When is selling parallel traded goods (grey goods) a criminal offence?13 Nov 2017
In the context of Brexit, there has been much talk of the English Courts adopting a more robust attitude to competition and departing from some of the jurisdiction and jurisprudence of the European Court of Justice. There is, however, scant evidence of such an approach in a recent decision given on 3 August 2017 by the English Supreme Court in one of the last decisions presided over by Lord Neuberger as President.
The lead judgment was given by Lord Hughes, who was previously Vice President of the Criminal Division of the Court of Appeal. Although all the Law Lords are gifted with brilliance, the fact remains that, with the potential exception of Lord Sumption, there was no real IP Judge on the panel and none of the practitioners practised at the IP Bar when in practice. The Appeal came from a decision of the Court of Appeal (Criminal Division) presided over by Lord Justice Davis. He was assisted by Mr Justice Birss, that decision having been handed down in 2016.
The first important matter was that this was not an appeal from any decided case, but from a decision on the interpretation of whether something could be a criminal offence under section 92 of the Trade Marks Act 1994. It is also important to note that criminal law is not homogenised under European law and there is a great deal of national discretion.
The case turned on whether there should be any distinction as a matter of law between counterfeit goods and grey market goods. One of the points raised was that goods can enter the grey market for any number of reasons. They can be goods that have been put there with the manufacturer’s consent; they could be there without the manufacturer’s knowledge as off-cuts; they may be goods rejected for quality control purposes; they may be goods that are manufactured and sold outside of established distribution networks.
Significantly, the case does not affect goods which have entered the market in Europe legitimately, ie. with a trade mark owners’ own consent. Accordingly, a case in which we featured, Procter & Gamble International Operations SA v Star Global Trading Ltd  EWHC 734 (Ch), remains good law; the burden, of course, being on the Defendant company to show that the goods were bought with a proper provenance enabling sale within Europe.
It should be borne in mind that Europe has a different regime to the rest of the world in terms of the doctrine of exhaustion of rights for trade mark owners. A brand owner, having put the goods legitimately on the market elsewhere in the world, cannot then restrain their further sale. However, if they are put on the market in Europe, unless authorised for resale in Europe, the brand owner can step in and prevent further sale. It is frequently the case that distributors in the grey market purchase goods that are mixed. It is rare for a legitimate trader knowingly to sell counterfeit goods. No-one would suggest that the sale of counterfeit should be anything other than a criminal offence. However, what the cases of R v M, R v C and R v T clearly establish is that there is no longer any doubt at all that it is possible for the sale of grey market goods to constitute a criminal offence. So, a trader selling goods that any member of the public or any trader would think were legitimate goods (that is, they are of the right quality with the trade mark applied in the right way) may be committing an offence if the provenance is not for sale within Europe, or if outside of Europe (and English companies frequently trade overseas) and so not for sale legitimately in that country.
We are concerned primarily with section 92(1)(c), which is where someone has in their possession, custody or control in the course of a business any goods that bear the packaging of a sign identical to, or otherwise likely to be mistaken for, a registered trade mark, with a view to doing anything by himself or another that would be an offence by the selling or letting for hire offer or exposure for sale or distribution of such goods. It is necessary to have criminal intent, and section 92(1) says a person commits an offence where there is a view to gain for himself or another, or with intent to cause loss to another and without the consent of the proprietor.
Most debate in practice will concern what is the consent of the proprietor. Under section 92(5), there is what is called reverse onus statutory defence. In other words, the burden of proof shifts from the prosecution to the defence: “It is a defence for a person charged with an offence under this section to show that he believed on reasonable grounds that the use of the sign and the manner in which it was used or was to be used was not an infringement of the registered trade mark.” That effectively is the Star v Procter & Gamble defence. In other words, there was a reasonable belief not dispelled by the trade mark owner that the goods were for sale in the EU. It cannot be a criminal offence unless it would also amount to an infringement under the civil sections of the Act. As the Supreme Court pointed out, of course, and as one would expect, the tests are not identical between civil and criminal liability. It is worth quoting paragraph 15 of the judgment, which shows the distinction between the approach of goods that are in Europe with provenance and the criminal test:
“The appellants are correct that, in the context of goods which a proprietor voluntarily puts into the European single market with his trade mark attached, section 12 of the 1994 Act, transposing article 7 of Direction 89/104/EEC, has the effect that further objection to the use of the mark is limited to special cases, such as changes or impairments to the goods. But that is true whichever of the rival constructions of section 92 is correct. Where it applies, this concept of exhaustion means that there is no infringement of the mark as a matter of civil law, and thus no criminal offence. But this sheds no light on the correct construction of section 92.”
