Microsoft Corporation v. 9038-3746 Quebec Inc.

Microsoft Corporation v. 9038-3746 Quebec Inc.
Court (s) Database
Federal Court Decisions
Date
2006-12-18
Neutral citation
2006 FC 1509
File numbers
T-1502-00
Notes
Digest
Decision Content
Date: 20070116
Docket: T-1502-00
Citation: 2006 FC 1509
BETWEEN:
MICROSOFT CORPORATION
Plaintiff
and
9038-3746 QUEBEC INC., 9014-5731 QUEBEC INC.,
ADAM CERRELLI and CARMELO CERRELLI
Defendants
AMENDED REASONS FOR JUDGMENT
HARRINGTON J.
[1] The first question in this copyright and trade-mark action is what the case is really about. The parties agree that it is about compact discs and related material which Microsoft alleges are counterfeit. The CDs contain copies of various Microsoft computer software programs. These programs are literary works, protected by copyright. The CDs and other material are also covered by such well-known trade-marks as “Microsoft”, “Windows”, “Office” and “Outlook”. However Microsoft goes on to allege that even if the CDs and other material are genuine, the defendants’ dealings in them were unlicensed and still constitute an infringement of its copyright and trade-marks. The defendants take the position that to the extent the items are genuine, even if unlicensed, they infringed nothing. They say they were dealing in the grey market which is perfectly legal.
[2] I find that the CDs as well as the material related thereto, such as instruction manuals and certificates of authenticity, were counterfeit. By counterfeit I mean they were neither manufactured by Microsoft nor by any of its authorized replicators. It follows that the copies of the computer programs embodied in the CDs were unauthorized.
[3] Consequently, Microsoft’s position that dealing in genuine, but unlicensed, material infringes copyright and trade-mark is somewhat moot. Nevertheless, some consideration must be given thereto because of the wide-ranging scope of the permanent injunctive relief it seeks.
[4] The evidence which leads me to the conclusion that the computer programs in question were not authorized by Microsoft to be copied, and that the CDs and related material are counterfeit, arises from a seizure by the Royal Canadian Mounted Police in November 1999, followed by another seizure by the Montreal Urban Community Police in March 2000. The items seized by the RCMP were exhibited at trial and examined in extensive detail by a renowned expert retained by Microsoft. I accept his opinion that what he identified as counterfeit was counterfeit. The items seized by the Montreal police were returned to the defendants who then disposed of them under extremely suspicious circumstances. Fortunately, however, they had been examined by a Microsoft in-house expert while still in police custody. I accept her opinion that the items she identified as counterfeit were counterfeit. It follows that the copies of the computer programs embodied in the CDs were not authorized.
[5] Although it is therefore a foregone conclusion that Microsoft is entitled to some judgmental relief, such as delivery up of the counterfeit material, the defendants say they did not know that the discs and related material were counterfeit and that the copies of the computer programs embodied therein were unauthorized. Indeed, by making Microsoft prove its case they made the point that it would be difficult, if not impossible, for someone to distinguish reality from illusion unless privy to Microsoft’s closely-guarded confidential information. Knowledge, or lack thereof, has a considerable bearing on the personal liability of the two individual defendants who are, or were, directors of the corporate defendants and on the scope of the wide-ranging injunction, statutory damages, punitive damages and other remedies sought by Microsoft.
[6] In order to put the facts of this case in context, I shall first begin with a brief legal overview, followed by an explanation of Microsoft’s business and licensing practices, the defendants’ business practices, a timeline of key events, findings of fact, the application of law to those facts, and the relief to be granted. As these reasons are lengthy, the following index may prove helpful:
Paragraphs
Legal Overview
7-9
Microsoft’s Business and Licensing Practices
10-20
The Manufacturing Process
11
The Distribution Process
15
The Defendants’ Practices
21-27
The Timeline
28-72
Were the items seized by the RCMP counterfeit?
35
Were the items seized by the Montreal police counterfeit?
46
What happened to the items seized by the Montreal police?
