His Honour Judge Richard Havery Q.C.
JUDGMENT
- This is an application on the part of the claimant against the third, fourth, fifth and sixth defendants ("the defendants") for summary judgment under CPR Part 24. Summary judgment is sought on the question of liability with damages to be assessed or an account to be taken.
- The claimant ("Microsoft") is a well-known computer software company operating world-wide. The third defendant ("Digital") is a limited company incorporated in England and Wales which, at least until recently, has carried on the business of, among other things, the sale of purported Microsoft products. It now claims to have ceased trading. The fourth defendant, Edward Hill, was the principal salesman employed by Digital. The fifth defendant, Gail Parker, is the managing director of Digital. She owns 76 per cent. of the shares in that company. The sixth defendant, Ronald Hill, is the sales director of Digital. He owns 24 per cent. of the shares in the company.
- In summary, the claim is a claim for relief in respect of the defendants' acts of
(a) unauthorised trading in genuine loose Microsoft certificates of authenticity ("COAs");
(b) trading in counterfeit Microsoft COAs;
(c) unauthorised trading in genuine Microsoft software media; and
(d) trading in counterfeit Microsoft software media;
whereby the defendants and each of them have been
(i) passing off by trading in instruments of deception;
(ii) infringing Microsoft's trade marks; and
(iii) infringing and/or authorising infringement of Microsoft's copyright.
The claim includes a claim for additional damages under section 97(2) of the Copyright Designs and Patents Act 1988.
- The claim form was filed and served on 26th October 2005. The particulars of claim were filed and served on 14th November 2005. The defendants' defence was filed and served on 10th February 2006. This application was filed on 25th April 2006.
- Microsoft has pleaded the subsistence and its ownership of the copyright in the computer software and associated documentation including manuals and COAs. The defendants have not denied that allegation but have put Microsoft to proof of it. There is before me uncontradicted evidence of the truth of the allegation. There was thus no live issue before me as to subsistence or ownership of the copyright.
- The subsistence, validity and Microsoft's proprietorship of the relevant trade marks is admitted in the defendants' defence.
- The defendants admit in their defence that Microsoft has goodwill in the United kingdom in relation to the trade marks relevant to the present proceedings, namely
(a) "Microsoft" in relation to computer programs;
(b) "Microsoft" in relation to books, printed matter, stationery, instructional and teaching materials, all relating to microcomputers;
(c) "Windows" in relation to computer software;
(d) "Windows" in relation to printed manuals and instructional materials relating to computers;
(e) "PowerPoint" in relation to computer programs;
(f) A flag device in relation to computer programs;
(g) "Windows XP" in relation to computer software, user manuals and stationery; and
(h) "Windows Server System" in relation to computer programs, user manuals and stationery.
- The following description of the distribution channels of Microsoft software is not in controversy between the parties. There are two kinds of channel: the Authorised Replicator/Authorised Distributor OEM channel and the Royalty OEM channel. (OEM stands for original equipment manufacturer). The former operates as follows. An authorised replicator operates with the consent of Microsoft under a licence granted by either Microsoft Ireland Operations Limited or Microsoft Licensing GP (depending upon geographic location). The authorised replicator is supplied by Microsoft with the necessary master computer files to enable it (by copying the software) to manufacture Microsoft compact discs ("CDs") and accompanying documentation (manuals etc.). It is not provided with the ability to manufacture COAs. COAs must be purchased from Microsoft or from a COA manufacturer authorised by Microsoft.
- The CD, documentation and COA are then packaged by the authorised replicator into OEM system builder packs. Those packs are sealed packs which have the full terms of an OEM System Builder Licence Agreement printed on the outside of the pack. The authorised replicator supplies the packs to authorised distributors. Authorised replicators are not authorised to issue COAs, media or any other component parts in separate form. Consequently, COAs cannot legitimately leave the authorised distributor otherwise than as part of a sealed OEM System Builder Pack. A royalty is paid by the authorised distributor to Microsoft for each system builder pack which it distributes.
