Advocate general issues opinion on seizure of goods in transit by Customs

European Union
In Koninklijke Philips Electronics NV v Lucheung Meijing Industrial Company Ltd and Nokia Corporation v Her Majesty's Commissioners of Revenue and Customs (Joined Cases C-446/09 and C-495/09, February 3 2011), Advocate General Cruz Villalón has stated that goods in transit or temporary storage cannot automatically be considered to be counterfeit and, therefore, seized by Customs, without sufficient grounds for suspecting that the goods are to be put on the market in the European Union. However, "suspicions" based on circumstantial evidence and lack of detail in customs declarations may be sufficient to trigger seizure.
The cases - Philips Electronics, referred by the Belgian court, and Nokia, referred by the English Court of Appeal - were joined by the Court of Justice of the European Union (ECJ) as both references posed questions concerning the interpretation of the EU legislation governing action by customs authorities against possible infringements of IP rights where goods were in the ‘external transit’ procedure.
The external transit procedures allow the movement of non-Community goods from one point to another within the customs territory of the Community without such goods being subject to import duties and other charges or to commercial policy measures (in accordance with Article 91(1)(a) of the Community Customs Code, established by Council Regulation 2913/92).
Nokia involved the EU Customs Regulation (1383/2003). Philips was referred in relation to the previous regulation, Council Regulation 3295/1994. Both regulations provide for initial action by Customs to detain the products followed by an opportunity for the right holder to lodge an application for action and the commencement of proceedings in relation to counterfeit or pirated goods.
The advocate general set out the stages of seizure of infringing goods:
  • The first "preparatory" stage begins when, in light of "sufficient grounds for suspecting" an infringement of IP rights, the customs authorities adopt "prior measures" consisting of suspending the release of the goods or detaining them (for three working days).
  • The second stage starts when, on application by the holder of the right which has allegedly been infringed and where those suspicions persist, the customs authorities confirm that they have suspended release of the goods or detained them.
  • The third and final stage: (a) the owner of the goods seized relinquishes them, and they may be destroyed under customs control; (b) within 10 days of notification of the action in the second stage, the holder of the right allegedly infringed applies to the "competent authority" (normally a court); or (c) the right holder does not take action within that 10-day period (if neither (a) or (b) takes place), in which case the goods are released.
The two cases involved different types of IP right - copyright and registered designs in Philips (counterfeit shavers) and trademarks in Nokia (counterfeit phones). Nokia was based on the lawfulness or otherwise of the actions of the HM Revenue and Customs in suspending the detention of the goods on the grounds that there was no actual or real infringement of the trademark (because the goods would not be put on the market in the European Union). Philips involved an application for a ruling that infringement had occurred in relation to goods in transit.
Nokia was a case at the second stage, and the question referred had to be answered in that context: whether, at this stage, the customs authorities must have some proof that those goods are to be traded on the EU market in one way or another in order to have the right to detain them. Philips involved the third stage: whether the proof that goods are to be traded in the European Union is essential to a finding that the right have been infringed.
In Nokia, the UK customs authorities had refused Nokia's application for seizure of some apparently counterfeit goods (mobile phones bearing Nokia’s marks coming from Hong Kong), arguing that their destination was Columbia and that there was no evidence that they were going to be diverted onto the EU market (for further details please see “Goods in transit are not 'counterfeit', says court”). The Court of Appeal asked the ECJ whether this likelihood of diversion was a matter which it is essential to establish in order to classify goods as counterfeit for the purposes of the customs legislation and, therefore, for the customs authorities to be able to detain those goods.  
The conclusion of the advocate general in response to the English court's reference was that there can be seizure of goods in transit only if there are:
"sufficient grounds for suspecting they are counterfeit goods and, in particular, that they are to be put on the market in the European Union, either in conformity with a customs procedure or by means of an illicit diversion."
It is not for the customs authorities to decide definitively whether any IP rights have been infringed. Their actions are a preventative measure and, as such, are provisional in nature and not dependent on a finding of infringement.
Excessive evidential requirements could render these customs procedures unworkable. Suspicions should be sufficient, as long as they are genuine, to set in motion preventative action by the customs authorities. To require more would not meet the breadth of ambit of the regulations defined by Article 1 of the Customs Regulation. The existence of "suspicion" is enough to satisfy the requirements of Article 2.
However, what does suspicion entail? The advocate general's opinion was that:
"for the customs authorities to be able lawfully to seize goods in transit subject to their control, they must at the very least have 'the beginnings of proof', that is to say some evidence that those goods may in fact infringe an intellectual property right."
