Corporate Crime analysis: Can a criminal offence be committed under the Trade Marks Act 1994 (TMA 1994) for the sale or distribution of so-called ‘grey goods’ without the trade mark proprietor’s consent? Ashley Fairbrother, solicitor at Edmonds Marshall McMahon, examines the Supreme Court’s answer in R v M; R v C; R v T and says the decision sets out in clear terms that ‘grey goods’ cases are worthy of prosecution in the same way that counterfeit goods cases increasingly are.

The published interview can be Seen here.

Original news

R v M; R v C; R v T [2017] UKSC 58, [2017] All ER (D) 20 (Aug)

On the true construction of TMA 1994, s 92(1), signs (or trade marks) which had been applied to goods for which there had originally been an authorisation of manufacture by the registered trade mark holder, but whose sale had not been authorised by him, fell squarely within the description in TMA 1994, s 92(1)(b). Accordingly, the Supreme Court dismissed the appellants’ appeal against the decision of the Court of Appeal, Criminal Division, that the appellants had been properly indicted for, among other things, offences of unauthorised use of trade marks, contrary to TMA 1994, s 92(1)(b) and (c).

What is the background to this case?

The appeal to the Supreme Court in this case arose from an interlocutory appeal brought by defendant clothing and footwear importers and distributors (the appellants) in a criminal prosecution under TMA 1994, s 92(1). The Court of Appeal judgment is cited as R v C and others [2016] EWCA Crim 1617, [2016] All ER (D) 28 (Nov). The trial is yet to be heard.

The appellants were in possession of items of clothing and footwear bearing the marks of well-known trade mark holders such as Adidas, Jack Wills and Fred Perry (the brands). All of the items forming the subject matter of the indictment had been manufactured outside the EU. Some of those items were counterfeit in the sense that they were not manufactured by or with the consent of the brands. Those items were not in issue in the appeal. In respect of the items that constituted the remainder of the indictment, and which were the subject of the appeal, the brands had given their consent to the manufacturers to apply their respective trade marks to the items that were produced. However, some of the items produced were either:

  • rejected for being of sub-standard quality
  • excess to requirements, or
  • cancelled in part or in full

In short, for those ‘surplus’ items, the brands had not authorised the manufacturer to sell them on.

It is easy to understand why this would be–a brand’s reputation relies on the quality of its goods. The sale of sub-standard goods, for example, in the market place would substantially damage the brand’s reputation. At the same time, it would allow the manufacturers to profit–in the short term at least–from the very unlawful sale that causes the damage. Manufacturers thus might find themselves in a position of holding a potentially large quantity of branded stock (ie stock with a trade mark proprietor’s sign applied to it) but lacking the consent of the trade mark holder to sell them. The question for the manufacturer is what to do with such stock. Very often, as in this case, such stock finds its way out of the factory through the ‘side door’ or it is sold to traders or to the public via other avenues, all without the trade mark proprietor’s consent. These goods are known as ‘grey goods’, and the market for these goods is known as the ‘grey market’.

What were the issues under appeal?

In a nutshell, the issue in this case was whether the sale of grey goods, or possession of them with a view to their sale, is a criminal offence or simply a civil infringement.

The appellants relied upon what the Supreme Court would refer to as a ‘strained and unnatural’ interpretation of TMA 1994, s 92(1) to make good their point. As far as is relevant to the issues on appeal in this case, TMA 1994, s 92(1) provides that:

‘A person commits an offence who….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 offers…for sale…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).’

Effectively, the appellants contended that an offence can only be committed under TMA 1994, s 92(1)(b) or (c) if an offence under TMA 1994, s 92(1)(a) had also been committed. The appellants contended that the term ‘such a sign’ in paragraph (b) referred back to paragraph (a), and, that being so, it means that an offence is only committed under (b)–to sell goods–or (c)–to possess them with a view to their sale–where the relevant sign had been applied without the consent of the proprietor and thus an offence under (a) had been committed.

It follows, the appellants argued, that any goods in the ‘grey market’ category had necessarily had the trademarked sign originally applied with the consent of the trade mark proprietor. Therefore, those goods are not ones to which paragraph (a) could apply and it followed that they are not, when it comes to paragraph (b) and (c), goods which bear ‘such a sign’.

