The judgment in Seagate Technology LLC v. Daichi International delivered on 21st May 2024 by the Delhi HC has the potential to change how the ‘refurbishment industry’ in India works. The industry for resale of used products has been a part of several trademark litigations in the past. (here) As I discuss in this post, the refurbishment industry has several stakeholders involved. However, constant litigations threaten the growth and expansion of the industry (here). The findings in this judgement, however, promise to turn around the fortunes of this industry.
This is Part I of this post wherein I will discuss the factual matrix of the dispute, the argument of exhaustion raised by the Plaintiff, court’s holding on legality of removing and replacing original marks, and the implication of the direction to make full disclosure before selling ‘used’ and ‘repaired’ goods.
Facts
Briefly put the plaintiffs (Seagate and WD) in this case manufactured Hard Disk Drives(‘HDD’) which were later sold to various Original Equipment Manufacturers (‘OEM’). The OEMs would, in turn, install the HDDs in laptops, desktops, surveillance cameras and other equipment. Over a period, the used equipment was sold and globally discarded. Thereafter, HDDs from the discarded equipment are detached or removed and further exported to other countries for refurbishment and resold as refurbished devices. Notably, most HDDs would have become end-of-life due to the expiration of the warranty period prescribed by the manufacturer by the time it is detached and imported into these countries. However, the end-of-life does not mean that the HDD was non-functional. Rather, it retains functionality. As a result, the imported HDDs are sold to various vendors, who, in turn, would de-mark (removing the brand name), refresh, repackage the HDD under their brand name (reverse passing off) and re-sell the refurbished product to the consumers with an extended two-year warranty. In the present dispute, Plaintiff sought a permanent injunction against the Defendants (Geonix, Daichi, Cubicor etc.) from dealing in refurbished HDDs.
Lawful acquisition or not: Principle of International Exhaustion
In Kapil Wadhwa v. Samsung Electronics, the DHC held that the Trademarks Act adopts the principle of international exhaustion of Rights. What does this mean? Simply put, once a person has lawfully acquired a product in any part of the world, the trademark owner cannot control any subsequent sale or use of the goods. In other words, it is lawful to import the goods from any country without the permission of the trademark owner since the latter has no control over the further sale and distribution of the goods. The only condition is that the good must be lawfully acquired in the first place.
In the present case, the Plaintiff argued that the Defendants had not lawfully acquired the HDDs since there was an illegality in the importation of end-of-life HDDs. However, the Court noted there was no law, regulation or policy which prohibited the importation of end-of-life goods and subsequent sale thereof. The Court concluded that there was lawful acquisition of the HDDs by the Defendants u/s. 30(3).
Removing Original Marks, 30(3) and Broadening ‘Impairment’
The Plaintiffs argued that even if the HDDs were lawfully acquired, the Defendants were prohibited from further sale or distribution u/s. 30(4). Section 30(4) entitles the trademark owner to oppose the ‘further sale’ of goods despite exhaustion if there are legitimate reasons such as a change in condition or impairment of the good. The Plaintiffs argued that the Defendants had removed the original mark of the manufacturer and re-packaged the HDDs under their brand name. This act of de-branding, it submitted, was an “impairment” of the good u/s. 30(4).
In Kapil Wadhwa, the Court had observed that the ‘difference in packaging’ of the good was also an ‘impairment’ of the good and thereby a legitimate reason to prohibit the further sale.
How is the removal of the brand name of the manufacturer ‘impairment’ of the HDDs? In a previous order, the Court had issued an ex parte ad interim injunction against the Defendants for removing the mark and replacing it with their own. (see here) In the present case, the plaintiff argued that the removal of the brand name or mark and repackaging of the HDDs under their brand name was a legitimate reason to oppose the sale since there was a ‘difference in packaging’.
Did the Court agree? Partly. It notes that the defence u/s. 30(3) is valid only if the goods sold in the market are the same as the good which bears the registered trademark i.e. the sale must be of the same good. If the refurbished good removes the original mark, it is no longer the same good and cannot avail the defence u/s. 30(3). It also relies on 30(4), an exception to 30(3), to argue that the removal of the original mark is a ‘change’ or ‘impairment’ of the product, meaning that 30(3) will not apply. Lastly, it relied on Kapil Wadhwa to hold that a good can be resold with ‘full disclosure’ (discussed later) only if it has the original trademark.
Another important takeaway- the judgement seems to broaden the ambit of 30(4) in the interest of the Trademark owner. By reading into the provision of the requirement of resale of goods only under the original mark, it provides the owner with an additional ground to oppose the ‘further sale’ of the good. Correspondingly, it restricts the rights of exhaustion for the buyer of the good from the trademark owner.
Full Disclosure
As seen above, the Court held that a refurbished product cannot be sold without the original mark of the manufacturer. The court, therefore, in order to protect the manufacturer from loss of reputation and goodwill relied on Kapil Wadhwa to add the requirement of ‘full disclosure’. The refurbisher is now required to disclose that the changes in the good are made by the refurbisher and do not resemble the original good released by the manufacturer in terms of ‘warranty, serviceability, life, manuals and brochure.’
The Court, through full disclosure, tries to balance the interest of the trademark owner (manufacturer), refurbisher, consumers and society. How?
A full disclosure means the consumer does not associate the refurbished good with the manufacturer, protecting its reputation and commercial goodwill. The consumer is forewarned that the product they are buying is not in its original condition. The refurbisher is allowed to open shops for re-sale of repaired and refurbished products without fear of trademark infringement suits. Lastly, it curbs the dumping of e-waste by prolonging the lifecycle of the electric product.
An obvious question to ask here: Is the ‘full disclosure’ requirement workable?
The customers of the refurbished industry, particularly in the sector of electronic goods, are aware that the good is used and repaired by the seller. In such a case, it is unlikely for the consumer to associate the good with the manufacturer thereby risking the loss of reputation or goodwill. In such a scenario, it is sufficient if there is accompanying information that the good is not new and the product is repaired and transformed by someone else. Seen in this light, the directions given by the court that the packaging of the refurbished good must indicate the original manufacturer and that the good is ‘used and refurbished’, will result in avoiding consumer confusion, if any.
In Part II of this post, I will discuss why the court concluded that a re-seller cannot remove a mark and replace it with his own mark for commercial sale. Further, I will analyse the distinction between ‘substantial’ and ‘simple’ repairs, discussed by Prof. Kur in her article. The court, while relying upon this article in the present decision, failed to apply this distinction in this case scenario. Lastly, I will elaborate as to how the present outcome protects the growth and expansion of ‘refurbishment’ industry through the requirement of ‘full disclosure’.