- Authorised distributors are bound by Authorised Distributor Agreements only to distribute unopened packs. The authorised distributors distribute the sealed packs to OEM System Builders. OEM system builders are small to medium sized enterprises who supply ready-built personal computers ("PCs") to end users. They buy in computers (i.e. the hardware with empty hard drive), instal the software in the computer and stick the COA on to the computer. They supply the product to end users together with a manual and back-up CD. By opening each OEM System Builder pack the OEM system builder is deemed to agree acceptance of the OEM system builder licence. It is common ground that such deemed agreement is effective in law as agreement. The OEM system builder licence provides, so far as material, as follows:
3. LIMITED LICENSE. This is a limited license to distribute the individual software licenses or hardware units contained in this package. "Individual software license" means any individual software license that comes in the package, including software media, documentation, certificates of authenticity, end-user license agreements, and security devices. "Hardware unit" means any hardware that comes in this package, including any hardware-related software and user documentation.
.....
4.3 Each individual software license must be distributed pursuant to the end-user license agreement ("EULA") that accompanies the individual software license. Under the terms of the EULA, you are the licensor.
The OEM system builder licence also provides, by clause 8, that the COA, if any, must be attached to the outside of the computer.
- In order to start using the PC, the end user has to signify his acceptance of the terms of the EULA by an appropriate operation of the computer. If he does not do so, the software will not work. He may then return the PC for a refund.
- The End User License Agreement provides, so far as material, as follows:
This End-User License Agreement ("EULA") is a legal agreement between you (either an individual or a single entity) and Microsoft Corporation for the Microsoft software that accompanies this EULA, which includes associated media and Microsoft Internet-based services ("Software").....YOU AGREE TO BE BOUND BY THE TERMS OF THIS EULA BY INSTALLING, COPYING, OR USING THE SOFTWARE. IF YOU DO NOT AGREE, DO NOT INSTALL, COPY OR USE THE SOFTWARE; YOU MAY RETURN IT TO YOUR PLACE OF PURCHASE FOR A FULL REFUND, IF APPLICABLE.
1. GRANT OF LICENSE. Microsoft grants you the following rights provided that you comply with all terms of this EULA.
Broadly speaking, the rights are to instal and use the software on one computer at a time. Thus if it is transferred to a second computer it must be deleted from the first. Section 14 of the EULA provides as follows:
SOFTWARE TRANSFER. Internal. You may transfer your copy of the Software to a different device. After the transfer, you must completely remove the Software from the former device. Transfer to Third Party. If you are the person who initially licensed the Software, you may make a one-time permanent transfer of this EULA, Software and Certificate of Authenticity (if applicable) to another end user, provided that you do not retain any copies of the Software. This transfer must include all of the Software (including all component parts, the media and printed materials, any upgrades, this EULA, and, if applicable, the Certificate of Authenticity). The transfer may not be an indirect transfer, such as a consignment. Prior to the transfer, the end user receiving the Software must agree to all the EULA terms.
In section 14, the word "licensed" used in the expression "the person who initially licensed the Software" means not "granted the licence of" but "received the grant of the licence of". That is not in dispute between the parties. It is also not in dispute that a licensee of the Software can dispose of the Software with its licence to a sub-purchaser provided that the sub-purchaser agrees to the EULA terms. The party disposing of the Software may not retain any copies of the Software, as provided by section 14. The Software can be passed down a chain of licensees provided that they all agree to comply with the terms of the EULA. The combined effect of section 1 and of section 14 is that if a purchaser fails to agree to comply with the EULA, he does not receive a licence. Thus in that case he cannot grant or transfer a licence.
- The other distribution channel is the Royalty OEM channel. That channel is similar to the authorised replicator/authorised distributor channel except that the three distinct roles of replicator, distributor and OEM system builder are combined in a single large company such as Dell, Compaq or IBM. Such companies obtain COAs from Microsoft or its authorised COA manufacturer and build systems for supply directly to end users. The software is required to be loaded directly on to the PC hard disc drives, the COA attached and the system supplied together with a media disc and accompanying documentation, including a copy of the EULA. Royalties are paid by the Royalty OEM to Microsoft, either upon receipt of the COAs, or when each system is sold by the Royalty OEM.
