Hong Kong Law Reports - Pinsent Masons

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Hong Kong Law ReportsIssue 6

July 2013

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Pinsent Masons | Hong Kong Law Reports

Pinsent Masons Hong Kong Law Reports is produced by specialist international law firm Pinsent Masons.

The purpose of the reports is to collect leading cases relating to civil procedure, employment, technology and IP matters in Hong Kong, together with occasional overseas decisions, in a readily accessible form useful for practitioners and in-house counsel alike and to provide authoritative commentary on each. The reports are available in electronic form on www.out-law.com and www.pinsentmasons.com.

Editorial Board: Peter Bullock (Editor), Paul Haswell (Editor), Jolene Reimerson (Managing Editor).

Hong Kong Cases

Lilas Aromas Limitedv

Chan Ka Yan & Chan Chiu Har_______________

Stichting BDO & Anotherv

Banco De Oro Unibank Inc & Another_______________

UK Cases

R (on the application of Prudential plc & Another)v

Special Commissioner of Income Tax & Another _______________

ADS Aerospace Ltdv

EMS Global Tracking Ltd _______________

Interflora, Inc & Interflora British Unitv

Marks and Spencer plc _______________

This

issu

e:

Employment – Restrictive Covenants Pg 2

Legal Professional Privilege – Scope Pg 6

Civil Procedure – Refusal to Mediate Pg 8

Intellectual Property – Keyword Advertising Pg 10

50532

[District Court – DCCJ 3868/2012]

Lilas Aromas LimitedPlaintiff

– and –

Chan Ka Yan and Chan Chiu HarDefendants

Judgment of the District Court (His Honour Judge Alex Lee) dated 31 January 2013

Employment – Restrictive Covenants – Non-compete clause – Injunction application

The FactsThe Plaintiff company (“Lilas”) runs a beauty and skincare clinic business in several locations in Hong Kong. The two Defendants were formerly employed by Lilas as Senior Beauticians (“Beauticians”), and they provided skin care services and body treatments to Lilas’ customers and were also involved in training apprentice and junior beauticians. The Beauticians were employed in Lilas’ Metro City Plaza branch in Tseung Kwan O (“Shopping Centre”) under an employment agreement which included the following terms:

“12E. After 3 months from the date of employment and upon termination of the employment for any reasons, the employee for a period of one year, shall not engage in work related to the beauty service industry in the same shopping mall or the same district of the branch to which she belong[s]. Failing which the Company may commence legal proceedings against the employees for its loss.” (the “Non-Competition Clause”)

“9.2. The employee shall not at any time before or after the termination of employment make use of, disclose and/or divulge to others any trade secret or confidential information which relate to the Company and its suppliers, agents and customers that you possessed by reason of your employment otherwise than for the [Company’s] business purpose.” (the “Confidentiality Clause”).

In May 2012, both Beauticians resigned from Lilas within ten days of each other. In July 2012, Lilas discovered the Beauticians working in the salon of a direct competitor in the same Shopping Centre. Lilas issued a writ against the Beauticians in November, on the grounds that they had breached both the Non-Competition Clause and Confidentiality Clause of their respective contracts. On 27 December 2012, Lilas applied for an interlocutory injunction against the Beauticians to restrain them, for a period of one year from the end of their employment (i.e. up to June 2013) in the following terms:

“ [the Beauticians] be restrained from (a) carrying on, being employed or otherwise engaged, concerned or interested in any capacity (whether for reward or otherwise) or in

any way assisting [the competitor] or any other individual, firm or corporation operating or engaged in the beauty business within (i) Metro City Plaza, Tseung Kwan O; and (ii) The Tseung Kwan O District…”

In Lilas’ claim, they argued that they had a legitimate interest to be protected by the Non-Competition Clause because, amongst other things, they had provided the Beauticians with a substantial amount of training and opportunities to enable them to gain popularity among customers. Lilas also claimed that the Beauticians attempted to solicit business by obtaining the mobile phone numbers of Lilas’ customers during the course of their employment to actively divert clients to their new place of employment.

The JudgmentIn considering Lilas’ application for an interlocutory injunction, Judge Lee reiterated the applicable principles of granting an injunction as established by American Cyanamid Co v Ethicon Ltd [1975] AC 396, namely:

(i) whether there is a serious issue to be tried; and

(ii) whether the balance of convenience lies in favour of granting an injunction.

Judge Lee also considered Midland Business Management Ltd v Lo Man Kui [2011] 1 HKLRD 470, at 477, which held that where it is not possible for a trial to be held before the claimed injunction expires, then consideration must be made as to whether the plaintiff would likely succeed at trial. Since the injunction, if granted, would only last five months from the date of the interlocutory hearing, and it was unlikely that the trial would be heard on or before expiry of the injunction, the Court considered that greater weight should be given to the prospects of success of Lilas’ claim.

With regard to the Non-Competition Clause, the Court observed that Lilas was only entitled to protect its legitimate interests through restrictive covenants, and not to guard itself from competition per se. In addition, customers usually purchased beauty packages from Lilas, which suggested that customers are attached to the services of Lilas rather than to individual Beauticians. The Court also noted that whilst Lilas provided training and opportunities to the Beauticians to gain popularity with customers, this is not, in itself, a legitimate interest which can be protected by a restrictive covenant (i.e. the Beauticians’ reputation is not a proprietary interest that belongs to the employer).

