The Superior Court of Justice’s recent decision in Computron Systems International Inc. v. Ladhani et al., 2020 ONSC 3188, granting summary judgment in the plaintiff’s favour, provides important guidance on the court’s application of section 14 of the Sale of Goods Act, which concerns sales by description and by sample. In this case, the defendants used the well-known Beats trademarks to sell headphones to the plaintiff. However, the headphones received were not authentic Beats headphones.
The key takeaway from this case is that where fake goods are sold with a description stating that they are authentic trademarked goods (in this case, Beats headphones), this is a breach of the provisions of the Sale of Goods Act addressing sales by description – even where a sample has been provided and the goods received match that sample. In other words, a seller cannot rely on compliance with the provisions of the Sale of Goods Act dealing with sales by samples to avoid a finding that it has breached the provisions dealing with sales by description. This aligns with the wording of section 14 of the Sale of Goods Act that “it is not sufficient that the bulk of the goods corresponds with the sample if the goods do not also correspond with the description”. Below, we elaborate on this case and our takeaways.
In 2017, Computron Systems International (Computron) purchased 750 wholesale Bluetooth wireless headphones from Husain Ladhani (Ladhani). The headphones were packaged and labelled as “Beats by Dre”, which is a product of Beats Electronics LLC (Beats). Ladhani had purchased the headphones from Prosonic Canada Inc. (Prosonic) and Techlogics Canada Inc. (Techlogics). In various invoices, Techlogics described the purchase product as “POWERBEATS 3 WIRELESS (100 % Original) BRAND NEW SEALED PACK” and “Powerbeats Wireless 3 headphones”.
Computron subsequently purchased 2,800 additional pairs of headphones directly from Techlogics including Solo 2 Wireless Beats and Solo 3 Wireless Beats for a purchase price of CA$474,600.
None of the headphone sales at issue were the subject of formal contracts between the parties. The various purchase agreements arose through different combinations of oral discussions, text messages, and purchase orders and were confirmed by invoices. These various documents referred to the headphones by their trademark brand and model names. Ex. Powerbeats 3® in-ear BT sport headphones complete (New/sealed) and Solo 2 Wireless Beats.
Shortly after receiving the first shipment, Computron became aware that the headphones were not authentic Beats products. When Computron notified its suppliers, both Prosonic and Techlogics asserted that the products were authentic. In fact, Techlogics provided Ladhani a letter from Mac Factories Holdings Ltd., which stated that the products were 100% genuine and based on the approved samples provided.
Both Computron and Ladhani brought motions for summary judgment, alleging they were misled by Techlogics’ representations that the headphones were genuine Beats products. The central issue was whether Ladhani and/or Computron knew that the headphones supplied by Techlogics were not authentic Beats products. Ladhani and Computron maintained that they always intended to buy authentic Beats products and believed based on oral affirmation that this is what they would receive. Techlogics did not dispute that the headphones were not authentic Beats products but maintained that the buyers knew or should have known that this was the case.
Description of Product
Section 14 of the Sale of Goods Act states:
Where there is a contract for the sale of goods by description, there is an implied condition that the goods will correspond with the description, and, if the sale is by sample as well as by description, it is not sufficient that the bulk of the goods corresponds with the sample if the goods do not also correspond with the description.
The court determined that in the context of sales of consumer electronics, when goods are “described” simply by referring to a brand name and particular model, this generally implies that the seller is agreeing to provide authentic branded products rather than inauthentic copies.
The court held that the purchasers did not have to insist specifically that the seller supply “authentic” products in order for it to become a term of the purchase contract. It is enough for the buyers to specify the name of the product (ex. “Powerbeats” or “Beats” headphones), and for the seller to agree to provide such products. If the seller intends to supply products other than authentic products, they must express that.
Sale by Sample
Techlogics argued that Ladhani was provided with a sample and the products the plaintiff received were the same as the pre-approved sample. However, the court concluded that a merchant who has expressly or implicitly agreed to supply genuine branded goods to a buyer cannot get around the requirement of authenticity by providing a sample and hoping that the buyer fails to identify it as a fake.
Section 14 of the Sale of Goods Act prevented Techlogics from relying on the fact that it provided a sample, given that it had expressly or implicitly “described” the products as authentic branded Beats products. As set out above, section 14 provides that it is not sufficient that the bulk of the goods corresponds with the sample if the goods do not also correspond with the description.
Techlogics knew both that the headphones it was selling were not authentic Beats products and that they had been carefully designed and packaged to be virtually indistinguishable from the real product. In the circumstances, and relying on Hearn v. McLeod Estate, 2019 ONCA 682, the court held that the fact that Ladhani had a chance to see a sample at some point before the sale does not convert the sale into something other than a sale by description for the purpose of the Sale of Goods Act.
Further, even if the headphones were characterized as a sale by sample, the result would not change pursuant to section 16(2)(c) of the Sale of Goods Act, which provides that “[i]n the case of a contract for sale by sample, there is an implied condition…that the goods will be free from any defect rendering them unmerchantable that would not be apparent on reasonable examination of the sample.”
The fact that the headphones purchased were not authentic Beats products was a “defect rendering them unmerchantable that would not be apparent on reasonable examination of the sample”. Ladhani would have been unable to tell from looking at a single sample that the headphones he was purchasing all had the same serial number, which was the main clue that they were actually knock-off goods.
This decision explains how courts will apply section 14 of the Sale of Goods Act and emphasizes the importance of ensuring that the description of the product corresponds to the product received, particularly where a good is being sold using a trademark to describe the product. The decision helps protect purchasers (both corporations and individual consumers) from the purchase of counterfeit goods by confirming that products referred to by their trademark name must meet the corresponding standard of authenticity. Providing a sample of the fake product where the product and packaging are designed to look authentic, will not be sufficient to overcome a finding of liability.