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In what should come as a welcome decision for brand owners, the Supreme Court has handed down its judgment in Oracle America Inc (formerly Sun Microsystems Inc) v M-Tech Data Ltd unanimously overturning the decision of the Court of Appeal, and restoring the first instance order of Kitchin J.

The case considered the EU policy of parallel imports, and addressed the question of whether an importer of goods bearing a registered mark into the EEA without the consent of the trade mark proprietor is entitled to defend an action for trade mark infringement on the basis that the proprietor is engaged in conduct calculated to:

  • obstruct the free movement of goods between member states; or
  • distort competition in the EEA market for the goods

(the so called “Euro defences”).

In summary, the Supreme Court decision protects a trade mark owner’s ability to rely on summary judgment as a quick and cost-effective method of curtailing parallel imports from outside the EEA, and, on a more academic note, addresses the interplay between primary EC law (the Treaty on the Functioning of the European Union and European harmonising legislation (specifically the Trade Mark Directive (“TMD“)).

Parallel imports and exhaustion

The combined effects of Articles 5 and 7 of TMD are that:

  • A trade mark owner has the exclusive right to control the first marketing of goods bearing his mark in the EEA.
  • Once these goods have been placed on the market in the EEA, the mark owner cannot (other than in exceptional circumstances) rely on his mark to oppose the resale of those goods in the EEA.
  • If a trade mark owner places goods on the market outside the EEA, he can rely on his mark to object to the resale of those goods in the EEA.

There has, historically, been a certain degree of judicial distaste for this “fortress Europe” regime, which allows traders to partition the European market from the rest of the world:

“generally the rule is self-evidently rather anti-competitive and protectionist. Our task is not to consider whether the rule is good or bad from an economic perspective. It is to apply it.” (Jacob LJ in Mastercigars Direct Ltd v Hunters & Frankau Ltd (2007))

However, as the Supreme Court acknowledges, whilst this policy might be economically controversial, it is legally well-established.

Facts and earlier decisions

The claimant manufactures computer systems, workstations and related goods, and owns a number of trade marks for “SUN” registered for use in connection with computer hardware.  The defendant is a UK secondary retailer of computer hardware originally sold by one of the major manufacturers (e.g. Hewlett Packard, IBM or Sun).

In 2009 M-Tech fulfilled a trap order from a purchaser in the UK for 64 new Sun disk drives.  M-Tech acquired these drives from a broker in the United Statesand imported them into theUK.  Sun issued proceedings and applied for summary judgment, contending that these disk drives were first put on the market in the UK by M-Tech without Sun’s consent, and accordingly, there could be no doubt that M-Tech had infringed Sun’s registered trade marks.

M-Tech sought to defend the claim on the following grounds:

1.  Sun failed to establish where the disk drives were first marketed, providing for the possibility that the drives were first marketed in the EEA, thus exhausting Sun’s trade mark rights (this was later abandoned).

2.  The object and effect of enforcement by Sun of its trade mark rights would be to partition the EEA market in Sun hardware contrary to the principle of free movement of goods (Articles 28-30 EC; now Articles 34-36 TFEU).

M-Tech’s allegation was that Sun refused to supply information which would enable independent resellers to discover whether equipment was first put on the EEA market by or with Sun’s consent.  This, combined with Sun’s aggressive enforcement of its trade mark rights effectively gave Sun control of the secondary market for its products.

3.  Enforcement by Sun of its trade mark rights is connected with agreements which are contrary to Article 81 EC (now Article 101 TFEU).

M-Tech asserted that Sun distributes its products through a network of authorised dealers who are bound by agreements which require them to obtain their supplies from Sun or authorised Sun dealers unless the goods cannot be supplied from those sources.  These authorised dealers are provided with information about the provenance of the Sun goods.  It was alleged that this eliminates the independent secondary trade and is contrary to Article 101 TFEU.

At first instance, Kitchen J held there was no real prospect of successfully defending the case on any of these grounds and granted summary judgment for Sun.  M-Tech appealed, adding an additional argument that the enforcement of Sun’s trade marks would constitute an abuse of rights.

The Court of Appeal reversed this decision finding (i) there was a real prospect of establishing Articles 5 and 7 TMD had to be interpreted by reference to Articles 28 – 30 EC; (ii) enforcement of Sun’s trade mark rights might be an abuse and could not with certainty be excluded at that stage; and (iii) there was an arguable case that there is a connection between the terms of the alleged restrictive agreements and practices and the infringement action.

Arden LJ (who gave the leading judgment) suggested there would be a “strong case for a reference” to the Court of Justice of the European Union (“CJEU“) if M-Tech’s allegations were established given the lack of clarity and the fact the issues involve questions of economic policy likely to affect Europe as a whole.

