Copyright — Offences — Selling infringing works — Sentence, punishments and fines — Fines.

   Sentencing of AFC Soccer, which was charged with selling counterfeit garments contrary to the Copyright Act.  AFC was a retailer of soccer clothing and accessories, which operated from two retail locations in Winnipeg and on the internet. AFC had arranged with a Thailand manufacturer to import counterfeit garments, which carried the well-known labels and logos of Nike, Umbro, and Adidas.  AFC did not have a licence from these manufacturers to distribute their goods in Canada. The garments also had tags sewn into them which contained false information as to the fabric content and place of manufacture.  The total number of items seized was 1,118.  The estimated profit which AFC had made in selling the counterfeit goods was $180,000.  The Crown sought a fine in the range of $50,000 to $90,000, arguing that the scope of the operation, as well as the inherent danger of deliberately mislabelled clothing, warranted a severe penalty.  AFC suggested a fine in the range of $2,500 to $3,500.  AFC pointed to the small size of its business, the lack of prior offences, and the guilty plea as mitigating factors in determining sentence.

   HELD:  AFC was fined $45,000.  There had been serious economic loss to the manufacturers whose copyrights were infringed, and the scale of the operation was considerable. General deterrence was an extremely important factor.  The best approach was to base the fine on a percentage of the revenue AFC realized from the sale of the counterfeit items. Here, a fine of 25 per cent of the total revenues of $180,000 was appropriate.

Statutes, Regulations and Rules Cited:

   Copyright Act, s. 42(1)(a).

Counsel:

¶ 1      DEVINE PROV. CT. J.:— The defendant AFC Soccer pled guilty on May 21st of this year to one charge under s. 42(1)(a) of the Copyright Act. This count alleges:

¶ 2      The crown proceeded by indictment making the maximum penalty for the offence a fine of one million dollars ($1,000,000) or five (5) years in jail.

¶ 3      The matter came before me for sentencing on August 12th at which time I heard submissions from crown and defense and reserved my decision.

¶ 4      Mr. Mahon for the federal Department of Justice indicated that the amount and value of the seizure involved in this criminal prosecution is unprecedented in Canada insofar as he has been able to ascertain. The investigation was triggered by a complaint from a manufacturer that counterfeit copies of its brand name soccer jerseys were being sold on the Internet. AFC Soccer, the entity that was offering jerseys purporting to be "Umbro" brand jerseys for sale, was not in fact licensed by Umbro Canada to sell its merchandise. The AFC Soccer shirts had differences in the material, dyes and placement of the patches in comparison to the copyrighted shirts sold by Umbro.

¶ 5      Subsequent RCMP investigation revealed that these items were being sold by the defendant at two different locations in Winnipeg, as well as on the Internet. AFC Soccer had a kiosk at Polo Park Shopping Centre, a Winnipeg mall, as well as its own store on Sergeant Avenue that later moved to Northgate Shopping Centre. RCMP undercover officers purchased sample jerseys with Umbro Logos as well as those of certain other prominent brand-name manufacturers from AFC Soccer for $55 each. These manufacturers, including Adidas, Nike and Fubu as well as Umbro, verified that the items sold by AFC Soccer were replicas of their own original copyrighted soccer jerseys ordinarily sold for a retail price of $140 each.

¶ 6      The RCMP then executed a search warrant in November of 2000 and seized numerous items of clothing and accessories from AFC Soccer premises, as well as documents and computerized business and accounting records. The seizures included 320 purported "Nike" jerseys as well as 80 Nike shirts, 27 pants and 5 hats. In addition, 388 "Adidas" jerseys, 67 shirts, and 45 pants were recovered, along with 94 "Umbro" jerseys and 30 shirts and 40 "Fubu" jerseys, 4 hats and 4 wallets. All of the 1118 items of apparel and accoutrements seized were brand name products and all were counterfeit.

¶ 7      Mr. Aree Arunkiet is the sole proprietor of AFC Soccer and had accepted delivery of all of the goods in question on its behalf. Neither Mr. Arunkiet nor AFC Soccer was licensed to sell the products of any of these brand name manufacturers. Mr. Arunkiet appears to have been well aware of the necessary procedures to become a legitimate distributor. Among the items seized from his premises were the business card of an Umbro representative as well as a blank Nike application and licensing agreement. These manufacturers were not the only entities to suffer economic loss from the marketing of counterfeit items. The branding on the items seized identified them as World Cup or British First Division team logos. These teams such as "Manchester United" would also have been deprived of any of the royalties to which they would ordinarily have been entitled from the sales of team items.

¶ 8      Documentary evidence showed that the owner of AFC Soccer, Aree Arunkiet, had been importing goods from Thailand since 1998. Analysis of his business records, web page and e-mails revealed to investigators that the minimum gross revenues from the sale of the infringing items was some $17,000 per month or $180,000 for the period of time covered by the charge.

