Friday, 5 October 2012

Parallel imports and summary judgment: Oracle v M-Tech in the Supreme Court

Author: Christopher Stothers (Arnold & Porter (UK) LLP and JIPLP editorial board member)

Oracle America, Inc (formerly Sun Microsystems, Inc) v M-Tech Data Ltd and Stephen Lawrence Lichtenstein [2012] UKSC 27, 27 June 2012

Journal of Intellectual Property Law & Practice (2012) doi: 10.1093/jiplp/jps157, first published online: September 28, 2012

The Supreme Court of the United Kingdom has restored a summary judgment against a parallel importer of genuine goods from outside the European Economic Area (EEA) by striking out competition and free movement ‘Euro-defences’. This allows brand owners to enforce more efficiently their right to object to the parallel importation of such goods.

Facts

Oracle (formerly Sun Microsystems) is a major manufacturer of computer systems, workstations and related goods and services under the ‘Sun’ trade mark. It sells its products through a network of authorized resellers. However, some unauthorized brokers and dealers also deal in these products in a ‘secondary’ or parallel distribution chain. M-Tech Data is one such unauthorized supplier.

M-Tech imported 64 disc drives from the USA to the UK and sold them to KSS Associates. Those disc drives were genuine products which bore the ‘Sun’ trade mark. However, the disc drives had never been put on the market in the European Economic Area (EEA) by Oracle or with Oracle's consent. Instead, they had been sold in Chile, China and the USA. Oracle therefore regarded them as unlawful parallel imports to the EEA under the doctrine of Community-only exhaustion, and brought an action for trade mark infringement in the High Court. Oracle then applied for summary judgment to avoid the need for the cost of disclosure, evidence and trial on the basis that M-Tech had no realistic prospect of defending the infringement action.

M-Tech resisted, arguing that Oracle should not be permitted to exercise its trade mark rights because (i) to do so would be contrary to the free movement of goods within the EU under Articles 28–30 EC (now Articles 34–36 TFEU) and (ii) such exercise was connected to anti-competitive distribution agreements under Article 81 EC (now Article 101 TFEU).

At first instance in the High Court (Sun Microsystems v M-Tech Data [2009] EWHC 2992 (Pat), discussed in Yee Fen Lim ‘The Future of Copyright Law’ (2010) 4(4) JIPLP 297, 298), Kitchin J granted summary judgment for Oracle, finding no real prospect of success of either defence.

In relation to free movement of goods, M-Tech had argued that the goods sold inside and outside the EEA looked identical, and that it was impossible for unauthorized brokers and dealers to determine whether any individual Sun product had been put on the market in the EEA by, or with the consent of, Oracle (although Oracle could do so from its internal database). As a result of that uncertainty, argued M-Tech, enforcement of Oracle's rights would restrict the free movement of those goods which had been put on the EEA market. The court assumed for the purposes of determining the application that these facts could be proven at trial. Nevertheless, it held that Article 7 of the harmonizing Trade Mark Directive gave Oracle the absolute right to rely on its trade mark rights to object to such parallel imports from outside the Community; that this was not contrary to Articles 28–30 EC. However, the injunction was limited by providing that M-Tech could sell goods without breaching the injunction provided that (i) M-Tech gave Oracle the serial and part numbers of goods it intended to sell and (ii) Oracle did not say within 10 days that the goods had not been put on the market in the EEA (a similar limitation of the scope of injunctive relief was applied in Sun Microsystems v Amtec [2006] EWHC 62 (Ch)).

In relation to competition, the court's reasoning was much briefer, concluding that there was no nexus or connection between the distribution agreements and the enforcement of trade mark rights which could render the rights unenforceable.

The Court of Appeal unanimously reversed this decision, with Lady Justice Arden giving the leading judgment (Oracle America v M-Tech Data [2010] EWCA Civ 997, discussed in [2011] JIPLP 610). In relation to free movement of goods, she held that there was a real prospect of establishing that Article 7 of the Trade Mark Directive must be interpreted by reference to Articles 28–30 EC and that this might preclude enforcement of trade mark rights on the pleaded facts. She also accepted that there was an arguable case that enforcement of trade mark rights in the circumstances would be an abuse of rights. Similarly, more briefly, she found that there was an arguable case that there was a sufficient connection or nexus for the purposes of Article 81 EC. She indicated that there would be a strong case for the trial court to make a reference to the European Court of Justice if M-Tech was able to prove its allegations, as the points were not acte clair as a matter of EU law.

However, the Supreme Court gave permission to appeal on 10 February 2011, and on 27 June 2012 unanimously overturned the Court of Appeal and restored the summary judgment. Lord Sumption regarded it as fundamental that, in relation to free movement of goods, the goods in question had not been put on the market in the EEA by or with the consent of Oracle. He noted that the injunction granted by Kitchin J had been carefully limited to such goods (as in Sun v Amtec). Accordingly, M-Tech could not complain of a restriction on the free movement of goods in relation to the 64 disk drives or to any goods subject to the injunction, as such goods had not been put on the market in the EEA. If Oracle's failure to confirm the product history restricted the free movement of goods which had been put on the market in the EEA then M-Tech might have a remedy under the free movement provisions in relation to those goods, but that was irrelevant (and did not provide a defence to trade mark infringement) in relation to goods which had been put on the market outside the EEA. Similarly, in relation to the competition defence, Oracle's enforcement of its trade mark rights and refusal to confirm the history of goods was not the subject, the means or the result of any anti-competitive agreement.

