Supreme Court of Appeal considers standard for registrations in bad faith

Vested rights, use in relation to registered goods and the ever-popular topic of use in good faith - these issues were examined in the recent Supreme Court of Appeal judgment of Etraction v Tyrecor ([2015] ZASCA 78). The judgment does not set new, earth-shattering precedents; it takes a rather scandalous set of circumstances and applies both local and foreign common law to strengthen some concepts, expand on others and potentially spur a few interesting arguments.

Briefly looking at the facts, the appellant, Etraction, is the proprietor of the trademark INFINITY in Class 12 in respect of "vehicle components and accessories; wheels, tires, rims". Etraction had monopoly rights in the trademark effective from the date of application - April 15 2008. The respondent, Tyrecor, is the importer and distributor of tires bearing the trademark INFINITY, but does not hold any registrations for this trademark locally. Through a somewhat complex business arrangement prior to the registration of Etraction’s trademark, the tires in question were imported by Tyrecor’s predecessor in title, Falck. A year after Etraction’s application, Tyrecor began importing the tires in its own name. Importantly, both companies are part of the same group of companies.                                                                             

Here is the catch. Etraction had been using INFINITY on vehicle rims since 1995 without attempting to register the trademark or assert any rights in respect of the use on tires. Etraction had never used the INFINITY trademark for tires. In 2006 Etraction gained knowledge of Infinity tires being imported into South Africa and no objection was made. Finally, Etraction met with Tyrecor in 2008 to discuss possible retail of Infinity tires in conjunction with Etraction. Most incredulously, only after this meeting did Etraction apply for registration of the trademark to the nescience of Tyrecor. Only once the application was successful and Etraction had a valid registration of INFINITY in respect of tires et al, did they proceed with a direct infringement claim against Tyrecor (Section 34(1)(a) of the Trademark Act 194/1993).

Tyrecor defended this infringement claim asserting that it had vested rights in the trademark INFINITY in relation to tires. In South African law, the concept of vested rights restrains the use of a trademark by its proprietor if, prior to registration, another party had made continuous use of that trademark in good faith (Section 36 of the act). It preserves the common law rights that may have existed prior to the registration of the trademark. Even if use of the mark was made by a predecessor it is possible to show that there are vested rights in the trademark. Simply put, vested rights are used as a defence against a direct trademark infringement claim (Section 34(1)(a)).

The court decided on two issues: what constitutes ‘use’ in relation to vested rights and whether Falck was, in fact, Tyrecor’s predecessor in title.

In addressing the former point, Tyrecor provided evidence of sales and marketing expenditure in relation to the Infinity tires prior to Etraction’s trademark application. It was clear that Infinity tires were performing strongly in the market with sales around R10 million ($819,000, effective from June 23 23 2015). The marketing spend was also significant at R140,000 ($11,476).

Etraction’s argument was that Tyrecor cannot have proprietary rights in the trademark as it had not registered it. Etraction’s counsel submitted that Tyrecor could only have rights in the goodwill of the business that the mark represents, further arguing that goodwill cannot attach to an importer of goods but only to the company overseas to whom the trademark belongs. In this case, it would be the Al Dobowi Group, which is part of a joint venture agreement with Tyrecor for the importation, distribution and sale of Infinity tires in South Africa.

The court rather bluntly stated that Etraction’s argument failed. So long as Tyrecor could show reputation, not dissimilar to the requirement in the common law conception of passing-off (Caterham Car Sales & Coachworks Ltd v Birkin Cars (Pty) Ltd (1998 (3) SA 938)), the requirement of ‘use’ would be met. The court accepted the marketing and sales figures as substantial proof of reputation, and thus use.

Moving to the latter point (that of predecessor in title), the transfer of the duty importation from Falck to Tyrecor was an internal strategic business decision. The court found that the group of companies, of which both Falck and Tyrecor were part, was at all times responsible for the presence of the Infinity tire in the country. Thus, Tyrecor could rely on the use of the trademark by Falck. This allowed Tyrecor to show use of the trademark for a period of around two years of prior to Etraction’s application.   

Tyrecor proved the requirements needed to rely on the defence of vested rights. Use was shown to have commenced two years prior to Etraction’s application, albeit by its predecessor in title. This use was continuous as Tyrecor traded in Infinity tires uninhibited from 2006 until infringement proceedings were lodged. Finally, the court did not question the good faith of this use. 

In light of this, Tyrecor’s vested rights defence succeeded.

Tyrecor counterclaimed for the partial expungement of Etraction’s trademark, removing ‘tires’ from its registration (under Section 27(1)(a)). It succeeded.

Tyrecor had to prove two things. First, that no use of the trademark in relation to the goods applied to be expunged was made after registration. Second, that the trademark was registered with no intention to use it in good faith.

Curiously, Etraction had made no use of the INFINITY trademark in relation to tires since its registration, and the court found this to be common cause.

In terms of intention to use in good faith, the court found that an ulterior motive could be inferred by the application for registration only after the two parties’ meeting. The court worked from South African case law, specifically quoting Rembrandt Fabrikante En Handelaars (Edms) Bpk v Gulf Oil Corporation (1963 3 SA 341 (A) 351), A M Moolla Group Ltd v The Gap Inc (2005 (6) SA 568), and Ansul BV v Ajaz Brandbeveiliging BV ([2003] RPC 40). The factual events prior to Etraction’s application were analysed and it was determined that Etraction was applying for registration of INFINITY in respect of tires for some ulterior purpose other than genuine intention to use it on tires.

Interestingly, the court discussed the Swiss case of Finter Bank Zurich v Gialuca Oliveri (Case No D 2000-0091 (WIPO Arbitration and Mediation Centre), which stated that acting in bad faith comprises two elements:

1. that the party has knowledge of given facts (ie, use of the trademark by another party prior to one applying for registration); and
2. the awareness to act against the rule of law (ie, to act for a purpose other than trademark registration is permitted) (Rembrandt).

Applying the above dictum from Finter Bank, the court found that Etraction applied for registration with express knowledge of Tyrecor’s extensive trade and marketing in Infinity tires. Second, it acted underhandedly with an apparent intention to “stultify” a competitor’s successful business and not with the genuine intention to use the trademark on the goods for which it applied.

What is important to take out from this is that the court followed the precedent set in previous cases in factually analysing Etraction’s actions prior to the registration to infer good or bad faith (Rembrandt, The Gap and Ansul). In addition, by using the dictum from Finter Bank, the court introduced a test for determining bad faith in registration, thus expanding the common law whilst adroitly using the existing precedent to support the test.

To conclude, this case does not go much farther than reinforcing the concept of vested rights, use in relation to registered good or services and the importance of striking a balance when registering a trademark of wide protection over many goods versus strong protection over a few. If one thing is to be taken away from this case, it is that South African common law now has a fairly clear standard for registrations in bad faith. Going forward, it will be interesting to see if this test for bad faith can be applied in other areas requiring good faith, such as for non-use expungements - let’s see whether the Swiss have an answer for that.