¶ 9      Net revenues were not as readily ascertainable from the documents available and there were certain demonstrably false invoices on the computer. However one representative invoice reflected a purchase price in Thailand of 28 baht (Thai currency) or the equivalent of $1 (one dollar Canadian) for a jersey that would later be sold in Canada for $44 to $55 Canadian dollars. The actual costs of shipping, tariffs and duties, and costs incidental to actually selling the items were difficult for the forensic accountants to identify and quantify based on available records. However the crown indicates that the normal range of retail mark-up for clothing is some 200 to 300%. Therefore, even if AFC Soccer's overall costs were 10 or 15 times that of the original one dollar ($1) wholesale purchase price of the shirt, there is no doubt that the defendant corporation was making a very substantial profit on shirts that he was selling for $55 each.

¶ 10      The documents showed evidence of certain aggravating factors as well. In some instances persons ordering by e-mail had explicitly inquired as to whether or not AFC Soccer was licensed and had been given the false information in reply stating that they were licensed. AFC Soccer could and did expressly direct the content of what was to be placed on the labels of the Thai "knock-off" items that they ordered. That is, items made in Thailand could be ordered with a label showing a specified fabric content or manufacturing location, regardless of the accuracy of the information. AFC was thus able to order goods that were actually manufactured in Thailand but sported labels stating that the item had been manufactured in the U.K. This is clear evidence that AFC knew that the goods being sold were counterfeit and was in fact complicit in their being counterfeited.

¶ 11      The crown seeks a fine in the range of $50,000 to $70, 000. The rationale for doing so is based on a number of factors. Firstly, the court is asked to be mindful of the risk that a lesser monetary penalty for an infraction of this scope and duration by a commercial enterprise could be viewed as merely a form of license fee. The crown submits that both specific and general deterrence are important considerations for this kind of regulatory offence to ensure that a criminal penalty is not seen as merely part of the cost of doing business. There is also the concern that minimum manufacturing and safety specifications regarding apparel may not have been met where data as to place of manufacture and fabric content are inaccurate. While crown concedes that there is certainly no evidence that the flammability of fabrics or toxicity of dyes for example are issues of concern in this particular case, such safety considerations are clearly part of the rationale for the regulatory requirements that apparel be labeled. The promulgation of counterfeit goods with misleading labels has the potential of causing harm beyond that of mere economic loss to the legitimate manufacturers.

¶ 12      The quantum of fine sought here has been based on the crown's conservative estimate of gross revenues, discounted to allow for extraordinary expenses, including the loss of the items seized. Mr. Mahon quite candidly admits that he cannot provide any precedents to assist the court in arriving at an appropriate sentence. Even though the provision under which the company has been charged will have been in effect in its present form for five years as of September 1st of this year, there is an apparent paucity of precedent to date. Apparently most prosecutions, at least locally, have involved for example a single instance of the copying of a tape by a commercial enterprise. In such cases, where the revenues earned amount to sums as small as $20, the fines requested and imposed have been in the range of $500 for a single and modestly lucrative infringement.

¶ 13      Counsel are in agreement that the computers seized by police are to be returned to AFC Soccer and that the remaining apparel items be forfeited and returned to the copyright holders for destruction. I so order.

¶ 14      Mr. Guttman appearing on behalf of AFC Soccer, submits that the fine sought by the crown is manifestly inappropriate and unprecedented. He suggests instead that a fine in the range of $2500 to $3500 be imposed.

¶ 15      Most of AFC Soccer's website sales were to the United States and to local Winnipeg soccer teams. Defense maintains that his client was filling a need in the community by supplying high quality affordable "replica" jerseys to both indoor and outdoor soccer teams as well as to individuals who would not be able to afford the originals. The quality of these replicas is manifested by the fact that only a close examination of the counterfeit product by the manufacturer actually ripping apart the seams of the questionable garments revealed differences in the stitching pattern of the seams. He agrees that there were also differences in the placement of the logos between the original and the replica goods. Counsel points out that the manufacturers who are complaining of these infringements  actually produce their own replicas that they retail for $110 rather than the $140 retail price for their original garments. He asserts that any soccer aficionado would realize that a shirt that is sold for $55 must also be a replica and that therefore it is unlikely that many AFC Soccer customers were in fact deceived.

