UK COURT DIARY

The Bad Faith Cocktail Combining the Objective and Subjective Tests

Is it possible to act in bad faith without realising that what you are doing is wrong? The Court of Appeal recently examined this issue in Harrison v. Teton Valley Trading Co. The impact of that judgment has already been felt in Trade Marks Registry decisions on intention to use. Its real importance, however, is in its having laid to rest, at least temporarily, fitful years of legal uncertainty as to what it means to act in bad faith.

The facts of Harrison were simple. A new London nightclub opened in 1998 to critical acclaim under the name CHINAWHITE. The club’s manager instructed the bar manager to develop a signature cocktail, white in colour, and oriental in flavour, to be served at the club under the name CHINAWHITE. The bar manager signed a confidentiality agreement concerning the recipe in December 1998, around which time the new cocktail was introduced at the club.

Just before signing the confidentiality agreement, the bar manager approached the applicant. He claimed that he had developed a new cocktail called CHINAWHITE which was to be served at a new club just opening under the same name. He stated that he was not bound by any formal agreement and mixed the drink for the applicant to taste. The applicant saw a commercial opportunity, and after trade mark and company name searches disclosed no hits, proceeded to apply for CHINA WHITE as a trade mark in respect of alcoholic and non-alcoholic beverages. He also incorporated a company, China White Ltd., with the barman as a director.

Teton Valley, owners of the club, opposed the trade mark application under S. 3 (6) of the Trade Marks Act 1994, which provided that an application to register a trade mark shall not be registered if, or to the extent that, it was made in bad faith. The Trade Marks Registry and, on appeal, the High Court, affirmed that the application had been made in bad faith. On further appeal to the Court of Appeal, however, the applicant argued that the finding of bad faith was an error, because the applicant had believed the barman and therefore believed himself to be entitled to apply for the mark. As the applicant’s state of mind had not been dishonest, he argued that he could not be regarded as having acted in bad faith.

As fundamental as it seemed, the relevance of an applicant’s state of mind to the assessment of bad faith was unclear. The High Court had considered the nature of bad faith in Gromax Plasticulture Ltd. v. Don & Low Nonwovens Ltd. [1999] RPC 367 at 379, in which Lindsay J. described bad faith as including dishonesty “and some dealings which fall short of the standards of acceptable commercial behaviour observed by reasonable and experienced men in the particular area being examined.” That appeared to leave as an open question, however, whether behaviour which the applicant thought was acceptable, but which in fact was not, should be regarded as manifesting bad faith.

The extent to which a state of mind was relevant in assessing dishonesty had, however, been examined by the House of Lords and the Privy Council, in Twinsectra Ltd. v. Yardley [2002] 2 AC 164 and Royal Brunei Airlines Sdn Bhd v. Tan [1995] 2 AC 378, respectively. In Royal Brunei, the Privy Council had found that “an honest person would have regard to the circumstances known to him, including the nature and importance of the proposed transaction [and] … of his role, the ordinary course of business, the degree of doubt…. Ultimately, in most cases, an honest person should have little difficulty in knowing whether a proposed transaction, or his participation in it, would offend the normally accepted standards of honest conduct.” This was a strong indicator that what mattered was not so much the actor’s own moral code, but what he knew of how the proposed act would measure up against the accepted moral code of others.

Twinsectra removed all doubt by holding that the test for dishonesty was not whether the defendant considered that he had acted improperly, because that would exclude from legal consequences those who had lower than average moral standards. The test instead was a combination of whether the behaviour in question was dishonest by normal accepted standards, and whether the defendant had realised it. Their Lordships termed this “the combined test.”

Although the combined test was derived for use in assessing dishonesty and not bad faith under S. 3 (6), its relevance in assessing bad faith had nevertheless been considered in Trade Marks Registry proceedings. In DAAWAT Trade Mark, an invalidity proceeding decided by Geoffrey Hobbs, QC acting as the Appointed Person in 2002, ([2003] RPC 187), Mr Hobbs QC had dismissed the “combined test” on the grounds that “conscious dishonesty” of the type that it appeared to require was not a prerequisite of S. 3 (6) bad faith. In that case, the applicants had applied for a mark knowing that it belonged to another company and that the filing would enable them to stop that other company from marketing their goods in the U.K. without permission. However, the hearing officer had accepted that the applicant (who had not been cross-examined) did not see anything wrong in its behaviour. By finding that the combined test did not apply, the Appointed Person concluded that even though the applicant considered its behaviour justified, it was nonetheless reprehensible by ordinary commercial standards, and was therefore in bad faith.

In Harrison, as in DAAWAT, much turned on the applicant’s view of his conduct. The applicant’s views were perhaps better understood than in DAAWAT, where cross-examination, had it taken place, may have drawn out a fuller account. Nevertheless, what was clear in Harrison was that the applicant had been confident that the bar manager had been entitled to confer rights in the CHINAWHITE cocktail recipe, and that the applicant therefore thought his conduct in filing the application was justified. It was equally clear that the applicant had known about the CHINAWHITE club, that the drink had been developed for sale there, and that the barman offering the recipe was not the owner of the club. It was common ground that the application would have been made in bad faith if the circumstances were such that an honest person would not have applied for the mark without making further enquiries.