55
The Mitchell Sting Operation
65
Liability of the Defendants – or What They Knew
73-99
The Corporate Defendants
73
Liability of Carmelo Cerrelli
91
Liability of Adam Cerrelli
99
Remedies
100-142
Declaration
101
Delivery Up
102
Damages
103
Statutory Damages
105
Punitive Damages
116
Permanent Injunction
121
Against Whom
125
Against What
128
Interest
139
Costs
141
Aftermath
142
LEGAL OVERVIEW
[7] Microsoft’s claim is based on two federal statutes, the Copyright Act, R.S.C. 1985 c. C-42 and the Trade-marks Act, R.S.C. 1985, c. T-13. The defendants have admitted that copyright subsists in the 25 works alleged in the proceedings and that Microsoft is the owner thereof. They also admit that Microsoft is the owner of the 10 trade-marks alleged, and is using and has used them extensively throughout Canada in association with the Microsoft computer programs and related material.
[8] Copyright gives the owner the sole right to produce or reproduce a work, in this case a literary work, in any material form whatever. Section 27 of the Copyright Act provides that it is an infringement of copyright for any person, without the owner’s consent, to do anything that is reserved to him, including offering for sale, selling or distributing copies to a prejudicial extent. It is a requirement that the infringer knew or should have known that the copy infringed copyright, or would have if made in Canada by the person who made it. However, if the copies were imported, knowledge is irrelevant. Where copyright has been infringed, the owner thereof is entitled to remedies by way of injunction, damages, equitable accounting of profit and delivery up. There are also special rules concerning injunctions and damages.
[9] The registration of a trade-mark, until shown to be invalid, gives the owner thereof the exclusive right to use it throughout Canada in respect of specified wares and services so as to distinguish them from those of others. Section 7 of the Trade-marks Act prohibits anyone from passing off other wares or services as and for those ordered or requested. Sale, distribution and advertisement of wares and services in association with a confusing trade-mark is deemed to be an infringement. Furthermore, no one may use a trade-mark registered by another in a manner that is likely to have the effect of depreciating the goodwill attaching thereto. The Act recognizes the equitable relief of injunction as does the Federal Courts Act, R.S.C. 1985, c. F-7 itself.
MICROSOFT’S BUSINESS AND LICENSING PRACTICES
[10] Microsoft Inc. of Redmond, Washington, is a well-known developer and purveyor of computer software programs; those systems and applications which enable a computer to carry out its desired functions. The Microsoft name is probably as renowned as any. Its computer programs are defined as “literary works” within the meaning of the Copyright Act, notwithstanding that they are not normally copied or stored in print form. The means of storing programs outside a computer has continually evolved, from punch cards to silicon chips to CDs to digital versatile discs (DVDs), and undoubtedly will continue to evolve. Although now almost a matter of ancient history in the rapidly evolving world of computers, Madam Justice Reed’s tour de force in Apple Computer Inc. et al. v. Mackintosh Computers Ltd. et al. (1986), 10 C.P.R. (3d) 1, aff’d (1987), 18 C.P.R. (3d) 129 (F.C.A.), aff’d [1990] 2 S.C.R. 209, provides sound background information.
The Manufacturing Process
[11] At the time in question Microsoft, for the most part, did not manufacture the pre-recorded read only memory compact discs (CD-ROMs) in which its computer programs were embodied. It hired outside manufacturing facilities and used various methods to deliver to them the copies of the programs, the artwork and text to be printed on the CDs, the front-liners and back-liners of the carrying cases, or jewel cases, in which CDs are normally stored, instruction manuals, certificates of authenticity and the like.
[12] Much of this information is closely guarded and was covered by a confidentiality order issued at an early stage of the proceedings by Prothonotary Giles, later amended by Prothonotary Lafrenière. It would be inappropriate to recount Microsoft’s evidence in chapter and verse as it was not contested and as counterfeiters should not be given information which would allow them to improve their product.
[13] Nevertheless, there is some information publicly available. Not only did witnesses called by Microsoft testify to that fact, but so did the two personal defendants. One thing to look out for is the source identification code (SID code) which is readily visible on the CDs. Microsoft participates in a program supported by the International Federation of the Phonographic Industry (IFPI), in conjunction with Philips Electronics of the Netherlands. Each production facility and each mould used to produce “stampers” which contain all the digital content of a disc, is assigned a specific identification code. This gives the optical disc production facility, and customers such as Microsoft, the means to identify all discs mastered or replicated in a particular plant, as well as the individual laser beam recorder and mould used to produce a particular disc. The assigned codes allow for parties to add more identification markers. Microsoft has done so in order to be able to know in great detail the provenance of each CD it authorized to be manufactured.
