Case No: HC 04 C 03552 & HC 04 C 03665
Neutral Citation Number: [2005] EWHC 2087 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 3rd October 2005
Before :
THE HONOURABLE MR JUSTICE WARREN
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Between :
	(1) SPORTSWEAR COMPANY Spa
(2) FOUR MARKETING LTD	
Claimants	
	- and –		
	SARBEET GHATTAURA
(trading as "GS3")
(HC04C03552)	

Defendant	
	
And Between
		
	(1) SPORTSWEAR COMPANY Spa
(2) FOUR MARKETING LTD	
Claimants	
	- and -		
	STONESTYLE LTD
(HC04C03655)	
Defendant	
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Guy Tritton (instructed by Messrs Wedlake Bell) for the Claimants
Hiroshi Sheraton (instructed by Messrs Mc Dermott Will & Emery UK LLP ) for the Defendants
Hearing dates: 27th & 28th June 2005
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Judgment
Mr Justice Warren

1. I have before me applications to strike out paragraphs 16 to 18 of the Defences in each of these two actions. The pleadings in each action are in virtually identical form. The actions are concerned with the alleged infringement by the Defendants of the trademark of the first Claimant (“Sportswear”). Sportswear is the owner of the registered trademark STONE ISLAND and the second Claimant is the distributor in the UK of Sportswear’s clothing

2. Stone Island, according to the Claimants, is a prestigious brand and clothing sold under its label commands a high premium. The Defendants in the two actions are selling clothing bearing the mark Stone Island which has had labels defaced and/or swing tags cut out and defaced. The labels include codes (“Garment Codes”) which contain information relating to the order and quantity of the order and from which Sportswear would be able to ascertain to which of its distributors/customers the clothing was originally sold.

3. There is no dispute that the clothing which the Defendants are selling is genuine Stone Island clothing and that it has been placed on the market in the European Economic Area (“the EEA”) by the Claimants or with their consent. This would normally have the result that Sportswear would be deemed to have exhausted its rights to prevent any further circulation of the clothing within the EEA: see section 12(1) Trade Marks Act 1994.

4. However, the Claimants object to what they describe as the mutilation of clothing bearing the Stone Island label including the removal of Garment Codes. They assert that customers buying genuine Stone Island clothing do not expect to buy clothing in such a damaged state. The customer has a right to expect Stone Island clothing to be in mint condition wherever he or she buys it. This is true, it is said, of any premium brand clothing such as Stone Island. They accordingly seek to prevent the continued sale of clothing by the Defendants in order, they say, to protect their own image. It is a feature of the case therefore that, absent the removal of the Garment Codes, the Defendants would clearly not be infringing Sportswear’s trade mark and would be entitled to market the Stone Island clothing.

5. The Defendants put forward another interpretation of the action being taken against them. Apart from saying that the removal of Garment Codes is not, in any sense, mutilation of the clothing, they suggest that the real reason for the actions is the desire to force the Defendants to retain the Garment Codes in order for the Claimants to be able to identify the person to whom the latter originally supplied the garments. In that way, they will be able to cut off supplies and thus throttle the business of the Defendants in an anti-competitive breach of Community law.

6. The Defendants rely on a number of defences. In particular, they attack certain agreements (including what is referred to as “the 2004 Distribution Agreement”) made between the Claimants as being anti-competitive and in breach of Article 81 of the EU Treaty (“Article 81”). In a domestic context, they refer to section 12(2) Trade Marks Act 1994. Under section 12(2), section 12(1) does not apply 
“where there exist legitimate reasons for the proprietor to oppose further dealings in the goods (in particular, where the condition of the goods has been changed or impaired after they have been put on the market)”.

7. The Defendants say that section 12 is to be construed against the requirements of EU competition law, and in particular Article 81. They say, in the light of the agreements which I have referred to between the Claimants, that the assertions made by the Claimants do not constitute legitimate reasons under section 12(2) and therefore that they, the Defendants, cannot be prevented from selling the clothing with Garment Codes removed.

