Dealing in grey goods can attract criminal liability16 May 2017 by
R v C & Others 1 November 2016
The Court of Appeal has held that a criminal offence may be committed under s92 of the Trade Marks Act 1994 not only for dealings in connection with counterfeit products, but also through the sale or possession of so-called ‘grey goods’.
Under s92 of the Trade Marks Act, a person commits a criminal 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).
Such an offence is subject to criminal sanctions, including imprisonment (of up to 10 years) or a fine, or both. Liability under s92 is separate from any civil liability for infringement under s10 of the Trade Marks Act.
The decision on appeal arose form a preparatory hearing and so there were no findings of fact at this stage. However, the case arises because it is alleged that the defendants are liable under s92(1)(b) for their involvement in unlawfully selling in the UK various well-known branded goods which were manufactured outside the EU. Some of these are alleged to be counterfeit products (i.e. goods which had not been manufactured by or with the consent of the trade mark proprietor). Others are alleged to be goods which were manufactured by factories authorised by the trade mark proprietor, but which were then disposed of and sold in the UK without the proprietor’s authority - so-called ‘grey goods’. These grey goods might include goods which had been manufactured pursuant to an order which was subsequently cancelled or rejected as being sub-standard, or which have been manufactured with authority but in excess of the required amount. However, they did not, for the purposes of this case, include parallel imported products.
At first instance, the Criminal Court held that there was no distinction between the two categories of goods and the sale of both attracted criminal liability under s92. The defendants appealed, arguing that criminal liability under s92 attaches only to dealings with products which bear a sign, identical to or likely to be mistaken for a registered trade mark, which has been applied without the consent of the proprietor (i.e. counterfeit goods) and not to grey goods, in relation to which the relevant remedy should be confined to civil infringement proceedings.
The Court of Appeal dismissed the appeal, holding that the sale and possession of grey goods could, if the relevant mental element was established, give rise to liability under s92 of the Trade Marks Act. The Court had to deal with a plethora of arguments from the defendants, but ultimately came to its conclusion primarily relying on (1) the interpretation of s92 itself; (2) the fact that such interpretation accords with existing authority; and (3) public policy implications.
So far as statutory interpretation is concerned, the Court held that the language of s92(1)(b) was clear. It refers to goods of packaging which bears “such a sign”. As a matter of ordinary language, these words must refer back to s92(1)(a): “a sign identical to, or likely to be mistaken for, a registered trade mark”. The court considered that it was not possible, without giving the section a wholesale and illegitimate rewriting, to link the words “such a sign” to the manner in which that sign was applied to the goods (i.e. applied with or without the consent of the proprietor).
The defendants argued that the provision cannot have been intended to apply to cases where the mark had been applied with the authorisation of the proprietor, because a sign cannot be “identical” to a registered trade mark where it has been affixed to the goods by or with the authorisation of the proprietor. This is because (it was argued), in that scenario, the sign and the mark would be one and the same and there would be no two things to compare. However, this ran contrary to the principle established in Levi Strauss v Tesco Stores  EWHC 1556 (Ch) (which had been approved in substance by the Supreme Court in Oracle America Inc. v M-Tech Data Ltd.  UKSC 27) and, in any event, the Court held that there is still a comparison to be made in that scenario: between the sign on the one hand and the trade mark which is registered (and found on the trade mark register) on the other.
The Court of Appeal concluded that it was not alone in giving s92 such an interpretation: the editors of Kerly’s Law of Trade Marks (15th ed.), the leading text book in the field, also consider the section to extend to grey goods. Further, it is consistent with the earlier Court of Appeal decision in Genis  EWCA Crim 2043, where the Court, in considering offences under s92(1)(c), suggested that s92 should apply to grey goods as well as to counterfeits. Even though the earlier decision was on a renewed application for leave to appeal (rather than a substantive appeal), the Court of Appeal considered it to be a reasoned judgment that was binding and, in any event, correct.
So far as the public policy argument was concerned, the Court of Appeal agreed with the defendants that a broad interpretation might give rise to harsh consequences in certain cases for certain users, but said there was a balancing exercise to be done and that this had to be set off against the “often unscrupulous conduct” of some others. The Court stated that “[t]rade mark violation gravely undermines the value of a brand and affects legitimate trade. The very fact of a cheap sale of an unauthorised branded item can both dupe a customer and diminish the market and overall value of the trade mark” and can also cause “very real issues of public health and safety” where the goods are fake or where they are genuine but rejected as being sub?standard. Further, the Court placed weight on the fact that, for liability under s92, the prosecution has to satisfy the higher criminal standard of proof and show that the defendant has the appropriate mens rea, as well as the fact that there is a statutory defence if the defendant can show that he believed on reasonable grounds that the relevant use of the trade mark was not an infringement (s92(5)).
This decision will clearly be welcomed warmly by trade mark owners, who continually face challenges to control their supply chains and prevent exploitation of their goods on the grey market. Not only are criminal sanctions now available, but perhaps the risk of such sanctions will act as a deterrent, at least to some of the more opportunistic of infringers. However, to assume that this will lead to many more successful prosecutions may be wishful thinking: in civil infringement cases, where the standard of proof is only on the balance of probabilities, it is often difficult to prove whether goods are genuine or fake, or whether their sale in the UK was consented to by the proprietor (explicitly or impliedly); and it is likely to be harder still for proprietors to satisfy the higher burden of proof - beyond reasonable doubt – and the requisite mens rea that is required for criminal liability.
So far as distributors are concerned, this decision highlights the need to take appropriate steps to ascertain exactly what consent has been given by the trade mark proprietor, before dealing in branded goods, to reduce the risk of criminal liability. This of course may be easier said than done for some distributors, and may be particularly worrying for distributors lower down in the supply chain, who may find it more difficult to establish what authorisation has been given by the trade mark proprietor.
The Court of Appeal acknowledged that this broad interpretation of s92 means that persons engaging in parallel imports of genuine branded products from outside the EEA might find themselves potentially vulnerable to criminal conviction. The Court refrained from expressing a concluded view on this point, as parallel imported products were not at issue, but it does leave the door wide open for trade mark owners to argue this point in future cases.