The Court held that the Non-Competition Clause was unreasonable because it purports to prohibit the Beauticians from working in shopping malls and districts of other Lilas branches at which the Beauticians had never been employed. Furthermore the word “district” was considered to be too wide, since it had not been defined, and was not enforceable. The Court declined to adopt the “blue-pencil approach” to delete the offending parts of the Non-Competition Clause because it would, in this case, have amounted to re-drafting of the clause. Lilas was therefore not entitled to rely on the Non-Competition Clause because the

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restriction was wider than necessary and there were no legitimate interests to be afforded protection.

As for the Confidentiality Clause, Lilas had put forward evidence from four to five unidentified customers alleging that the Beauticians had kept their mobile numbers and had messaged them to entice them away from Lilas. However, the Court noted that the Beauticians had approximately 200 regular customers, and there was no evidence to show how the Beauticians had become connected with the four or five customers concerned or how their phone numbers had been obtained (there was no allegation that the Beauticians had used Lilas’ notes or records to obtain the names and numbers). The Court therefore held that there was insufficient proof that the customer information was confidential in nature.

In addition, given that the injunction application was filed five months after Lilas was aware of the Beauticians’ change of employment (in which time the Beauticians had settled into their new employment and Lilas’ customers would have already turned to the competitor if they were going to do so), the Court concluded that, in the balance of convenience, the long delay meant that maintaining the status quo is more favourable than granting the injunction.

Accordingly, Lilas in this case failed to show they had a good prospect of success in relation to either the Non-Competition Clause or the Confidentiality Clause, and failed to show the balance of convenience was in their favour. The application for injunction was accordingly dismissed.

Commentary by Paul Haswell Partner Pinsent Masons [email protected]

This case underlines, once again, the difficulties faced by an employer when drafting an effective set of restrictive covenants for its employment contracts. It also shows the pitfalls one can fall foul of when it comes to enforcement and the Court’s willingness to find for a departing employee unless the employer can establish a compelling legitimate business interest.

The principles set out in Midland Business Management v Lo Man Kui, and reiterated by Judge Lee in the present case, are of relevance. An employer cannot, through a restrictive covenant, protect itself from competition per se. Rather:

•an employer is not entitled to prevent its ex-employee from using the skill and knowledge in his or her trade or profession which was acquired during the course of employment;

•an employer is entitled to rely on a restrictive covenant to protect its legitimate interest, such as trade secrets and trade connections, but the restriction must be no more than necessary;

•the onus of proving reasonableness of the restrictive covenant lies on the party who seeks to enforce it.

In the present case, this onus of proving reasonableness was too much for Lilas. The covenant sought to restrain the employees from carrying on the same trade in the same district for one year. This was not a case where the restriction sought to limit the employees from working for clients of Lilas, or for whom they had previously worked, rather the restriction sought to prevent them carrying on any work related to the business service industry; given the employees’ role as beauticians this would have the effect of preventing them

from working in the restricted locations for a year. Convincing the court that this was protecting its legitimate interest was always going to be a tough sell for Lilas. Geographical restrictions are an especially difficult area to get right in Hong Kong since even a restriction across a relatively small geographical area such as within the same district or within a 1,000 metre radius may impose an unreasonable restriction on an ex-employee’s ability to work and therefore be construed as a restraint of trade.

This makes it all the more perplexing as to why Lilas chose to seek an injunction from the Court that had a wider ambit than the covenant it sought to enforce. The covenant prevented the employees from engaging in work related to the beauty service industry whereas the injunction sought to prevent them from working “in any capacity… in the beauty business”. As Judge Lee said, “there is simply no basis for the plaintiff to seek an injunction which is beyond the scope of the restrictive covenant upon which the application for injunction is based”.

Similarly odd is why Lilas waited for five months before seeking an injunction. An injunction is, by its very definition, emergency relief. It should be sought promptly, as soon as the applicant becomes aware of a breach of the covenants in the employee’s or ex-employee’s contract of employment. Once the ex-employee is settled in his or her new position, working for new clients, the balance of convenience falls too far towards him or her in order to convince the Court to impose any restriction.

The lesson to be learned from this case is that when it comes to restrictive covenants and their enforcement, reasonableness and promptness is key. The covenants one is seeking to enforce must be reasonable, the relief one is seeking from the Court must be reasonable and certainly should not be more than the covenants allow for and, finally, action must be taken quickly to obtain that relief. If one seeks relief that is unreasonable, or one drags its heels in doing so, then it can expect to be disappointed in Court.

50534

[Court of First Instance – HCA 1162/2009]

Stichting BDO and AnotherPlaintiffs

– and –

Banco De Oro Unibank Inc and AnotherDefendants

Judgment of the Court of First Instance (Hon Suffiad J) dated 14 December 2012

Intellectual Property – Registered Hong Kong Trade Mark – Use of Similar Sign – Claims of Passing Off and Trade Mark Infringement – What Is Relevant Public?