- The above channels relate only to software supplied with a new PC. It is possible to purchase Microsoft's products "over the counter" for installation in or upgrading of an existing PC. Such channel is not relevant for the purposes of this application.
- Loading of the software on to a hard disc during installation results in a copy being made of the software. Using the software necessarily results in at least a transient copy of the software being made in the memory of the PC.
- It is common ground that the defendants have been trading in loose COAs, that is COAs not attached to computers It is in issue whether such trade can be carried on without infringement of Microsoft's rights. It is clear from the licence agreements that COAs can be transferred in accordance with those agreements only as part of a bundle with the software, media and documentation. Mr. Lambert submitted that the restrictions in the intermediary and end user licence agreements were unlawful and unenforceable both under competition law and also at common law as unreasonable restraints of trade, since their effect was to extract multiple licence fees in respect of the same licence. He further submitted that there was in any event a legitimate trade in individual COAs and in individual media.
- Mr. Lambert gave an example in support of two features of his contention, viz the legitimacy of trade in loose COA's and the point that the effect of Microsoft's licensing system is to exact two royalties for the same software. The example was this. A large user of computers, such as a bank, might order a number of computers containing Microsoft software, but prefer to have other software on those computers. It could delete the Microsoft software on the computers, without having agreed to accept the EULA terms. It or its employees could then peel off the COAs from the computers and sell the COAs. Such trade was legitimate, went the argument, since the bank had never agreed to the terms. The fallacy in the argument is that if the bank does not accept the EULA terms, it receives no licence. Thus it can confer no licence for the use of any Microsoft software by passing on the COA, nor can the COA be evidence of, or itself confer, such a licence. Thus, provided that the licensing system is enforceable in law, the circumstances exemplified cannot give rise to a legitimate trade in COAs.
- Mr. Lambert explained that the COAs obtained from the bank or its employees in the example could be purchased by Digital or other traders on the market for loose COAs and then sold with the relevant Microsoft media to a dealer in refurbished computers. If that were not permitted, the relevant software could not be used without the payment of a further royalty to Microsoft, in addition to the royalty paid in connection with the COA on the first use of the COA. In my judgment, there is no reason why Microsoft should not be paid a royalty for the use of its software in a refurbished computer. If that software were already licensed, there should already be a COA sticker on the computer. The objection was, I think, really to the payment by the bank of a price reflecting the royalty for software that it chose not to use. The question arose why the hypothetical bank should enter into such a transaction. Mr. Lambert submitted initially that computers without software were unobtainable. And the bank could not simply return the software since it would have to return the whole package, including the computer, to the OEM. He showed me by way of example condition 12 of the conditions imposed by Dell, a royalty OEM, which does indeed contain such a requirement. He later corrected his submission that computers without software were unobtainable. He adduced evidence, obtained by Edward Hill in part during the course of the hearing, that one particular supplier offered a range of laptops of which over 560 models had a Microsoft operating system and only two had no pre-installed operating system. The same piece of evidence also showed that owing to economies of scale computers with software installed were cheaper than those without. In my judgment, there is no real prospect that at trial the defendants would be able to establish that Microsoft's licensing system operates unreasonably in restraint of trade by reason of matters of the kind he exemplified, even if the example is realistic.
- As to competition law, Mr. Lambert relied on Articles 81 and 82 of the EC Treaty, embodied, so far as concerns trade in the United Kingdom, in sections 2 and 18 respectively of the Competition Act 1998. Section 2 of the Competition Act 1988 reads as follows:
2. - (1) Subject to section 3, agreements between undertakings, decisions by associations of undertakings or concerted practices which-
(a) may affect trade within the United Kingdom, and
(b) have as their object or effect the prevention, restriction or distortion of competition within the United Kingdom,
are prohibited unless they are exempt in accordance with the provisions of this Part.
(2) Subsection (1) applies, in particular, to agreements, decisions or practices which-
(a) directly or indirectly fix purchase or selling pieces or any other trading conditions;
(b) limit or control production, markets, technical development or investment;
(c) share markets or sources of supply;
(d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
(e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.