[14] Microsoft also publishes some indicia of authenticity on its website and on its products. For example, the certificate of authenticity accompanying Microsoft Windows 95 identifies certain things to look for in the certificate itself. The manual states that if one believes the product may be counterfeit one may communicate with Microsoft at a specified email address. The back-liner of the jewel case in which the Microsoft Office 2000 Professional CD-ROM is intended to rest explains that the authenticity of that disc can be verified by the presence of a holographic image.
The Distribution Process
[15] For the purposes of this case, Microsoft used two major distribution chains to get its programs to the end-user. On the one hand there is the original equipment manufacturer (OEM) market and on the other the retail market. Licensing is a key feature of both.
[16] The OEM distribution chain in turn is divided in two: royalty OEMs, and “system builders”. Royalty OEMs do not figure in this case. They are major computer hardware companies which have individual contracts with Microsoft or its replicators. Such well-known names as Compaq, Dell, Hewlett-Packard and IBM were given as examples. However there are also smaller manufacturers or assemblers, called “system builders”, which might be as small as a corner store. They put together and sell clone computers which require software programs.
[17] The OEM products, which it turns out were counterfeit, were purportedly subject to two separate licensing agreements; the first between Microsoft and the system builder and the second between the system builder and the end-user. It is a condition of the first agreement that the items only be sold in conjunction with a computer, and never on a stand-alone basis. It bears mentioning, however, that this first agreement is between Microsoft Licensing Inc., a Nevada corporation, and the system builder. Presumably there is an in-house agreement between the plaintiff, Microsoft Corporation, and Microsoft Licensing Inc. However, that agreement was not before the Court, and Microsoft Licensing Inc. is not a plaintiff. Be that as it may, according to the agreement, the system builder has been given the right to distribute one complete unit of the items enclosed in the distribution pack. The system builder pack exhibited in this case contains three units in shrink-wrapped packages which contain such things as the CD, the instruction manual, a certificate of authenticity (COA) and the End User License Agreement (EULA) between the system builder and the end-user.
[18] It is not difficult to appreciate how the individual components of the system builder pack could find their way onto the market. A small system builder might have a contract to build 10 computers for one customer. The customer may only need one CD and instruction manual. The temptation arises for the system builder to sell the unneeded copies to someone else. However, for the most part, in this case we are not dealing with such genuine CDs, instruction manuals and related material.
[19] The retail market is somewhat different. The retail boxes seized from Inter-Plus by the police were also counterfeit, as I have used that term. Microsoft products on offer can be seen in advertisements placed by retailers in your daily newspaper. One buys a cellophane-wrapped cardboard box festooned with various Microsoft trade-marks. Inside one will find a CD within a jewel case, an instruction manual and related material. Although the end-user has purchased the CD, he or she has apparently not purchased the computer program or programs embodied within. The installation of the program within the computer and the authorization particulars which have to be entered to allow the program to function are said by Microsoft to constitute a licensing agreement between it and the end-user.
[20] Although I am somewhat loath to discuss genuine, but unlicensed product, Microsoft acknowledges that, in addition to the unlicensed unbundling of product by OEMs, genuine product made by an authorized replicator could “find its way out the back door.” A replicator is licensed to produce a specific number of CD-ROMs. Overproduction is possible. Such surplus would be unauthorized and unlicensed from Microsoft’s point of view. However, as aforesaid, that is not what we are talking about in this case.
THE DEFENDANTS’ PRACTICES
[21] Carmelo Cerrelli is the kingpin, and “Inter-Plus” is the name of the game. I say that deliberately. Both numbered company defendants have carried on business under that name - and more recently, other related corporations which are not named defendants have done so as well. In addition, the name “Inter-Plus Inc.” has also been used, although there is no evidence that such a corporation exists, or ever existed. 9014-5731 Quebec Inc. was struck from the Quebec Company Register in 1999 for failing to file annual returns. To raise a lawyer’s point, it could be, but has not yet been, revived. However, no attempt has been made to have the action dismissed against it on the basis that it is a non-entity. Given the intermingling between the two numbered company defendants, the fact that they have both been controlled by Carmelo Cerrelli, have used the same name, and have operated out of the same premises, and considering that there is evidence of the shifting of assets in ongoing shareholding arrangements, for the purposes of this case I shall treat 9038-3746 Quebec Inc. and 9014-5731 Quebec Inc. as one.
