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By | OUT-LAW.COM 26th August 2010 11:33

Court of Appeal challenges parallel import blocking

Oracle's victory should be 'set aside'

Brand owners may have less power to prevent sales in Europe of goods intended for other markets after a ruling by England's Court of Appeal this week. The judgment over the sale of Sun-branded disk drives is likely to be welcomed by independent resellers.

In 2009 Sun Microsystems won the right to block the sale of 64 disk drives that went on sale in the European Economic Area (EEA) without its consent. British company M-Tech Data had bought the drives from a US broker and sold them in the UK to another company.

Sun sued M-Tech, claiming the sale infringed its trade mark rights because the importing and sale in Europe happened without its consent. The High Court granted a summary judgment in Sun's favour. That ruling was overturned on Tuesday.

European law provides that a company which makes something available for sale anywhere in the EEA cannot stop those goods being sold elsewhere in the EEA. However, that company can use its trade mark rights to prevent the sale in the EEA of goods that have only ever been made available for sale by it in countries outside the EEA.

Importing branded goods destined for one market to sell them in another without the consent of the trade mark owner is known as parallel importing. The trade mark owner's right to sue a parallel importer is lost if, but only if, the goods were first marketed in the EEA. Sun's drives had been first put on the market in China, Chile and the US, thus Sun's rights to sue for infringement had not been exhausted.

M-Tech argued that Sun's approach to controlling parallel imports was unfair. Sun did not publish the information that a reseller like M-Tech would need to determine whether or not particular products had first been placed on the market in the EEA – ie whether Sun had exhausted its rights. M-Tech argued that because only Sun could tell whether equipment had first been put on sale in the EEA, independent resellers were always at risk of a lawsuit.

M-Tech said Sun's approach breached European laws on import restrictions. The High Court rejected that argument, saying Sun was acting within its rights.

Since that ruling, Sun Microsystems has been bought by Oracle, one of the world's largest technology companies. This week the Court of Appeal said the ruling in Oracle's favour should be set aside, but it stopped short of ruling in M-Tech's favour.

Lady Justice Arden noted that Oracle deterred the import of its products by independent dealers.

"Oracle has deliberately adopted a policy of not publishing its database in order to make trade in genuine EEA-first marketed goods as difficult as possible," she said, adding that the company aggressively pursued independent resellers for infringement if they misjudged a product's provenance.

M-Tech argued that Oracle's enforcement of its exclusive rights in the marks was contrary to Articles 28 and 30 of the EC Treaty. Article 28 bans "quantitative restrictions on imports" and Article 30 provides that any justified prohibitions or restrictions on imports must not "constitute a means of arbitrary discrimination or a disguised restriction on trade between Member States".

Lady Justice Arden also considered two provisions of the Trade Marks Directive that Oracle had relied upon: Article 5, which grants a trade mark owner exclusive rights to prevent another party using its mark in the course of trade, and Article 7, which sets out the rules on exhaustion of those rights.

"In my judgment, there is a real prospect of establishing that Articles 5 and 7 [of the Trade Marks Directive] must be interpreted by reference to Articles 28 and 30 [of the EC Treaty] and that on the facts and matters pleaded a breach of Article 28 will be established which will not be capable of being justified under Article 30EC or Article 7TMD and which will affect Oracle's right to sue M-Tech as a parallel importer for infringement of its marks," wrote Lady Justice Arden.

She also doubted that Oracle's practices amounted to justified prohibitions under Article 30 of the EC Treaty. "[The] practices alleged arguably have more to do with restricting imports with the object of preventing price competition within the EEA and thereby protecting Oracle's profit margins than with the proper exercise of the right to control the first marketing of Oracle equipment within the EEA," she said.

"The [High Court] judge may ultimately be right in saying that these complaints sound in competition law rather than trade mark law, but the space between the two sets of rights is not necessarily exclusively populated by the one or the other set of provisions of European Union law and thus the points are in my judgment reasonably arguable under the [Trade Marks Directive]."

She concluded that M-Tech's defences "are probably arguable" and should not have been dismissed by way of summary judgment.

M-Tech also claimed that Oracle was in breach of Article 81, which prohibits agreements between companies that prevent, restrict or distort competition within the internal market. M-Tech pointed to a term of Oracle's agreements with its distributors and resellers that said they must buy Oracle equipment, whether new or second-hand, from within its supply network. These agreements, M-Tech argued, form part of an overall scheme for excluding secondary traders from the market. Lady Justice Arden said this point was also arguable.

"This case clearly has important financial and economic implications not just for the parties but also for others involved in the grey market in Oracle, and possibly other, computer hardware and goods," wrote Lady Justice Arden. "The economic function of parallel imports and the grey market is controversial."

The case is now due to go to a trial judge to hear evidence from M-Tech. "If M-Tech's allegations are established, the trial judge will have to consider whether to make a reference to the Court of Justice to enable him to decide the issues in the action," said Lady Justice Arden. "In the absence of any material change in European Union law or in M-Tech's case, there would be a strong case for a reference by the trial judge.

Copyright © 2010, OUT-LAW.com

OUT-LAW.COM is part of international law firm Pinsent Masons.

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