Taking a match to Fortress Europe?
Fladgate Fielder, London
by Eddie Powell
Earlier this year the Court of Appeal for England and Wales held that the parallel importation of Cuban cigars did not amount to trademark infringement even though the importer could not demonstrate express consent to the import. This is believed to be the first time the ‘inferred consent’ defence has been run successfully in the United Kingdom. Is this a cause for concern for brand owners?
Many trademark practitioners will be familiar with the ongoing saga of exhaustion of trademark rights within the European Union and the three member states of the European Free Trade Association (Iceland, Liechtenstein and Norway), which together create the European Economic Area (EEA). Essentially, the European Union has adopted a position of rights exhaustion within the EEA so that trademark owners cannot use trademark rights to partition the EU market. This policy was seen as necessary to promote cross-border trade between member states and promote the creation of a single market in the EEA. Article 7 of the First Trademarks Directive states: “A registered trademark is not infringed by the use of the trademark in relation to goods which have been put on the market in the [EEA] under that trademark by the proprietor or with [its] consent.” [emphasis added]
This provision prompted queries as to what was the situation regarding goods coming from outside the EEA. These were soon answered by the *Silhouette Case* (C-355/96): the European Court of Justice (ECJ) ruled that goods first placed on the market outside the European Union do not enjoy the same liberty as those first put on the market in the EEA and will effectively amount to counterfeit goods unless the brand owner has consented to the European sale. This decision effectively turned the European Union into a fortress for any wannabe parallel importer.
Consent issues
This has led to a debate as to what constitutes sufficient consent; the ECJ has heard a number of cases exploring the issue of, among other things, whom the consent must be given by and for what. The most important case on the issue is *Davidoff v A&G Imports* (C-414/99), decided in 2001. In it, the ECJ ruled that “consent … is tantamount to the proprietor’s renunciation of [its] exclusive right … to prevent all third parties from importing goods bearing [its] trademark”, and that “consent must be so expressed that an intention to renounce those rights is unequivocally demonstrated”.
The ECJ went on to say that such consent would normally be in the form of express statement, before adding: “Nevertheless it is conceivable that consent may in some cases be inferred from facts and circumstances prior to, simultaneous with or subsequent to the placing of the goods on the market outside the EEA which … unequivocally demonstrate that the proprietor has renounced its rights.”
However the ECJ was clear that there could be no such thing as consent by inaction or silence; simply selling the goods outside the EEA did not amount to consent without something more.
In the *Van Doren Case* (C-244/00) the ECJ went on to decide that in trying to prove consent, the burden fall on the trademark owner only to establish that in the normal course of things it operates a distribution system which does not permit goods sold outside the EEA to be imported into the EEA; once this burden is discharged, then it is down to the importer to try and establish that the goods it has imported have in fact received requisite consent. In practice, this burden leaves importers struggling to make any dent in the rules. In fact, the author of this article is unaware of any case before the *Mastercigars Case* where a UK court has accepted that consent was given to non-EEA imports.
*Mastercigars*
The *Mastercigars Case* ([2007]EWCA Civ 176, March 8 2007) concerned the importation of Cuban cigars into the United Kingdom. The manufacture and sale of all Cuban cigars are controlled by one company, Corporación Habanos SA (Habanos). Habanos grants exclusive distribution licences across the world to a number of companies, including Hunters & Frankau in the United Kingdom. A parallel importer, Mastercigars Direct Ltd, had built a successful business of purchasing cigars from Cuba to sell in the United Kingdom, bypassing Hunters & Frankau.
One consignment of cigars was intercepted by the UK customs authorities and detained on the basis that they may be counterfeit. Mastercigars sued Hunters & Frankau for the release of the goods and Habanos countersued Mastercigars for trademark infringement, based on the allegations of counterfeit, but also on the basis that the importation was without the consent of Habanos – which owns the UK trademarks – and so constituted infringement under the rules prohibiting non-EEA parallel imports.
The first instance court determined that the allegation that some of the goods were counterfeit was not proven ([2006] EWHC 410 (CH), March 2006 10, HH Judge Fysh QC). The judge voiced grave concerns about the handling of the testing and the inconsistencies in the counterfeit indicators relied on by Habanos. However, he decided that the importation of the cigars had been conducted without the consent of Habanos and gave judgment for Habanos in the parallel import case.
The Court of Appeal of England and Wales, however, disagreed with the first instance judge’s approach. The judgment of the Court of Appeal was prepared by Lord Justice Jacob, a career IP judge who is not afraid to take the bull by the horns when making his decisions. In his judgment, he began by commenting that the ‘Fortress Europe’ rule outlined above is generally “self evidently rather anti-competitive and protectionist”, but went on to make the point that his task is “not to consider whether the rule is good or bad from an economic perspective”.
