31 August 2017

The Criminalisation of ‘grey goods’

Anyone reading this article believing it to be about a new book relating to 50 Shades of…. can stop now: the goods in question are parallel imports of branded clothing. The recent ruling of the UK Supreme Court in R -v- C and ors [2017] UKSC 58 has expanded criminal liability for trade mark infringement beyond the traditional scope of counterfeiting, by confirming the applicability of s. 92(1) of the Trade Marks Act 1994 to so-called ‘grey’ market goods. The decision, which has attracted some criticism, adds another weapon to the arsenal of brand owners looking to restrain unauthorised use of their trade marks.

“You can have any colour so long as it’s grey”

The term ‘grey goods’ refers to genuine branded goods which are sold by or with the proprietor’s consent outside of the European Economic Area, but are then imported into the EEA.

In the present case the Crown was attempting to prosecute defendants who, it is alleged, were in the business of selling various goods that infringed the marks of well-known brands, such as Ralph Lauren, Adidas, Jack Wills, and Fred Perry.  All of the goods were manufactured outside of the European Union and subsequently, it was alleged, sold in the UK by the defendants. As there has not yet been a trial, the facts have not fully been established; however, what emerged from the prosecution’s case is that there were several different types of goods. Some of the goods were fakes and counterfeits in the ‘true’ sense, i.e. that the trade marks of the brands had been applied to them without any authorisation. However, a substantial amount of the goods comprised items manufactured by factories which had been authorised by the trade mark proprietor. In a number of these cases, the goods were from a batch that had been rejected for quality reasons, or exceeded the production quota allowed. Accordingly, while the trade marks had been applied with the consent of the proprietor, what they had not consented to was the subsequent sale and importation of these specific goods.

Section 92(1), reads:

‘A person commits an offence who with a view to gain for himself or another, or with intent to cause loss to another, and without the consent of the proprietor—

(a) applies to goods or their packaging a sign identical to, or likely to be mistaken for, a registered trade mark, or

(b) sells or lets for hire, offers or exposes for sale or hire or distributes goods which bear, or the packaging of which bears, such a sign, or

(c) has in his possession, custody or control in the course of a business any such goods with a view to the doing of anything, by himself or another, which would be an offence under paragraph (b).’

The Crown did not make any distinction between the counterfeit goods and the grey goods. The defendants argued that s. 92(1), and specifically s.92(1)(b) under which they were charged, should only apply in cases of ‘true’ counterfeits, and so the indictment was defective and should be dismissed.

The argument was that the words ‘such a sign’ in paragraph (b) referred back to the ‘sign’ in paragraph (a), and that the ‘sign’ in paragraph (a) was one that had been applied to the goods or packaging without the consent of the proprietor. Accordingly, if no offence had been committed under paragraph (a) there could be no offence under paragraph (b). Both the Crown Court and the Court of Appeal disagreed with the defendants, who appealed to the Supreme Court.

Three stripes and you’re out……and nicked!

In a unanimous judgment, the Supreme Court sided with the prosecution. Lord Hughes’ relatively short speech set out the interpretation of the Court. He agreed with the defendants that the words ‘such a sign’ in paragraph (b) referred back to paragraph (a). However, there was a difficulty in reading the words ‘without the consent of the proprietor’ into the definition of ‘sign’ in paragraph (a), as those words appear in the first few lines of the section and not in paragraph (a). The ‘sign’ that is referred to in (b) is one which, as per (a), is ‘identical to, or likely to be mistaken for, a registered trade mark’. The words ‘without the consent of the proprietor’ are to be read as applying to each of the paragraphs that follow. The result of this reasoning is that s. 92(1)(a) creates an offence of the making of counterfeit goods, and that s. 92(1)(b) creates one of selling of both counterfeit and ‘genuine’ branded goods where there has been no proprietor’s consent to the sale etc.

The Supreme Court considered whether Parliament may have intended, when enacting s. 92(1), that it should apply to the counterfeiting of goods only. They considered ‘the appellants realistically did not contend that there had been the kind of clear ministerial statement which amounted to a definitive identification of what the [Trade Marks] Bill was intended to achieve’. Furthermore, ‘there is no ambiguity or obscurity in the language such as would justify the court… in investigating the contents of Parliamentary debate’. However, the language in s. 92(1) is clearly not without ambiguity.

Branded a thief?

While for trade mark proprietors this judgment is undoubtedly good news, for those traders who have purchased genuine goods from outside the EEA, and sought to bring them in, they are now considered in the same category as a thief.

Accepted that ever since the 1999 ruling of the European Court of Justice (as it was then) in Silhouette -v- Hartlauer it has been the case that the principle of exhaustion of trade mark rights applies only within the boundaries of the EEA. However, those imports amounted to a trade mark infringement; a civil wrong, not a criminal one. Given that the ruling on s. 92(1)(b) apparently does not care whether the mark was applied to the goods with consent or not, it is now, in the UK at least, also a criminal offence to do so, with a maximum possible penalty of ten years’ imprisonment.

The decision has provoked many to consider it unduly harsh with serious consequences for individuals, since the offence in paragraph (b) is not conditional on the acts being done in the course of a business in the way that paragraph (c) is. This is highlighted by the example that was argued before the Court of Appeal that ‘a young student who purchases from an authorised outlet a pair of legitimately branded jeans in… New York at a favourable price [who] then returns to the UK and advertises those jeans for sale on eBay… is… vulnerable to criminal prosecution and conviction.’ The Court of Appeal accepted that this would be the case, saying that the ‘outcome is capable of being tough in certain cases’ but that ‘Parliament has weighed the balance and decided as it has’.  The Court of Appeal considered it was best left to the ‘good sense of the trading standards officer’ whether in such cases a prosecution was merited.

What the Supreme Court did not do was touch on the issue of parallel importation. This is where goods have been put on the market by or with the proprietor’s consent, and then brought into a different EU Member State, often repackaged and with the trade mark applicable in the importing Member State, applied to that packaging by the importer, not the proprietor. This has been the subject of many cases, most notably those involving pharmaceuticals. It remains to be seen whether, if a true parallel importation case came up, it would accept the broadening of s. 92(1) to the extent suggested by the Court of Appeal. It is difficult to see how the logic would not also apply in these cases.

Notwithstanding the potential impact the R v C decision could have, trade mark proprietors will be no doubt wary before seeking Trading Standards help in such cases.