The Court has found that InterContinental Brands (ICB) passed off its VODKAT product as vodka and thereby caused damage to Diageo, manufacturer of SMIRNOFF. This is the latest case on the extended form of passing off which started with the champagne cases in the 1960s.
"Vodka" is defined as a "colourless alcoholic spirit made in Russia and Poland by the distillation of grain etc" by the Shorter Oxford English Dictionary. It has also been defined by European Regulations which have specified, among other requirements, that it has a minimum alcoholic strength by volume (ABV) of 37.5%. Since 1990 vodkas have almost all been at least this strength. Since the 1950s nearly all have all been clear, distilled spirits with little or no flavour.
It is almost always displayed with other spirits in retail outlets (in both the off and on trade). The claimant's main vodka brand, SMIRNOFF, was one of the first brands to be marketed in the UK. It accounts for more than 40% of the UK vodka market by volume, with annual revenue of around £90 million.
Mr Justice Arnold concluded that VODKAT, manufactured by ICB, is not a vodka. It is a mixture of vodka and neutral fermented alcohol which has an overall ABV of 22%. The neutral fermented alcohol costs ICB considerably more to purchase than the vodka (however, this enabled a lower price point for the product because its use resulted in a lower ABV - see below). The main commercial justifications for the product were:
- it would, by virtue of its low price (around £5 per bottle) and its lower alcohol level, fill a gap in the market for a "light spirit", and
- due to the way HMRC classifies spirits, the duty on a 22% ABV product is significantly lower than stronger spirits, at £2.85 per litre rather than £8.49.
The Law of Extended Passing Off
Extended passing off is reviewed in great detail by Mr Justice Arnold in his judgment. To summarise the review, the first successful case ( Ch 262 and  1 WLR 277) for extended passing off concerned "Spanish champagne", long before champagne was a protected designation of origin. The Court found that a cause of action for passing off existed, as "champagne" meant sparkling wine produced in the Champagne district of France and that the use of the term "Spanish champagne" in relation to sparkling wine from Spain was likely to mislead people who were not knowledgeable about champagne into thinking that the defendant's wine was champagne.
After a number of other cases concerning sherry ( RPC 1), Scotch whisky ( 1 WLR 917) and champagne cider ( RPC 79), the House of Lords heard the "Advocaat" case ( RPC 31).
The Extended Passing Off Test
Lord Diplock in Advocaat identified five characteristics that create a valid cause of action in extended passing off:
- a misrepresentation
- made by a trader in the course of trade
- to prospective customers of his or ultimate consumers of goods and services supplied by him
- which is calculated to injure the business or goodwill of another trader (in the sense that this is a reasonably foreseeable consequence) and
- which causes actual damage to the business or goodwill of the trader by whom the action is brought or will probably do so.
Lord Diplock dismissed the geographic connotations of the previous cases as irrelevant. The key issue, said the House of Lords, was that there had to be "at least some measure of distinctiveness". Names which begin their lives as descriptive of the product, such as Carrara marble and champagne, may over the course of time become distinctive as well.
Laddie J clarified in the later Swiss Chocolate case ( RPC 117) that the descriptive term must denote an identifiable group of products which have a perceived distinctive quality. If a sparkling wine of equal quality was produced in, say, New Zealand, this would not destroy a case by a French champagne house if the latter can prove that it has a certain cachet which made products sold under that word attractive to the consumer. This, said Laddie J, is the hallmark of a particularly valuable mark. It must, as Professor Wadlow put it in The Law of Passing Off: Unfair Competition by Misrepresentation (3rd Ed) "have some drawing power in its own right".
Arnold J found it difficult to see how one can distinguish between products which are bought because they are perceived to be of superior quality and those bought simply because consumers like them. It is not, he found, that the descriptive term must cover products of superior quality, simply that it covers products with recognisable qualities. This is why Advocaat is protected but (to use Laddie J's example in the Swiss Chocolate case) "Italian pencils" would not be - there is no public perception that pencils from Italy form a discrete group of products having any particular reputation.
