A Spoonful of IP (April 2016)

SpoonfulJan2016

April 2016 issue

* When is it legitimate for a trader to use a supplier’s registered trade marks?
* Accounts of profits in the retail sector. Part 1 – can the claimant claim all the defendant’s profits?
* Accounts of profits in the retail sector. Part 2 – what can the defendant deduct from its gross profits figure?
* Trunki decision – a disappointment for designers, but registered designs are still a valuable right

When is it legitimate for a trader to use a supplier’s registered trade marks?

To what extent can a trader use, in the course of its trade, registered marks owned by a supplier? This issue, which in our experience arises on a regular basis, has recently been considered by the Intellectual Property Enterprise Court in BMW AG v Technosport London Ltd. The defendant is an independent garage specialising in the repair and maintenance of BMW cars. It is not, though, an authorised BMW garage – it has no licence from BMW – although it does use genuine BMW parts, supplied to it by authorised BMW dealers.

BMW commenced proceedings for trade mark infringement in relation to Technosport’s use of BMW’s well-known roundel and M logo (shown below), as well as the word mark “BMW” itself.

BMW-RoundelBMW-M

BMW contended that no lawful use could be made of the logos except by authorised dealers. The judge rejected that submission, holding that genuine BMW spare parts bear the logos and are supplied, perfectly lawfully, by unauthorised dealers. However, the judge decided that use of the logos on the outside of the garage or prominently inside the premises, would, at the very least, have caused the average consumer to wonder whether Technosport was an authorised dealer. In view of the case law relating to trade mark infringement, including the decision in Interflora, that was sufficient to infringe the registered trade marks.

In respect of the word mark, BMW conceded that it could not prevent Technosport from using the mark in a purely descriptive manner e.g. by advertising itself to be “The BMW Specialists” on a fascia at the front of its premises. However, BMW specifically objected to Technosport using the BMW name in conjunction with its own name – on a shirt and on its Twitter account @TechnosportBMW. The judge decided that this conveyed to the average consumer nothing more than that Technosport traded or specialised in the maintenance and repair of BMW cars, and the infringement claim failed in respect of the word mark.

Each case inevitably turns on its facts, and in this particular case the existence of authorised garages, who have specific permission to use BMW’s registered marks, played a key factor in the decision. Nonetheless, the case demonstrates that whereas it is generally acceptable for a business to use a supplier’s name in promotional materials to indicate the type of goods/services provided, it is best practice to avoid using the supplier’s logos for that purpose.

Practical tip: whilst it is generally acceptable for a business to use a supplier’s name in promotional materials to indicate the type of goods/services provided, it is best to avoid using the supplier’s logos for that purpose.

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Accounts of profits in the retail sector. Part 1 – can the claimant claim all the defendant’s profits?

Following a finding of infringement, a claimant can choose between receiving damages (intended to compensate it for its losses) and an account of profits (intended to remove the defendant’s profits attributable to the infringement). Until quite recently, accounts of profits were very rare, and many aspects of the approach to be adopted by the courts were unclear. In the past few years, though, there have been a number of reported cases involving accounts, including two decisions by the Court of Appeal, which have clarified the approach to be taken. In Jack Wills v House of Fraser, the High Court has applied that guidance to an account of profits in the retail sector.

House of Fraser sold a range of clothing bearing a stylised pigeon wearing a top hat. That was held in 2014 to constitute trade mark infringement and passing off in relation to Jack Wills’s pheasant logo. Jack Wills elected for an account of profits, which was heard in March this year.

The Court considered two main issues – what proportion of House of Fraser’s profits are attributable to the infringement, and what proportion of House of Fraser’s overheads are deductible from its gross profits? We consider the first issue in part 1 of this article, and the second issue in part 2.

The first issue is one which arises on a regular basis in infringement claims concerning the retail sector. Can the claimant claim all the defendant’s profits from its sales of the infringing product, even though the infringing element of the product may only constitute a small part of the overall product? Or must the court apportion the profits to reflect the importance of the infringement in the overall product?

Applying the Court of Appeal’s recent decision in Design & Display v OOO Abbott, the judge held that the key question is whether the infringement “drove the sale” of the infringing products i.e. was it the essential ingredient in the infringing products? As the infringement in this case constituted the affixing of a logo to otherwise unobjectionable clothing, the judge decided that it did not drive the sales of the clothing, and an apportionment was necessary. Noting that House of Fraser typically paid a royalty of around 1.5% for a bare licence of third party brands, the judge decided that 41% of House of Fraser’s net profits were attributable to the infringement. The basis on which he reached the latter figure is not spelled out in the judgment, but we assume that House of Fraser’s net profit margin (i.e. after deduction of permitted overheads) must have been around 3.66%, as 1.5% is 41% of 3.66%.

