Last week the Court of Appeal overturned the High Court's decision on parallel importation in MasterCigars Direct v. Hunters & Frankau and Corporacion Habanos v. MasterCigars Direct and Christopher Kenyon, finding that the cigar consignments did not infringe Corporacion Habanos' ("Habanos") trade marks. This is good news for UK lovers of Cuban cigars, and has wider implications for parallel importers in general.

Background

Habanos is a major player in the Cuban economy. It has the exclusive right to buy, sell and market rolled tobacco of Cuban origin, including brands of hand rolled cigars. It owns a number of UK and Community trade marks for these brands. Habanos manages domestic sales of cigars through selected retailers (known as "Casas") and appoints overseas distributors, of which H & F was the exclusive UK distributor.

MasterCigars purchased cigars in Cuba through a local agent. Habanos sets a limit of US$25,000 for private sales to customers in a single transaction in the Casas which sell principally to foreigners. This can amount to several thousand cigars. An invoice ("factura") is completed for every sale. This contains spaces for the name, nationality and passport number of the purchaser, and the following sentence in Spanish, English, French and German: "Note show this voucher at Custom House on leaving the country."

In August 2004, a consignment of cigars purchased from a Casa in Havana was detained by HM Customs and Excise, following a tip-off from H & F that the consignment was believed to contain counterfeit goods or, failing that, were unlawful parallel imports of genuine goods. MasterCigars sought, amongst other things, a declaration that the cigars did not infringe Habanos' trade marks. Whilst the goods were not counterfeit, at first instance Judge Fysh QC found no implied consent by Habanos to the imports, and consequently that there was trade mark infringement.

Legal analysis

The Court of Appeal had to determine whether Habanos had consented to the cigars being put on the market in the EEA within the meaning of Art. 5.1 and Art. 7 of the Trade Marks Directive 89/104. Article 5.1 confers exclusive rights on a trade mark proprietor to prevent third parties using the mark in the course of trade without the proprietor's consent. Article 7 provides that "The trade mark shall not entitle the proprietor to prohibit its use in relation to goods which have been put on the market in the Community under that trade mark by the proprietor with his consent."

The leading ECJ case is Zino Davidoff v A & G Import [2001], which held that, given the serious consequences of exhaustion of rights, consent must be so expressed that an intention to renounce those rights is unequivocally demonstrated. Since then there has been much debate as to the circumstances in which consent will be found.

Habanos contended (based on the ECJ's repeated use of the word "unequivocal") that the defendant needed to prove implied consent beyond reasonable doubt. The Court of Appeal however did not accept that "unequivocal" related to the standard of proof. Rather it indicated that the act must be unambiguous in demonstrating that consent was provided.

The "point of control" is key. The Court of Appeal focussed on what is really happening, on actual knowledge and actual, practical control or the right of control by the trade mark owner. In the current case Lord Justice Jacob found this meant 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?

The Court of Appeal's decision

The Court of Appeal found that Judge Fysh QC had erred in failing to consider the impact of the evidence as a whole. Habanos had not merely failed to police the parallel trade, it had facilitated it. The main factors that led to the finding of implied consent by Habanos were (i) that individual foreigners could buy a commercial quantity of cigars and (ii) the facturas, which assisted export. There had also been meetings between Habanos, the Casas, Customs and sometimes the relevant Ministry, which showed these parties to be acting in concert.

Copies of facturas were kept at the Casa, and in practice Habanos could be given access to these. A system was set up via the facturas which could have been used to police exports and yet there was an abstention from using it for that purpose. That suggests a positive decision to condone (i.e. consent to) the parallel trade.

The combined effect was that Habanos was 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." That led to the conclusion that consent to the use of the trade marks on the purchaser's home market is given. Despite having exclusive distributors outside Cuba, Habanos was prepared to allow small commercial quantities to be purchased by foreigners within Cuba for them to take out and re-sell abroad.

Commentary

This case shows that the extent of a trade mark owner's control over the route by which the goods come into the EEA is critical, and brand owner may be at risk of parallel importation if consumers are free to buy commercial quantities of the product outside the EEA. In the Levi case (heard with Davidoff) jeans came from authorised retailers abroad, or from accumulators, who could buy a maximum of 6 pairs in one purchase. This was found not to be a commercial quantity. Mr Justice Jacob commented that neither was there facilitation for export or any detailed co-operation between the trade mark owner and the outlet.

It is interesting to speculate whether parallel importation would be permitted if the defendants were aware of objections to export to Europe. For example, in the Cuban case the facturas have now been changed to add the words "Not for re-sale". It was left open whether there could still be said to be consent. Brand owners should be warned that actions may speak louder than words. A lot would depend on whether in reality the objection and new factura were merely a façade – no more than empty protestations about what was really encouraged by the US$25,000 purchase limit.

Davidoff was distinguished from the current case because the goods were purchased from Davidoff's exclusive distributor, and there was no question of Davidoff acting in concert with its distributor. However if brand owners do use a distribution network and do not wish their goods to end up in the EEA, it is advisable to be clear that imports are not permitted into the EEA, to police the terms of their distribution agreements and again to mark invoices and packaging with an import restriction.

Lord Justice Jacob seemed to relish the opportunity to provide his opinion on parallel importation. Whilst the Court of Appeal accepted that a number of cases culminating in the ECJ decision in Davidoff have "embedded" the doctrine of EEA-wide exhaustion of rights, the judgment was critical of this "so-called doctrine", at least insofar as trade marks are concerned.

Although the Court of Appeal stated that its task was not to consider whether Art. 5.1 was good or bad from an economic perspective, merely to apply it, it did in the same breath comment that generally this rule is "self-evidently rather anti-competitive and protectionist…. By jumping to consider whether or not there is exhaustion, the very function and nature of a trade mark has been overlooked. But such is the position which has now been reached. The doctrine clearly applies to trade marks as much as it does to the other IP rights, even though the nature of those rights is very different from trade marks and is particularly so much more obviously territorial in nature."

Lord Justice Jacob observed that the "public would be surprised" to know the legal position, clearly indicating his sympathy lies with a pro-consumer and free trade agenda. The issue of exhaustion is bound to come up again, and it will be interesting to see if the UK courts again rule in favour of the parallel importer.