Who can sue?
In considering the Spanish Champagne cases, Lord Diplock in Advocaat decided that it did not matter that the class of traders between whom the description "champagne" was shared was a large one. He noted that if the class is broad, the term is likely to be descriptive of a broader range of products in terms of quality. This may make it harder to show that the term has acquired a public reputation and goodwill, with recognisable qualities which distinguish it from others of lesser reputation, but that is a separate question. Later members of the class of traders would have to show that they have been using the descriptive term for long enough in connection with their own goods and have traded successfully enough to have built up goodwill for their business before they can bring an action.
What if there is no real likelihood of damage to the claimant through lost sales?
This came up in the "elderflower champagne" case ( FSR 641). It was about a quarter of the price of champagne, and the High Court found that although the labelling of the product amounted to a misrepresentation that it was champagne, there was no real likelihood of real damage to the claimants. The Court of Appeal allowed the appeal by the claimants, on the basis that blurring or erosion of the uniqueness of the word champagne would debase the exclusive reputation of the champagne houses.
The Findings of the Court
Arnold J said that he had three main issues to decide:
- Does the term "vodka" denote a class of goods with a reputation and hence a protectable goodwill?
- The term "vodka" denoted a clearly defined class of goods for the reasons set out above.
- That class of goods has a reputation giving rise to goodwill. Consumers may not know precisely what vodka is (as the evidence found) but they do use the term vodka to get what they want and to distinguish it from similar products, such as rum, gin and whisky.
- Did ICB's marketing of VODKAT amount to a misrepresentation that it is vodka?
- The name VODKAT suggests that the product is either vodka or made from it. Given that the latter is true, Arnold J considered that ICB could have used the name without misrepresentation if sufficient care had been taken to inform consumers that is was not vodka, through labelling, advertising and instructions to the trade on sales presentation.
- It did not do this, and so Arnold J found that there was misrepresentation, especially given that evidence was presented to court of actual confusion at almost every level of the supply chain, from the advertising agency promoting VODKAT to those selling the product to the end consumer.
- Has Diageo suffered, or is it likely to suffer, damage as a result of the misrepresentation? Diageo accepted that sales lost through mere competition between VODKAT and vodka, as opposed to sales lost due to confusion, had to be disregarded, and account had to be taken of the fact that most of the lost sales would be sales of brands other than SMIRNOFF, but it contended that it had lost at least some sales due to confusion, and Arnold J agreed.
- Even if there had been no evidence of lost sales, Arnold J held that it was clear that ICB's marketing of VODKAT is likely to erode the distinctiveness of the term "vodka". If allowed to continue, it would cease to be a term for 37.5% ABV distilled spirits, but come to be seen as a term applicable to lower strength products which include fermented alcohol. Arnold J felt that this was already starting to happen.
As a result, ICB was held to have passed off VODKAT as vodka.
Procedural issues: trap purchases and surveys
Mr Justice Arnold made some observations on trap purchases and surveys. On the former, he said that immediate notification of the trap purchase to the defendant is required in some instances, but only really where there is likely to be some dispute as to what actually happened. For example, if the evidence about a trap purchase relies on what was said, notification should be swift to allow the defendant to verify what happened by interviewing those involved while it is still fresh in their memories.
On surveys, often criticised by courts, the judge was critical of the questions asked, as they could be interpreted in more than one way. In fact, in this case, Arnold J found that they were of little probative value as those matters that it helped to prove were matters that the claimants were willing to admit from the outset.
Given the development of the case law in the area of extended passing off during the past 50 years, this decision will come as little surprise. However, each case in this area is gradually broadening the scope of passing off. The law as it stands now protects any group of products that is recognised by the public as having defined qualities. While this may sound very broad and, as such, there may be concern that the floodgates will open to a tide of such cases, there are surprisingly few types of product where all the elements that constitute extended passing off are likely to come together. Limited permission to appeal has been given.