Grey Market Goods – Coty and Costco Battle it Out in Québec

By Scott Miller and Carl Farah, September 1st, 2020

The Québec Court refuses to force Costco to disclose where it obtained genuine goods but offers a practical solution to track down the source of the goods.

Grey marketing typically consists of a retailer purchasing genuine branded products abroad for less than offered to them from a local distributor. Grey marketing is generally problematic for international brand owners, who may end up competing against their own products thereby losing control of how the brand is represented to customers.

On June 22, 2020, the Québec Superior Court, in Coty Inc. c. Costco Wholesale Canada Ltd.[1], issued a decision regarding Coty’s request for a Norwich Order asking the Court to compel Costco to disclose the identity of the supplier who sold it genuine Coty cosmetic products.

Norwich Orders are an extraordinary pre-trial discovery measure that allows the holder of a right to compel an innocent third party to disclose the identity of wrongdoers in order to commence legal proceedings against them.

Coty argued that Costco had obtained Coty products from distributors who had breached their exclusive distribution agreements and as such, Costco ought to reveal the identity of these distributors. However, Costco answered that the doctrine of exhaustion should prevail in that the intellectual property rights (trademark/copyright) embodied in a tangible object are “exhausted” after it undergoes its first sale. The Court agreed with Costco and further noted that Costco’s expectation of privacy should be upheld and there was no evidence that Costco had purchased illegal goods.

The Court refused to issue the Norwich Order. Intriguingly, the Court offered a solution to discover the identity of the alleged foreign distributor(s) who were purported to be in violation of selling outside their territorial limits by implementing a tracking system to determine the origin of the products sold by Costco instead of seeking to compel the disclosure of this information.

In conclusion, this decision further exemplifies the degree to which Norwich Orders are extraordinary measures that should only be granted when there is sufficient evidence to substantiate allegations of wrongdoing.