Analysis

The Supreme Court explicitly recognized the important policy issues arising in relation to the use of free movement and competition ‘Euro-defences’ in paragraph 7 of its judgment:
‘Euro-defences’ of this kind have been deployed by alleged infringers of intellectual property rights for many years, and the English courts have varied in the robustness with which they approach them. The dilemma is that litigation devalues intellectual property rights, by increasing the cost and delay associated with their enforcement. It may also serve to confer on the alleged infringer a temporary immunity or an improvement of his bargaining power in settlement negotiations, to which he will turn out not to be entitled. The effect can often extend beyond the parties or transactions in issue, to many other cases in which similar questions might be raised. These factors mean that defences like the present one must be scrutinised with some care, even if that requires a certain amount of analysis. On the other hand, a defendant must be allowed to go to trial if it has raised a triable issue of fact which is relevant in point of law. For obvious reasons, this is especially important when the case is founded on fundamental principles of the European Union such as the free movement of goods and undistorted competition …
Here the Supreme Court was able to solve this dilemma by determining that the facts raised in the ‘Euro-defences’, even if proved, would not provide a defence to trade mark infringement in relation to the goods in dispute. This division of the issues seems entirely correct as a matter of logic and rightly enabled the Supreme Court as the court of final instance to find that the issues were ‘entirely clear’ (acte clair) and so did not need to be referred to the ECJ (despite the unanimous verdict of the Court of Appeal that the points were not acte clair).

However, as the Supreme Court acknowledged, its ruling leaves open the question whether the same facts could form the basis of separate claims under Articles 34–36 and 101 TFEU (and, implicitly, what the implications would be for the conduct of the action if these were raised as counterclaims rather than defences). The risks to a parallel trader of pursuing such claims are considered further below.

In addition, the Supreme Court also considered two other points in passing which are, with respect, incomplete summaries of the legal position as laid down by the ECJ.

First, in paragraphs 12–15, the court found that Articles 5 to 7 of the Trade Mark Directive constituted a ‘complete harmonisation of the rules relating to the rights conferred by a trade mark’ (following the ECJ in Case C-355/96 Silhouette [1998] ECR I-4799, para 25). The court suggested that this meant that these Articles of the Trade Mark Directive superseded Articles 34–36 TFEU. This appears correct in relation to the issues in question, but should not be interpreted more broadly. For instance, the Articles of the Treaty still have application in relation to the repackaging of pharmaceuticals where the brand name is changed. The rules in Article 7 only provide for exhaustion in a trade mark where goods are put on the market ‘under that trade mark’. However, if a parallel importer changes the trade mark to that used in the importing Member States, exhaustion under Articles 34–36 remains possible (see Case C-379/97 Pharmacia v Paranova [1999] ECR I-6927, para 28).

Secondly, in paragraph 21, the Supreme Court noted that ‘it has been held that a trade mark proprietor may not object to the removal of identification codes or marks which would reveal the trader's sources of supply to the trade mark proprietor and thereby make it impossible for the trade to serve that market at all’ (citing Case C-349/95 Loendersloot v Ballantine [1997] ECR I-6227, para 40). However, in that case the court also indicated the trade mark owner may object to removal where the codes are necessary to comply with a legal obligation ‘or to realise other important objectives which are legitimate from the point of view of Community law, such as the recall of faulty products and measures to combat counterfeiting’ (paras 41–43). More recently, the court has confirmed that the trade mark owner may object to resale of products where the information has been removed where such removal harms the image of the products (see Case C-324/09 L'OrĂ©al v eBay (12 July 2011), paras 78–83, following Advocate General Stix-Hackl in Joined cases C-414/99, C-415/99 and C-416/99 Zino Davidoff and Levi Strauss [2001] ECR I-8691, points 120 and 121).

Practical significance

This interesting decision of the Supreme Court will be welcomed by brand owners. It remedies the problems which arose from recent judgments of the Court of Appeal reinstating ‘Euro-defences’ and supports the ability of the High Court to grant summary judgment against parallel imports from outside the EEA in the face of such weak defences, avoiding the time and expense of taking those defences to trial.

Although the judgment is likely to discourage imports from outside the EEA generally, brand owners would be well advised to consider how they can prove that goods were first put on the market outside the EEA. Ideally, importers should be unable to prevent such proof without causing such damage to the goods or packaging that the reputation of the goods would also be damaged. Assuming such proof is possible, brand owners should now be much more willing to start proceedings against parallel importers and then to apply for summary judgment in the face of any weak defences which may be raised.

Equally, companies which (whether deliberately or unwittingly) import or sell in the UK goods which have been put on the market outside the EEA are now in a far more difficult position than previously. The value for settlement negotiations of raising a free movement or competition defence is now substantially reduced, unless it can be shown to be sufficiently related to the infringing act to constitute a defence. In the light of the Supreme Court's ruling, this seems unlikely in the majority of cases.

To the extent that there are genuine restrictions on the ability of traders to engage in parallel import within the EEA, whether due to the risk of accidentally trading in goods from outside the EEA or otherwise, the correct remedy is to seek relief under the competition Articles of the Treaty (or, potentially, the free movement Articles). However, traders will need to consider the merits of any such action very carefully, bearing in mind the high cost of such actions and the fact that the winning party before the English courts can normally recover its reasonable costs from the losing party. In addition, there is a real possibility that the trader will be asked to provide security for the brand owner's costs (see eg Chemistree Homecare v Roche Products [2011] EWHC 1579 (Ch), where security of £450,000 was ordered). Capping of cost recovery in private competition cases has been mooted in the UK Government's recent consultation (Department for Business Innovation and Skills, ‘Private Actions in Competition Law: a Consultation on Options for Reform’, launched on 24 April 2012 with responses by 24 July 2012), but the Government will undoubtedly be keen to ensure that the costs recovery rules (like the summary judgment procedures) still discourage weak claims.

No comments:

Post a Comment