Does EU Customs need greater powers?

The recent judgment of the Court of Justice of the EU (CJ) in the Nokia and Philips cases holding that Customs authorities cannot seize goods which are in transit and are not meant for sale in the EU, raises important legal issues on cross-border protection and enforcement of IP rights.

As an IP practitioner in India, the word 'counterfeit' along with 'transhipment' brings to mind the seizure of generic medicines in the EU. Although that was a patent issue, rather than trade marks as in the present cases, it demonstrates the problem with seizure of goods in transhipment. The purpose and the object of permitting such seizures, however laudable, has become controversial due to one fundamental problem: the broad meaning given to "counterfeit goods" and "goods violating IP rights".

There is no dispute that counterfeits, as we traditionally understand the term, are harmful not just for brand owners but customers and society as well. Irrespective of where counterfeits are made and where they are sold, it is impermissible for anyone to claim a right to make them or sell them.

If that is the agreed position, why is there is so much controversy over seizure of counterfeit goods in transit? The main reason appears to be the attempt to include issues relating to violation of patent rights, design rights and unfair competition issues within the realm of counterfeits/IP violations and hence subject to seizures. These issues are exclusively determined by national courts as per national laws. No judicial system would be willing to give the right to decide complex and subjective legal issues to Customs authorities that have the power to seize and destroy counterfeit goods.

Only with what TRIPs terms "counterfeit trade mark goods" and "pirated copyright goods" as they are traditionally understood, would a system accept giving powers to administrative authorities. Thus, the Nokia and the Philips judgments do not come as a surprise.

The test applied by the CJ to determine whether the goods are "counterfeit" or "pirated" is to ask whether, as per the Regulations, the goods would be put to sale in the EU. This, legally, is the correct question to be asked and answered. When one looks at the purpose of EU Regulation 1383/2003, it is clear that it remains applicable to all goods intended for sale in the EU. The Court has proceeded on a fundamental principle of trade mark law that it is territorial in nature.

Its finding that any contrary interpretation would hinder legitimate international trade in goods transiting the EU, clearly shows an apprehension that the power of seizure is likely to be misused. This appears to stem from the controversy surrounding seizure of generic medicines. The Court has however given sufficient safeguards to IP owners to protect their rights, if for example the source of the products is not disclosed or the destination of the goods is not disclosed.

The recent discussions surrounding ACTA show the difficulties in finding a broad consensus on cross-border seizure of goods in transit. Though the definition of counterfeit is meant to include typical trade mark and copyright violations, which are traditionally treated as counterfeit goods, the definition of "intellectual property" is broad enough to include patents, designs, geographical indications and others.

INTA and ICC BASCAP were conscious of this fact while making Recommendations on ACTA, saying in their text: "The scope of draft text of the agreement includes a wide range of intellectual property rights, which risks diluting the focus and overall strength of the trade agreement."

Even a body of IP rights owners recommends that the scope of "counterfeiting" ought to be narrow.

The 2003 EU Customs Regulation was interpreted by the CJ in the light of past precedents and on the principle of identifying the "point of sale", which most IP owners argue is too restrictive.

But the new, proposed Customs Regulation will only compound the confusion. It is more on the lines of ACTA, attempting to equate "counterfeit goods" with "goods suspected of infringing an intellectual property right" which would include everything plant varieties to trade names.

The operative part of the CJ judgment clearly balances the rights of IP owners while safeguarding the interests of legitimate trade. The Court holds that the impossibility to identify the manufacturer or consignor of the goods, non-cooperation with Customs authorities and possible diversion of the goods to customers in the EU, would be relevant factors to be considered by Customs.

Thus, there may not be a need to amend the laws in EU but there is an immediate need to evolve a broad consensus on defining "counterfeit goods" for the purposes of seizures to mean what TRIPs stipulated: counterfeit trade mark goods and pirated copyright goods. Once this happens Courts are more likely to favour seizures of goods in transit as all fears and apprehensions of "hindrance to legitimate trade" would be allayed.