(3) Subsection (1) applies only if the agreement, decision or practice is, or is intended to be, implemented in the United Kingdom.
(4) Any agreement or decision which is prohibited by subsection (1) is void.
Article 82 of the Treaty and section 18 of the Competition Act 1998 contain similar provisions in relation to the abuse of a dominant position.
- Mr. Lambert put forward no specific reasons, other than his double royalty point, why Microsoft's licensing agreements should fall within those sections. He submitted that it was for Microsoft to prove that the agreements did not infringe competition law, and that that question should be determined at a trial, and not summarily.
- In my judgment, the mere enablement of copyright protection by granting limited licences on agreed terms cannot constitute a matter falling within article 81 or article 82 of the Treaty or section 2 or section 18 of the Competition Act 1998 so as to be prohibited unless exempt. Otherwise, copyright protection in relation to computer software would be largely a dead letter. That is by no means to deny that a particular licensing system can on its facts constitute a prevention, restriction or distortion of competition or the abuse of a dominant position. But it must be for the defendants to put forward a case why the licensing system falls within those provisions. The only case that has been put forward is the double royalty point, and I am satisfied that that case has no real prospect of success at trial.
- Mr. Lambert drew my attention to Practice Direction—Competition Law (Civil Procedure 2006, volume 1, paragraph B12-003), paragraph 3 of which required the defendants to serve a copy of their statement of case on the Office of Fair Trading at the same time as it was served on the other parties. The defendants notified the Office of Fair Trading out of time during the course of the hearing before me. There is no material before me which raises even a prima facie case that the agreements fall within Article 81 of the EC Treaty or section 2 of the Competition Act 1998. Moreover, the existence of section 56(1) and (2) of the Copyright, Designs and Patents Act 1988, which I set out below, strongly suggests that prima facie agreements of the kind in question do not fall foul of competition law.
56. Transfers of copies of works in electronic form
(1) This section applies where a copy of a work in electronic form has been purchased on terms which, expressly or impliedly or by virtue of any rule of law, allow the purchaser to copy the work, or to adapt it or make copies of an adaptation, in connection with his use of it.
(2) If there are no express terms—
(a) Prohibiting the transfer of the copy by the purchaser, imposing obligations which continue after a transfer, prohibiting the assignment of any licence or terminating any licence on a transfer, or
(b) Providing for the terms on which a transferee may do the things which the purchaser was permitted to do,
anything which the purchaser was allowed to do may also be done without infringement of copyright by a transferee; but any copy, adaptation or copy of an adaptation made by the purchaser which is not also transferred shall be treated as an infringing copy for all purposes after the transfer.
- Mr. Lambert accepted that resale of COAs was unlawful if they were counterfeit or stolen, or if they were sold to someone who was making many different machines and selling them to the public. But he submitted that their resale was not necessarily unlawful. Edward Hill gave evidence that much of Digital's merchandise was bought in distress sales. He wrote:
Not long ago Tiny [sic] Computers (which was one of the largest PC suppliers in the UK with shops in virtually every major town or city) ceased trading and its software licences, CDs, DVDs, and COAs flooded the market.
- Mr. Andrew Hosking, an insolvency practitioner employed by Grant Thornton UK LLP, gave this evidence:
I led the team working on the administration of Granville Technology Group Limited (which traded as Time [sic] computers). I confirm that to the best of my knowledge the administrators of Granville Technology Limited have not sold any Microsoft Corporation Certificate of Authenticity labels ("COAs") by themselves, whether used or new, to any third party.
Be that as it may, what is clear is that the administrators would have no authority to sell loose software licences, loose CDs or loose COAs of Microsoft, and that if they did the use of such objects would be unlicensed.
- Edward Hill went on to say:
.....some of our goods were for products that customers still want to use but which were no longer marketed or even supported. For instance, we supplied "recovery discs", that is to say CDs that enable users to restart programs that had crashed or been corrupted. Licensees will have been issued with those discs but they are often misplaced or discarded. They have no great value unless and until a system crashes which is why we can pick them up very cheaply...... Also ..... royalties will have been paid to the software house for all the goods mentioned above.
