One of the issues being considered by right holders is whether or not third parties, such as Amazon, can be liable for merely storing and delivering goods that infringe their rights. Tom Wilkin, solicitor in the Commercial Litigation team provides further insight.
Amazon, which, according to the BBC, recorded a profit of $3bn in 2017, operates in several ways; one of which is providing a service known as drop shipping, also known as ‘Fulfilled by Amazon’. Under this model, goods are sold to customers by third party sellers, however Amazon is responsible for storing, packing and delivering products and also dealing with customer returns.
The Court of Justice of the European Union has recently given judgment in Syed (C-572/17) which has clarified that a seller can be liable for storing, as well as selling, infringing goods.
The Case involved a preliminary ruling in relation to Article 4(1) of the Copyright Directive, which provides right holders with distribution rights. Article 4(1) states:
"Member States shall provide for authors, in respect of the original of their works or copies thereof, the exclusive right to authorise or prohibit any form of distribution to the public or sale otherwise".
Mr Syed sold clothing and accessories, bearing rock music graphics and designs, from a shop in Stockholm, Sweden. Graphics and designs are capable of being protected by trade mark rights (which protect the word marks) and copyright (protection that automatically accrues to, amongst other works, original graphic works). The motifs on some of the items were unauthorised copies of designs that carried trade mark and copyright protection.
As well as stocking goods in the shop, Syed maintained stock at a storage facility in a Stockholm suburb.
Swedish copyright law transposes the Copyright Directive and makes copyright infringement a criminal offence. Paragraph 53 of the Lagen (Law) (1960:729) provides:
"Any person who, intentionally or through gross negligence, takes measures relating to a literary or artistic work which constitutes an infringement of the copyright in that work held by a person... shall be liable to a fine or to a custodial sentence of up to two years.”
The Syed judgment states that under paragraph 2 of that law, “such a measure may comprise, for example, exploiting that work by making it available to the public without the rightholder’s consent...
...The third subparagraph... of that paragraph specifies that a work is made available to the public, inter alia, when copies of the work are offered for sale, rent or loan, or are otherwise distributed to the public.”
Syed was prosecuted for trade mark and copyright infringement in respect of the infringing goods. The Prosecutor argued that all of the goods (both those in the shop and those in storage) were being offered for sale or distributed to the public and therefore infringed paragraph 53, above.
The Swedish District Court found Syed guilty of trade mark infringement in relation to all of the goods. The Court also found Syed criminally liable for copyright infringement, reasoning that the concept of "offering for sale" applied to the goods in the shop and their identical counterparts held in storage. The Court did, however, distinguish the stored goods that were not yet on display in the shop as these "could not be regarded as having been offered for sale". Syed received a suspended sentence and a fine.
The decision was appealed. In relation to copyright infringement, the Swedish Court of Appeal disagreed, holding that "it could not be considered that those goods had been offered for sale or distributed to the public", and that storing the goods did not constitute an “attempt, or preparation, to commit an infringement”. The case was appealed to the Swedish Supreme Court, where Syed argued that, in order to constitute an infringement of a right holder’s distribution rights, an 'offer for sale' required an act directed towards selling the goods to the public, which simply storing infringing goods could not be considered.
The Supreme Court questioned whether, in light of the European case law – which sets out that steps taken prior to an act of sale can constitute an infringement of a right holder’s distribution rights - the storage of infringing goods would be an infringement of the law. Consequently, the Supreme Court referred the following questions for preliminary ruling by the Court of Justice for the EU (known as CJEU):
- When goods bearing protected motifs are unlawfully offered for sale in a shop, can there also be an infringement of the author's exclusive right of distribution under Article 4(1) of the Copyright Directive as regards the goods with identical motifs, which are held in storage by the person offering the goods for sale?
- Is it relevant that the goods are held in a storage facility adjacent to the shop or in another location?
The CJEU held that:
- The Copyright Directive should be interpreted in line with Article 6(1) of the WIPO Copyright Treaty, which provides that:
"Authors of literary and artistic works shall enjoy the exclusive right of authorising the making available to the public of the original and copies of their works through sale or other transfer of ownership.”
As such, the term "distributing to the public" holds the same meaning as "making available to the public... through sale".
2. Distribution to the public "is characterised by a series of acts going, at the very least, from the conclusion of a contract... to the performance thereof by delivery to a member of the public."
3. Acts preceding the conclusion of a contract for sale (for example, an offer of a contract for sale) can constitute "distribution" even if the purchaser does not take ownership of the goods.
4. An act prior to the final sale, including storing goods, may constitute a distribution and infringe the rightholder's distribution rights under the Copyright Directive. The caveat is that it must be proven that the infringing goods are intended to be sold to the public.
The Court provided guidance on the approach that should be taken to establish if the goods in storage are intended for sale. The Court stated that relevant factors to be taken into account include the volume of sales, the frequency with which the shop is restocked from goods in the storage facility, current contracts for sale and the correlation between current sales/orders for sale and levels of stock. In addressing the second question, the Court said that the distance between the storage facility and the shop can be taken into account (among other facts) however "cannot, on its own, be a decisive element in determining whether the stored goods are intended for sale on the territory of that Member State."
Syed expands the scope of seller’s liability for holding counterfeit goods and demonstrates a continuing move towards widening the scope of protection for brand owners.
Looking back to Amazon, this case raises interesting questions around the drop shipping model, where, in many instances, multiple sellers' inventory are held in one place and, in reality, it is only Amazon who deals with and handles the goods before they are delivered to the customer. This arguably blurs the distinction between the seller and "drop shipper".
In an increasingly online based marketplace, legislators appear to be shifting in the direction of requiring intermediaries to do more to protect end users and customers. In the event companies such as Amazon are held liable for the goods they store, this may have an impact on the drop shipping model. For the time being, the Syed judgment sets out sellers and third parties must be cautious about holding goods that infringe brand owners' intellectual property rights.
Tom Wilkin comments: "Against a backdrop of increasing social and political pressure on large companies to be held accountable for the way in which they conduct business, this judgment potentially opens the door for businesses such as Amazon, who hold goods and deal with distribution to customers on behalf of a third party seller, to be held liable for infringement of a right holder's distribution right in instances where they are not the seller."