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Punitive Damages May Exceed Compensatory Damages: Federal Court of Appeal

The Federal Court of Appeal has agreed that, in principle, an award for punitive damages may exceed compensatory damages.

In Annie Pui Kwan Lam v. Chanel S. De R. L., 2016 FCA 111, Ms. Lam appealed a decision in which Justice Martineau conducted a summary trial and ordered Ms. Lam to pay compensatory damages in the amount of $64,000, punitive damages in the amount of $250,000 and costs of $66,000 by reason of her sale and offering for sale of counterfeit Chanel merchandise (see our previous post, here)

Ms. Lam had been named as a defendant in two earlier actions relating to counterfeit Chanel merchandise. Those actions were settled and two Orders were issued which enjoined Ms. Lam from offering for sale and selling any merchandize bearing any of the Chanel trade-marks. Despite those orders, Ms. Lam continued to sell Chanel merchandise through a business operated by a new company that had not been the subject of the earlier Federal Court Orders. A new action was commenced against Ms. Lam on the basis of the new acts of infringement.

Justice Martineau awarded compensatory damages on a nominal basis for each of four acts of infringement. He found that each instance of infringement was compensable at $8,000 per infringement, and that each instance amounted to two acts of infringement as the rights of both the trade-mark owner and Canadian licensee were violated. On that basis, he arrived at a damages award of $64,000 ($8,000 x 2 x 4). He also awarded $250,000 in punitive damages.

The Court of Appeal found no reviewable error in the decision of Justice Martineau to proceed by way of summary trial. That decision is a discretionary one entitled to deference, and “it is not simply because a defendant raises an unbelievable defence of denial in response to a motion for summary trial that the motion must be dismissed.”

The Court of Appeal also found no merit in Ms. Lam’s submission that the Federal Court erred in making a nominal damages award, or setting the amount for each infringement at the level of $8,000, holding:

[17] The authorities support a nominal damages award in a case like this, where the defendants are uncooperative, proof of actual damages is difficult and it is hard to estimate the harm done to the trade-mark owner’s goodwill through the sale of inferior quality counterfeit goods…

[18] Likewise there is significant authority to support an award of $8,000.00 per act of infringement (adjusted as a result of inflation) and to support awarding damages to both the trade-mark owner and Canadian licensee in a case like the present.

However, the Federal Court of Appeal found ambiguity in the decision of the Federal Court in that it was not clear if Ms. Lam was liable for the fourth act of infringement that had taken place in June 2013. The Federal Court of Appeal held:

[19] However, given the ambiguity in the trial judge’s Reasons, it is impossible to discern what acts of infringement the appellant was found to have committed. Certain paragraphs of the Reasons can be read as a finding that the appellant is liable for all four instances of infringement whereas other paragraphs seem to indicate that the trial judge found the appellant responsible for the infringing activities only up to May 28, 2013 and thus to be exonerated from the most serious acts of infringement that occurred on June 2, 2013…

On the basis of this ambiguity, the Federal Court of Appeal remitted the matter to the trial judge for re-determination as to the quantum of damages, including punitive damages, and costs. Following the decision of the Supreme Court of Canada in Whiten v. Pilot Insurance, the Court of Appeal held that the scope of review of punitive damages awards is broader than for other damages and a reviewing Court is justified in reducing punitive damages when the award is higher than rationally required. While characterizing Justice Martineau’s reasons underlying the $250,000 punitive damage award as “quite sparse” and that it was “difficult to discern the precise basis for the award”, the Court of Appeal held that there was a basis in principle an award of this magnitude:

[25] Bearing these factors in mind, it is entirely possible that an award of punitive damages in the amount of $250,000.00 might be a supportable remedy in a case like the present, even though the award is proportionally higher than the awards made in earlier cases. Violation of trade-mark rights through the repeated sale of counterfeit goods is serious misconduct worthy of sanction and justifies damages awards that are high enough so as to deter the defendant and others from engaging in such reprehensible conduct…

Although Ms. Lam was partially successful on the appeal, the Court of Appeal did not grant any costs on the appeal in light of her conduct.

A copy of the Court of Appeal’s decision may be found here.