The Court of Appeal considered the approach taken in DAAWAT, as well as the judgment in Twinsectra. It was persuaded that the combined test, although derived initially for use in a different area of law, was nevertheless appropriate guidance for the assessment of bad faith. The words “bad faith,” Sir William Aldous held, “suggest a mental state,” and therefore it would be necessary to show that an applicant acting in bad faith understood that his behaviour would offend acceptable standards of commercial behaviour before a finding could be made out. Although the result in DAAWAT was approved, the reasoning, insofar as it rejected the combined test, was not.

In this case, the Court proceeded on the basis that a person in the applicant’s position, having been approached by the barman of a new club and offered the recipe for the club’s new signature cocktail, would, if adopting proper standards, have made enquiries to establish the truth of what he had been told before applying to monopolise a trade mark which on the known facts appeared very likely to have been derived for use by another. Nothing on the facts suggested that the applicant had not understood those proper standards and what would be considered normal and acceptable commercial behaviour. The Court found that there was a consensus, which it approved, that “seeking to monopolise another’s trade mark and other unfair practices would render an application invalid for bad faith.”

The applicant was thus found to have acted in bad faith, regardless of his personal view that his action was justified. The application was accordingly rejected.

 

The Immediate Impact

After 2 years of uncertainty following DAAWAT, the certainty of the combined test in Harrison is welcome. Its impact will be felt mainly in cases where it is clear that acceptable commercial standards of behaviour have been breached, however. Where that cannot be made out, the tribunal will not move on to consider the applicant’s state of mind—no finding of bad faith will be made.

This is clear from recent cases on whether over-claiming in specifications, and lack of intention to use “as a trade mark,” can constitute bad faith. Both points were considered by Prof. Ruth Annand, acting as the Appointed Person, in a decision handed down only 3 days after Harrison on a series of oppositions by supermarket chain Asda to applications by rival chain Tesco for marks including TESCO WE SELL FOR LESS, TESCO PEOPLE MAKE THE DIFFERENCE, TESCO EVERY DAY LOW PRICES, and others in that vein (O-256-04).

Asda argued that Tesco had filed in bad faith because it had no bona fide intention to use the marks for all goods and services claimed, and could not moreover use them “as trade marks,” but rather only as pricing slogans.

In her decision the Appointed Person endorsed the combined test and under its first arm found that it was not unacceptable commercial behaviour to claim protection for goods and services not strictly part of the applicant’s business or interest (“over-claiming”), in circumstances where it was done to ensure adequate protection in the event that the registrability of marks for retail services (which would more accurately have described most of Tesco’s activities) was undermined following the awaited decision of the ECJ in Case C-418/02, Praktiker Bau-und Heimwerkermarkte AG. Consequently, Tesco’s “state of mind” in filing was not considered, and the oppositions based on bad faith were rejected.

Matters may have been different if Asda had shown that Tesco had no bona fide intention to use the marks. In a hearing officer decision handed down on 12 October 2004, an opposition by Unilever to three-dimensional detergent tablet shape applications of Henkel succeeded on such grounds (O-311-04). Unilever successfully argued that the sheer volume of the different soap tablet shape applications filed by Henkel over a 2-year period (150 U.K., CTM and IR applications), coupled with the lack of any known use of any of them in the U.K., raised a prima facie case of bad faith. Henkel filed no evidence contesting the allegations, which it declined to admit. The hearing officer found that applying for trade mark monopolies without an intention to use as required by S. 32 (3) was unacceptable commercial behaviour, and that he was entitled to infer bad faith where a prima facie case had been raised and the applicant could, but did not, offer any evidence to contest it.

Although the hearing officer did not expand on the application of the combined test, he did endorse it. Hence, once he had found that seeking a trade mark monopoly without an intention to use was unacceptable commercial behaviour, he could only find bad faith if he was satisfied that Henkel was aware of that, regardless what its own corporate standards might be. The hearing officer went on to make that finding.

 

Comment

Among those who prefer the moral certainty of the more objective DAAWAT approach, it might initially be feared that the Harrison combined test provides a way out for those who have acted unacceptably, but can show that, for some reason, they were not aware that the conduct breached prevailing standards. However, this is unlikely to be so.

For example, it is difficult to imagine any case of trade mark filing without a bona fide intention to use, where the applicant could reasonably be said to have been unaware that such conduct falls short of acceptable commercial standards. Trade mark filings are applications for commercial monopolies, made by commercial people. Their grant entitles the holder to limit the commercial activities of others. Tribunals are likely to view the acquisition of such rights without any underlying commercial interests as plainly unacceptable. Claims that businessmen are not aware of those standards are likely to be met with considerable judicial scepticism.

The judgment in Harrison balances the requirement of a mental state implied by S. 3 (6) with the practical need for an objective, commercial assessment of the activity under scrutiny. The resulting cocktail is no small beer; but rather a welcome tonic settling some uncertainties that had long prevailed in this corner of law. Whether and how the combined test can do justice in those rare cases where there really is an argument that unacceptable behaviour was not recognised, remains to be seen.