[22] When 9038-3746 Quebec Inc. was incorporated in 1996, Maria Pellizzi Cerrelli appeared as sole shareholder and director. However, it became apparent during the course of proceedings that she had only lent her name to her two sons, Carmelo and Adam, in order to avoid potential credit problems. In reality, the company reflected a partnership among Carmelo, Adam, and another. That partner left in 1998, and has subsequently died. He never figured in the action which has now been discontinued against Maria.
[23] Adam Cerrelli left Inter-Plus shortly thereafter and moved from Montreal to the Toronto area where he set up a company by the name of Magnasoft Distributors Inc., of which Carmelo was also a director. In August 1999 Magnasoft and Adam pleaded guilty to criminal charges of knowingly selling infringing copies of Microsoft works in which they had no copyright entitlement. Microsoft no longer seeks damages or costs from Adam, but on the other hand it has been agreed that if an injunction issues against Carmelo personally, it should also issue against Adam. Carmelo testified at trial. Adam did not, but part of his examination for discovery was read in. Any reference to Mr. Cerrelli, without further specification, is a reference to Carmelo Cerrelli.
[24] Inter-Plus has dealt with Microsoft OEM and retail products, as well as products from other software companies. A great deal of the product has been imported from the United States. It has not purchased product from Microsoft authorized distributors. It purchased from those who would not say from where the product originated, but nevertheless “assured” it that it was buying the genuine article. Leaving copyright and licensing issues aside, it is quite legal to buy a genuine article on the “grey market” (Kraft Canada Inc. v. Euro Excellence Inc. (2004), 33 C.P.R. (4th) 246 (T.D.), varied (2005), 47 C.P.R. (4th) 113 (F.C.A.), leave to appeal to the Supreme Court granted, [2006] C.S.C.R. no. 47).
[25] Inter-Plus received its product in various ways, most of which were outside the stream of commerce contemplated by Microsoft. It bought items on a stand-alone basis. For example, it would purchase CD-ROMs on spindles, or in paper sleeves, without the accompanying jewel cases, front-liners, back-liners, manuals of instruction, certificates of authenticity, and so on. Those items in turn would also be purchased on a stand-alone basis. Inter-Plus would bundle a package together, shrink wrap and sell. However, it also purchased some retail boxes complete with contents.
[26] Inter-Plus’ customers were said to be system builders and retail outlets. Although customer lists were not produced despite court order, I am satisfied that Inter-Plus did not sell to end-users, although a related company does. It bought and sold, but did not manufacture, the CDs and other wares in question.
[27] Since Inter-Plus was neither a system builder nor an end-user of any of the items, but merely a middleman, for the purposes of this case it has not been in a direct contractual relationship with Microsoft.
THE TIMELINE
[28] Microsoft obviously monitors the market closely for it did not take long for its solicitors to put Inter-Plus on notice. In March 1997 they wrote to say that Microsoft had received reports that Inter-Plus was distributing OEM versions of Microsoft software products on a “stand-alone” basis. The letter went on to say that Microsoft granted licenses to OEMs which authorized them to distribute operating system software and other Microsoft software titles with personal computers or hardware components. The licenses prohibited the OEMs from distributing such software on a stand-alone basis and required that they pass that condition down the distribution chain. They added that in Microsoft’s view stand-alone distribution was contrary to Canadian copyright law. Finally they said that according to a market survey, copy of which was not provided, one third of Microsoft’s OEM products distributed on a stand-alone basis in Canada were found to be counterfeit.
[29] This letter was followed up in January and May 1998 by further letters in which the lawyers said it had been reported to Microsoft that Inter-Plus was distributing counterfeit OEM Microsoft Windows 1995.
