20 Nov 2020

'Bait and switch' selling is the act of marketing certain goods, but then substituting alternative goods when such goods are supplied. At its broadest, it is any attempt to get customers to accept something different from what originally attracted them. Such acts may be restrained if they are deemed to constitute an actionable misrepresentation.

What happens when an approved distributor advertises a trade mark protected product alongside its own competing goods that suggests to customers they should buy the distributor's 'own brand' – even where they originally requested the 'real deal'?

A recent case in the Intellectual Property Enterprise Court suggests that such practice may be permissible, provided customers are aware of the origin of the alternative so there is no confusion, and attempts to strike the balance between protecting rights of trade mark owners and rights of consumers to be informed about alternative products.

Background

Pliteq Inc and Pliteq (UK) Limited (collectively, Pliteq), designers and manufacturers of acoustic damping and sound control products, issued proceedings against a former non-exclusive UK-based distributor of Pliteq's products, iKoustic Limited (iKoustic), and its sole director and owner (together with iKoustic, the Defendants), alleging that the Defendants had undertaken acts amounting to 'bait and switch' selling, thereby infringing Pliteq's trade mark rights[1].

After the termination of the distributorship, iKoustic possessed a large quantity of Pliteq's stock which Pliteq refused to take back. For a period of around a year, alongside selling its own alternative products under the names "MuteMat" and "MuteClip" (the Defendants' Marks), iKoustic continued to sell off stock of Pliteq's products under Pliteq's trade marks GENIECLIP and GENIEMAT (the Trade Marks). In doing so, the Defendants had used Google adwords, including Google dynamic ads service – where the content of the ad is created by Google's algorithms – and used the Trade Marks on iKoustic's website.

Pliteq alleged that the Defendants had used the Trade Marks to lure internet users by advertising Pliteq's products but had then sold iKoustic's competing goods under their own distinct trade marks when they were unable to meet the level of demand arising from enquiries relating to Pliteq's products. Pliteq also alleged that the Defendants' activities constituted passing off[2].

The Defendants denied infringement. They argued that they had only made use of Pliteq's marks legitimately in relation to genuine goods of Pliteq (not for the purpose of selling the Defendants' products) and therefore had due cause. The Defendants also explained that, when Pliteq's products were not in stock, they were not displayed on iKoustic's website, so a potential purchaser would have to consciously select a link containing the Defendants' Marks to purchase alternative goods, thereby avoiding any confusion as to the origin of the goods. They also relied upon the exhaustion defence – being that, after the products covered by either of the Trade Marks had been sold by Pliteq, or with their consent, the Trade Marks could not be asserted to restrain further dealings in the products.

Infringement and functions of a trade mark

Whilst not expressly in the text for establishing trade mark infringement under section 10(1) Trade Marks Act 1994 or Article 9(2)(a) EUTMR[3], case law has established that an essential element of such infringement is that the use of the sign by the alleged infringer must affect, or be liable to affect, one of the functions of the trade mark. The parties agreed all other elements required for trade mark infringement under this test[4] were satisfied; the question was whether any of the functions of the Trade Marks had been, or were liable to be, affected.

The judgment (at paragraph 38) sets out the functions of trade marks as restated by the CJEU in Mitsubishi v Duma[5]:

  1. The origin function – "to guarantee the identity of the origin of the marked goods or service to the consumer or end user by enabling him to distinguish the goods or service from others which have another origin".
  2. The investment function – "the possibility for the proprietor of a mark to employ it in order to acquire or preserve a reputation capable of attracting customers and retaining their loyalty, by means of various commercial techniques".
  3. The advertising function – "using a mark for advertising purposes designed to inform and persuade consumers".

Specifically in relation to internet advertising, the judgment cites Google France[6], at paragraph 60, stating that the origin function:

"… is adversely affected if the ad does not enable normally informed and reasonably attentive internet users, or enables them only with difficulty, to ascertain whether the goods or services referred to by the ad originate from the proprietor of the trade mark or an undertaking economically connected to it or, on the contrary, originate from a third party".

The decision

The judge, Miss Recorder Amanda Michaels, held that the Defendants' actions did not constitute trade mark infringement nor passing off, and were not 'classic' bait and switch selling as alleged by Pliteq.

Unlike earlier cases involving bait and switch selling[7], where a registered trade mark had been used simply to stimulate interest in competing products, iKoustic had stock of genuine goods bearing the Trade Marks used in most of its dynamic adverts and on its website. The judge was satisfied that, where a customer had contacted iKoustic thinking it was a distributor of Pliteq's products, or had reached iKoustic's website via a search engine and received the message that the products were unavailable and/or that they should contact iKoustic, iKoustic had "made it clear to customers either that they had ceased to be a distributor for Pliteq, or that… they were offering them an alternative product".

The judge went on to consider whether any of the Defendants' usages infringed because they affected the functions of the Trade Marks.