The FactsThe Plaintiffs (“BDO International”) are part of a well-known international network of public accountancy firms. The first Plaintiff operated under the name “Binder Dijker Otte & Co” in the 1970s and has used the abbreviation “BDO” since 1988. It is also the registered owner of around 165 trade marks throughout the world, including Hong Kong, for the “BDO” mark and logo (the “Registered Trade Mark”). The second Plaintiff has been the Hong Kong member of the international network since 1997.

The first Defendant is a bank which has used the name “Banco De Oro” and the “BDO” acronym and logo in the Philippines since 1977 (“Bank”). The second Defendant (“Remittance Office”) is a wholly owned subsidiary of the Bank, providing remittance services for Filipinos working in Hong Kong who want to remit funds back to the Philippines. In September 2004, the Remittance Office changed its name to “BDO Remittance Limited”. It operated from a building in Central which housed a number of businesses and shops offering goods and services to members of the Filipino community in Hong Kong. As a result of a merger in 2007, the Bank obtained a licensed banking branch in Hong Kong and, in March 2008, it changed the name of the Hong Kong banking branch to “Banco De Oro Unibank Inc”.

BDO International objected to the Bank and Remittance Office using the letters “BDO” for the purpose of providing banking or financial services in Hong Kong (including advertising those services on the Bank’s website at www.bdo.com.ph). BDO International brought an action for passing off, on the grounds that use of the “BDO” acronym and logo generated confusion so that the public was led to believe that the services offered by the Bank and Remittance Office were services offered by BDO International.

BDO International also claimed trade mark infringement under the Trade Marks Ordinance (Cap. 559). Section 18(3) relates to use of a mark similar to a registered trade mark on identical or similar goods and services for which the trade mark is registered. Section 18(4) relates to use of a mark similar to a registered trade mark on non-identical or non-similar goods and services and, unlike s.18(3), requires the registered trade mark to be “well-known”.

The JudgmentThe Court first considered the passing off claim, noting that the criteria for proving the claim is for a plaintiff to show goodwill, misrepresentation and damages. The Court accepted that BDO International enjoyed sufficient goodwill in Hong Kong with its international reputation, but held that the goodwill only attached to accountancy services (and not to investment banking services which was offered by the Bank). As for misrepresentation, the Court found, amongst other things, that:

• visually speaking, the BDO logo used by the Bank was very different to the Registered Trade Mark – they had different appearances and colour schemes;

• the Bank and Remittance Office were in a totally different field of business to that of BDO International – the former was in the banking business whereas BDO International were part of a global network of international accountants, and there is no suggestion that a global accountancy network includes an investment bank;

•the Bank often used the name “Banco De Oro” alongside its BDO logo (for example, inside its premises, on its letterheads, banking forms and promotional materials as well as on its website).

The Court considered that if a client or potential client of BDO International mistakenly stepped into the Bank’s branch or Remittance Office, thinking that it was the premises of an accountancy firm of BDO International, the individual would soon come to realise that the premises operated as a bank and not an accountancy firm. The Court found it difficult to imagine that any clients or potential clients of BDO International would be misled into thinking that the Bank was operated by BDO International or that there was any connection between the two. The Court therefore held that BDO International had failed to prove misrepresentation – there was no real risk that the public would be deceived into thinking that the services of the Bank are the services of BDO International.

For completeness, the Court also dealt with the issue of damages. BDO International had claimed that the Bank’s use of the BDO acronym and logo would lead to “tarnishment, blurring or degradation” of its Registered Trade Mark. However, the Court held that this could only apply if the parties were in the same field of business, whereas the Court had already considered that the Bank (which was the largest banking group in the Philippines) was in a totally distinct field of business from BDO International’s accountancy services. For the same reason, the Court held that the claim for trade mark infringement under s.18(3) of the Trade Marks Ordinance could not succeed, since it could only apply to a mark being used on identical or similar services for which a trade mark is registered.

As for the claim for trade mark infringement under s.18(4), which relates to infringement of a registered trade mark on non-identical or non-similar services, this requires that the registered trade mark is well-known and that use of a similar sign takes, without due cause, unfair advantage of (or is detrimental to the distinctive character or repute of) a registered trade mark.

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The Court considered that the fact that both BDO International and the Bank used the same three “BDO” letters in their logos was not sufficient to link them together (particularly given that, visually, the two marks looked quite different from each other). To succeed under s.18(4), BDO International had to prove that members of the public would consider the Registered Trade Mark to be well-known and would link it to the BDO acronym and logo used by the Bank. The Bank argued that the “relevant public” were the customers to whom BDO International marketed their services (who were different to the customers of the Bank), whereas BDO International contended that once a trade mark is well-known, it does not matter what service that trade mark is well-known for, since s.18(4) covers trade mark infringement relating to non-similar services.

The Court agreed with the Bank that the reputation of a trade mark does depend on the products or services for which it is actually marketed to the public (and does not necessarily cover all the services which are set out in the specification of the Registered Trade Mark). The Court noted that BDO International targeted its accountancy services to multi-national companies, listed companies and high-net worth individuals in Hong Kong,

whereas the Bank targeted its services mainly to Filipinos and Philippine companies in Hong Kong (who were relatively low net worth and made up around 99% of the Bank’s customers).