8. Article 81 provides as follows: 
“The following shall be prohibited as incompatible with the common market: all agreements between undertakings, decisions by associations or undertakings and concerted practices which may affect trade between Members States and which have as their objective or effect the prevention, restriction or distortion of competition within the common market, and in particular those which….[and there follow lettered paragraphs containing examples]”

9. There must, for the prohibition under Article 81 to apply, be (a) an agreement or concerted practice (b) which may affect trade between Member States and (c) whose object or effect is to prevent unfair competition. It is well established, and is not in dispute, that requirement (b) requires that the effect on trade be appreciable as the case-law of the ECJ has explained that word: see for instance Volk v Vervaecke [1969] EC 295 and Miller v EC Commission [1978] 2 CMLR 334. To ascertain whether there is an appreciable effect on trade will, no doubt, usually require an economic analysis of the relevant market and the trader’s place in, and share of, it.

10. The basis of the applications to strike out paragraphs 16 to 18 of each Defence (which are in the same terms in relation to the same claims in each action) is that they disclose no arguable defence and/or are embarrassing.

11. There are in essence two distinct criticisms of the Defences: 
a. The Defences do not set out how the agreements affect trade between Member States or assert an appreciable effect on trade between Members States (the “Appreciable Effect on Trade” point). The Claimants say that they are in fact such small undertakings that their activities are incapable of have an appreciable effect on trade. 
b. A breach of Article 81, even if proved, would not provide a defence to trade mark infringement (the “Nexus” point).

12. During the course of argument, the Defendants were compelled to accept that paragraphs 16 to 18 were defective in failing to address the Appreciable Effect on Trade point. But it was maintained on their behalf that this was a purely pleading point which could be corrected by amendment. It was accordingly appropriate to give them the opportunity to make such amendments. Draft amendments have now been submitted which refer expressly, in both paragraphs 16 and 17, to the agreements which I have mentioned as being “capable of appreciably affecting trade between member states” and contain particulars relied on. In this judgment, however, I do not deal with whether the amendments are adequate to deal with the Appreciable Effect on Trade point.

13. For the purpose of addressing the Nexus point, I make the assumption that the agreements which I have mentioned contain terms which infringe Article 81 ie they have as their object or effect the prevention, restriction or distortion of competition and are capable of affecting trade between member states.

14. It is submitted on behalf of the Claimants that, for an Article 81 defence to succeed as a defence to an action for trade mark infringement, it must be shown that there is some credible nexus between the relief sought in the action and the alleged breach of Article 81. Reliance is placed on British Leyland v Armstrong [1984] 3 CMLR 102 where a defendant sought to defend an action for copyright infringement brought by a copyright owner on the grounds that the plaintiff was party to an agreement with third parties (its licensees) which contravened Article 81. For the Claimants it is, of course, submitted that there are very strong parallels with the facts of the present cases. In dismissing this defence, Oliver LJ said this: 
“[89] Now the only agreements upon which the defendants rely as infringing this Article are certain licence agreements, to which I will refer in a little more detail below, under which certain manufacturers of spare parts engage to pay royalties to the plaintiffs on spare parts manufactured and sold by them, and there is, as it seems to me, a very short answer to the defence based on this Article. 
[90] The defendants have not entered into such an agreement, so that what they are saying, in effect, is this: 'because you have entered into agreements with X, Y and Z, which are void under Article [81], you are debarred from exercising any of the rights which the law confers on you in respect of infringements by us'. The answer to this is, I think, conveniently set out in the judgment of Sir Robert Megarry, V.C. in Imperial Chemical Industries v. Berk Pharmaceuticals, [1981] [1981] FSR 1, 2 CMLR 91, where he struck out a paragraph in the defence which pleaded that by reason of breaches of Article 86 (in that case) [now Article 82] the plaintiffs were debarred from relief against passing-off on the ground of the lack of nexus between the abuse pleaded and right claimed by the defendants. 
[91] That seems to be equally applicable here, where the defendants claim the right to do what they would otherwise be prohibited from doing because of some contractual relationship which has been entered into between the plaintiffs and third parties. 
[92] The learned Vice-Chancellor observed [see [1981] FSR at p 6]: ” 
'Article [82] prohibits any abuse which falls within the ambit of the Article. Many other acts by the plaintiffs are also prohibited, whether by statute, common law or equity, or under the Treaty. I do not think that it could be said that a person in breach of some statutory duty or other prohibition thereupon becomes an outlaw, unable to enforce any of his rights against anyone. If the plaintiffs are imposing unfair selling prices in that they charge too much for their product, I cannot see why this breach of the prohibitions of Article [82] means that the defendants are thereby set free from any liability to the plaintiffs if they, the defendants, commit the tort of passing off (or, indeed, any other tort) against them'.” 
[93] That seems to me equally applicable here and to provide a complete answer to any defence based on Article 81.”

