respondent with reference to any rights flowing to it by way of a trade mark registered in the name of Hattori under the Trade Marks Act of Canada, R.S.C. 1970, T-10. Indeed, Hattori would be a requisite plaintiff if any such claim were made. Perhaps the respondent, if it held an appointment as a registered user of the registered trade mark, registered under the Trade Marks Act of Canada, would have the requisite status. See Fox on Copyrights (2nd ed. 1967), at pp. 440-41. Neither condition here exists. We therefore are not confronted with the situation before the Exchequer Court in Remington Rand Ltd. v. Transworld Metal Co., [1960] Ex. C.R. 463.

For these reasons, I therefore would allow the appeal and direct that the order issued at trial be amended by the deletion therefrom of paragraph 2. The interlocutory injunction, granted on February 14, 1979, included an order to the appellant not to issue or distribute any Seiko warranty booklets. This provision did not subsequently appear in the permanent injunction issued after trial. The respondent apparently did not seek the restoration of this aspect of the injunction. This seems to be a proper result because it was Hattori, and not the respondent, who issued the guarantee, and Canadian purchasers should be left with their chances of forcing Hattori to perform this obligation. The appellant shall have its costs here and in the Court of Appeal, but shall have no costs with reference to the counterclaim. I would not vary the order as to the cost at trial because it is not entirely clear that the appellant gave, before the commencement of trial, the consent and undertaking with reference to the continuance of the interlocutory injunction which would have made the prosecution of the action through to judgment at trial unnecessary.

Appeal allowed with costs.

Solicitors for the appellant: Fogler, Rubinoff, Toronto.

Solicitors for the respondent: Osler, Hoskin & Harcourt, Toronto.

[1] The Chief Justice took no part in the judgment.

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