The committees of Strasbourg may be riding to the rescue of brand owners frustrated at watching fake goods waved through Customs just because they are in transit through the EU. Our heroes are the rapporteurs of three parliamentary committees. In a common position that they reached in February this year, there is now a willingness to address the legal lacuna highlighted by last December's Court of Justice of the EU ruling in Nokia v HMRC and Philips v Lucheng Meijing. The background facts and a brief summary of the ruling are set out separately below. It prompted a clamour amongst brand owners and their advisers called for the already contemplated reforms of Regulation 1383/2003 (the Customs Regulation) to go further, in particular to bring an end to this Nelsonian turning-of-a-blind-eye. Quite apart from the legal illogicality that the law should permit this, the issue is a moral one.

It seems unarguably wrong that well-resourced EU Customs should be permitted, even required, to release fake goods for their less well-resourced counterparts in poorer countries to have to try to re-locate, seize and destroy them at a later date. If this cannot be justified if illicit drugs, arms and counterfeit currency were found by Customs, how can it be justified for blatantly fake goods? In its Nokia/Philips ruling, the CJ sees the solution as being one where the two Customs bodies will co-operate pursuant to Article 69 of TRIPs. However, that seems an inefficient and risky approach.

Regrettably, some of the moral high ground on this issue was lost when generic pharmaceuticals being transhipped from India to Brazil were seized by EU Customs, leading to WTO complaints filed against the EU in May 2010. While it may beg the question of how appropriate it is for the Customs Regulation to treat goods infringing patents in the same way as counterfeit and pirated goods, it would not seem to justify the unfettered transhipment of fakes. And yet this was a material influence in the arguments submitted to the CJ in the Nokia/Philips case by the UK and Czech governments and the Commission. In particular, they each supported the argument of the Chinese defendant in the Philips case.

The Nokia/Philips ruling included an observation or rider that goods posing a threat to health and safety could, in any event, be seized under the European Customs Code. It is unclear if the goods in either the Nokia or Philips cases would have qualified for that. Certainly counterfeit pharmaceuticals and anything ingestible (alcohol and cigarettes) do. It could also apply to fake electrical goods, toys and car parts. All of these feature regularly on the Commission's annually published list of goods seized by EU Customs.

However, there is a certain illogicality to this. It assumes that EU health and safety legislation is the relevant touchstone here. And yet, if the goods are truly in transit, why should it be? One man's meat is another man's poison: what is deemed unsafe in the EU may be entirely acceptable in the destination country (which may have little or no equivalent consumer protection or a different appetite for risk). There seems no obvious basis for the CJ to rule that EU trade mark laws should not apply and yet EU health and safety laws should. Even so, pending a change to the Customs Regulation or substantive law, brand owners may want to start emphasising the health and safety risks in their cases of transiting fake goods, for example that fake clothing is flammable (a safety risk) and fake sports shoes can cause sports-related injuries (a risk to health or safety).

Brand owners generally welcomed the Commission's proposed new draft Customs Regulation published in May 2011 (COM(2011)285). It contained some beneficial proposals, such as adding overruns and parallel imports to what could be seized, making the optional simplified procedure mandatory across the EU and acknowledging that rights owners would want to recover costs from the protagonists. However, other changes were less welcome, for example an even less clear definition of counterfeit goods. Most notably, the proposals were largely silent and wholly ineffective as regards the transhipment issue. Only new Recital 17 mentioned it. That merely referred to medicines being transhipped and suggested Customs take account of "any substantial likelihood of diversion" into the EU. The long-awaited Nokia/Philips decision then compounded the issue by raising more questions than it answered.

Since then, almost 200 amendments to the draft new regulation have been tabled by the European Parliament. On the issue of transhipment, the rapporteurs have decided to press ahead with just two in particular. These are:

• Amendment 77 for new Recital 10(a). This seeks to reverse the burden of proof onto the declarant or holder of goods in transit that are suspected of being an imitation or copy of a product protected in the EU by an IP right. It would create a presumption that the final destination of the goods is the EU, such that it would be for the declarant or holder to come forward with clear and convincing evidence to the contrary. The Commission would also be invited to issue guidelines for Customs to assess the risk of deviation onto the EU market bearing this in mind and CJ case law. The latter means the Nokia/Philips case in particular for now.

• Amendments 189/199 and part of 193 for Article 16, new paragraph 3(a). This implements the presumption mentioned above, requiring the declarant or holder to come up with its evidence within three working days of being requested. It also adds that the test for infringement is to apply the IP laws of the member state where the goods are found or where an application is made (this largely mirrors the already proposed wording for Article 3).

