Protect Yourself from Copycats

by Alex McKnight

For most businesses, goodwill is one of its most valuable assets, particularly if the business is well established with a good and distinct reputation, and a widely known and recognised trading style. It is always important to ensure that this asset is properly protected by, for example, registering any trademarks. In the real world, this does not always happen. Furthermore, not all aspects of this asset are capable of being protected in this “before the event” way, leaving them vulnerable to attack by copycat competitors and/or new entrants into market.

If the acts of a third party, whether deliberately or innocently, confuse customers into believing that the goods and/or services they are buying are those of another business, their activities, if left unchecked, could have serious consequences for that business. In legal terms, this activity is known as “passing off.”

“Passing off” with fake branded goods or services could eventually erode the value of the genuine asset by damaging the owner’s reputation by selling sub-standard goods in their name. There is also a risk that volume of sales of the authentic product will be affected by price undercutting.

The court will intervene to protect a claimant business that is threatened in this way by requiring the third party to refrain from “passing off” its business as the claimant’s, and it may also award damages. However, the court will only provide a remedy to a claimant business in certain circumstances.

The claimant needs to establish a sufficient degree of customer connection to, and recognition of, its business and reputation. Put another way, it needs to show that its reputation is sufficiently well established and distinct such that its potential customers are aware of its good name. Evidence from existing customers may be a good indication of this, as would, for example, evidence of any advertising/marketing activity that has taken place over the years.

Geography is a factor here: for example, a court may be unwilling to intervene to protect a Cumbrian claimant, whose business is local, against the actions of a third party that are taking place in another part of the country.

If the claimant is able to prove customer connection/recognition, the next hurdle is to demonstrate that the third party’s activities are likely to confuse potential customers into believing that the goods and/or services they are buying are those of, or are in some way linked to, the claimant. The most common indicators of likely confusion are the third party’s use of a trade mark, trade name, or trading style with which with the claimant’s goods and/or services are associated by potential customers. The trading style may be comprised of, for example, the shape of the goods, the use of similar decorations for premises, similar livery for employees and vehicles, or similar advertising slogans or themes. It is important that more then simply copying the claimant’s trading style, the third party’s activities are likely to have a definite and material influence on the actions of potential customers. Also, the court will not intervene if the third party’s actions simply amount to copying of the claimant’s trading style. It will only intervene if that copying causes customers to believe that they are buying the claimant’s good and/or services. Put another way, the court will allow a third party to attempt to enter and derive profit from a market that has been created by the claimant. The third party’s actions will be regarded by the court as legitimate unless customers think they are purchasing the claimant’s good and/or services.

The final hurdle is proof that the third party’s activities have caused and/or will cause substantial loss to the claimant if left unchecked. The loss is most likely to be lost profits caused by the diversion of business from the claimant to the third party, but the claimant may also suffer loss if the thirds party’s poor reputation and/or the inferior nature of its goods and/or services are wrongly ascribed to the claimant and its goods and/or services. Where the third party is an obvious competitor and rival of the claimant, the court will readily infer loss without the claimant needing to go to great lengths to prove that loss has occurred and/or will occur.

Some cases can be straight forward but many are not and it is important to bear in mind that the court will only provide a remedy if all three components are proved to its satisfaction and the burden of proof is on the claimant.

Typically, the remedy the court will grant will be an injunction to restrain the third party from continuing the activities that have been found to amount to passing off. If the third party ignores the injunction, the court will regard its conduct as amounting to a contempt of court, the ultimate sanction for which is imprisonment.

In many cases, the claimant will be satisfied with an injunction and the case will end there. However, if the claimant considers it has suffered a loss as a result of the third party’s activities, then, in addition to an injunction, the court will also order an “inquiry into damages”, which is a hearing to determine the amount of the loss sustained by the claimant. In most cases, this element of the case is usually capable of being resolved by the parties “out of court” by way of mediation or other less formal means of dispute resolution.
 
The internet is now a well established tool of business and this development, whilst bringing many advantages, is also the cause of new problems, specifically, in this context, the practice that has become known as “cyber-squatting.” This takes place where a third party registers a domain name that is similar to the claimant’s domain name.

If the third party’s use of a domain name is likely to confuse the claimant’s customers in the manner set out above, then the court is likely to restrain the third party’s actions by granting the claimant an injunction. In this situation, the court will regard the domain name as an instrument of deception. However, the first port of call in such cases is the relevant internet registry, for example, in the UK, Nominet is the registry for “.uk” domains, who may be able to offer a dispute resolution service that is just as effective as a court imposed injunction without the need for the claimant to engage solicitors and commence court proceedings.

Therefore, the court is very likely to intervene to protect a claimant business’ goodwill if it is satisfied that the claimant has a good and distinct reputation, that customers believe they are buying the claimant’s goods and/or services when they are actually buying a competitor’s, and that the claimant has suffered, or will suffer, a loss, as a result. As with any potential legal dispute, swift action generally is the best way to maximise the possibility of an early, positive, and commercial resolution.

Alex McKnight is an Associate Solicitor at Burnetts Solicitors specialising in civil litigation.  For further information about protecting your business from copycats, contact Alex on 01228 552222. 

Mar 2006