[30] Inter-Plus drew these letters to the attention of its lawyers. In December 1998 its lawyer, who did not identify his client, sent two Microsoft retail boxes to Microsoft for analysis. Microsoft replied that the products were counterfeit. Particulars thereof were neither given nor sought. The Microsoft memo stating that the products were counterfeit was among the material seized by the RCMP.
[31] Carmelo Cerrelli would have the Court believe that the two items in question had been purchased from Microsoft-authorized distributors. I do not believe a word of it. Not only is there no corroborating evidence, such as invoices, but Mr. Cerrelli, as shall be detailed later on in these reasons, proved himself time and time again to be a liar and a scofflaw.
[32] In November 1999 the RCMP executed a search warrant at Inter-Plus’ premises, and seized various CD-ROMs and other items. This was followed by a second search warrant executed by the Montreal Urban Community Police in March 2000. They also seized CD-ROMs and other items. In both cases, the Crown prosecutor declined to press criminal charges.
[33] Section 42 of the Copyright Act makes it a crime for a person to knowingly import, sell, distribute, or exhibit for sale an infringing copy of a work in which copyright subsists. The decision of the Crown prosecutor is not relevant to this case, which is subject to proof on the civil standard of the balance of probabilities, rather than on the criminal standard of proof beyond a reasonable doubt. The various American proceedings involving O.J. Simpson bring home this point.
[34] In August 2000, Microsoft filed this suit, which has been twice amended. It promptly obtained an order from Mr. Justice MacKay relating to the custody of the material seized by the RCMP which would have otherwise been returned to Inter-Plus. The material came into the custody of KPMG as court-appointed guardian. However, before Microsoft could obtain a custody order with respect to the items seized by the Montreal police, they were returned to Inter-Plus. Microsoft nevertheless did obtain an order for inspection and preservation pending the outcome of the proceedings. However, it was told by Inter-Plus’ lawyers of the time that the items had been sold, while in a subsequent affidavit Carmelo Cerrelli said he threw them in the garbage. In any event, while the RCMP items were exhibited at trial, the items seized by the Montreal police, with one possible exception, were not.
Were the Items Seized by the RCMP Counterfeit?
[35] The RCMP items were delivered to the Court by a representative of KPMG. As he was not the one who had originally taken delivery from the RCMP, issues arose concerning the chain of custody. However it became apparent that if need be Microsoft was in position to call each and every person from KPMG who had had a hand in the matter over the past six years. It was agreed that evidence could be led by way of affidavit, and Inter-Plus waived its right to cross-examine. I am satisfied that the items exhibited in Court as being items seized by the RCMP from the offices of Inter-Plus in December 1999 were in fact the items so seized, and are the same items examined before trial by Microsoft’s expert, Robert Freedman, at KPMG’s offices.
[36] Mr. Freedman has most impressive credentials. He has spent some 25 years in the computer software business. He is currently Senior Vice-President, Technical Operations of the Optical Disc Manufacturing Division of National Film Laboratories Inc. in Los Angeles. His company, which does business as Crest International, is a full-service manufacturer of pre-recorded discs including all forms of CDs and DVDs. It is involved in the mastering, replication and printing of CDs and DVDs for a number of different content providers including music companies, and Microsoft.
[37] He was a founding member of the Anti-Piracy Task Force Working Group of the International Recording Media Association (IRMA) which is supported by various trade associations including IFPI, above, the Recording Industry Association of America and the Motion Picture Association. He has been called upon to assist United States Customs and the Los Angeles Police Department.
[38] I qualified Mr. Freedman as an expert to assist the Court in determining the authenticity of CD-ROMs and related material. Mr. Freedman had an encyclopaedic knowledge of CDs, the ways in which they are manufactured and how they work. That knowledge extended far beyond the mastering and replication processes and also covered printing and packaging.
[39] In brief, a CD-ROM, whether it contains a Microsoft software program or pre-recorded music, or a DVD which might contain a motion picture, works by inserting it into a disc drive in which an optical laser reads the pits and lands which were created in the manufacturing process and converts this information into computer-readable digital content.
[40] Mr. Freedman determined that 394 of the 397 CD-ROMs he examined were counterfeit and that the front-liners and back-liners so identified in his report were also counterfeit. There were a number of matters he took into account. Given the confidential nature of his testimony, and the fact that it was not contested, it is not necessary to set out his evidence in detail. He took into account SID codes, artwork, mould characteristics and CD-ROM contents.