The Court held it “obvious” that the relevant sections of the public as regards BDO International were quite distinct from that of the Bank, and there was no evidence to show that the relevant public targeted by BDO International had been confronted by the BDO acronym and logo used by the Bank. On this basis, together with the earlier finding that the parties were in totally separate fields of business, the Court held that BDO International had failed to prove that members of the relevant public would link the BDO acronym and logo used by the Bank to the Registered Trade Mark. The Court also found that there was no evidence of any actual detriment suffered by BDO International.

Further, the Court noted that the Bank had used the BDO acronym and logo in the Philippines since 1977, and this was a justifiable reason for its current use of the “BDO” acronym and logo in Hong Kong. Accordingly, BDO International’s claims were dismissed in their entirety.

Commentary by Jolene Reimerson Associate Pinsent Masons [email protected]

This case serves as an important reminder to businesses that trade mark protection can be limited – a company which registers a trade mark in Hong Kong has the exclusive right to use that mark in Hong Kong but only in relation to the specific goods and services for which the mark is registered.

In this particular case, Stichting BDO is the registered owner of a number of trade marks in Hong Kong for the word mark “BDO” including a logo. The trade marks are registered under a number of classes and the trade mark specifications cover an extensive list of services. However, it is clear from the ruling of the Honorable Mr. Justice Suffiad that when considering whether a trade mark is “well-known” for the purposes of a trade mark infringement claim under s.18(4) of the Trade Marks Ordinance, the Court will look at the precise goods and services for which the mark is well known and will not assume that it is well-known for all the services which are listed in the specification.

It is often tempting for a trade mark applicant to draft the specification as widely as possible, especially as it can be narrowed – but not widened – once the trade mark application has been filed (a separate application will need to be made if you wish the trade mark to cover any additional services). However, an applicant should take care in ensuring that the specification is clear and relevant to the goods and services that will actually be provided, rather than attempting to encompass all potential goods or services which the applicant can conceive of. Indeed, it is important to note that a trade mark registration in Hong Kong may be revoked if the trade mark has not been

genuinely used for at least three years in relation to the goods or services for which it is registered. Since 1 January 2013, goods and services are classified in accordance with the 2013 version of the 10th edition of the Nice Classification published by the World Intellectual Property Organization.

The BDO case also highlights the difficulties in establishing a claim for passing off, which is a common law action that can be used to protect both registered and unregistered trade marks. Although passing off is commonly claimed in conjunction with an action for trade mark infringement, it is generally more difficult to prove. Accordingly, companies should not be deterred from registering trade marks and should take steps to check whether the marks they are using may be similar to, or are the same as, trade marks that have already been registered by a third party.

It is worth noting that, in 2009, Stichting BDO filed a similar claim in the Philippines against Banco De Oro Unibank Inc for trade mark infringement and unfair competition. In February 2012, a Philippine court dismissed Stichting BDO’s claims on the grounds that the bank had used the initials “BDO” since 1977 (whereas Stichting BDO’s trade mark was not registered in the Philippines until 2004) and the bank was able to show that “BDO” was not well-known in the Philippines for BDO International’s accountancy services. In addition, the Philippine Intellectual Property Office cancelled Stichting BDO’s previously-registered trade mark. As a result of the claim in Hong Kong, Banco De Oro Unibank Inc has sought to register its BDO mark and logo, filing relevant applications in 2011. However, registration has not yet been granted by the Hong Kong Trade Marks Registry, likely due to the issue of the existing trade marks already registered by Stichting BDO. Companies should therefore seek to protect the goodwill and reputation subsisting in the marks which they use by registering their trade marks at an early stage, in order to avoid potentially lengthy and costly proceedings for future infringement claims.

50536

[Supreme Court of England and Wales – [2013] UKSC 1]

R (on the application of Prudential plc and Another)Appellants

– and –

Special Commissioner of Income Tax and AnotherRespondents

Judgment of the Supreme Court of England and Wales (Lord Neuberger, Lord Hope, Lord Walker, Lord Mance, Lord Clarke, Lord Sumption and Lord Reed) dated 23 January 2013

Privilege – Legal Professional Privilege – Scope – Tax Avoidance Scheme – Accountant’s Legal Advice – Disclosure of Advice

The FactsIn 2004, PricewaterhouseCoopers (“PwC”) created a tax avoidance scheme (“Scheme”) which, as required by the UK’s Finance Act 2004, was disclosed to the Commissioners for Inland Revenue (subsequently known as HM Revenue & Customs (“HMRC”)). Around the same time, the Prudential group of companies sought advice from PwC on a number of overseas holdings, and PwC proposed adapting the Scheme for them. This Scheme was carried out by the Prudential group through a number of transactions (“Transactions”), which had the effect of a substantial tax deduction for Prudential.

The inspector of taxes (“Inspector”) decided it was necessary to look into the Transactions and HMRC served notices on Prudential under section 20B(1) of the Taxes Management Act 1970, demanding the disclosure of documents relating to the Scheme and Transactions.

Prudential refused to disclose certain documents in relation to the Transactions (the “Disputed Documents”), arguing that it had received legal advice from barristers, solicitors and accountants of PwC on the Scheme and Transactions such that the Disputed Documents were protected by legal professional privilege (“LPP”).

The Inspector obtained authorisation from the Special Commissioners to require disclosure of the Disputed Documents. Prudential issued an application for judicial review to challenge the validity of the notices to disclose.