¶ 16      AFC Soccer calculates its net cost per jersey to be $24 which means that its estimate of the value of the seizures is approximately $20,000, already a serious monetary penalty to the company. The additional expenses of retailing are also significant according to the company. For example the rental of the kiosk at the mall costs $30,000 per year. Mr. Guttman also points out that there was substantial negative publicity for his client at the time of the police raid in November of 2000. At that juncture 85% of the company's business at the Northgate store alone involved soccer apparel. Ensuing credit and marketing difficulties for the company have also been incurred. AFC Soccer is a family run business with Mr.Arunkiet also employing his wife and his mother-in-law from time to time. If this were not the case, defense asserts, the business would likely have closed by now. Defense also maintains that this investigation has made the continued operation of the business difficult since the authorities are now closely scrutinizing all of its imports and have held up shipments for as long as six weeks. On one occasion Mr. Arunkiet was thus prevented from providing the uniforms he had promised for a mini world cup soccer tournament, negatively impacting on his good relationships within the local soccer community.

¶ 17      Defense asserts that the business is barely functioning at present, having switched its focus to hip-hop clothing. A fine of the size sought by the crown would put the company out of business he says. The maximum fine for an offence on which the crown had chosen to proceed summarily would be $25,000. The fact that the crown has proceeded by indictment should not preclude the imposition of a fine at the lower end of the summary range in this instance, bearing all of the relevant factors in mind. Defense agrees with the crown assertion that there are no analogous published precedents. His client should be given credit for his guilty plea which has obviated the necessity for what would have been a complex trial. He also notes that the imposition of a severe monetary penalty in this proceeding will not necessarily preclude civil remedies being sought by the manufacturers whose copyrights have been infringed. For all of these reasons, defense urges the imposition of a fine of between $2500 and $3500 dollars.

¶ 18      It is rare in my experience as a sentencing judge to have such a wide discrepancy between the representations of counsel as to the appropriate range of fine. The range proposed by the crown is twenty times that suggested by defense counsel. Given the relative positions of counsel and the lack of precedent, I turn to some first principles of sentencing for guidance.

¶ 19      There is no question that this is a serious instance of copyright infringement, deliberate, relatively sophisticated, and ongoing for an extensive period of time, with economic harm caused to more than one copyright holder. Undoubtedly, the relative economic harm to these multinational corporations like Adidas and Umbro is less significant than it would be to an individual copyright holder, but it is economic harm nonetheless. It is also clear that the income generated by these infringements was by no means insubstantial, amounting to tens of thousands of dollars over almost an entire year. The use of the website for sales of goods imported from Thailand also meant that the forum for the distribution of the infringing products became not only national but also international in scope. I agree that inappropriately low fines for these kinds of regulatory offences risk can potentially amount to a calculatedly cheaper licensing fee than actually obtaining the proper license from the manufacturer. Therefore the fine ought to bear some relationship to the scope and profit of the offending activity.

¶ 20      On the other hand, AFC Soccer is a local sole proprietorship operated essentially as a family business. This is a first offence and the company's guilty plea constitutes an acknowledgement of the wrong done. There has already been some financial penalty to this company by virtue of the negative publicity and its impact on business, as well as the seizure of over 1100 apparel items along with computers and business records. This specific deterrence already meted out to the company should militate against the likelihood of its repeating the offence. However there is manifestly a need for general deterrence for this kind of offence as well.

¶ 21      One of the troubling aspects of this case is the lack of concrete data proffered as to the current economic health of the company. Clearly AFC Soccer is not on a par with Microsoft when it comes to ability to pay. Nonetheless I find it difficult to accept the bare assertion by defense that a fine in the range sought by the crown will put the company out of business, nor do I accept that if this were to be the end result it would necessarily amount to a legitimate rationale for the court not to assess the appropriate penalty.

¶ 22      Ultimately I have concluded that the most appropriate method of assessing a fine in these circumstances is to tie the fine in some way to the gross revenues generated by the infringing behaviour, at the same time weighing all of the other factors I have enumerated so as to tailor the fine to the individual circumstances. The Crown's assertion of gross revenues from the sale of the infringing items of $17,000 per month over a period of approximately ten and a half months for total gross revenues of approximately $180,000 was not disputed by defense. The discrepancy between the parties related to the net profits. If these gross revenues were representative of the usual retail pattern of a 200 to 300% percent markup referred to earlier, they would represent actual net profits to the defendant of between $60,000 and $120,000 for the period in question.

¶ 23      In all of the circumstances I conclude that basing the fine on a percentage of known gross revenues is the most appropriate manner in which to proceed. While I think that in many cases the figure sought by the crown amounting to some thirty to forty percent of gross revenues generated could easily be justified, I am persuaded that in this instance a lower amount is appropriate for the reasons indicated above relative to this particular small business. On the other hand, the fine urged by the defendant company equating to some two per cent or less of gross revenues is manifestly inadequate and would clearly amount to nothing more than a nominal licensing fee.

¶ 24      In my view, a fine of $45,000 is appropriate here which I find represents approximately twenty-five per cent of the gross revenues generated by the defendant from the infringing items.

DEVINE PROV. CT. J.

QL Update:  20021118
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