One of the most difficult things for customs authorities to assess is the destination of the goods. To that end, said the advocate general, in the assessment of whether there are sufficient suspicions, particular account should be taken of the danger of fraudulent entry of goods into the European Union. In assessing this danger, and whether it so great as to make it possible to classify the goods as suspected of infringing an IP right, the advocate general gave some guidance as to the circumstances that might create a legitimate suspicion.
Evidence of such circumstances could, in particular cases, "lend substance to a well-founded suspicion that goods appearing in themselves to be 'counterfeit' or 'pirated' are to be placed on the market of the European Union" and, therefore, provide a legitimate basis upon which to found any seizure of the goods by the customs authorities.
The ECJ may or may not agree with the advocate general's suggestions. It is hoped that it will give further guidance on the circumstances that could indicate sufficient suspicion of entry onto the EU market.
In Philips, the Belgian customs authorities discovered shavers from Shanghai which had been declared under the temporary import arrangements without declaring the country of destination of the goods. Philips claimed that its IP rights had been infringed (under Article 6(2)(b) of the 1994 Customs Regulation). It claimed that there was a type of "legal fiction" that applied (that the goods are treated as if they had been manufactured in the member state in which they were being held by Customs) - an elegant circumvention of the evidential burden of demonstrating that the products would be traded in the European Union. The advocate general referred to this as the "production fiction". The referring Belgian court asked the ECJ whether this fiction should be applied, and the temporary storage or transit status of the goods ignored.
The advocate general's opinion was as follows:
  • The temporary storage/transit status could be taken into account. This did not in itself involve any marketing of the goods in question and did not, therefore, infringe the rights involved.
  • The "production fiction" could not be constructed from Article 6(2)(b) of the 1994 Customs Regulation.
  • Philips’ interpretation went beyond the objectives pursued by the 1994 Customs Regulation. It would mean that it was not possible to use any sort of temporary storage or transit procedure regardless of the intended destination of the goods.
The preamble to the 1994 Customs Regulation talks about counterfeit/pirated goods being prevented from being placed on the market and measures adopted to that end to deal effectively with this unlawful activity without impeding the freedom of legitimate trade. This, said the advocate general, reflected the legislature's wish to render the content of the customs rules compatible with the ordinary rules for the protection of IP rights based on "use in the course of trade".
The earlier law did not support the "production fiction" either, said the advocate general.  The advocate general sought to distinguish the Polo/Lauren and Rolex cases (where the 1994 Customs Regulations were held applicable to non-Community goods in transit to a non-member state without particular reference to any need to prove that they were destined for the Community market; which cases where heavily relied upon by the applicants) from the Class International and Montex cases (where the ECJ emphasised the need for actual entry onto the market in relation to a finding of trademark infringement under either the First Trademarks Directive (89/104/EEC) or the Community Trademark Regulation (40/94)) and to confirm that these latter two cases were those that "most accurately reflect this court's position".
If the advocate general's opinion is followed by the ECJ:
  • The seizure of counterfeit goods in transit through the European Union will not be achieved simply by identifying the goods to Customs as counterfeit or pirated, as would be the case if the "manufacturing" or "production" fiction applied.  
  • It may be difficult for brand owners to persuade customs officials to seize allegedly counterfeit goods without evidence (ie, "sufficient grounds for suspecting") that the goods are likely to enter the EU market if no further action is taken. However, the advocate general gave some guidance on the kinds of evidence that could trigger a legitimate "suspicion", much of which is circumstantial in nature. Some may see this as a positive opportunity for rights holders to have goods in transit seized.
  • The "fiction" that goods in transit are to be treated as manufactured in that state (often applied in order to circumvent the need for evidence that they have been or are likely to be put "on the market" in the European Union) will no longer be applied. The advocate general's opinion was that it was not supported by the legislation and was just that - a fiction.  Further, the temporary nature of the transit or storage could and should be taken into account by a court assessing whether the goods are "counterfeit" (in terms of whether they are on the market in the European Union, infringe IP rights, and whether Customs can seize the goods).  
  • Brand owners should consider providing evidence of the following, suggested by the advocate general as suitable indicators of "sufficient grounds for suspecting":
    • the excessive duration of the transit;
    • the kind and number of means of transport used;
    • the greater or lesser difficulty of identifying the consignor of the goods; and
    • the lack of information on their physical destination or consignee.
Such evidence may be able to "lend substance to a well-founded suspicion that goods appearing in themselves to be 'counterfeit' or 'pirated' are to be placed on the market of the European Union", which evidence the advocate general considered to be a requirement for action by the customs authorities.
We must await the decision of the ECJ for the definitive guidance on what evidence should trigger sufficient grounds for suspicion and the interpretation of the two customs regulations involved in these references.
David Wilson and Rachel Montagnon, Herbert Smith LLP, London

Unlock unlimited access to all WTR content