Mr. Hill did not suggest that the use of such objects that he sold on would have been licensed. Moreover, he could not but have been aware of the risk of proliferation of unlicensed copies of Microsoft software in consequence.
- I come now to the question of counterfeit COAs. Microsoft has adduced evidence that numerous counterfeit Microsoft CDs and COAs were found on Digital's premises. The defendants deny that they knowingly traded in such products. Edward Hill, in a witness statement dated 30th May 2006, stated:
We have not yet had the time or resources to test the items that Microsoft alleges to have been counterfeit, though we hope to do so before trial. Unless and until we can do so, we dispute the allegation that the majority of them were unlicensed or counterfeit.
As to the allegation that counterfeit goods were found on our premises, I refer to the last sentence of paragraph 8 ["We found it helpful to keep samples of infringing items for reference purposes which is why a few such items were found on our premises...."] where I explained that we kept a few samples for reference purposes. We needed them because Microsoft's guidance on what is genuine and what is not proved to be insufficient as the letter on page 5 of EH4 illustrates.
Later in the same statement, he said:
.....we had to keep up to date with what the counterfeiters were up to in order to detect and reject bogus products. That required us to examine them or get pictures or descriptions from time to time.
- Gail Parker said in a witness statement dated 31st May 2006 that she had read a draft of the above statement of Edward Hill and believed it to be correct. She also said:
I do not believe that any of us has ever knowingly dealt in counterfeit goods. Certainly, I have never knowingly done so.
.....
Eddie has already explained why we kept a few samples of counterfeit products for reference purposes.
- Ronald Hill, in his witness statement, said that he had read drafts of the above witness statements of Edward Hill and Gail Parker and believed them to be correct. He also said:
I wish to make clear beyond peradventure that by no means everything that William Ling supplied to us was counterfeit.
- Mr. Peto made the cogent submission that if the intention had been to avoid dealing in counterfeit products it would have been more useful to Digital to have genuine products, rather than counterfeit products, for comparison.
- Microsoft has adduced evidence that Edward Hill knowingly dealt in counterfeit goods, including Microsoft products. A number of messages have been put before me. They were letters, documents and emails (in paper form) obtained during the execution of a search order against Digital, together with emails from computer hard drives copied during the execution of that order. Examples are as follows:
(1) An email of 27th June 2005 from "Eddie Hill" of Digital to "Rebecca" stating "How many Office 2003 Pro do you have? I know they are not original but do they look ok? Can I come and see you and we can talk better". Office 2003 is a Microsoft product.
(2) An exchange of emails between "David" of "Easewealth" and "Eddie Hill" of Digital on 13th June 2005. David thanks Eddie for his enquiry and gives a price list including prices of 138 Microsoft-operated used PCs. Mr. Hill replied "I assume from these prices that the product is counterfeit. I would be interested in seeing a sample of Office 2003 pro in order to establish quality".
(3) Correspondence dated 15th September 2005 between "Philip" (Wu Jun) in China and Eddie Hill, referring to a previous meeting between them in Shenzhen. Eddie Hill seeks a quotation for CDs from a factory. He says ".....try and establish if the factory can produce the sample to exact standards. Must be 100%". The reply is "I had asked the factory. They told me they can produce the sample to exact standards. If the sample not exact same with the original, they would adjust it, and re-produce it untill they looks like the same" [sic].
(4) An email exchange of 6th February 2003 between E Hill UK and "vertexrichard" which refers to IFPI numbers. I was told that genuine Microsoft CDs bore two IFPI numbers. A genuine Microsoft CD was exhibited. What is meant in this context by "two numbers" is evidently a single number that is etched on one side, and the mirror image of the same number that is etched on the other side, of the disc. Extracts from the exchange read as follows:
E Hill UK: The IFPI numbers have been scratched out
.....
I did ask if you had the double IFPI.
.....
vertexrichard: O.k. we will be getting in double ifpi I913 in next week
.....
your customer cannot ship back to us.