The Judgment of the Court of First InstanceThe application was heard by Charles J of the Queen’s Bench Division, High Court. He considered whether LPP should attach to legal advice by accountants. He held that LPP did not extend to advice given by accountants, even if the advice was identical in nature to that which would have been given by a member of the legal profession. He recognised that the approach to LPP has been as follows:

“(1) the right should not be undermined or qualified in respect of communications to which it applies because of its importance to the proper administration of justice,

(2) the right should not be extended to other communications because of the impact it has on the disclosure of relevant information and thus on a competing public interest relating to the administration of justice that courts and tribunals should have all relevant material before them, and

(3) the relationship between LPP and the duties of lawyers to the court and their clients in the context of the administration of justice is part of the background of LPP and its development.”

Charles J considered existing case law, such as Wilden Pump Engineering Co v Fusfeld [1985] FSR 159, which considered whether it was necessary in the public interest to extend LPP to patent agents and found that it did not for the reason that “the exigencies of mankind require that in matters of business which may lead to litigation men should be enabled to communicate freely with their professional advisers, and their communications should be held confidential and sacred, and that no one should have a right to their production” as per Lord Watson in Lyell v Kennedy (1883) 9 AC 81.

Charles J also stated that the skills and expertise of the legal profession relate directly to the administration of justice, and this is especially so given lawyers’ primary duty to the courts. He held that even though much of the advice on tax necessarily contained a legal element or foundation, this did not mean that LPP should be extended to cover other professions.

The Judgment of the Court of AppealThe Court of Appeal upheld Charles J on substantially the same reasons. Lloyd LJ said that if LPP was to be extended to apply to legal advice in tax issues given by accountants, then “the appropriate scope of that extension is a matter for Parliament, not the courts”. Prudential appealed to the Supreme Court.

The Judgment of the Supreme CourtThe Supreme Court dismissed the appeal by a majority of five to two. This is in line with decisions made regarding the LPP status of advice given by surveyors and claims consultants and reflects legal authority and academic texts of high standing. The Supreme Court was not prepared to extend LPP to communications in connection with advice given by professional people other than lawyers for three reasons.

First, extending LPP to any case where legal advice is given by a person who is a member of a profession which ordinarily includes the giving of legal advice would likely lead to the uncertainty of a clear and well understood principle. It is a known principle that LPP is confined to communications between a client and his legal adviser, which is between client and solicitor or client and barrister. There would be uncertainty if the Court has to decide whether a group constitutes a profession for the purpose of legal advice privilege. It would also be unclear as to how the Court would decide whether a profession is one which ordinarily includes the giving of legal advice. And when members of other professions give legal advice, it often would not represent the totality of the advice, so it may also be difficult for the Court to decide on how to deal with documents which contain legal and non-legal advice.

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Secondly, the extension of LPP to cases where legal advice is given from professional people who are not qualified lawyers raises questions of policy which should be best left to Parliament. The significant consequences of extending LPP should be considered through the legislative process, with its wide powers of inquiry and consultation and its democratic accountability. The extension of LPP to professions may only be appropriate on a conditional or limited basis, which is an aspect which can be properly decided and implemented by Parliament, not by the Court. It was apparent that the issue of extending LPP had been put forward to Parliament on previous occasions but Parliament had apparently chosen not to extend LPP to accountants giving tax advice.

Thirdly, Parliament had enacted legislation relating to LPP which suggests that it would be inappropriate for the Court to extend the law on LPP as proposed by Prudential.

It is worth noting that the minority considered that LPP attaches to any communication between a client and his legal adviser and does not depend on the adviser’s status, provided that the advice is given in a professional context; advice on tax law from a chartered accountant will attract LPP where it would have done so had it been given by a barrister or a solicitor.

Commentary by Peter Bullock Partner Pinsent [email protected]

This decision of the English Supreme Court, which is binding on the Courts of Hong Kong, relates to a matter of considerable importance to the accounting profession, and other professionals who offer legal advice to clients as part of their practice.

Legal professional privilege (LPP) keeps communications between a lawyer and their client confidential and it means that information cannot be disclosed even during the course of most trials. The existence of LPP permits clients in need of guidance on the law to consult a lawyer freely, without the concern that if the advice is in some way unfavourable to their position, or involves disclosure by them of facts which they wish to keep confidential, this will be brought out into the open at some later date. The Supreme Court has ruled that LPP should only apply to communications between lawyers and their clients and not to accountants.

When the rules relating to LPP were developed in the 19th century, only lawyers gave legal advice. Accountants compiled and audited financial statements and, in relation to clients’ tax affairs, stood back from offering any legal opinions. This only changed in the 1960s, when the large accounting practices were emerging and felt that tax (and the laws relating to tax) fell within their domain. By this time, however, LPP was

associated inextricably with the giving of advice by lawyers to their clients in a professional setting (heavily regulated by Law Societies and Bar Councils).

However, the privilege is not a benefit or professional courtesy afforded to the lawyer. It is a rule of evidence designed to protect individuals against disclosure to a court. This led two Judges (out of the panel of seven) in the Supreme Court to dissent. One of the dissenting Judges, Lord Sumption, held:

“Once it is appreciated (i) that legal advice privilege is the client’s privilege, (ii) that it depends on the public interest in promoting his access to legal advice on the basis of absolute confidence, and (iii) that it is not dependent on the status of the adviser, it must follow that there can be no principled reason for distinguishing between the advice of solicitors and barristers on the one hand and accountants on the other. The test is functional.”