[41] To the extent that there were IFPI numbers shown on the CDs, they suggested that the discs emanated from three different plants in three different continents. Mr. Freedman visited each of those plants, checked their masters against what had been provided by Microsoft, examined their equipment and concluded the discs were not manufactured by these three Microsoft-authorized replicators, in the places and with the equipment suggested by the IFPI numbers appearing on them. He stated that although the uninitiated, not privy to the information he had, could not have identified the discs with the same degree of accuracy, it is common knowledge in the industry that the absence of certain IFPI numbers makes an item suspect. This information was readily available from the IFPI and other Internet websites.
[42] He demonstrated to the Court, with the aid of material not available to the general public, or even to retail dealers, why the printing and artwork on the CDs, and on the printed material was counterfeit.
[43] The defendants did not attempt to contest Mr. Freedman’s opinion. Rather they suggested that a stranger, not privy to Microsoft’s secrets, would not be able to distinguish the counterfeit from the real. Although there might have been some merit to that position if the fakes were better, one need not be privy to Microsoft’s secrets to appreciate the significance of missing or incomplete IFPI numbers on CDs. In addition, a comparison of genuine and counterfeit product showed to the naked eye, or perhaps with slight magnification, that the printing and artwork on the genuine article was far crisper and more professional than on the counterfeits. On the other hand, the CDs Mr. Freedman randomly installed into a computer all worked. The access keys worked. If the key number was one originally issued by Microsoft, it could, at that time, be used on any number of computers, a problem which may well now have been eliminated.
[44] Microsoft employees called as witnesses at trial, or examined on discovery, conceded that although they were able to identify counterfeit material, they doubted they could have done so without their special knowledge, at least when a full set of IFPI numbers appeared on the CD itself.
[45] Corporal Lamontagne of the RCMP participated in the execution of the search warrant. Although he was part of the Copyright Enforcement Group, which he had joined two years earlier, and although he had benefited from on-the-job training and follow-up workshops, he was not able, and did not try, to ascertain whether the CDs were counterfeit or not. He selected some 20 at random, marked them, and sent them to Microsoft for analysis. Microsoft returned them with an explanation from its employee Michelle Boyes as to why the items were counterfeit. All he can say is that the Crown prosecutor did not lay charges. He was not privy to those deliberations.
Were the Items Seized by the Montreal Police Counterfeit?
[46] On 1 March 2000, the Montreal police seized further wares from Inter-Plus in virtue of a different search warrant. The items seized included eight units of packaged Microsoft Office 97 Professional Edition, 168 units of Microsoft Office 2000 Professional (CD-ROMs in jewel cases), 595 units of Microsoft Windows 98, Second Edition (OEM), CD-ROMs on spindles, license packs, Client Access Licenses, front-liners, back-liners, sheets of CD-key labels, sheets of product-key labels, end user license agreements and other material. These items remained with the police until 22 April 2003, when they were returned to Inter-Plus. During that time they were examined by Michelle Boyes, a paralegal with Microsoft Canada who had been trained in its anti-piracy program. She was of the opinion that some of the items seized were counterfeit, others were not, while others were suspect.
[47] By April 2003, in fact in 2002, Microsoft had furnished the defendants with an affidavit from Ms. Boyes. They had also furnished an affidavit from Mr. Freedman with respect to the RCMP seizure.
[48] Microsoft’s attorneys were aware that the Crown prosecutor was not going to lay charges with respect to the items seized by the Montreal police, and that they were to be returned to Inter-Plus. They called upon Inter-Plus’ attorneys to reach a custody agreement, failing which they would seek an appropriate court order. They specifically mentioned that they wanted their expert to examine the items. For whatever reason, which shall be discussed later on, Inter-Plus never made the returned items available for subsequent examination.
[49] Consequently Microsoft called Ms. Boyes as a factual and as an expert witness. Inter-Plus opposed her qualification as an expert and asserted that in any event she was in a conflict of interest because she was employed by Microsoft.
