July 26 (Bloomberg) -- Kraft Foods Inc., the world's second-biggest food company, lost a bid in Canada's highest court to stop a rival importer of its Cote D'Or and Toblerone chocolates from using registered images on candy.

Canada's Supreme Court in Ottawa today ruled 7-2 that Euro Excellence Inc. can sell the chocolates packaged in wrappers depicting art that Kraft's European units have copyrighted. In the case of Cote D'Or, the wrapper has picture of a white elephant. Toblerone bars show a bear hidden within a mountain.

For Northfield, Illinois-based Kraft to succeed, it had to show that Euro Excellence ``imported works that would have infringed copyright if they had been made in Canada,'' Justice Marshall Rothstein wrote for the majority. ``This hypothetical primary infringement cannot be established in this case.''

The decision, which overturned a lower court's ruling, sets a standard for owners of famous brands, and for retailers and distributors of consumer goods throughout Canada, said attorney Mark Evans of Smart & Biggar. That's because Euro Excellence didn't copy the wrapper art and obtained it legally, though it lacked permission to use it in Canada, said Evans, whose firm is Canada's biggest practicing exclusively intellectual-property and technology law.

``Justice Rothstein made it very clear that there is a big difference between assignment of copyright and a license,'' Evans said in a phone interview. ``As an exclusive licensee, you can't keep out genuine goods.'' Kraft Canada licenses the image rights from company units in Europe.

Kraft's Options

Kraft may seek to obtain the copyright from the European units so it can enforce it in Canada, company spokeswoman Lynne Galia said in a phone interview.

``We believe the outcome would've been in Kraft's favor if we had assignment of copyright,'' Galia said. ``So we do see an opportunity to look at further options.''

Shares of Kraft fell $1.31, or 3.8 percent, to $53.42 in New York Stock Exchange composite trading. They've declined 6.3 percent this year, leaving the company with a market value of $53.7 billion.

Closely held Euro Excellence, based in Ville Lasalle, Quebec, imports Kraft's Cote D'Or Belgian chocolate and Toblerone Swiss chocolate from an undisclosed source in an undisclosed European country and distributes them across Canada. Kraft doesn't dispute that the products are genuine. It asked the court to order Euro Excellence to cover up art on the packaging.

Officials from Euro Excellence didn't respond to a request for comment.

Undercutting Prices

The dispute arose because Euro Excellence has been able to undercut Kraft's prices in North America, by buying the chocolate at a discount in Europe, and by offering oversized Toblerone bars that Kraft's Canadian unit says it can't get because they're designed for sale only in duty-free stores.

It's what's known as the sale of ``gray goods,'' or parallel importation, a practice that was prevalent in Canada in the mid-1980s and almost stopped as the value of the Canadian dollar plunged against foreign currencies later that decade.

``It didn't make economic sense for companies to go outside of Canada and buy goods and then bring them back,'' Evans said. ``Now with the strength of the Canadian dollar, I anticipate that we will see a resurgence of parallel importation of foreign-purchased goods coming into Canada.''

The Canadian dollar, which reached a low of 61.98 cents against the U.S. dollar in January 2002, is nearing parity with its U.S. counterpart, trading at 94.9 U.S. cents at 4:02 p.m.

Consumer Benefits

The Retail Council of Canada, an association representing more than 40,000 stores in the country, said the court decision will benefit consumers, who can get a better selection of products at better prices.

``The purpose of copyright law is to reward the actual creators of our cultural heritage and not to serve as an artificial barrier to free trade,'' Diane Brisebois, president of the Retail Council, said in a statement.

Kraft accused Euro Excellence at trial of ``piggy- backing'' on its advertising, giving it a market advantage. Euro Excellence argued that a copyright can't be used to create a monopoly that would infringe upon the free exchange of goods.

Federal court Judge Sean Harrington granted a permanent injunction in 2004 and ordered Euro Excellence to stop selling the chocolate in the wrappers depicting the elephant and the bear. He ordered Euro Excellence to pay Kraft C$300,000 ($288,000), a portion of the profit made on sales of the goods.

Ruling Upheld

Federal appeals court Judge Alice Desjardins upheld Harrington's ban on the use of those pictures, though she overturned the damage award.

The Supreme Court ruling won't dilute the protection companies get for copyrighted material, Daniel Drapeau, a partner at Ogilvy Renault in Montreal, said in a phone interview.

``There's a concern here for balancing rights,'' Drapeau said. ``This may be a temporary victory'' for Euro Excellence.

Switzerland's Nestle SA is the world's largest food company.

The case is Between Euro Excellence Inc. and Kraft Canada Inc., 31327, Supreme Court of Canada (Ottawa).

To contact the reporter on this story: Joe Schneider in Toronto at jschneider5@bloomberg.net.

Last Updated: July 26, 2007 16:03 EDT