Inverse passing off examined by High Court

In QB Net Co Ltd v Earnson Management (S) Pte Ltd ([2006] SGHC 183, October 17 2006), the High Court of Singapore has examined, among other things, the plaintiff's claims of inverse passing off and breach of confidence against the defendants in relation to a system of operation for 10-minute haircut salons.

The plaintiff, QB Net Co Ltd, is a Japanese company which operates and offers licences to operate 10-minute haircut salons in a number of countries worldwide (including Singapore). The hair salons operate under the names QB House, QB Shell or QB Shell-type.

QB Net entered into licence agreements with a Singaporean company, QB House Pte Ltd (QBHPL), and granted to QBHPL the right to operate hair salons in Singapore and Malaysia under the trade names QB House and QB Shell, and to adopt QB Net's QB House system, QB House get-up and QB HOUSE marks. The second defendant was the director of QBHPL and represented QBHPL in the negotiations for both licence agreements.

The relationship between QB Net and QBHPL took a turn for the worse during the subsistence of the licence agreements. Consequently, QBHPL entered into a sale and purchase agreement (S&P Agreement) with the first defendant, Earnson Management (S) Pte Ltd, in January 2005, divesting its business assets to Earnson. Under the S&P Agreement, Earnson also took over the employment of QBHPL's employees. Earnson commenced its 10-minute haircut business in Singapore on January 1 2005 by operating hair salons under the trade name EC House.

The third defendant was a management consultant who provided corporate-related support and was appointed as Earnson's sole, non-executive director by virtue of his management consultancy business. The second defendant was appointed a consultant to Earnson during the same period of time.

QB Net commenced action against the defendants for, among other things, inverse passing off (against Earnson only) and breach of confidence.

QB Net asserted that there was goodwill associated with its name QB House, as well as its QB House system and get-up, and that the public would associate the trade name QB House and the distinctive nature and get-up of the QB House system with QB Net alone.

Earnson refuted QB Net's claims by arguing that the former had neither used the QB House name nor other features of the QB House system.

The court considered two questions in determining the issue of the existence of goodwill:

• Did goodwill accrue in respect of QB Net's QB House system, get-up and services?
  
  
• If so, did such goodwill accrue solely to QB Net?

The court held that there was no goodwill in respect of QB Net's QB House system, get-up and services: QB Net had not shown that the QB House get-up is a crucial point of reference for customers who want its services, or that the QB House get-up is so closely associated with QB Net's services that it is distinctive of QB Net alone.

The court went on to say that:

"[while QB Net's] use of a ticket-vending machine, electronic sensors and a no-reservations system are unusual features of a haircut salon, these factors in themselves are insufficient to warrant a finding of goodwill."

It is worth noting, however, that the court found goodwill in QB Net's business. It also found that this goodwill did not vest solely in QB Net alone. The court was of the view that QBHPL played an equally (if not more) significant role in promoting the QB House trade name and haircut services in Singapore and that QBHPL had acquired shared ownership in respect of QB Net's business in Singapore.

Turning to the question of misrepresentation, the court found that Earnson had misrepresented QB Net's services as its own based on various instances.

Earnson had written to inform retail operator Seiyu Singapore that "the trade name of QB House will be changed to Express Cut for all outlets in Singapore". This letter was subsequent to an earlier letter from QBHPL, which informed Seiyu Singapore that Earnson would take over the business of QB House and continue the tenancy agreement with Seiyu Singapore. The same letter also said that the takeover was part of the company's plans for expansion. The court held that the reference to a continuation of the tenancy and the change of name amounted to an implied representation that Earnson was associated with, if not the successor of, QB Net.

Earnson had also placed an advertisement in The Straits Times on January 4 2005 stating that "QB House is now known as EC House". The advertisement listed the various locations of EC House in Singapore, whereby the locations were largely identical to those of predecessor QB House outlets. The court held that the newspaper advertisement would reasonably lead a consumer to believe that the QB House outlets in Singapore had undergone a change of name, and that the outlets had been created or were owned by Earnson.

The court also found that there were striking similarities between the way in which QB Net and Earnson conducted their businesses and that Earnson had continued to use QB Net's trading style.

It was held that Earnson's adoption of QB Net's trading style together with the claim of a name change amounted to misrepresentation for the purpose of passing off. Based on a consideration of the same circumstances, the court further held that the misrepresentation was likely to confuse consumers.

Taking into account that QB Net and Earnson are direct competitors in the same industry, the court was prepared to "infer damages or the likelihood thereof to QB Net's goodwill". However, as QB Net did not establish goodwill in its QB House system and get-up, the court dismissed QB Net's claim of inverse passing off.

The court next examined QB Net's claim that its QB House system, along with the various manuals for operating the outlets, were confidential in nature and that Earnson and the other defendants had breached this confidence. The court was of the view that QB Net's "QB House system and its concept of the 10-minute express haircut service was information that was unmistakably in the public domain" as the features of the QB House system could be easily observed by any customer who visited the outlet.

The court then cited the availability of numerous publications describing QB Net's QB House system as further support for its view that the information was available in the public domain.

Based on earlier authorities, the court also held that QB Net could not invoke the law of confidence because the information sought to be protected had been disclosed in QB Net's Japanese patent applications, which had been published.

The failure to establish that QB Net's QB House system and manuals possessed the requisite quality of confidence was fatal to QB Net's claim. Accordingly, QB Net's claim for breach of confidence was also dismissed.

Joyce Ang, Alban Tay Mahtani & De Silva, Singapore