[50] On this latter point, it is well established that employment by a party to a lawsuit does not automatically disqualify a person otherwise qualified from offering the Court an expert opinion. The risk of a conflict of interest goes to the weight which should be given to that testimony, when all is taken into account. In the present case, it was Inter-Plus’ blatant disregard of orders of this Court which denied the Court the benefit of Mr. Freedman’s expertise. Although Ms. Boyes’ experience and breadth of knowledge were narrower than Mr. Freedman’s, and although she was only trained with respect to Microsoft products, while Mr. Freedman has for example testified with respect to pirated music CDs, hers was the only trained eye that looked at the seized items. She had, once before, offered an opinion to a New Brunswick court. I qualified her as an expert. My confidence was not misplaced. She was of considerable assistance to the Court, and to the extent possible she approached the matter the way Mr. Freedman had. She was privy to secret information. I accept that what she said was counterfeit, as I use the word, was counterfeit, and what she said was not, was not. As to items she identified as suspect, their disappearance after they were returned to Inter-Plus meant a follow-up inspection of the manufacturing plants would have been of no value.
[51] She pointed out that certain CD-ROMs were missing required IFPI numbers, that there were errors in the artwork, that print quality was substandard, process colours were off and micro-type was wrong, among other things. It bears noting that, as aforesaid, in her opinion not all the items seized were counterfeit.
[52] Francesco Secondi, the officer in charge of the Montreal police seizure, was also called as a witness. In 2000, he was an investigator in the Fraud Squad which at that time included computer matters. He is currently the supervisor of the Computer Crime Unit. During the seizure he dealt with Carmelo Cerrelli who was most cooperative. For instance, the search warrant did not cover all of Inter-Plus’ premises - but nevertheless, access was given to all. The room which particularly drew his attention was one with shelving containing Microsoft and other software, a machine with shrink wrap, various Microsoft booklets, CDs on 100-capacity spindles, CDs in paper sleeves, and paper licensing agreements. There was also a notice posted that care should be taken that the same key number not be repeated. He considered the whole layout, including the notice, to be very suspicious. Although he did not seize the notice, he took a photograph of it and photographs of the overall layout.
[53] His idea was that fraud charges be laid. However he was later informed that since the Copyright Act itself had criminal aspects to it, the enforcement of that Act, as opposed to the Criminal Code, R.S.C. 1985, c. C-46, at large, fell upon federal, rather than provincial, authorities. Ultimately, he was informed by the Crown prosecutor that charges would not be laid and that the seized items were to be returned to Inter-Plus on request. These items were returned to a representative of Inter-Plus on 22 April 2003.
[54] Unfortunately, the file which Mr. Secondi had with him at trial was incomplete. At a very early stage, it had been lent to the RCMP, and only returned a few days before trial. Some of the material was not in it, including the photographs. Nevertheless I am satisfied, on the balance of probabilities, that a sign warning against the duplication of key numbers had been posted on the premises. Carmelo Cerrelli was later called as a witness, but not asked any questions thereon. Although it was suggested that Mr. Secondi was biased against Mr. Cerrelli in that he may have been poisoned by Microsoft into believing that trading in grey market unlicensed goods was in and of itself criminal in nature, I find no basis for that suggestion. In fact, it was during his examination-in-chief that Mr. Secondi volunteered that Mr. Cerrelli was very cooperative.
What Happened to the Items Seized by the Montreal Police?
[55] We have reached the stage where I have found that all the items seized by the RCMP which were identified by Mr. Freedman as counterfeit and all the items seized by the Montreal police which were identified by Ms. Boyes as counterfeit were, on the balance of probabilities, counterfeit. It follows that the computer programs embodied in the CDs were not authorized by Microsoft. While the items seized by the RCMP were exhibited in Court and will eventually be delivered up to Microsoft, the ultimate disposal of the items seized by the Montreal police is unclear. No matter what happened, Carmelo Cerrelli and Inter-Plus are caught up in a web of deceit which amply demonstrates their utter disregard for the process of this Court.
[56] On 4 June 2003, Inter-Plus’ solicitor wrote to Microsoft’s solicitors to say “the products returned to our clients from the MUCP have been sold.” He added that even if Microsoft had had any basis to bring on a motion for inspection, the issue was now moot.