In other words, the majority of House of Fraser’s net profits on its sales of the clothing were held not to be attributable to the infringement. The majority of the profits were presumably attributable to factors such as the value of the House of Fraser brands, and the design and quality of the garments themselves. Of course, apportionment in an account of profits is inevitably fact-specific, and where the infringing act is, say, the wholesale copying of an innovative garment design, it is easier to imagine a court ruling that most or all of the profits are attributable to the infringement.

Takeaway point: this is good news for retailers who are found to have sold an infringing product, as they may be able to avoid paying all the profits made, if the infringing element is not the “essential ingredient” in the infringing products.

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Accounts of profits in the retail sector. Part 2 – what can the defendant deduct from its gross profits figure?

The court also had to determine which, if any, of House of Fraser’s overheads could be deducted. It is clear from the case law that overheads can be deducted to the extent that they are attributable to the infringement. Determining whether they are attributable to the infringement, however, is not always straightforward.

It had previously been thought that in order to establish that overheads are attributable to the infringement, a defendant must prove that it was operating at full capacity before engaging in the infringing activity, i.e. that the overheads were necessarily increased as a result of the infringement. That approach was overruled very recently by the Court of Appeal in Design & Display v OOO Abbott. The correct position is that a defendant may deduct overheads if either:

a) it can prove that it was operating at full capacity before engaging in the infringing activity; or

b) it can show that, had it not engaged in the infringing activity, it would have carried on a non-infringing business, and the overheads which supported the infringement would have been used to support the alternative business.

Applying that to the facts, the judge held that the infringing garments were part of an existing range, sold under the Linea brand. The infringing sales displaced non-infringing sales. Had House of Fraser not infringed, the non-infringing sales would have been supported by the same overheads used to support the infringing sales. The majority of the defendant’s overheads were therefore deductible from the gross profit figure.

In retail cases, the difference between gross and net profits is typically huge – in this case, the gross profit margin was around 47%, whereas as we say in the first part of the article, the net margin was less than one tenth of that. The likelihood in this case is that the judge’s decision will result in House of Fraser paying tens, rather than hundreds of thousands of pounds in the account.

Takeaway point: this is more good news for retailers who are found to have sold infringing products, as the difference between gross and net profit is typically very high in the retail sector.

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Trunki decision – a disappointment for designers, but registered designs are still a valuable right

Earlier this month, the Supreme Court gave judgment in the long-running dispute, PMS International Group plc v Magmatic Limited, over whether PMS infringed the registered design protecting Magmatic’s “Trunki” suitcase. The trial judge had held that PMS had infringed the registered design, but that was overruled by the Court of Appeal. The Court of Appeal was particularly influenced by the fact that the registered design showed a case in the shape of a horned animal, whereas PMS’s case was in the form of an insect, giving rise to a different overall impression.

The Supreme Court has agreed with the Court of Appeal, and dismissed Magmatic’s appeal. Whilst it was clear that PMS had copied the idea of the Trunki (i.e. an animal-themed dual purpose suitcase/ride on toy), registered designs protect appearance rather than underlying ideas. PMS’s case did not look sufficiently similar to the registered design – it produced a different overall impression and therefore did not infringe.

Whilst this decision has been heralded as a disappointment to designers, it does not mean that registered designs are of little or no value – far from it. There were in effect two primary reasons why the claim failed. The first – the “horned animal” point mentioned above – is fact specific, and we believe will not arise in most claims for registered design infringement. The second reason was concerned with the form in which the design was registered. The designer had filed computer generated three-dimensional images of the product, which although in greyscale showed a contrast in colour between the wheels and the rest of the case. That was held by the Court of Appeal to be an important part of the overall impression produced, and which was not present in the PMS cases.

It is generally recognised as best practice to file simple line drawings of a design, without colouring or shading, and had Magmatic done so, the court’s decision may have been different. There is always a trade-off, when seeking registered design protection, between filing drawings which are as simple as possible (which may be invalid over prior art) and more drawings containing more detail (which may not be infringed by the competitor’s product). There is, though, nothing to prevent a designer from filing multiple applications, each covering the same design but at different levels of specificity.

In summary, therefore, the decision provides an illustration of the limits of registered design protection – it will not protect underlying ideas – but designers can use the lessons learned to ensure that their design registrations are better drafted, to avoid the identified pitfalls.

Practical tip: file multiple registrations, including line drawings, covering versions of the same product at different levels of specificity e.g. with and without colour, surface decoration, embellishments etc.

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Photograph of spoon and limes: “Sabre All Color flatware” by Didriks used under CC BY. Brightness/contrast modified from original.