The characterisation of LPP as applying to any case where legal advice is given by a person who is a member of a profession which ordinarily includes the giving of legal advice would be likely to lead to a clear and well understood principle becoming uncertain. It is not only accountants who would like to be covered by LPP but others such as surveyors and planning consultants. The Court took the view (by the majority) that the only way to maintain certainty would be for any extension to LPP to be granted by parliament, through legislation. Given the strength of the accountancy lobby, it is quite likely that pressure will be brought to bear to introduce such a bill to the English parliament. Whether it would be seen as a matter of priority is an open question.

50538

[High Court of England and Wales, Queen’s Bench Division, Technology and Construction Court – Case No. HT-11-319]

ADS Aerospace LtdClaimant

– and –

EMS Global Tracking LtdDefendant

Judgment of the Technology and Construction Court, Queen’s Bench Division (Akenhead J) dated 24 October 2012

Civil procedure – Costs – Defendant unwilling to mediate – Unsuccessful Claimant seeking reduction of costs

The FactsOn 20 December 2005, the Claimant (“ADS”) entered into an agreement with the Defendant (“EMS”), who manufactures satellites, for the exclusive distribution of satellite tracking devices (that both parties developed) called the SAT-111 and any derivatives of it. During the period of this agreement, EMS developed an aeronautical device, to replace the original product, called SAT-201. ADS were unable to sell a significant number of the SAT-111. Both parties then attempted to develop a SAT-221 but this fell through and on 12 August 2011, ADS issued proceedings. ADS claimed that EMS had repudiated the contract because EMS ceased to manufacture the SAT-111 and that the SAT-221 was a derivative product. Akenhead J gave his substantive judgment on 3 August 2012 in favour of EMS. EMS was not found to have ceased manufacturing, since manufacturing was done to order. The Technology and Construction Court (“TCC”) also held that given the way the SAT-221 was developed, it was not a “derivative product”.

The parties made submissions on costs in August and September. ADS claimed that EMS was entitled to costs but asserted that costs to EMS should be substantially decreased by about 50% because EMS had been unwilling to mediate the issues.

The following reflects the material events of 2012 in terms of parties’ attempt to negotiate and enter into mediation:•2 March: EMS attempted to initiate without prejudice

discussions, but ADS wanted to wait for the exchange of witness and expert statements before any such discussions.

•10 April: EMS offered ADS GBP50,000 to settle, whilst maintaining that ADS’ case was without merit. Three days later ADS indicated to EMS that it did not want to settle.

•15 May: EMS re-asserted its willingness to settle, to which ADS said they would revert.

•31 May: ADS wrote to EMS characterising the offer of GBP50,000 as a ‘nuisance payment’ (which it did not accept) and that ADS was confident of the merits of its case suggesting settlement through mediation since both parties appeared to be willing to discuss settlement.

•1 June 2012: EMS replied that it did not think mediation would be a ‘worthwhile or successful investment of time and cost’ primarily because there was no indication that ADS would accept anything much lower than its claim of US$16 million. EMS re-iterated its willingness to settle through without prejudice discussions.

•6 June 2012: ADS responded by saying that the costs of mediation could not be a concern given that EMS’ estimated costs were GBP1 million. ADS re-emphasised that it was confident in its case and that a skilled mediator would help resolve the dispute rather than without prejudice discussions. EMS responded immediately refuting the need for mediation three weeks before trial and once again offered to enter into without prejudice discussions.

•7 June 2012: ADS offered to settle the case for GBP4,246,000 and repeated the option of mediating. Four days later EMS offered to settle for GBP100,000. Neither offer was acknowledged.

The JudgmentIn considering whether a party should be penalised for not taking part in alternative dispute resolution procedures (“ADR”), the TCC cited Halsey v Milton Keynes NHS Trust [2004] EWCA Civ 576, as the leading authority. In that case, it was held that such a penalty should be the exception, not the rule. Dyson LJ in Halsey said “the burden is on the unsuccessful party to show why there should be a departure from the general rule” and that the test was whether or not “the successful party acted unreasonably in refusing to agree to ADR”. Dyson LJ then went on to note that although mediation has a number of advantages over litigation, including being cheaper, it should not blind litigators to the effectiveness of without prejudice negotiations. In determining whether or not the successful party was acting reasonably in refusing to mediate, the Court would consider the following: •the nature of the dispute;•the merits of the case;•the extent to which other settlement methods have been attempted;•whether the costs of the ADR would be disproportionately

high;•whether any delay in setting up and attending the ADR would

have been prejudicial; and•whether the ADR had a reasonable prospect of success.

The onus to prove that mediation was unreasonably refused was on the losing party. The TCC decided that EMS was not unreasonable for the following reasons:•ADS placed no effort on without prejudice discussions until late

in the process, despite repeated attempts by EMS on the same;•ADS’ offer to settle was of such a high amount that it

clearly thought it had a strong case and that it was entirely uninterested in the nuisance payment;

•the mediation suggestion from ADS came too late, being less than 20 working days before the hearing and even if the mediation lasted for one day, preparation for the same would have taken up precious trial preparation time; and

•both parties believed they had very strong cases and mediation or without prejudice discussions would not have made a difference in coming to a settlement agreement.