E Hill UK: why?
vertexrichard: .....we do not want them to know where they are coming from
.....
also because they are the double Ifpi, they might be .50c more but I might be able to do something with that where it will be the same price for you
.....
vertexrichard:.....if they want to cancel, let me know and I will cancel there 5,000 pcs....they are coming direct from pressing plant
.....
E Hill UK: lets do this. Send 2000 pieces of good double ifpi to my client directly on Tuesday/Wednesday and refund me .50c on 3000 pieces and I will keep them.
vertexrichard: your going to keep the 3,000 pcs?
E Hill UK: it appears they are not so bothered as long as they are reimbursed a little!
.....
Just make sure that these 2000 look ok.
- There is evidence before me of a sheet of paper on which 18 various COAs, ostensibly of Microsoft Windows XP Professional, have been stuck. There is a manuscript note in the margin in the handwriting of Gail Parker saying "Is this any better will ship anyway if not happy return Regards Gail". The identity of the writer was not in dispute. It was said that that was evidence of counterfeit COAs with the accuracy of which the customer was not happy. Mr. Lambert submitted that the question "Is this any better" could be a reference to the photocopy of the sheet. He did not suggest that that was what Ms. Parker in fact meant.
- There is evidence before me that between August 2002 and October 2005 Microsoft's investigators made a number of test purchases of purported Microsoft CDs and COAs from Digital. Some of those CDs and COAs were found to be counterfeit. Many of the COAs were genuine, but had been tampered with. On one occasion, 4th July 2005, whilst the negotiations on behalf of Digital were primarily conducted by Edward Hill, Ronald Hill was present and personally offered the purchaser five Windows 2000 COAs, of which one was found to be counterfeit and four were found to be genuine but to have been tampered with.
- There is also evidence before me that Edward Hill has made statements to a test purchaser, Mr. Kenneth Anderson, indicating that he knew that he was infringing Microsoft's rights. For example, on 17th May 2004, the following conversation is recorded as having taken place:
EH: We've got full versions of XP PRO for 65 quid.
KA: Are they a good buy?
EH: Yes. It depends what you want out of it. If he's building computers you can get away with just putting the sticker on the computer. If he wants the CDs to go with the computers we've got them cheap.
In a conversation with Mr. Anderson on 16th January 2004 Mr. Hill is reported as having said the following things:
But we've got 98 second edition licences, which are basically one of these stickers. When he builds a PC what he does he instals the software, peels that sticker off and puts it on the outside. That shows that a PC's licensed and we sell those licences.
And:
You can use the same discs. Technically you're supposed to buy the whole pack. Once you've got the disc use the one disc to instal the software in loads of machines so long as you put one [sc, a COA] on the PC.
And:
These [sc., stickers] have been pulled off new machines. The codes haven't been used so they are activatable. If he's putting them on to a PC he's going to need a bit of glue on the back. Stick them on the PC.
The following conversation is stated to have taken place on 4th August 2005:
EH: Right, I've got Office 2003. Is he after a full licence?
KA: He's after one of them and he's after some stickers as well.
EH: You don't know if he wants full, as for the Office I need to know if he wants a full licence.
KA: What's the difference there cost-wise?
EH: Well, the price. I can do you an Office 2003 without a licence for eighty-five quid. The licensed version is one hundred and eighty-five quid. With the eighty-five quid one we're not lining Bill Gates's pocket. If he's installing it in a business or something he might want to do the licence. He might want to do it properly.
.....
If it's just for home then go for the unlicensed.
KA: Get me one of them then.
EH: OK.
KA: Them stickers, they're a good buy, aren't they?
EH: Yes, it's normally one hundred and eighty-five quid for that product. It's because they're copies there's just no licence with them.
And in a conversation on 29th October 2004:
EH: [The laptops have] all got XP Pro.
KA: Have they, and is it with a sticker or do you get the disc?
EH: No. They're not licensed but it's all loaded. They're ready to go. Just switch on and go.