  • As to the origin function, Pliteq's submission amounted to an argument that offering any competing product to a potential purchaser affects this function, even where the consumer understands that they are buying a substitute. This was rejected by the judge, noting that, absent any obligation to sell the trade mark owner's goods exclusively (which was not the case here), offering competing alternative proucts was likely to be "an everyday and unobjectionable commercial reality". Sales in this manner could only affect the origin function where the substitute goods were supplied without the proposed substitution being drawn to the customer's attention (again, not the case here)
  • As to the investment and advertising functions, the judge was not convinced by Pliteq's argument that the Defendants' conduct undermined these functions because the Trade Marks had been used to attract custom for iKoustic's own products, impairing the ability of the Trade Marks to enable Pliteq to maintain customer loyalty. The judge found no evidence that the use affected Pliteq's own use of the Trade Marks as a factor in sales promotion, or as an instrument of commercial strategy
  • However, the judge did hold that, if the Defendants had used the Trade Marks in relation to their own goods (rather than Pliteq's goods), this might have substantially interfered with the investment function, as it could impact Pliteq's use to preserve a reputation attracting customers and retain their loyalty. Still, the investment function would not be impacted if the Defendants were competing fairly, and the only consequence was that Pliteq had to adapt its efforts to protect the Trade Marks' reputation.

The key issue for the judge, on both questions of trade mark infringement and the applicability of the exhaustion defence, was whether or not the Defendants were using the Trade Marks in relation to Pliteq's goods.

Pliteq argued that defendants in such cases should not be permitted to rely on the exhaustion defence where it has limited stock of the marked goods, and therefore cannot fulfil an average/normal order, because use in such circumstances was not really [emphasis taken from judgment] in relation to the protected goods, but to attract custom for alternatives. Pliteq also proposed that the defence should similarly not apply where a defendant holds on to stock simply for the purpose of legitimising use of a trade mark to create or preserve an attraction for customers.

These arguments were rejected, with the judge explaining that establishing a threshold for stock to be maintained by a potential defendant would add a significant limitation to the exhaustion defence which cannot be imported into the wording in the legislation. Furthermore, Pliteq failed to establish on the facts that iKoustic was holding stock such that an average/normal order could not be fulfilled, therefor rendering the Defendants' use of the Trade Marks illegitimate. The judge found that Pliteq's rights in all of its goods held by iKoustic had been exhausted.

There was a single exception to this finding, with reference to one of the Defendants' advertisments, in which they had used the GENIECLIP Trade Mark to identify Pliteq's products with the intent of persuading customers to look at the iKoustic's alternative products, which the judge described as "out of line" with the Defendants' behaviour more generally. As this use of the Trade Marks was not to recommercialise Pliteq's goods, the exhaustion defence did not apply.

In view of her other findings, the judge also found that Pliteq had no legitimate reasons to oppose the further commercialisation of Pliteq's products, not limited to the fact iKoustic had been previously approved as a distributor of the same, and rejected Pliteq's claim for passing off.

Comments

As case law in this area develops, there is tension between:

  • those who support the principle that, as far as possible in the absence of express statutory defences, a trade mark owner should be able to control use of its trade marks – even in circumstances where the public are not confused as to the origin of the goods. Such principle gives rise (and purpose) to the advertising and investment functions of a trade mark
  • those who believe that, whilst those functions should be protected, they should not be interpreted so widely as to prevent consumers from receiving information about alternative products and promoting fair competition. Even if a competitor's actions compel a trade mark owner to alter its advertising or business strategy, such proponents would argue that this should be tolerated to some degree, unless the competitor's actions are without due cause and/or materially affect the trade mark owner's rights.

The tests formulated by the CJEU to assess whether the three functions of a trade mark are adversely affected (as described above) were formulated with great care and their purpose was not to protect their owners against fair competition, even if such competition means that they have to adapt their efforts to preserve a reputation to retain customers. They go beyond the origin function of a trade mark and give equal importance to the advertising and investment functions of a trade mark, as opposed to the English courts which had previously been more inclined to exclude the advertising and investment functions in their overall assessment.

This decision serves as a useful platform demonstrating how the courts will reconcile this tension and, in particular, shows that the English courts remain reluctant to intervene where the practices are frankly part of everyday commercial practices in fair competition.

Practical tips

Although it can seem pessimistic to think about the end of such arrangements during negotiations, and parties invariably spend less time on termination consequences, it is important when drafting distribution, franchise and licensing agreements – as right-holder or distributor – to consider what should be done about the use of trade marks when stocks are running down, especially when the cause may be that relationships between the parties have broken down. 

With hindsight, despite not offering iKoustic an exclusive distributorship of the Trade Marks, Pliteq could have included provisions in their distribution arrangements with iKoustic requiring that: (i) iKoustic did not sell competing products; (ii) upon termination, iKoustic must cease advertising any of Pliteq's products and must offer back all remaining stock at a pre-determined price; and/or (iii) during the arrangement and for a short period thereafter, iKoustic was restricted in its use the Trade Marks as keywords (under the Google Adwords system or similar).

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[1] Pliteq Inc & Pliteq (UK) Limited v iKoustic Limited & Mr Ricky Lee Parsons [2020] EWHC 2564 (IPEC)

[2] The Claimants had suggested that the Defendants' use of the Trade Marks infringed by taking unfair advantage of their reputation, due to the 'bait and switch' selling, whether or not the alternative trade origin was discernible; however, this warranted limited discussion in the judgment

[3] EU Trade Mark Regulation (Regulation (EU) 2017/1001)

[4] The other elements are that (a) there must be use of a sign by a third party within the relevant territory; and that such use must be (b) in the course of trade; (c) without the consent of the trade mark proprietor; (d) of a sign identical to the trade mark; and (e) in relation to goods or services identical to those for which the trade mark is registered. 

[5] Case C-129/17, EU:C:2018:594, [2018] ETMR 37

[6] C-236/08 to C-238/08, EU:C:2010:159

[7] For example, see Cosmetic Warriors Limited v Amazon.co.uk Ltd [2014] EWHC 1316 (Ch)