No defence to breach of trademark rights

Supreme Court

Published July 16, 2012

Oracle America Inc (formerly Sun Microsystems Inc) v M-Tech Data Ltd

Before Lord Walker of Gestingthorpe, Lord Clarke of Stone-cum-Ebony, Lord Sumption, Lord Reed and Lord Carnwath

Judgment June 27, 2012

It was no defence to a trademark proprietor’s legitimate claim to enforce its right to control the first marketing of its goods within the European Economic Area that the proprietor might also be engaged in other conduct which unlawfully restricted the free movement of its goods after they had been so marketed.

The Supreme Court so held in allowing an appeal by the claimant, Oracle America Inc (formerly Sun Microsystems Inc) from the Court of Appeal (Lord Neuberger of Abbotsbury, Master of the Rolls, Lady Justice Arden and Lord Justice Tomlinson) ([2011] FSR 79) which had allowed the appeal of the defendant, M-Tech Data Ltd, from the grant of summary judgment in favour of Sun by Mr Justice Kitchin sitting in the Chancery Division, after an inter partes hearing ([2010] FSR 251).

Mr Geoffrey Hobbs, QC and Mr Guy Hollingworth for Sun; Mr Christopher Vajda, QC and Mr Guy Tritton for M-Tech.

LORD SUMPTION, with whom the rest of the court agreed, said that Sun was the manufacturer of computer hardware. M-Tech was an importer and supplier of computer hardware based in the United Kingdom. M-Tech supplied a customer with 64 Sun disk drives which it had bought through a broker in the United States. None of the disk drives had previously been marketed in the European Economic Area with Sun’s consent.

On the face of it, therefore, M-Tech had infringed Sun’s trademarks contrary to article 5.1(a) of Council Directive 2008/95/EC on the approximation of laws on trademarks (the Trademark Directive) by using them in circumstances where Sun’s exclusive right had not been exhausted under article 7.1.

M-Tech’s defence was that Sun’s trademarks were not enforceable because:

(i) the object and effect of enforcement would be to partition the European market in Sun hardware contrary to articles 34 to 36 of the Treaty on the Functioning of the European Union relating to the free movement of goods; and (ii) the exercise of Sun’s trademark rights was connected with its distribution agreements, which were said to contain restrictive provisions inconsistent with article 101 of the Treaty.

The allegation was that Sun had deliberately set about securing the European market for itself and its authorised dealers by declining to supply information which would enable independent resellers to discover whether any particular equipment had first been put on the European market by or with Sun’s consent.

The withholding of information about provenance had, said M-Tech, both the object and the effect of eliminating the legitimate as well as the illegitimate parallel trade in Europe, thus giving Sun effective control of the secondary market in its products there, and enabling it to partition that market through its control of an authorised network of dealers.

His Lordship said that the decision in Zino Davidoff SA v A&G Imports Ltd (Joined Cases C-414/99 to 416/99) (The Times November 23, 2001; [2002] Ch 109) was part of a consistent line of authority for the propositions:

(i) that the Trademark Directive had to be construed as a definitive statement of the harmonised law concerning the rights of trademark proprietors, and

(ii) that it conferred on trademark proprietors a right to control the first marketing of their goods in the European Economic Area save in cases where that right had been unequivocally renounced.

On the agreed facts, the goods had never been marketed in Europe until they were imported and marketed there by M-Tech without Sun’s consent. It was therefore not in dispute that the only right derived from its trademarks which Sun was seeking to enforce by the proceedings was its right to control the first marketing of the goods in Europe.

That was an exercise of rights which did not engage the principle of the free movement of goods between member states embodied in articles 34 to 36 of the Treaty. It affected only the entry of the goods onto the European market, not the movement of the goods within it. It was specifically authorised by articles 5 and 7.1 of the Trademark Directive, which were part of an exhaustive code that itself fully reflected the requirements of articles 34 to 36 of the Treaty.

M-Tech’s argument to the contrary, and the decision of the Court of Appeal accepting it, were both substantially based on decisions of the Court of Justice of the European Union under article 7.2 of the Directive concerning the use of trademark rights to obstruct the trading between member states of goods already legitimately in circulation within Europe. That was a different, and for present purposes irrelevant situation.

The difficulty about M-Tech’s argument was that the act of a trademark proprietor in seeking to control the first marketing of his products in Europe was in principle an ordinary exercise of the essential right conferred on him by articles 5 and 7.1 of the Directive.

He might or might not also engage in activities which were designed to eliminate the independent parallel trade. But Sun could not be prevented from doing something which was in itself entirely lawful and consistent with the principle of the free movement of goods, simply because it proposed to do something else as well which was unlawful and inconsistent with that principle.

The exercise of a right which had no impact on trade between member states did not become unenforceable merely because it was accompanied by other acts which did. The law responded to such a situation by restraining the acts which did. It did not pull down the whole temple.

The case concerned business which M-Tech had done in infringement of Sun’s trademarks. It was not a defence to proceedings brought on that basis that there was other business that M-Tech had been prevented from doing by Sun’s arguably unlawful policy of withholding information.

Solicitors: Nabarro LLP; Hill Dickinson LLP, Liverpool.