15. Neuberger J in Sandvik v Pfiffner [2000] FSR 17 at p 62 also made the point that there needs to be a nexus between the alleged anti-competitive agreement and the proceedings in the context of a patent infringement action where defences based on breach of Community law were raised.

16. In reliance on those cases, the Claimants submit that there is no sufficient nexus which could possibly be established in the present cases between their breaches of Article 81 (which, as I have said, for the purposes of this argument, I am assuming to be established) and the relief sought in the action ie orders restraining trade-mark infringement. Quite apart from that, it is said that the necessary nexus is not in any case pleaded.

17. Both parties referred me to the decision of Laddie J in Philips Electronics NV v Ingman Ltd [1999] FSR 112. The Defendants rely on this decision, and also the decision of the Court of Appeal in Intel Corporation v Via Technologies Inc [2002] EWCA Civ 1905, to show that a breach of Article 81 can give rise to a defence to patent infringement proceedings (and the same no doubt applies in the case of trade mark infringement proceedings) and that a sufficient nexus is therefore established. However, in Philips, the complaint was that the proceedings were being used as a way to force the defendant to enter into a standard form licence the terms of which offended against what is now Article 81. It is not surprising, to my mind, that Laddie J accepted that the defendant’s case was arguable. But the Judge cast no doubt on the approach in British Leyland v Armstrong. Indeed, in considering that case he said this, at paragraph 91: 
“In that case, the Court was not facing an allegation that the purpose of the proceedings was to force the defendant or others into signing up to offensive agreements. It believed that it was only facing an allegation that because the plaintiff had done something illegal in relation to an unrelated third party, it was not entitled to enforce its intellectual property rights. That is quite different to the point raised here and in British Leyland v TI Silencers.”

18. On this aspect, Intel Corporation v Via Technologies Inc really takes the matter no further. I do not think either that decision or Philips assists the Defendants in their attempt to distinguish British Leyland v Armstrong on the facts of the present case.

19. The Defendants say that the Claimants are, quite apart from that, wrong in their approach to the Nexus point. They say (taking this from the skeleton argument on their behalf): 
a. There is an element of nexus between EU competition law and the Trade Marks Act 1994. The Claimants acknowledge (as, I understand, is in fact the case) that the Defendants are free to argue that the Garment Codes have been used for a purpose that does not give rise to a legitimate reason under section 12(2) Trade Marks Act 1994. That question involves, it is said, an analysis of competition law since section 12(2) requires a consideration of whether the circumstances under which the right to object to further dealings in the goods constitutes a disguised restriction of trade between Member States. 
b. The starting point is that trade mark rights are not enforceable against parallel imports by virtue of section 12(1). This is subject to an exception when the specific subject matter of the trade mark suffers substantial harm. Even if substantial harm is suffered, trade mark rights are not enforceable if they constitute arbitrary discrimination or disguised restrictions on trade under the last sentence of Article 30 of the EU treaty. In this context it is said that the marketing system which Sportswear has adopted and, specifically, whether this contributes to the artificial partitioning of markets, is a proper consideration in determining the scope of section 12(2). Reliance is placed on Boehringer Ingelheim and others Case C-143-00 (23 April 2002). 
c. Next, the Defendants say that if the arrangements put in place by the Claimants are prohibited by Article 81, the resulting illegality removes the legitimacy of reasons to oppose further dealings in the goods. The EC competition provisions must be taken as a whole with a view to attaining the overall objectives of the treaty. 
d. Reliance is also placed on Frits Loendersloot t/a Loendersloot Internationale Expeditie v George Ballantine & Sons Ltd which has some parallel with the present case. In that case, the ECJ considered the removal of identification numbers from whisky bottles. Reliance is placed on what is said in paragraph 43: 
“Where it is established that the identification numbers have been applied for purposes which are legitimate from the point of view of Community law, but are also used by the trade mark owner to enable him to detect weaknesses in his sales organization and thus combat parallel trade in his products, it is under the Treaty provisions on competition that those engaged in parallel trade should seek protection against action of the latter type.” 
The Defendants say that this is exactly what they are doing in the present case in pleading their defences under Article 81.