[57] Undeterred, Microsoft pressed on. On 16 June 2003 Prothonotary Lafrenière ordered that to the extent any of the items in issue were still in the defendants’ possession, power or control, Microsoft’s counsel and Mr. Freedman were to be granted access to Inter-Plus’ premises to conduct an unimpeded inspection thereof. To the extent that any of the items were no longer in their possession, custody or control, they were required to forthwith serve an affidavit providing particulars of any sales or any other manner of disposition.
[58] This order was upheld on appeal by Madam Justice Snider on 7 July 2003.
[59] This gave rise to an affidavit from Carmelo Cerrelli dated 10 July 2003, which flies in the face of the letter sent by his solicitors a month earlier. Mr. Cerrelli said:
1. The items seized by the Montreal police department are no longer in my possession.
2. I have disposed [sic] all of them by throwing them in the garbage shortly after April 22 and before May 1, 2003.
[60] Although he was aware that according to Ms. Boyes not all the returned items were counterfeit, apparently it was too much trouble to identify and save the genuine articles.
[61] However by the time Mr. Cerrelli was examined on discovery in 2005, his story had changed, and indeed it appears to have changed once more at trial. He testified that when he used the word “I” in his affidavit, he meant the royal “WE”. Mr. Cerrelli does not deal in garbage. What he meant was that he had instructed a worker in the warehouse room, whom he did not identify with precision except that he had left Inter-Plus’ employ shortly after, to throw the items out. It was only some time later when he visited the warehouse that he realized his instructions had not been followed, and so he instructed a new employee, Patrick Mitchell, to do so.
[62] The evidence from Mr. Mitchell, corroborated by his employment contract, is that he only joined Inter-Plus 18 June 2003. If Mr. Cerrelli meant to tell the truth, his instructions to Mr. Mitchell could only have been issued after he had signed his affidavit on 10 July 2003. By then Inter-Plus was under court order to allow the items to be inspected, and so the instructions to Mr. Mitchell were in clear violation of that order.
[63] Mr. Mitchell testified that he, together with another employee in the shipping department, took the 20 to 25 boxes in question and threw them into a dumpster in the back of Inter-Plus’ premises. Some of the boxes had open tops, and Mr. Mitchell could see various computer products bearing Microsoft’s name. He surreptitiously returned later to the dumpster and helped himself to four or five boxes.
[64] It may well be that Mr. Mitchell unilaterally helped himself to some of the items he was instructed to throw out, and that he threw out the rest. It is also possible that Mr. Cerrelli then visited the dumpster himself. However, no matter how this is analyzed, the items had not been destroyed when the lawyer said they were and, to Mr. Cerrelli’s knowledge, were available for inspection after Prothonotary Lafrenière’s order. He testified that his solicitors kept him fully informed of events as they happened either by providing a copy of letters and orders, or by informing him of the contents. If he later destroyed the items, or sold them, he did so in clear contravention of an order of this Court.
The Mitchell Sting Operation
[65] In October 2003, a private investigator hired by Microsoft made a test purchase of a Microsoft Windows 98, Second Edition (OEM-Packaged product) from Mr. Mitchell who was operating an E-Bay account. His connection with Inter-Plus was not known by Microsoft at that time. The purchase was exhibited at trial. Although there was an initial challenge to the chain of custody, Microsoft again established that it was in position to call as witness each and every individual from the firm of private detectives who had played a role therein. An agreement was reached on the spot between counsel whereby affidavits were filed. I am satisfied that the product exhibited at Court was the product purchased from Mr. Mitchell and examined by Ms. Boyes prior to trial. Mr. Mitchell readily admitted that he had sold items so described, but quite understandably was not able to say whether the items exhibited at Court were the same ones he had sold.
[66] Based on Ms. Boyes’ evidence, I am satisfied that the CD-ROM is counterfeit. The manual was a genuine manual for Windows 98, but not for Windows 98, Second Edition.
[67] Mr. Mitchell’s evidence is most interesting in that he readily admitted to being disloyal to his employer on a number of occasions. Not only did he attempt to sell the items taken from the dumpster on his E-Bay account (with limited success), but he also took Inter-Plus’ price list, put his own business name thereon, converted the prices into U.S. dollars, and