Wednesday, April 11, 2007

Sabotage marketing as unlawful competition in South African lawBy Wim Alberts
After years of planning and development by production and design specialists, A, a food producer, is ready to launch a new product. To be on the safe side, A’s trade mark attorneys are instructed to file a trade mark application as soon as the product name is decided on. This occurs two years before the intended launch date. At an advanced stage of development, rumours about the new product surface in the industry. B, a competitor of A, decides to launch his own product, using a confusingly similar name. A obtains legal advice to the effect that he cannot rely on trade mark infringement for probably another two years, having regard to the administrative position at the office of the Registrar of Trade Marks. The remedy of passing-off is also not available as the product of A has not been on the market, and has accordingly not yet established a reputation. Moreover, in response to a letter of demand from A’s attorneys, B allege that A’s mark is descriptive. Will A thus not have a remedy? To answer this question, the case law on this point must be examined.
Must a product be on the market?
A label of a competitor was obtained prior to the launching of a product in Stellenbosch Wine Trust Ltd v Oude Meester Group Ltd. 1972 (3) SA 152 (C). In this matter A decided to market a wine under a particular label. An extensive advertising campaign was planned for the 31st of January 1972, but on the 19th of January 1972 B commenced marketing of a product which was said to bear a remarkable resemblance to the label of A. B argued that the product had, at the relevant time, not yet been marketed and that the label concerned had accordingly acquired no reputation (page 159 H).
The conduct of B was held to amount to passing off. The court also considered that B competed unlawfully by taking information which it knew to be secret and confidential (page 162 A). The view has however been expressed, by Van Heerden and Neethling, Unlawful Competition (1995) 172 that it was not correct to have ruled that passing off was involved:

"It is, however, doubtful whether this is a case of passing off in its traditional sense. As a matter of fact, the applicant could not acquire a right to the label as distinctive mark before his wine was marketed, since the label did not have any distinguishing value at that stage. The label would only have individuated the wine – in other words, enabled customers to distinguish the wine from other wines – when it was placed on the market. Accordingly, the respondent could not have created the misrepresentation that his wine was the wine of the applicant; passing off his wine as that of the applicant was therefore out of the question."

The product concerned was also not yet on the market in Pepsico Inc v United Tobacco Co Ltd. 1988 (2) SA 334 (WLD). A was the owner of the trade mark Ruffles used in relation to potato chips. This product was introduced to the major retailers by way of advertisements and thereafter by advice and information to them in preparation for the marketing of the products. Factory equipment was purchased, which was used to make samples for testing for quality specifications. Thereafter the introduction of suitable packaging took place, as well as the development of an advertising strategy and sales merchandising which related to equipment for the presentation and sale of the product in retail outlets. The court indicated (page 343 I) that these activities, in themselves, would not have been an introduction into the market (having regard, inter alia, to the Carling National Breweries Incorporated v National Brewing Company decision Patent Journal December 1979 page 126 - discussed below).
B adopted the approach that it had entered the market prior to A’s launch, that there was no reputation amongst end-users, and that, consequently, there was no passing off. The court analysed the facts (page 346 D – I ) and concluded that the consideration that the product had not gone through to the final consumer is not a disqualification. There was a reputation in some sectors of the market. It was also mentioned that the facts of the case was distinguishable from that of the Carling decision, where there had been no similar preparation of the market and the retail market to whom the producer was going to sell. The Carling followed a more strict approach. There a beer named Colt 45 was intended for marketing in South Africa. Marketing materials were prepared, strategic studies were done, and a short trial run was conducted. About a week prior to the launching of the beer by the appellants, the respondent advertised its intention to market a product to be called Stallion 54. Advertisements were placed in various newspapers and the product was available at certain liquor stores. The Colt 45 product was not yet available. The court, having dismissed the trade mark infringement action, remarked (page 128) as follows:

"I am equally of the view that the Court a quo rightly non-suited the appellants on their claim based on unfair competition. By the time the respondents placed their product on the South African market, the appellants had, save for a very small trial run, not yet come onto the market. How the fact that a competitor has entered the market which another is as yet only contemplating to do can be labeled unfair competition surpasses my understanding."
To the extent that the Pepsico case can be seen as providing authority for sabotage marketing being unlawful competition even in the absence of actions establishing some form of reputation, it is to be preferrred to the Carling ruling.
The role of motive
In Kellogg Company v Bokomo Co-operative Limited 1997 (2) SA 725 (C) it was alleged that there was a deliberate attempt to prejudice a competitor’s marketing efforts. This matter related to an allegation that B brought forward the launch date of its product so as to interfere with A’s marketing plans. A submitted that B’s launch has been on a very limited scale, that it had no product on which to use its trade mark, and urgently purchased a cereal biscuit from a large chain store, and that the pack design of this product was made in a number of days. It was also said that the only difference between B’s conduct and that of the respondent in the Pepsico case is that the respondent in the current instance alleged that it had plans to launch its product for a long time, which was a distinction not of any significance, and that B’s conduct accordingly offended against the boni mores. B adopted a different approach. It was stated that it had decided to introduce line extensions to its brand and that the line extension plans faltered because of manufacturing difficulties and unavailability of technology. It also stated that it commenced the construction of a manufacturing plant at a cost of more than 60 million rand and that it intended to import products merely until its own manufacturing facility was ready. Having regard to all the factors the court ruled in favour of B, and stated (page 739 E - own emphasis) the following:

"I am, on the facts at my disposal, satisfied that the respondent, by having brought forward the launch date of Nu-bix, was actuated by the advancement of its own economic interests which, generally speaking, is a legitimate motive for acting and not to the detriment of the applicants."
Interference with a marketing campaign was seen not to be necessarily unlawful in the Carling case. It was stated (page 128 – own emphasis) that:

"One realises that in this field, as no doubt in many others, competition amongst rival traders is very keen and that there must inevitably be manoeuvres, sometimes skillfully conducted, to steal a march on a competitor, but that is part of the game, and a practice which in general can only redound to the public benefit. It is part and parcel of our free trade policy. A Court will only interfere if a rival uses methods which are manifestly unfair, and it does so with a weather eye on the public benefit. As long as the rivalry between competing traders is fair, and not to the detriment of the general public interests, a Court should, in my view, leave the competitors to fend for themselves. Should a competitor, through his diligence and foresight, steal a march on a rival competitor, he should not, merely because of that, be censured by a court of law."
This statement is, as a general pronouncement, with respect, open to criticism. When regard is had to the extensive preparations and considerable cost involved in the process of launching a new product it is, arguably, against the boni mores to disrupt same. Usually the name will be changed somewhat, but the underlying motive is to strip the competitor of the benefit of the "novelty" value of the intended new product. The relevance of motive in determining unlawfulness is, of course, well established.

On the other hand, in the Pepsico case, the motive of the defendant was considered to be relevant. After considering the chronology of events, the court answered (page 349 G – J) the question whether the actions of the respondent amounted to unlawful competition as follows:

"In my view, fairness and honesty applied to their actions, manifest those traits by their lack of application by the respondent. With the knowledge that the product was to be launched, they scurried off and prepared a launching on a small scale with the express intention of preventing the applicant from carrying out its prepared introduction and final launch in October of its product. Here the first party who expressed a concrete intention in material form to use the mark, and who acted in taking steps to prepare for the market, actually approached its customers to demonstrate the mark and the product, are the applicants. Once the respondent became aware of this prior use of the mark, which had, in my view, acquired a reputation by its demonstration, it was sharp practice constituting unlawful competition to attempt to pre-empt the applicant’s launch…"

Sabotage marketing also featured in the British decision of Alida Gibbs Limited v Colgate Palmolive Limited [1983] FSR 95. Here A decided in March 1982 to launch a marketing campaign for a new toothpaste, Mentadent, which would be based on a tree theme. A made presentations to the trade in August 1982, and in September it was introduced to the press, professional bodies, and government departments. The public and in particular the television campaign, was to start on Monday, the 18th of October. B became aware of A’s intended public marketing campaign to be launched on the latter date, and on Sunday the 17th of October it placed an advertisement featuring a tree theme in a national Sunday newspaper, and the next day in two national newspapers, in an attempt to pre-empt A’s campaign and to assert their entitlement to the theme in question. On Monday the 18th of October A placed his advertisement in national newspapers. B adopted the approach that on the 17th and the morning of the 18th of October, A had no reputation amongst the general public to the tree theme and could not positively have acquired it because its television programme did not begin to show until some later time on the 18th. The court ruled in favour of A, and stated (page 100) that B had no motive of promoting a present trade of its own in the United Kingdom, but only that of defeating the plaintiff’s campaign for some possible future utility to the defendant.
Descriptive marks
Particular problems would be experienced when there is prior use of a mark, but it is of a descriptive nature, as this would normally exclude protection on the basis of passing off. This would be the position because, if the mark is descriptive, it would be unlikely that it would have built up a reputation at the date that the respondent commenced use of the mark. The existence of a reputation at that date is a sine qua non for liability. However, can reliance be placed on the general ground of unlawful competition? The approach of the courts is reviewed briefly below.
Sea Harvest Corporation (Pty) Limited v Irvin & Johnson Limited 1985 (2) SA 355 (C) dealt with the use of the words "prime cut" in relation to fish products. Reliance was not placed on passing-off, but on unlawful competition. A indicated that it was the first South African producer of frozen fish to use the words "prime cut." It has also spent a substantial amount of money promoting the sale of its products. Furthermore, its marketing campaign had been very successful, and B’s conduct would result in loss to A. It also indicated that there were various other phrases that B could use, but it chose to use the words "prime cut," because B wished to share in A’s success without having to invest financially. Accordingly, it was submitted that B’s conduct amounted to a deliberate misappropriation of a business asset of A.
The court made (page 361 D – E, own emphasis) the following statement in regard to whether the use of a descriptive word can be unlawful in view of the intention of the respondent:

"[W]hile that may sometimes be a factor to take into account, it is not sufficient to render respondent’s conduct "unlawful competition" in this particular case. Our law recognizes the freedom to trade competitively, and competition more often than not involves a deliberate intention to benefit oneself at the expense of a rival business."
A different approach was followed in Appalsamy v Appalsamy 1977 (3) SA 1082 (D & CLD). Here A was involved in the business of manufacturing and repairing geysers under the name City Geysers. B commenced use after A of the name City Geysers Manufacturers. With regard to the relevance of the respondent’s motive, the court made (page 1086 F – H, own emphasis) the following statement:

"The enquiry is thus…whether the applicant, in the absence of proof that the descriptive words have acquired a secondary meaning, has nevertheless shown a passing off. One of the relevant considerations in this regard is the nature of the respondent’s conduct and more particularly the reasons for adopting the name City Geyser Manufacturers. If, in choosing this name, the respondents were actuated by an intention to deceive, the Court will not be astute to find that they have failed or will fail in the object … While their [the respondents] conduct, prima facie suggests bad faith I do not think that it would be proper to hold, in the absence of viva voce evidence, that the applicant has proved that they acted mala fide…"
In regard to the question whether an ulterior motive could provide the basis for protection of a non-distinctive mark, it is important to bear in mind the decision in Bress Designs (Pty) Ltd v GY Lounge Suite Manufacturers (Pty) Ltd. 1991 (2) SA 455 (W). Here the court took into consideration the fact that the respondent’s actions had as their sole or dominant purpose the infliction of harm for its own sake. In this decision protection was granted although the shape of the product concerned, a sofa, was not of a distinctive nature. It is submitted that an analogy can be made with the position of a descriptive mark.
It is of value in this regard to consider the views of Van Heerden and Neethling who deal with situations where the lawfulness of the conduct of the second user of a descriptive mark is revoked. This would be where the second user’s purpose is to pass off his goods as that of the first user. This will, prima facie, be in conflict with the competition principle. They describe (Unlawful Competition 174 note 149) another instance as follows:

"[T]his occurs where the second user’s exclusive aim is to injure the first user by his conduct. Because of the obvious absence of a legitimate interest on the part of the perpetrator in utilising the descriptive words – and here, as has been argued earlier…his improper motive is a strong indication of his lack of interest and therefore the unreasonableness of his act – his infringement of the first user’s [descriptive] mark is branded unlawful."
It appears that the courts have been prepared to grant protection, albeit that the relevant product has not been available on the market. Thus, in the Stellenbosch Wine Trust case, passing off was found to have occurred. The lack of a market presence, or rather the lack of a presence amongst end consumers, was also held not to exclude protection in the Pepsico decision. In contrast, in the Carling decision, the absence of a presence on the market was fatal to the applicant’s case.
In relation to the motive and the possible unlawfulness of the pre-emption of a competitor’s marketing campaign, it was held in the Kellogg case that where the respondent, by having brought forward the launch date of its product, was motivated by the advancement of its own economic interests, its actions would not be unlawful. In the Carling case it was said that "manoeuvres" may be employed "to steal a march" on a competitor, and such actions were seen to be acceptable in our economic structure, as long as the rivalry remained fair, and was not to the detriment of the public interest. On the other hand, in the Pepsico-case, it was held relevant that the respondent, with the knowledge that the product was to be launched, quickly launched their product with the express intention of thwarting the applicant’s marketing campaign. The British Elida Gibbs case is in line with the latter approach.
The business who plans to launch a product under a descriptive name is confronted with the requirement of the existence of a reputation, in order to be able to rely on passing off. This will, per definition, be absent. The availability of protection against sabotage marketing could thus hinge on the question whether unlawful competition can be established. It is submitted that such a business should, in appropriate circumstances, be able to obtain a remedy on that ground. The reasoning in the Bress Designs and Appalsamy cases, as well as the views of writers such as van Heerden and Neethling, would support this approach, and could come to the aid of A, in the example in the beginning. The views expressed in the Sea Harvest decision can however not be discounted. For one, that not all forms of "interference" are unlawful.