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Commentary by Rachel ChengSolicitor Pinsent [email protected]

Traditionally costs follow the event. What this means is that the winning party would be entitled to the costs incurred. However with the introduction of mediation and other alternative dispute resolution procedures (“ADR”), the Court has encouraged parties to attempt ADR and parties who unreasonably refuse to enter mediation would face costs sanctions. In light of this development (in Hong Kong as in the UK), practitioners have encouraged parties to attempt mediation because an unreasonable refusal to mediate may result in costs sanctions. However, it should be noted that not all winning parties who refuse to enter mediation face costs sanctions. The threshold for the Court to deviate from its normal costs order is quite high.

This case serves as a reminder of the factors which contribute to “unreasonable refusal”, namely the nature of the dispute, the merits of the case, the extent of attempted settlement

methods, the costs of ADR, prejudice caused by delay and the reasonable prospect of success of ADR. Parties should be reminded that these factors are not exhaustive but fact sensitive. It is notable that the Court held that ADR processes may not be appropriate in every case. Although mediation offers flexibility which traditional litigation does not offer, it could have disadvantages. The Court stressed that there is no presumption in favour of mediation and the question whether a party has acted unreasonably in refusing ADR must be determined having regard to all the circumstances of the particular case. Parties should therefore carefully consider the six factors identified by the Court and other relevant factors in determining the option of ADR.

One thing which is notable is the Court’s discussion on without prejudice discussion compared to mediation in this particular situation. It is not suggested that all parties should attempt without prejudice discussions rather than mediation but the stage of the litigation that parties are at plays a vital factor. In this case, the parties were less than 20 working days before the hearing. The Court viewed mediation as more expensive and favoured without prejudice discussions. The Court adopted a pragmatic approach to settlement negotiations and parties are reminded to do the same when making decisions on ADR and without prejudice discussions.

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[High Court of England and Wales, Chancery Division, Community Trade Mark Court – Claim No. HC08C03440]

Interflora, Inc and Interflora British Unit Claimant

– and –

Marks and Spencer plcDefendant

Judgment of the Chancery Division, Community Trade Mark Court (Arnold J) dated 21 May 2013

Intellectual Property – Trade mark infringement – Internet keyword advertising

The FactsIn 2008, Google changed its trade mark policy relating to keyword advertising in the UK. Previously, advertisers using Google’s “AdWords” service were not able to bid on trade marks of which they were not the proprietor, with the result that if an internet user searched for a trade marked term, only sponsored adverts placed by the proprietor would appear. From 5 May 2008, Google changed its policy in the UK and Ireland to allow advertisers to bid on any trade marks.

The Claimants (“Interflora”) own and use registered UK and European Community trade marks for the word “interflora”. On the day the policy changed, the Defendant (“M&S”) began bidding on the term “interflora” as well as on misspellings such as “intaflora” and related terms such as “interflora flowers”. Based on M&S’ use of these terms in its keyword advertising on Google, Interflora issued trade mark infringement proceedings against M&S in December 2008.

It was undisputed between the parties that they both had substantial reputations in the UK. Operating since 1912, Interflora is the UK’s largest flower delivery network, with around 1,800 members, mainly made up of local high street florists but also operating via commercial partnerships with the likes of Tesco, Hallmark, Thorntons and The Co-operative Funeral Service. M&S is one of the best known retailers in the UK, where it has traded since the 1890s and has over 700 stores. However, while Interflora’s reputation relates almost exclusively to flowers, M&S’ flower business is a small part of its offering and its reputation covers a much wider selection of goods and services.

As this dispute raised questions of general importance relating to whether and how keyword advertising could constitute trade mark infringement, Arnold J referred questions to the Court of Justice of the European Union (“CJEU”) (at the time known as the European Court of Justice) in 2009. The CJEU handed down its judgment in September 2011, deciding that keyword advertising can constitute trade mark infringement if the reasonably well-informed and reasonably observant internet user cannot tell from the advertiser’s advert, or can only tell

with difficulty, that there was no economic connection between the advertiser and the trade mark proprietor (the “internet user test”). The answer to the internet user test therefore was determinative of the issues in the case.

Interflora’s case was based on:

(i) infringement by M&S due to the fact it had used without consent an identical sign to Interflora’s registered trade marks for identical goods and services, under Article 5(1)(a) of Directive 89/104/EEC (now 2008/95) (the “Directive”) and Article 9(1)(a) of Council Regulation 40/94/EC (now 207/2009) (the “Regulation”); and

(ii) infringement by M&S due to its use of an identical and/or similar signs for identical goods and services under Article 5(2) of the Directive and Article 9(1)(c) of the Regulation whereby such use without due cause took unfair advantage of, or was detrimental to, the distinctive character or repute of the Interflora trade marks.

The CJEU ruled that infringement would be found if the use by M&S had an adverse affect on either the “origin function” of Interflora’s mark (i.e. the ability of consumers to distinguish Interflora’s goods and services from those of others such as M&S) and/or the “investment function” of Interflora’s marks (i.e. damage to the reputation of its marks, such as damage to Interflora’s brand image). However, the CJEU ruled that there could be no adverse affect on the advertising function of the Interflora trade marks as a result of the conduct about which complaint had been made.

