Effacement Of Trademarks Amounts To Impairment: Delhi High Court

Summary: The Delhi High Court has held that effacement of trademarks from refurbished or resold goods would amount to impairment, even if international exhaustion is at play. However, resale may be valid and permissible if refurbished goods are offered for sale with full and proper disclosure, as per terms laid down by the court.

Refurbishment and reselling of products is a growing industry, reinforced by government initiatives such as the ‘Right to Repair' for consumer goods (which empowers end users to repair devices they own or service without any manufacturer or technical restrictions). Although these are consumer friendly goals, they can pose tricky situations for trademark owners, around exhaustion of rights, among other things. The question of whether refurbishment impinges on the rights of trademark proprietors came up recently before the Delhi High Court in Seagate Technology LLC v. Daichi International (2024 SCC OnLine Del 3767).

Factual context

The Plaintiffs, i.e. Seagate Technology LLC (“Seagate”) and Western Digital Technologies Inc. (“WD”), had filed suits against the Defendants i.e. Daichi International (“Daichi”), Consistent Infosystems Pvt. Ltd., (“Consistent”), Geonix International Pvt. Ltd. (“Geonix”) and Cubicor Information Systems Pvt. Ltd. (“Cubicor”).

The short issue before the Court was whether resale of Hard Disk Drives (“HDDs”) of the Plaintiffs, which had been imported into India and were being resold after the removal of the trademarks ‘Seagate' and ‘Western Digital', was in contravention of the Trade Marks Act, 1999 (“the Act”), and specifically, of Sections 30(3) and 30(4) of the Act.

At the interim stage of this matter, certain directions had been passed by the Court, including an ad interim  injunction (CS(COMM) 67/2024, CS(COMM) 114/2024, CS(COMM) 168/2024), against the Defendants, and allowing the sale of refurbished HDDs (CS(COMM) 192/2024, CS(COMM) 191/2024), subject to the phrase, ‘used and refurbished goods', being displayed as a disclaimer on the packaging.

The legal position

The provisions being tested were Section 30(3) and 30(4) of the Act.

Section 30(3) encompasses the exceptions to the rule of infringement provided under Section 29 of the Act, and thus sets up the defences available to a party in an infringement action. Colloquially understood as ‘exhaustion of rights', Section 30(3) provides that when ‘goods bearing a registered trademark' are lawfully acquired, the further sale of such goods in the market does not amount to infringement of the rights of the original seller, i.e., the trademark holder.

Section 30(4) acts as an exception to Section 30(3), and permits the registered trademark proprietor to oppose further dealings in the goods when the condition of the goods has been ‘changed or impaired' after being put on the market.

The case of the parties

The Plaintiffs argued against the Defendants on several grounds:

1. Infringement and reverse passing off: The effacement of the Plaintiffs' trademarks amounted to infringement as well as reverse passing off. The HDDs could be attributed to the Plaintiffs even after the removal of trademarks as they were identifiable by their distinct shape, silver plates and the colour of the Printed Circuit Board (“PCB”).
2. Misrepresentation: The Defendants had made false statements and misrepresentations such as, claiming that the refurbished HDDs were 20% faster, that the HDDs were used, that they could be used for both desktops and cameras, etc. Such misleading statements invited bad reviews, and consumers were attributing product quality to the Plaintiffs, thus tarnishing their reputation and goodwill.
3. Unlawful acquisition: The HDDs were not lawfully acquired, and their removal from discarded computers was illegal acquisition since these were end-of-life HDDs. Thus, the resale of such HDDs could not be considered ‘exhaustion of rights' and no benefit under Section 30(3) was available to the Defendant.
4. Impairment: The effacement of the Plaintiffs' trademarks from the HDDs amounted to changing the material condition of the goods and was thus 'impairment' under Section 30(4).

The Defendants, on their part, contended that:

1. Legal import: The HDDs were legally imported (and not illegally acquired) and were purchased through invoices on which adequate taxes had been paid.
2. International exhaustion and no infringement: India follows ‘international exhaustion', which means that once a product has been lawfully acquired in any part of the world, the trademark proprietor cannot govern the subsequent sale/use of such product. Thus, the Plaintiffs had exhausted their right to govern the manner of sale of the HDDs being imported and refurbished in India, provided they were lawfully acquired. Hence, there was no case of infringement and the Defendants could take the benefit of Section 30(3).
3. Reverse passing off: There was no possibility of confusion as the HDDs were sold under the refurbished name, with their own unique serial number and model number.
4. Impairment: No ‘functional' impairment was caused to the HDDs. They were restored after undergoing a health check. Refurbishment was a regular industry practice and only provides the public with accessible and affordable products.

Since, the issue at hand was fairly new, the Court also sought the assistance of an Amicus, who pointed out the following:

• Since the Plaintiff's trademark was not displayed at the time of the sale, no clear case of infringement could be made out.
• Even if the goods were legally acquired and international exhaustion applies, the Plaintiff has the right to prevent further dealings of the goods if they have been impaired.
• Under Section 30(3), ‘sale of goods in the market' or ‘goods having been put on the market' would mean the goods along with the registered trademark as being put in the market.

The decision

The Court referred to a decision of the Division Bench of the Delhi High Court in Kapil Wadhwa & Or. v. Samsung Electronics Co. Ltd. & Anr. ((2012) 194 DLT 23 (DB)), in which it was held that “impairment is only a specie of the genus legitimate reasons, which genus embraces other species as well”, whereby ‘species' could include the difference in services and warranties, advertising and promotional efforts, packaging, language/literature provided with the product.

Following this judgement, the Court in the present case concluded that although there was no patent illegality in the import and further sale of the end-of-life HDDs, the sale of refurbished HDDs without the registered trademarks does not satisfy the requirements under Section 30(3), i.e. the goods should enter the market with the registered trademark. Since the HDDs had entered the market without the registered trademarks, such effacement amounts to impairment of the goods, as their condition has materially changed. Accordingly, a harmonious reading of Sections 30(3) and 30(4) would imply that the Defendants cannot get the benefit of the defence under Section 30(3) of the Act.

Nevertheless, the Court allowed the Defendants to sell the refurbished HDDs provided they sold or offered for sale the goods with “full disclosure”. The directions of the “full disclosure” given by the Court included:

1. Packaging to identify the source of the product.
2. Reference to the original manufacturer is to be made through their word mark and not the device mark.
3. Packaging must specify that there is no original manufacturer's warranty
4. Packaging must specify that the product is ‘Used and Refurbished'.
5. Statement as to extended warranty by the Refurbisher.
6. Packaging must reflect an accurate description of the features.

Conclusion

This was an unusual case in that despite the Court holding that there was impairment, the Defendants were ultimately allowed to sell the refurbished goods. The key takeaway from this case would be that even if principles of international exhaustion apply, a trademark proprietor still has a right to prevent the sale of goods if the material condition of such goods has been impaired. This judgment provides a fresh interpretation and relief to rights holders who are aggrieved by refurbishers and resellers tarnishing their reputation in the market. At the same, it also strikes a balance in the business interests of trademark proprietors and refurbishers/resellers by laying down clear guidelines for the necessary disclosures required for valid reselling and refurbishment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.