20. However, Loendersloot was principally concerned with the protection of producers under what is now Article 30 from the effects of what are now Articles 28 and 29. I do not say that some sort of case based on Articles 28 to 30 might not be made out and, indeed, Loendersloot suggests that there can, in principle, be such a case. It should be noted, however, that the application of the principle on which the Defendants rely is hedged with protections for the producers. In the context of repackaging, the ECJ ruled that what is now Article 30 must be interpreted as allowing the owner of trade mark rights to prevent a third party from removing labels, even if that constitutes a barrier to intra-Community trade, unless (a) there is artificial partitioning of the markets between Member States as a result (b) it is shown that the relabelling cannot affect the original condition of the produce (c) the presentation of the relabelled products is not such as to be liable to damage the trade mark and its owner and (d) the person who relabels the products informs the trade mark owner of the relabelling before the products are put on sale (see Loendersloot itself and Bristol-Myers Squibb v Paranova A/S [2003] Ch 75). Those requirements will obviously have parallels in a case of removal of the Garment Codes in which context requirement (c) is precisely one requirement which the Claimants would say cannot be fulfilled.

21. I reject these arguments based on achieving the overall objective of Community competition law as a justification for the pleading relying on Article 81. So far as I can see, Article 81 is not relevant to these arguments. What the Defendants complain about is the enforcement by Sportswear of its trade mark in circumstances where, they say, the purpose of enforcement is to “enable them to reconstruct the itinerary of their products, with the purpose of preventing their dealers from supplying persons carrying on parallel trades” (as it is put in Loendersloot at paragraph 40). That may or may not be a breach of Community competition law. But it is, in my judgment, not to the point in relation to these arguments whether, when carrying out that purpose, the Claimants are parties to an agreement which happens to infringe Article 81. If the Defendants are right in saying that there is artificial partitioning of markets they may have good defences to the infringement actions under Community law but those will be defences which have nothing to do with Article 81. If they do not have good defences under Community law apart from Article 81, I fail to see how Article 81 gives them any (subject to the separate submissions which I address at [24] below).

22. On that basis, Article 81 is, in my judgment, irrelevant also to the applicability or otherwise of section 12(2) Trade Marks Act 1994. The argument has to be that the enforcement of the trade mark for illegitimate reasons means that the conditions of section 12(2) are not fulfilled. In a case where it would be a breach of Community law to enforce the trade mark (a possibility envisaged in Loendersloot) I can see that section 12(2), which needs to be construed against the background of Community law, might also need to be construed in such a way that legitimate reasons have to be held not to exist; but if Article 81 is not relevant to determining whether there is a relevant breach of Community law, then it cannot be relevant to section 12(2) either.

23. But even if, contrary to my view, Article 81 were, somehow, relevant, I agree with Counsel for the Claimants when he says that, if there is both a legitimate and an illegitimate purpose in seeking to enforce trade mark rights, then section 12(2) applies (unless the illegitimate purpose is so serious as to render enforcement altogether a breach of Community law) but there may, in giving effect to the illegitimate purpose, be a cause of action against the trade mark proprietor under Article 81.