The CJEU also ruled that Interflora’s claim would succeed if Interflora could show that the internet user test had been satisfied, i.e. that reasonably well-informed and reasonably observant internet users could not tell, or could only tell with difficulty, whether the M&S advert which appeared in response to an internet search for “interflora” (and related terms) came from M&S or Interflora.

Between the CJEU’s ruling in September 2011 and the judgment of the High Court in April 2013, Interflora made two case management applications (both of which were appealed to the Court of Appeal) for the admission of witness evidence from survey subjects to support its submissions relating to the internet user test. As result of the Court of Appeal decisions, new guidance was given as to the admissibility of this type of evidence. Such evidence was only inadmissible if the evidence has “real” value and the cost of obtaining it was proportionate in all the circumstances. On the facts of this case, the evidence was found not to be of sufficient value and so the case proceeded to trial without hearing any evidence from members of the public.

The JudgmentThe judgment was decided in favour of Interflora on the question of infringement under Article 5(1)(a) of the Directive and Article 9(1)(a) of the Regulation. Arnold J ruled that Interflora had satisfied the internet user test, i.e. the reasonably well-informed and reasonably observant internet user was not be able to tell from

11


M&S’ advert that Interflora and M&S are not economically linked. However, Arnold J decided that Interflora’s claims under Article 5(2) of the Directive and Article 9(1)(c) of the Regulation failed.

Arnold J made clear that he was required to put himself in the position of the reasonably well informed and reasonably observant internet user and then apply as best he could the internet user test. He decided that on the evidence before him,

which included academic articles and studies as well as empirical analysis such as that found in the reports of Ofcom (the UK’s communications regulator), that a significant proportion of internet users would not be able to tell from whom the M&S adverts came and therefore there was an adverse affect on the origin function of the marks. Accordingly, he ruled that there was trade mark infringement.

Commentary by Iain Connor Partner Pinsent [email protected]

and

Leila Panesar Solicitor (England and Wales)Pinsent [email protected]

The nature of Interflora’s brand was important to the decision in this case. The fact that Interflora operates as a network of co-branded shops which operated under both their own name and the Interflora brand, and Interflora worked with other retailers such as Tesco and The Co-operative Funeral Service, increased the likelihood that internet users might think that M&S was part of Interflora’s network, or working with Interflora in some way. The fact that Interflora’s case was successful is likely to encourage other trade mark proprietors to protect their marks against keyword advertising by competitors and proprietors will no doubt assert the particular qualities of their own brands to demonstrate why keyword advertising has an adverse affect on the functions of their brands.

Arnold J’s decision was founded on the basis that a “significant proportion” of internet users do not appreciate that the search results pages show sponsored adverts that come from advertisers who are unrelated to the searched for brand. The fact that Arnold J used the wording “significant proportion” and simultaneously decided that a “majority” of internet users would in fact know that the advert came from a competitor confirmed the traditional UK view that a finding of trade mark infringement only requires there to be some “confusion” in the market and that it is not an empirical test requiring more people than not to be confused by the actions of the defendant.

Arnold J tried to distinguish between the confusion test required under Article 5(1)(b) of the Directive and Article 9(1)(b) of the Regulation and the confusion test in the form of the “internet user test” under Article 5(1)(a) of the Directive and Article 9(1)(a) of the Regulation. In his view the CJEU could not have meant that the test which applies to “double identity”

(an identical sign to Interflora’s registered trade marks for identical goods and services) was the same as that which applies elsewhere in EU trade mark law.

Arnold J made the point that although M&S could have conducted consumer research surveys, it had adduced no evidence to show that it was generally known by consumers of flower delivery services in the UK, in May 2008 or now, or that M&S’ flower delivery service was not part of Interflora’s network. M&S’ strategy following the CJEU ruling and the implementation of the internet user test appeared to have been to knock out the survey evidence adduced by Interflora, as it successfully did twice at the Court of Appeal, rather than adducing its own survey evidence in its defence.

Overall, on the facts of the case, Arnold J made clear that he preferred the evidence of Interflora.

Some of the evidence adduced by Interflora relating to consumer perceptions of search results pages showed that consumers did not understand the differences between paid for advertisements on search results pages and the so called “natural” or “organic” results. The judgment records that this evidence was supported by one of M&S’ own witnesses, who works in consumer research and who said under cross-examination that he thought that a lot of customers do not know whether they have clicked on a paid advert following an internet search. The question of what internet users really know or understand about keyword advertising was crucial to this case given the importance of the internet user test.

In addition, due to the wording of the internet user test, which focuses on the ability of the advert in question to “enable a reasonably well-informed and reasonably observant internet user...”, there is an implication that the onus is on advertiser defendants to ensure that their adverts are sufficiently clear. Decisions in other national courts across Europe were referred to by both parties at trial and summarised in the High Court judgment. The summary shows that cases are consistently decided on the particular facts of the case with some going in favour of the trade mark proprietor and some going in favour of the advertiser. It will be interesting to observe from cases decided in the future whether any particular type of adverts prove to be sufficiently clear to ensure that internet users are not confused such that a pattern develops in the area of keyword advertising.

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Notes

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