- Edward Hill answered that evidence in his own witness statement:
The trap orders were among the very rare occasions when we dealt with a member of the public in our office. I believe that my remarks have been taken out of context and also that they have not been properly transcribed. My recollection is that I was trying to find out whether Ken Anderson or his son had a volume licence. I believe that that gentleman told me that his son did have a volume licence agreement. If I remember correctly, the reference to not lining Bill Gates's pockets was to emphasize that there was no point in paying twice for the same right. I have to add that it all took place a very long time ago.
- The defendants have admitted that to their knowledge Digital had counterfeit products of Microsoft in its possession. It is clear on the totality of the evidence that there is no real prospect of any of the defendants successfully defending the claim against them that Digital to their knowledge traded in counterfeit products of Microsoft.
- I now consider the individual bases on which Microsoft makes its claim. Mr. Peto said that his primary case was that the defendants had been committing the tort of passing off by issuing an instrument of deception. They offered for sale and sold COAs which could only be used to allow another (some downstream purchaser of the COA) to pass off an unlicensed copy of a Microsoft product as a licensed product. (This clearly does not apply to the test purchases themselves). Mr. Peto relied on the following passage in the judgment of Aldous, L.J., with whom Swinton Thomas and Stuart-Smith L.JJ. agreed, in British Telecommunications Plc v. One In A Million Ltd. [1999] 1 WLR 903, 920G:
.....a court will intervene by way of injunction in passing off cases.....where the defendant has equipped himself with or intends to equip another with an instrument of fraud.
Aldous L.J. relied on the following passage from the judgment of Buckley L.J. in Norwich Pharmacal Co. v. Customs and Excise Commissioners [1974] AC 133, 145-146 which related to patents and trade marks:
If a man has in his possession or control goods the dissemination of which.....will infringe another's patent or trade mark, he becomes, as soon as he is aware of this fact, subject to.....an equitable duty not to allow those goods to pass out of his possession or control at any rate in circumstances in which the proprietor of the patent or mark might be injured by infringement ensuing. The man having the goods in his possession or control must not aid the infringement by letting the goods get into the hands of those who may use them or deal with them in a way which will invade the proprietor's rights. Even though by doing so he might not himself infringe the patent or trade mark, he would be in dereliction of his duty to the proprietor. This duty is one which will, if necessary, be enforced by way of injunction.....
I conclude in relation to the tort of passing off, and for the reasons set out below in relation to copyright and trade mark infringement, that the defendants would not at trial be able to defend liability for issuing instruments of deception.
- Mr. Peto further submitted that by trading in loose COAs, genuine or otherwise, the defendants were authorising infringement of Microsoft's copyright. By installation and use of unlicensed Microsoft software, customers would unavoidably infringe Microsoft's copyright. Mr. Peto submitted that such authorisation constituted infringement of Microsoft's copyright in the software by virtue of section 16(2) of the Copyright, Designs and Patents Act 1988. It is common ground that such authorisation would constitute an infringement of Microsoft's rights if the defendants knew or had reason to know or believe that the COAs were likely to be used to facilitate copyright or trade mark infringement or passing off. On the evidence before me, there is a strong inference of such knowledge on the part of all the defendants. And there is an overwhelming inference of the defendants' having reason to know of or believe in the likelihood in question. It is unrealistic to think that at a trial any of the defendants could successfully rebut either such inference.
- Mr. Peto further submitted that by selling the loose COAs the defendants were procuring or inducing their customers or the ultimate users of the COAs to infringe Microsoft's copyright, and the defendants and each of them thereby had an accessory liability for such infringements. Further, by possessing counterfeit COAs in the course of their business whilst knowing them to be the same, the defendants infringed Microsoft's copyright in the underlying COAs under section 23 of the Copyright, Designs and Parents Act 1988. Finally in connection with copyright, Mr. Peto submitted that by electronically copying COAs (by scanning and photocopying them) the defendants have further infringed Microsoft's copyright by virtue of section 16(2) of that act. Apart from the general arguments of Mr. Lambert that I have considered above, it has not been suggested that those arguments are incorrect in law. It has not been drawn to my attention what particular scanning or photocopying has taken place, though I have mentioned above the copy of 18 COAs made by Ms. Parker. The same arguments as are mentioned in this paragraph in relation to COAs also apply to Microsoft software media.