Amending the Customs Regulation does not necessarily fully address the issue. In particular, if the proposal is amended only with the changes mentioned above, there would appear to be the potential for arguing there is no infringement with transiting goods. The point seems to remain that there may be no "use in the course of trade" in the relevant EU country. It depends to what extent private parties can rely on the statutory presumption in the Customs Regulation, being an instrument of administrative procedure rather than an integral part of the harmonised substantive trade mark law.

The Commission was originally due to make an announcement this spring on what, if any, changes it proposes to make to substantive European trade mark law in the light of the Max Planck Institute's report published in March 2011. Given that the latter was delayed by at least four months, we may not see any proposals for a while yet. Expectations are running high, not least because many trade mark professionals agree on one thing at least: there is much scope to make material improvements. Options for addressing the transhipment problem include:

• Adding the act of transhipping goods through the EU to the list of express acts of infringement in Article 9(2)(c) of the CTM Regulation (207/2009) and Article 5(3)(c) of the Directive (2008/95); the act of exporting is already there. Since that act no more affects either consumers within the EU than the act of transhipping from one non-member state to another or free trade within the EU, there is no greater logic or justification for including one but not the other; and

• Clarify the requirement for use "in the course of trade" as including trade anywhere, provided the use is within the relevant member state.

Brand owners should preferably join with the industry organisations, such as INTA, MARQUES, ACG and others, to encourage the Commission to tackle transhipment head on with appropriate amendments to the substantive law. Now would be the time to engage on this.

Any changes to the Customs Regulation or substantive IP laws will be too late to affect Nokia and Philip in their cases.

Nokia has indicated that it sees the CJ decision as extremely helpful anyway. A number of comments from the CJ might suggest that the English court should indeed favour Nokia when applying the ruling to the facts. This is because, for the detention stage of a Customs action (pending a court ruling or consent for destruction), there is almost certainly enough for the required suspicion of diversion into the EU market. Much of the CJ's guidance maps onto the factual situation in the Nokia case, in particular the fact that it was impossible to identify the consignor. Whether those facts would provide enough proof of an intention for the goods to be diverted for a later substantive stage is another matter. That would only be tested if the consignee or holder contested the move to destroy the goods. In reality, that seems unlikely given the facts. Dealers in fakes rarely come forward to oppose destruction and consignments tend to be destroyed by default following the simplified Customs procedure. Since no one has come forward in the Nokia case to date, it seems unlikely they will now.

In the Philips case, the Chinese manufacturer is defending the infringement action. It is less clear whether the CJ's guidance on what may satisfy the higher burden at this later stage of the process will help Philips. That case will now revert to the Belgian court for determination.

The cases

Nokia v HMRC In July 2008, UK Customs (HMRC) at Heathrow Airport intercepted a consignment of fake Nokia mobile phones and accessories coming from Hong Kong and in transit to Columbia. Nokia was given the declared consignor and consignee details and copies of the shipment documentation and made enquiries that showed that the protagonists' declared details were misleading. Nokia asked HMRC to detain the goods but HMRC refused on the ground that they did not fall within the definition of "counterfeit goods" in the Customs Regulation. Nokia applied for judicial review of the HMRC decision, lost at the High Court and appealed to the Court of Appeal. The latter asked the CJ if Article 2(1) could apply where "there is no evidence to suggest that those goods will be put on the market in the EC, either in conformity with a customs procedure or by means of an illicit diversion." Philips v Lucheng Meijing and others In 2002, Belgium customs suspended release of a consignment of electric shavers which they suspected infringed registered designs owned by Philips. They were being held in the customs warehousing procedure in Antwerp. At the time, the previous customs regulation applied (Regulation 3295/94). The goods were from Shanghai but there was no information about their ultimate destination. Customs later detained the goods and Philips sued those involved in their manufacture, marketing and transport. Philips argued that the test for whether the goods were infringing, and so "pirated goods" under the regulation, could assume the "production fiction", namely as if the goods had been made in Belgium. That assumption had been applied in an earlier Dutch case concerning patents (Sosecal v Sisvel). The manufacturer (Far East Sourcing) defended, arguing that there was no evidence that the goods were to be put on sale in the EU. The Belgian court referred one multi-layered question to the CJ, including whether the production fiction must be applied.