Background
Zoe International Distributing Inc., operating as HBI Canada, is a long-standing manufacturer and wholesale distributor of smoking accessory products — rolling papers, hemp wraps, grinders, and related goods — sold across Canada. In two parallel actions (T-2111-23 against Smoke Arsenal Inc. and T-1125-24 against Vanpak Limited), Zoe alleged that each defendant infringed its copyright, trade dress, and trademark rights in artwork and marks appearing on product wrappers. The two files were ordered to proceed in tandem by the Case Management Judge (CMJ), Associate Judge Kathleen Ring.
In response to Zoe’s claims, both defendants raised a defence of misuse of copyright and filed counterclaims under s 7(a) of the Trademarks Act, RSC 1985, c T-13, alleging that Zoe had sent false and misleading letters to the defendants’ customers. Zoe moved to strike both the misuse-of-copyright defences and the s 7(a) counterclaims. In orders issued in 2025, the CMJ struck the misuse-of-copyright defences for failure to plead sufficient material facts — but granted leave to amend — and dismissed Zoe’s motions to strike the s 7(a) counterclaims, finding it was not plain and obvious that they disclosed no reasonable cause of action.
Zoe appealed both rulings to Justice Fothergill of the Federal Court. The parties also made supplementary submissions on the Supreme Court of Canada’s decision in Patrick Street Holdings Ltd v 11368 NL Inc, 2026 SCC 15, which was released shortly after argument on the doctrines of issue estoppel and abuse of process.
The Court’s Holding
Justice Fothergill allowed the appeal in part. On the misuse-of-copyright defence, the Court upheld the CMJ’s approach in full. Issue estoppel barred Zoe from arguing that the defence does not exist in Canada: the 2024 CMJ Order had implicitly determined that the defence was at least arguable by granting leave to amend, the order was final (neither party appealed it), and Zoe could have raised its broader challenge at that stage. Independently, re-litigating the question constituted an abuse of process, inconsistent with the principles of finality and judicial economy articulated in Janssen Inc v Apotex Inc, 2023 FCA 253. On the merits, the Court agreed with Justice Furlanetto’s analysis in Millennium Funding, Inc v Bell Canada, 2023 FC 764, confirmed by the Federal Court of Appeal in 2025 FCA 153, that the Supreme Court of Canada in Euro-Excellence Inc v Kraft Canada Inc, 2007 SCC 37, did not definitively reject misuse of copyright in Canada — the doctrine remains novel but arguable. Because the defects in the defendants’ pleadings (insufficient material facts as to who, what, when, where, and how) were potentially curable, the CMJ was correct to grant leave to amend.
On the s 7(a) counterclaims, however, the Court found the CMJ erred. Constitutional validity of s 7(a) of the Trademarks Act requires that the cause of action be limited to false or misleading statements made about the claimant’s own trademark or intellectual property (citing Canadian Copyright Licensing Agency v Business Depot Ltd, 2008 FC 737). The defendants’ revised counterclaims failed to plead any nexus between Zoe’s allegedly misleading letters and the defendants’ intellectual property. This omission is fatal to a s 7(a) claim. Although the defect is potentially curable, the CMJ should have granted Zoe’s motion to strike the counterclaims with leave to amend.
The appeal was accordingly allowed in part: the CMJ’s orders striking the misuse-of-copyright defences with leave to amend were confirmed, while the dismissal of Zoe’s motions to strike the s 7(a) counterclaims was reversed and those counterclaims were struck with leave to amend.
Key Takeaways
- The defence of misuse of copyright remains novel but arguable in Canada: Euro-Excellence did not definitively reject it, and courts may not strike the defence as plainly hopeless at the pleadings stage.
- Issue estoppel can attach to interlocutory case-management orders; a party that fails to appeal such an order, or that could have raised an argument but chose not to, may be barred from relitigating the issue in a subsequent motion in the same proceeding.
- A counterclaim under s 7(a) of the Trademarks Act must plead that the defendant’s allegedly false or misleading statements were about the claimant’s own intellectual property — failure to plead that nexus is fatal, even if the identity of the competitor is otherwise inferable.
- Leave to amend a deficient misuse-of-copyright pleading should be granted unless a party has already had multiple failed opportunities to plead the required material facts; a first or second deficient attempt is generally curable.
Why It Matters
This decision is significant for Canadian intellectual property litigators on two fronts. First, it reaffirms — in a product-liability and competition context rather than film piracy — that the misuse-of-copyright doctrine has not been closed off by the Supreme Court of Canada and can survive a motion to strike if adequately pleaded. Defence counsel in copyright infringement actions now have clearer guidance on what material facts are required: the pleading must identify the specific actors, conduct, time, place, and illegality that ground the misuse claim. Second, the decision draws a clear line under s 7(a) of the Trademarks Act: counterclaiming parties must expressly connect the impugned statements to their own trademarks or intellectual property, or risk having the claim struck at the threshold.
More broadly, the case illustrates how the doctrines of issue estoppel, abuse of process, and judicial comity operate in tandem-managed, parallel proceedings before the Federal Court. Parties who obtain a favourable interlocutory ruling — and who choose not to appeal it — may find that ruling locks in legal determinations they intended to revisit, underscoring the importance of mounting a complete challenge at the first available opportunity.