- Microsoft's materials contain its trade marks. For example, the CD exhibited is marked Microsoft Windows Server 2003. The COA exhibited is marked Microsoft and Windows XP Professional. By using the materials, whether counterfeit or genuine, in the course of trade, without the consent of Microsoft, all the defendants in my judgment are clearly in breach of section 10(1) of the Trade Marks Act 1994, having regard to section 9(1) of that Act. It is also said that the defendants have infringed subsections (4) and (5) of section 10. It is clear that they have infringed section 10(4)(b). It is unnecessary for me to decide whether section 10(5) comes into play.
- Mr. Lambert pointed out correctly that there was no dispute that the trade mark issue arose only if or in so far as the defendants were selling unlicensed, stolen or counterfeit goods. I have already indicated that in my judgment there is no real prospect of defending the claim that they were selling such goods. In relation to such goods, Mr. Lambert's only argument in relation to the trade mark issue was an argument under section 12 of the Trade Marks Act 1994 that by putting the goods on the market Microsoft had exhausted its rights. He accepted that Microsoft was entitled to use its trade marks to interdict the distribution of software that it has not written, but not the distribution of copies made under its authority upon which the licence fee is likely already to have been paid or could have been or could still be extracted. To succeed under any of the subsections of section 10 of the 1994 Act or any of the paragraphs of Article 9 of the Community Trade Mark Regulation Microsoft must prove that the goods distributed by the defendants did not replicate faithfully its software. The making and distribution of perfect but unlicensed copies was certainly actionable but the complaint lay under the Copyright, Designs and Patents Act 1988.
- Mr. Lambert relied on the case of Centrafarm BV v. American Home Products Corporation [1978] ECR 1823. The material part of the judgment of the European Court was
11. In relation to trade marks, the specific subject-matter is in particular the guarantee to the proprietor of the trade mark that he has the exclusive right to use that trade mark for the purpose of putting a product into circulation for the first time...
12. In order to establish in exceptional circumstances the precise scope of that exclusive right granted to the proprietor of the mark regard must be had to the essential function of the trade mark, which is to guarantee the identity of the origin of the trade-marked product to the consumer or ultimate user.
23. It is for the national court to settle in each particular case whether the proprietor has followed the practice of using different marks for the same product for the purpose of partitioning the markets.
- In my judgment, no question of partitioning the United Kingdom market or the market in the European economic area arises in this case. Moreover, when the software bearing the mark is sold it is "put into circulation" in a limited way, that is, that it can be used on only one computer at a time (or the computers of one entity in the case of multiple licences). Section 12 of the Trade Marks Act 1994 takes account of European competition law. It provides as follows:
12.—(1) A registered trade mark is not infringed by the use of the trade mark in relation to goods which have been put on the market in the European Economic Area under that trade mark by the proprietor or with his consent.
(2) Subsection (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).
Here, the proprietor has legitimate reasons for imposing conditions on the further dealings in the goods, namely to prevent proliferation of royalty-free copying of its software. I thus reject Mr. Lambert's argument.
- It is clear that defendants (4), (5) and (6) have all been involved in commission of the foregoing wrongs on behalf of Digital and have adopted those wrongs of Digital as their own. I conclude that there is no real prospect of any of the defendants successfully defending this claim.
- Section 97(2) of the Copyright, Designs and Patents Act 1988 provides as follows:
The court may in an action for infringement of copyright having regard to all the circumstances, and in particular to—
(a) the flagrancy of the infringement, and
(b) any benefit accruing to the defendant by reason of the infringement,
award such additional damages as the justice of the case may require.
Mr. Peto has invited me to conclude that there can be no defence to a claim for additional damages in the premises of the flagrant infringement of Microsoft's rights. I accept that there is no real prospect of any of the defendants resisting that claim.
- There is no other compelling reason why the case should be disposed of at a trial.
- Accordingly, I give judgment for Microsoft on their claim including the claim for additional damages to be assessed. I shall hear counsel on the terms of my order including any interim payment.