Mastercigars argued that because all the entities in Cuba are state-controlled, sales by a retailer to a purchaser from Europe are effectively sales by Habanos. Jacob was unconvinced by this approach, preferring to focus on the specifics of the circumstances of the case.
Jacob sought to clarify further what is needed to establish unequivocal consent; he said that this did not mean that the importer had a high burden of proof: it simply meant that all the evidence should be evaluated to determine whether the only conclusion that could be reached was that the proprietor had consented. An act or omission consistent with consent, but also consistent with its absence, would not be sufficient. He therefore said: “I think one must focus on what is really happening, on actual knowledge and actual, practical control or the right of control by the trademark owner. In this case, this means concentrating on the acts of [Habanos] and its legal and *de facto* powers of control. Do they, taken overall, lead to the unequivocal conclusion that [Habanos] consented to the sale of the consignments in Europe?”
To do this, Jacob set about examining the evidence with a fresh eye not usually found in an appeal court. A number of facts stand out from the judgment:
• Habanos has exclusive control over the sale and supply of cigars for local sale and export.
• Habanos supplies about 230 independently owned and run stores within Cuba and a number of franchised *Casas del Habano* for local and tourist sales. The *casas* are also owned by third parties, but subject to a franchise agreement with Habanos which prohibits them from exporting or acting as a wholesaler.
• There was evidence that meetings were held between representatives from Habanos, the *casas*, Cuban Customs and others to discuss various matters including pricing and export control. There was also other evidence which indicated that Habanos exercised a considerable degree of control over the *casas* and their staff.
• Where a shop sold cigars to a tourist, the shop was obliged to issue an invoice to the customer. The invoice was partly for customs purposes and included messages not just in Spanish but also in English and German. A copy of the invoice was retained by the shop. The evidence established that Habanos had no legal rights to see the invoice, but in practice the stores would comply with a request to this effect.
• Habanos set a limit on individual purchases; for the casa that Mastercigars used, that limit was set at $25,000. The first instance judge determined that this was a “commercial quantity” and that any purchaser of such a quantity would be intending them for re-sale.
• Habanos has an interest in sales by *casas*; it earns a small royalty and promotes hard currency sales in Cuba.
In Jacob’s view, these points added up to the fact that Habanos was not just turning a blind eye to the purchase of Cuban cigars in Cuba and their export to Europe, but was actively encouraging it: “It seems to me blindingly obvious that [Habanos is] saying in effect to the *casas* ‘you can sell these small but commercial quantities to foreigners and if you do, you must give them the appropriate documentation so they can go through Customs, so they can take them home to sell.’ And [this] leads ineluctably to the conclusion that consent to the use of the trademarks on the purchaser’s home market is given. The ‘unequivocal’ test is passed. Despite having exclusive distributors outside Cuba, [Habanos was] prepared not only to tolerate, but to allow small commercial quantities to be purchased by foreigners within Cuba for them to take out and re-sell abroad.”
Interestingly, Jacob added an aside to the effect that consent might also be derived from the fact that while a system to police parallel trade was in place, there was a conspicuous decision not to do so; in his words: “That suggests a positive decision to condone (ie, consent to) the parallel trade.”
For these reasons, Mastercigars’ appeal was allowed. However, Jacob made the point that because Habanos changed certain practices (the wording of the invoices was subsequently changed), Mastercigars could not rely on the same ruling applying to any future shipments.
Conclusion
The decision will be read by those in parallel trade as meaning that there is wiggling room when it comes to importing goods into Europe. Certainly, the comment that not actively using existing policing methods would be enough to condone parallel trade and so constitute consent is surprising and, even if not followed in future cases, will encourage defences on this basis. It indicates to trademark owners that they cannot relax their guard and must take consistent solid commercial steps to prevent parallel imports into the European Union. Also, it is not unknown for brand owners on the one hand to denounce the grey trade and make all the right noises about combating it, but on the other hand sometimes to use quietly the grey market as a dumping ground for excess stock or to improve sales figures, and this decision suggests that such brand owners may find themselves unable to rely on their EU trademark rights in these circumstances.
However, the *Mastercigars Case* should be seen in context; the circumstances were fairly unique, with Habanos exercising considerable control over the activities of its resellers and any brand owner that allowed $25,000 of stock to be shipped to Europe would probably accept that it was supplying wholesale. The walls of ‘Fortress Europe’ are by no means breached.
The case perhaps reflects the fact that the Fortress Europe policy attracts little support in the United Kingdom outside the brand owner, distributor and reseller community, and the courts have for quite a while indicated their displeasure at having to enforce it. The Court of Appeal is perhaps more at liberty than lower courts to give effect to this. On the whole, UK courts do enforce the rules, but brand owners should expect compliance, rather than sympathy, from the courts when bringing actions against grey goods from outside the EEA.