What did the Supreme Court decide?

In a short 20-paragraph ruling, the Supreme Court agreed with both the Crown Court and Court of Appeal and unanimously rejected the appellants’ interpretation of TMA 1994, s 92(1). Lord Hughes, who gave the ruling, agreed that ‘such a sign’ in paragraph (b) does refer back to the sign described in paragraph (a), but went on to say that the difficulty for the appellants came when one read ‘without the consent of the proprietor’. This requirement of subsection (1) appears in the opening part of the subsection and qualifies paragraphs (a), (b) and (c). Lord Hughes stated that ‘as a matter of plain reading’ the offences under paragraph (a), (b) and for that matter (c) are not cumulative but separate. The absence of the consent of the proprietor is a requirement that applies of each paragraph independently–it is not necessary that one variation of the offence, paragraph (a) has to be committed before the next in line can be. The issue in the appeal was therefore decided simply as a matter of statutory construction.

Lord Hughes made a number of additional, and obiter, policy points in further support of the prosecution’s construction of TMA 1994, s 92(1). In these remarks, he stated that in some cases manufacturers may make trademarked goods in excess of what was ordered with the ulterior intention of selling the balance for their own benefit. He said that the sale of both ‘fakes’ and grey goods may involve a deception and, to exacerbate this, in some cases grey goods may also be defective.

In addition to this, Lord Hughes succinctly stated that ‘Defendants who set out to buy up grey market goods to make profit on re-sale do so because the object is to cash in on someone else’s trademark. If such be proved, they have scant claim to a beneficent construction of the Act’. Public policy objectives therefore favoured the prosecution’s–and the court’s–interpretation of TMA 1994, s 92(1).

Now the Supreme Court has decided it is a criminal offence to sell grey goods, the case will be handed back to the Crown Court and the defendants will be tried.

What does the case reveal about the limits on or advantages of using private prosecutors to bring these types of proceedings?

Traditionally, the protection of intellectual property (IP) rights has been considered primarily a matter for recourse through the civil courts. This case highlights the fact that infringement of IP rights is not just a civil matter, it is a criminal offence that carries substantial custodial sentences of up to ten years.

The Court of Appeal in this case recognised that the law may be tough for certain importers, distributors and retailers, but this should be balanced against the ‘often unscrupulous conduct of some of those determined to exploit to their own advantage, and to the detriment of proprietors and consumers, the proprietary rights in trade-marks belonging to, and established at great expense by, others’.

The government is increasingly recognising the importance of the criminal law and in particular the use of private prosecutions in protecting IP rights. In only two months’ time, on 1 October 2017, the Digital Economy Act 2017 will come into force to increase the sentence for online copyright infringement from two to ten years. In the consultation paper, Baroness Neville-Rolfe DBE CMG, Parliamentary Under Secretary of State and Minister for Intellectual Property, recognised the use of private prosecutions to enforce the legislation. In addition to this, in 2014 the government brought into force the Intellectual Property Act 2014 which criminalises the unauthorised copying of a registered design, punishable by up to ten years’ imprisonment. This instant case demonstrates the court taking a similarly robust approach to IP crime. The use of private prosecutions will inevitably be a major tool by means of which to enforce and protect IP rights in the future.

Do you envisage an increase in cases like these being brought (by private prosecutors) or do you see this as the perfect-storm type of case?

I see this case as highlighting the use of the criminal law to protect IP rights and as further paving the way for private prosecutions being brought to protect intellectual property rights. The Supreme Court set out in very clear terms that ‘grey goods’ cases are worthy of prosecution in the same way that counterfeit goods cases increasingly are. Since the Court of Appeal decision was handed down in November 2016, we have been instructed in two matters relating to the sale of grey goods. One such case, similar to this, related to the parallel importation of goods from abroad into the EU without the consent of the proprietor and in the other a supplier had authority to apply the sign to goods, but extended past that authority to sell the goods to others.

Interviewed by Sean Delaney, Lexis Nexis