The 1938 Trade Marks Act effectively prevented prosecutions, because it needed a more rigorous mental element than under the current section. It is therefore thought that more prosecutions are now likely to ensue. Under the 1994 Act, the offence is committed if there is intent to cause loss to another and without the consent of the proprietor. The Supreme Court correctly pointed out that whether or not evidence is available does not affect whether or not a criminal offence has been committed. It simply is likely to affect whether a prosecution should be brought or a defence can succeed.
Accordingly, the Court said that a defence, if advanced, must be met on its merits, which will no doubt involve investigation of the circumstances in which the defendant acquired the goods and the inquiries he did or did not make. However, the conclusion Lord Hughes made is that it is just as unlawful for a person in the position of the defendants to put grey goods on the market as to put counterfeit ones there. Both may involve deception of the buying public; the grey goods may be such because they are defective. He said that the distinction between the two categories is by no means cut and dried, but both are infringements of the rights of the trade mark proprietor. It is the last element of reasoning which belies a real lack of understanding both of how markets operate and of the pressures on traders. It cannot be the intention of the Act (as opposed to the desires of the luxury goods manufacturers of France and Italy) that there can be no competition in perfectly legitimate, properly sourced and properly marked genuine goods simply because the trade mark owner has an interest in preventing those sales in its commercial interest.
It is also well known and axiomatic that trade mark owners release into the worldwide market surplus production and old lines precisely for distribution through grey channels. Previously, advisors and clients were comfortable with having a civil action, injunction or the payment of damages. That is a long way away from the risk of criminal prosecution, which on indictment can lead to imprisonment for up to 10 years. The confusion between counterfeit goods and goods that may or may not be allegedly of lower quality (and who determines that other than the brand owner?) is a real erosion of civil liberty. Although the defence tried to argue a human rights point, this was always doomed to fail. It is not a matter of someone’s human rights in not being able to sell or buy goods that is at risk, but the liberty of the individual.
In the Court of Appeal it was made clear “What is, however, not alleged in this case, it should be noted, is that the defendants were engaged in the United Kingdom, importing and selling branded goods which were both manufactured and sold with the authorisation of the proprietor in a country outside the European Union (sometimes also known as parallel imported goods)”. Parallel goods, however, can also apply to goods sold in the European Union, because they are not within a selective distribution arrangement. Accordingly, the law in France is already far more severe against the grey market trader than it is in the UK.
There is now brought into the mix the caprice of the criminal system where, in many cases, the only defence will be to show that the use of the sign and the manner it was used or was to be used was not an infringement of the registered trade mark. Knowing the aggression of some of the brand owners, one can expect an increase following this decision, both on prosecutions instituted by Trading Standards and, more worryingly, private prosecutions.
Although, as you would expect, we would suggest that very specific advice is taken by clients, there is no doubt that there is going to have to be a much greater delving into the source and provenance of goods to avoid the real risks of criminal sanction. It is worth pointing out that a person guilty of an offence under this section is liable on summary conviction to imprisonment for a term not exceeding six months or a fine not exceeding the statutory maximum, or both, and on conviction on indictment to a fine or imprisonment not exceeding ten years, or both. What sometimes is lost sight of is that a trader may, by buying five consignments in rapid succession from different sources, can rapidly acquire a criminal record leading to a more severe approach being taken.
As a civil lawyer practising in the trade mark field and being involved in parallel imports for over 40 years, it is depressing that a unanimous Supreme Court addressed only the narrow point before it: could what was alleged constitute a criminal offence? No doubt as a result of the matter being argued by non-IP lawyers, not one of the Law Lords thought it appropriate to give any indication about policy, the effect on competition or trade, and the deleterious effect on UK companies trying to compete in the face of an already oppressive selective distribution regime employed by the luxury brand houses in particular. It may well be subject to how this operates in practice that, post-Brexit, there will have to be some Parliamentary intervention if in fact the doctrine of exhaustion of rights is not to be simply reinforced, as opposed to being diluted.