24. It is also said by the Defendants that, even if Article 81 does not bear on the legitimacy of reasons for the purposes of section 12(2), the breach of Article 81 is relevant to the relief granted. It is said that the court should not grant any of the equitable relief sought. 
a. First it is said that application and use of Garment Codes is contrary to Article 81 and gives rise to a claim that relief should not be granted, reliance being placed on British Leyland Motor Corporation Ltd v TI Silencers Ltd [1981] FSR 213 and Intel Corporation v Via Technologies Inc. (supra) 
b. Secondly, it is said that the instigation of litigation against third parties pursuant to a concerted practice (ie an arrangement between the Claimants) is itself contrary to Article 81 and can prevent a claim to equitable relief, reliance being placed on Glaxo Group Ltd v Dowelhurst Ltd [2000] EWHC 134 and Intel Corporation v Via Technologies Inc at first instance (Lawrence Collins J) [2002] EWHC (Ch) 1159.

25. I am not clear if a distinction is being drawn by the Defendants between, on the one hand, a defence to the claims of the Claimants and, on the other hand, a refusal, as a matter of discretion, of injunctive relief. As to the latter, if there is no sufficient nexus between Article 81 and the trade mark infringement alleged so as to afford the Defendants a defence based on breach of Article 81, I do not consider that the breach can disentitle the Claimants from injunctive relief. However, if what the Defendants are saying is that the arguments mentioned in [24] above afford a separate line of defence, then I need to address those arguments on that basis.

26. As to the first of those arguments, it is not pleaded, either in the original pleading or the draft amended pleading, that the Garment Codes themselves or their use are contrary to Article 81. It is not easy to see how the Garment Codes themselves could be contrary to Article 81. Nor is it easy to see how the use of the Garment Codes is said to be a breach of Article 81. The most that could be said, I think, is that, were the Garment Codes to be left intact, the Claimants would then be able to discover the route by which the Defendants are supplied and to take steps (in breach of Community law) to block such supplies. But this takes us back to the same issue of nexus between the enforcement of the trade mark rights and the breach of Article 81 where I have already decided that there is not a sufficient nexus.

27. As to the second of those arguments, paragraph 19 of the proposed amended Defence reads: 
“……the Claimants’ action in seeking to prevent the importation and sale of goods bearing the Registered Marks in the UK with the Garment Codes removed is action brought as the object, means or consequences of an agreement prohibited by Article 81(1) of the EC Treaty and thus is itself contrary to Article 81(1)” 
Reliance, by way of particulars, is then placed on paragraph 17(d)(ii) which reads: 
“the present proceedings have been brought pursuant to Clause 13 of the Distribution Contract and, in consequence of the existence of these proceedings, Mr Ghattaura has stopped selling STONE ISLAND clothing [certain losses to the Defendants in the two actions are then alleged]. Third parties (including the Defendant) are hindered and/or discouraged from engaging in parallel trade in the goods with the Garment Codes removed.”

28. Clause 13 (or, rather, Article 13) is headed “Brand Protection”. It provides, at 13.1, for Sportswear to contribute a maximum specified sum per annum to allow Four Marketing Ltd to “investigate and deal with counterfeit and parallel issues”. It then provides, in 13.2, for any brand protection activity which will involve legal costs to be sanctioned by Sportswear. It provides that any “settlement whether derived by legal action or not will be split equally between [Sportswear] and [Four Marketing Ltd]”.

29. It should be noted that there is no obligation on either party to the agreement actually to commence proceedings against parallel importers. Further, there clearly might arise issues concerning either counterfeit goods or parallel issues in relation to which proceedings could properly taken without any suggestion of breach of Article 81 or other impropriety eg to prevent marketing of an actual counterfeit garment purporting to be a Stone Island garment, or to prevent parallel imports from outside the EEA.

30. The Defendant relies on the two decisions mentioned. First there is the passage in Glaxo found at paragraph 13 of the Judgment of Laddie J: 
“Before me [on an earlier occasion: see [2000] ECC 193; [2000] EuLR 493] was an application by the defendants to amend their Defences to allege that these proceeding were the product of a concerted practice by the claimants to bombard parallel importers with litigation so as to hinder inter-State trade. The defendants said that if, as they alleged, such a concerted practice exists it offends against Article 81 of the Treaty of Rome and precludes the claimants from obtaining relief in these proceedings. I held that the allegations, though weak, were arguable against some but not all of the claimants……”

31. Then, in Intel Corporation v Via Technologies Inc, Lawrence Collins J expressed himself in what might be thought to be rather wider terms saying (at paragraph 100): 
“….it is at least arguable that if two undertakings agree to commence proceedings against a third undertaking for infringement of intellectual property rights that may involve an agreement between undertakings in contravention of Article 81: see Glaxo Group Ltd v Dowelhurst Ltd [2000] EuLR 493.” 
However, that case reference is to the first decision of Jacob J, not to the later decision to which I was referred and from which I have quoted above. I was not taken to the earlier decision and have received no submissions on it.

