The following article does not constitute legal advice but serves as a warning to those who sell 'grey goods' or deal in parallel imports, whether it be clothing, cars, computers, pharmaceuticals, or software.

The judgment given in R v M C T, a case heard by the Supreme Court on 19June 2017 (Lords Neuberger, Mance, Sumption, Hughes, Hodge) has resolved, once and for all, the scope of s92 (1)(b) of the Trade Marks Act 1994. The question of whether the sale of genuine 'grey goods' (as opposed to counterfeits) can amount to a criminal offence was decisively resolved following this interlocutory appeal. This is a landmark case for trade mark owners, but for any discounter or reseller this decision now puts them at risk of committing a criminal offence.

The appellants were alleged to have imported and sold trademarked goods which had been legitimately manufactured outside the EU. Such alleged importation and sales were made without the trademark owners' permission and this was unanimously ruled by the Court to be a criminal offence.

What are 'grey goods'?

'Grey goods' are those which bear an authentic registered trade mark and are produced with the trade mark proprietor's consent, but are sold without the registered trade mark owner's consent. They also include parallel imports, which are registered trade marked goods that the trade mark proprietor consents to being sold outside of the European Economic Area, that are then sold within the European Economic Area without the proprietor's consent.

Background

The appellants dealt in wholesale trading of imported branded clothing. This included the bulk UK importation of genuine branded goods (manufactured in countries outside the EU) which had only been authorised to be sold and distributed outside of the European Economic Area. They were prosecuted with offences contrary to s92 Trade Marks Act 1994. They argued before the Crown Court that the importation of 'grey goods' disclosed no criminal offence. The Crown Court rejected this argument as did the Court of Appeal, which nevertheless certified a point of law of general public importance for the consideration of the Supreme Court. In the UKSC the prosecution/respondent conceded that whilst some of the goods concerned were counterfeit, the vast majority of them were 'grey goods.' It was agreed by both sides that the trade in 'grey market' goods amounted to a civil infringement of the trade mark holder's rights: this was clear from LEVI STRAUSS AND CO AND ANOTHER V TESCO STORES LTD (2002). Criminal proceedings, however, had never before been bought in relation to the trading of 'grey goods' and most Trading Standards Departments had previously considered 'grey goods' to fall outside of s92 TMA 1994.

Issues arising for the Supreme Court's consideration

The appeal focused upon the construction of s92 (1) (b) TMA 1994. The appeal thereby became a test case on the ambit of s92 TMA 1992. The appellants argued that s92 (1) (b) only applied in respect of counterfeit goods. It was submitted that criminal liability only attached if the manufacture of the goods was unauthorised and/or a relevant sign or mark was placed on the goods without the consent of the trade mark proprietor. If goods were originally manufactured with the permission of the trade mark proprietor, they would fall outside of s92, even if the subsequent sale was not authorised by the trade mark proprietor. The argument, that the words 'such a sign' in subsection 1(b) could only refer to a sign which had been applied without the trade mark holder's consent, was based on the connection between s92(1)(a) and s92(1)(b). The appellants contended that the use of the term 'such a sign' in s92(1)(b) referred back to subsection 1(a) and thus 'such a sign' meant a sign which had not been applied with the consent of the trade mark proprietor, given, it was said, the plain meaning of s92(1)(a).

Court decision

Paragraphs 10 and 11 of Lord Hughes' judgement (with which Lords Neuberger, Mance, Sumption and Hodge agreed) outlines the court's decision to reject the appellant's interpretation. It was ruled that the offences set out in (a), (b), and (c) of s92 were, as a matter of plain reading, separate rather than cumulative. The mental element of a view to gain or the intent to cause loss, and the element that the use made of the sign was without the consent of its proprietor, applied to all three subsections. This means that under s92 (1) (b) it was an offence to sell goods with such a mark, without the consent of the proprietor provided there was the necessary mental element. The criminal law unquestionably caught genuine goods which were put on the grey market and sold without the trade mark holder's consent in breach of their intellectual property rights. The appellants' argument that the expression 'such a sign' in s92 (1) (b) referred back to s92 (1) (a) was criticised by Lord Hughes. He ruled that 'it does not simply reach back to (a) but to the general words of the section which precede it.' Thus, it was held that one could not infer that the term 'such a sign' meant a sign which had not been applied with the consent of the trade mark proprietor, as the term referred further back to the governing words of the section. The full Supreme Court judgement can be found at https://www.supremecourt.uk/cases/docs/uksc-2017-0006-judgment.pdf.

Clarification of this area of law

This test case ruling means that parallel or 'grey market' trading now leaves the trader open to criminal prosecution and sanctions, in addition to civil infringement proceedings. In contrast, EU Regulation 608/2013, regarding the enforcement of intellectual property rights by the customs agencies of member states, unambiguously advises that infringements resulting from so-called illegal parallel trade and overruns are expressly excluded from the scope of Regulation (ED) No 1383/2003 being 'genuine goods and it is therefore not appropriate that customs authorities focus their efforts on such goods. Illegal parallel trade and overruns should therefore also be excluded from the scope of the Regulation.'

Implications for importers of grey market goods

This is another example of how the civil commercial interests of big business are being promoted by use of the criminal law when civil remedies are perfectly adequate and proportionate. No prosecution had previously been brought on the basis of 'grey market' trade. This decision requires traders in this market to seek urgent and immediate legal advice. As counsel involved in the appeal have said: 'the legal 'grey market' no longer exists: there are now just authorised sales channels or piracy. The decision sends out a strong signal that those trading in the 'grey market' will be prosecuted in the Criminal Courts.' Whereas civil damages and injunctions were judged to be acceptable commercial risks, now traders face the possibility of imprisonment, with a maximum of ten years. The reverse burden statutory defence provided by s92 (5) TMA 1994 is not straightforward and requires careful preparation and thought.

Proceeds of Crime Act 2002

In addition to the potential prison sentence, the Proceeds of Crime Act 2002 can also be used to confiscate from the trade mark infringer and compensate the trade mark proprietor. The courts can order a defendant that is found guilty of trade mark infringement to pay a penalty up to the financial value equivalent to the entire benefit derived from the criminal activity. If the defendant is unable to pay the full sum when sentenced, an application can be bought at a later date to recover additional monies, in the event that the defendant later acquires further assets. Only upon full payment will the obligation imposed be discharged. Additional prison terms, in default of settling the confiscation order, are draconian.

The importance of obtaining legal advice

Lord Hughes' judgement stated 'It is, on any view, unlawful for a person in the position of the defendants to put grey goods on the market just as it is to put fake ones on there. Both may involve deception of the buying public; the grey market goods may be such because they are defective. The distinction between the two categories is by no means cut and dried. But both are, in any event, clear infringements of the rights of the trade mark proprietor. Defendants who set out to buy up grey market goods to make a profit on re-sale do so because the object is to cash in on someone else's trade mark. If such be proved, they have scant claim to a beneficent construction of the Act. As it is, its ordinary reading plainly means that, unless they have the statutory defence, they have committed an offence.' The burden and standard of proof is more onerous to discharge in a criminal case, however the threat is greater as there is a maximum sentence of ten years imprisonment plus the confiscation of assets through the Proceeds of Crime Act 2002. Generally investigations into trademark infringement are bought by Trading Standards. This fact that the costs of bringing a criminal prosecution are arguably far less than in the civil courts and that compensation can be sought using the Proceeds of Crime Act 2002, may however result in a rising number of private prosecutions.

If you are a company or individual who would like to discuss the implications of this Supreme Court decision, please contact the Business Crime and Regulation department on 0345 872 6666.