Supreme Court decision

Taking each of the potential defences in turn:

1.         Articles 34-36: Free movement of goods

The Court held that any breach of Articles 34 – 36 TFEU would not give M-Tech a defence to trade mark infringement.

Crucial to the Court’s reasoning was that the goods in question were first imported and marketed in the EEA by M-Tech without Sun’s consent and that the unlawful conduct alleged by M-Tech was collateral to the right Sun was seeking to enforce (being entry of goods onto the EEA market, not the movement of goods within the market).  It was held that this enforcement was specifically authorised by Articles 5 and 7.1 TMD, which are part of an exhaustive code that itself fully reflects the requirements of Articles 34-36 TFEU.

Additionally, on M-Tech’s account of the facts, the adverse effect on free movement of goods arose, not as a result of enforcement of Sun’s right to control first marketing, but from the partitioning of the market through Sun’s controlled distribution network.  Regardless of whether Sun engaged in illegal activities (such as withholding information about provenance), it could not be prevented from doing something it is lawfully entitled to do simply because it proposes to do something else which is unlawful and inconsistent with principle of free movement of goods.

Finally, M-Tech’s proposition that Article 5 TMD is impliedly limited by Articles 34-36 TFEU necessarily operates to suspend Sun’s trade mark rights indiscriminately as against the entire EEA market.  This would include traders who are entirely unaffected by the withholding of information about provenance (such as those who are knowingly importing goods without consent).  It would also make Sun’s trade mark rights unenforceable against other categories of infringer such as counterfeiters.  The Court considered the proposition to be “unnecessary to vindicate principles of the [TFEU] and contrary to the object and express terms of the [TMD]”.

The Supreme Court accepted that M-Tech may have a cause of action against Sun based on Articles 34-36 TFEU.  However, this was not relevant to the current proceedings which only concerned activities M-Tech has carried out in infringement of Sun’s trade mark rights.  M-Tech could not defend the proceedings on the basis there is other business that M-tech has been prevented from doing by Sun’s alleged unlawful policy of withholding information.

2.         Article 101: Anti-competitive agreements

The Court found that there may be circumstances in which an intellectual property right may be unenforceable because there is a sufficient nexus between the exercise of that right and the agreement or concerted practice in question.  In this case, the question asked was whether Sun’s alleged breach of Article 101 had any relevant connection with the exercise of its right to control first marketing in the EEA of its trade marked goods.  No connection was found.  More generally, the Court held that neither trade marks, nor the rights conferred on a proprietor by the TMD can be characterised as the subject, the means or the result of any agreement or concerted practice contravening Article 101.

3.         Abuse of rights

This argument was given short shrift; the Court held this defence could not succeed where the other grounds had failed.

4.         CJEU Reference

In the circumstances a CJEU reference was not required.  The legal principles were clear, and M-Tech failed because it could not establish a relevant connection between the exercise of Sun’s right to control first marketing of their goods in the EEA and any breach of the TFEU.

Conclusion

What is, arguably, the most interesting aspect of this decision is the Court’s analysis of the interplay between the TMD and primary EU law.

The Supreme Court concluded that Articles 5 to 7 TMD must be construed as embodying a complete harmonisation of the rules relating to rights conferred by a trade mark, and that Article 5 is not qualified by any proviso relating to free movement of goods within the EU because it does not need to be – the reconciliation is achieved by Article 7 TMD.

In reaching this conclusion, the Court reasoned that the TMD is a harmonising measure directed to achieve (amongst other things) the internal market and the free movement of goods.  The TMD must therefore be treated as giving effect to the relevant commercial context, both to the principle of free movement of goods and to the limitations on that principle.  Harmonising legislation can be understood as substantiating the free movement of goods principle by establishing actual rights and duties to be observed in the case of specific products.

The Supreme Court added that, as a general rule, where a particular area of commercial activity engaging the principle of free movement of goods is regulated by harmonising legislation of the EU that legislation supersedes the general provisions of Articles 34 – 36 TFEU.

Practically, the benefit of this decision to brand owners seeking to prevent parallel imports is self-evident.  The dilemma, as the Supreme Court saw it, is that litigation devalues IP rights by increasing cost and delay associated with enforcement.  It may also confer on the infringer a temporary immunity, or an improvement in his bargaining power in settlement negotiations.  The flip side to this is that a defendant must be allowed to go to trial if it has raised a triable issue of fact.

The Supreme Court has resolved this tension in favour of trade mark owners with its finding that in seeking to enforce a right to control first marketing of goods in the EEA, the exercise of that right does not engage the principle of the free movement of goods between member states.  This must be the preferred interpretation – had the Court of Appeal’s decision been left to stand, illegal parallel importers would be allowed to raise Euro defences to avoid summary judgment.