32. In the light of the approach of both Laddie J and Lawrence Collins J, it may well be the case that, in some circumstances, the commencement of trade mark infringement proceedings pursuant to an agreement between two undertakings, or a concerted practice resulting in such proceedings, can be a breach of Article 81. If, in a particular case, a breach of Article 81 is established, it is, to put it at its lowest, arguable that there is a real nexus between the breach of Article 81 (by commencing the proceedings) and the defence to the infringement action.

33. However, in the present case, the Defendant relies on Clause/Article 13 as the agreement giving rise to the breach of Article 81 and not on any other agreement or concerted practice, as is made clear by the draft amended Defence. It has not, for instance, been argued by the Defendant that the mere bringing of these two sets of proceedings by the Claimants is a breach of Article 81. The Defence is that these proceedings have been brought “pursuant” to the agreement. But, on my reading of Clause/Article 13 that is not the case. The proceedings are not, so far as I can see, brought pursuant to that Clause/Article at all since, as just pointed out, there is no obligation on either party to commence proceedings. Moreover, as also pointed out, the provision is capable of operating perfectly legally. On these grounds, I would refuse to allow the amendment to the Defence. I would strike out the existing Defence also since the reference in it to the “agreement” is, without the particulars provided in the draft amended Defence, insufficiently particularised (and it has, in any event, been made clear, by the draft amendment, that the agreement referred to is the 2004 Distribution Agreement).

34. That is enough to dispose of the application before me. However, I would add that, in the light of the first decision in Glaxo, I would take a great deal of persuading that there was more than a fanciful claim that the Claimants’ two actions constitute a breach of Article 81 even if the 2004 Distribution Agreement had contained a provision obliging the parties to commence trade mark infringement proceedings against the Defendant. As Laddie J explains, the breach of Article 81 is to be found in the co-operation between trade mark proprietors in bringing their actions. It does not follow that, even where there is such improper co-operation, the individual trade mark owners are deprived of the right to sue for infringement, the impact of an adverse finding being only to prevent traders acting in concert. This can, of course, give rise to difficulties in determining whether a trade mark owner is acting independently or in concert. But any relief granted would, as Laddie J points out, have to be carefully worded to prevent the improper collaboration but without taking away the right to sue for infringement of trade mark.

35. What I have said in this judgment about the Nexus point is in accordance with the approach of Laddie J where there is abuse of dominant position: see another of his judgments: Hewlett-Packard Development Company LP v Expansus UK Ltd (unreported, 23 June 2005). The decision was handed down after the conclusion of argument in the present case. Since I have formed a firm conclusion in the present case without reference to that decision, I have not thought it necessary to receive any observations from Counsel on it. I need only quote a short passage from paragraphs 15 and 16: 
“15. [Counsel for the defendant] accepts that his client needs to demonstrate the existence of a nexus. He says that it exists in the use of the Claimants’ trade marks to secure the market environment in which it is possible for HP to fix prices. That, he says, is a sufficient nexus with the result that HP can no longer rely on its trade mark rights.
16. I do not accept that submission either. There has been much jurisprudence on the interface between intellectual property rights and abuses of dominant position yet, so far as I am aware, it has never been held that the existence of a proved abuse results in the unenforceability of intellectual property rights. This is so notwithstanding the fact that such arguments have been raised regularly by infringers…..”

36. In the light of my decisions on the Nexus point and the additional arguments raised by the Defendant, I refuse the application to amend the Defences in these two actions and order that paragraphs 16 to 18 of each of the Defences be struck out.