Member Article

The liability of online platforms for the activities of third-party vendors has always been a controversial area. With the explosion of online shopping as a result of the pandemic, the issue has come under increased scrutiny. Although cases in the UK and EU have discussed the factors that the Court will consider in deciding whether the operator of an online platform is jointly liable, the position in Hong Kong remained uncertain, until now.

Deacons has successfully represented the operators of the leading online platforms, Tmall and Taobao (the Alibaba Companies) in several interlocutory applications, where the Hong Kong Court addressed a number of key issues regarding online platforms for the first time. In this alert we will discuss the Court’s findings regarding the liability of the operators of online platforms for IP infringement by third-party vendors, jurisdiction over cross-border e-commerce and the legality of parallel imported products.

Background

In October 2017, cosmetics company Mary Kay Inc. (Mary Kay) commenced proceedings in the Hong Kong High Court alleging trade mark infringement and passing-off against two third-party vendors (the Vendors) for the sale of Mary Kay products on the popular Taobao and Tmall e-commerce platforms. Mary Kay claimed that the Alibaba Companies (as platform operators) were joint tortfeasors.

Trade mark infringement and parallel imports

Under Hong Kong law, it is not trade mark infringement if the goods in question have been put on the market anywhere in the world, with the trade mark owner’s consent (whether express, implied, conditional or unconditional) (the ExhaustionDefence).^[1] The exception is where the condition of the goods have been changed or impaired after they have been put on the market, and the use of the registered trade mark in relation to those goods is detrimental to the distinctive character or repute of the trade mark.^[2]

During the proceedings, it was revealed that the subject goods were genuine Mary Kay products. Mary Kay’s only claim for trade mark infringement was that the production lot codes had been removed from the packaging of the genuine Mary Kay products being offered for sale by the Vendors. Mary Kay claimed that the removal of the production lot codes meant that the condition of the goods had changed or had been impaired and therefore, the ExhaustionDefence could not be claimed.

Due to the difference in wording of the Hong Kong legislation when compared to that of the UK and EU, Mr Justice Lok held that in Hong Kong, the exception to the Exhaustion Defence for genuine/parallel imported goods can only apply if the physical condition of the goods has been changed or impaired. This is in contrast to the UK and EU which also takes into account the “mental condition” of the goods i.e. conditions affecting the perception of the customers such as the prestige and allure of the products or the brand. Mr Justice Lok also confirmed that not all changes to the physical condition are relevant; the exception will only apply if the condition of the product inside the packaging is adversely affected and the damage is substantial. This important finding makes clear that impairment or damage has to be to the goods themselves and not just the packaging.

Mr Justice Lok went on to say that, even if the Hong Kong exception covers both the physical and mental condition of the goods (as in the UK and EU), the UK Zino Davidoff case makes clear that the removal, or partial removal, of code numbers on packaging does not alter the mental condition of the goods, and are not sufficient or substantial enough to constitute a change in physical condition, so as to fall within the exception.^[3] Therefore, Mary Kay’s trade mark infringement claim was “doomed to fail”.

Passing-off

Mary Kay also claimed that the Vendors committed passing-off as the online shops were set up to mislead and deceive the public into believing that the Vendors, and the Mary Kay products sold by them, were authorised by, connected to, or in some way related to Mary Kay.

Mr Justice Lok found that there was no passing-off as there was no evidence to suggest that the Vendors misrepresented that they were related to Mary Kay and, in fact, the Vendor’s shop advertisements expressly stated that the production lot codes were removed in order to avoid Mary Kay from tracing the source. As the goods were genuine goods, there was no deception.

Mr Justice Lok also held that there was no misrepresentation on the part of the Alibaba Companies that the stores were authorised. Although the “Tmall China” platform is marketed as a trusted platform which takes steps to check the identity of third-party vendors and source of their goods, consumers cannot take this to mean that Tmall China will check and verify that each new applicant applying to become a vendor is directly authorised by the brand owner.

Joint liability of online platform operators

As Mr Justice Lok also took the opportunity to clarify the position regarding liability of online platform operators, holding that mere knowledge and intent is not enough to make the platform an infringer or a joint tortfeasor. Joint liability requires proof that:

• the secondary infringer acted in a way which furthered the commission of the tort by that primary infringer; and

• the secondary infringement must have done so in pursuance of a common design to do, or secure the doing, of the acts which constituted the tort.
  
  

Specifically in relation to liability of online platform operators, Mr Justice Lok agreed with the principles set out in the UK L’Oreal v eBay case and found that the Alibaba Companies were not jointly liable because amongst others:^[4]

• The provision of an online platform to facilitate the marketing and sale of the products by the Vendors is not sufficient as authorization or procurement nor of any common design.

• There is no evidence to support the allegation that the platform operators approved or procured the Vendors to sell the products; they had merely implemented a policy which requires applicants wanting to set up a store to submit certain documents showing that the products are prima facie genuine. There are also Notice-Take-Down procedures to deal with complaints from brand owners.

• A platform operator is under no legal duty to prevent infringement. There is nothing in Tmall China’s policy which favours or encourages infringement. In fact the platform operators have been implementing measures to combat infringement.

• Even if the platform operators have financially benefited from the acts of the sales of the subject products, this is not sufficient to make them liable.
  
  

Jurisdiction

Mr Justice Lok also discussed the issue of jurisdiction in cross border e-commerce cases, finding that Mainland China is the most natural and appropriate forum for trial of the case. He found that the platforms and shops concerned were not actually targeting the Hong Kong public, taking into account, amongst other factors, that the advertisements and posts were in simplified Chinese and the prices were in RMB. He confirmed the fact that a domain can be accessed anywhere in the world does not mean that there is “use” anywhere in the world. Some of the shops do not service Hong Kong at all and, even though Mary Kay made some trap purchases to Hong Kong, this alone does not mean the Hong Kong public were targeted. In fact, there was some weight in the criticism that the trap orders were placed by Mary Kay to facilitate “forum shopping” in Hong Kong, with Mr Justice Lok stating that “this case marks another attempt by a brand owner to try to establish jurisdiction in the Hong Kong Court with a view to stop alleged “infringing” activities which mainly occur in the Mainland”.

In addition, it was found that there had been significant, deliberate and indefensible material non-disclosure by Mary Kay in its application to serve the Mainland China defendants out of jurisdiction and Mr Justice Lok ordered indemnity costs against Mary Kay in relation to one of the interlocutory applications.

Conclusion

This decision is of great significance to online platform operators (and other internet service providers) as it makes clear for the first time the factors that a Hong Kong Court will consider in determining when a platform operator can be jointly liable for the infringing activities of third-parties conducted on its platform. In addition, the decision provided clarity regarding the application of the Exhaustion Defence in Hong Kong with respect to parallel imports, which is significantly different from the UK and EU.

On the jurisdiction issue, when tackling infringement on cross-border platforms, the decision is a reminder that IP owners should work with its legal advisors to consider carefully the evidence and the strategy in order to identify the most effective jurisdiction to take action against any infringing activities to protect its rights.

Update: The Plaintiffs have applied for leave to appeal which will be heard by the Court in July 2021.

^[1] Section 20(1) Trade Mark Ordinance (Cap. 559)

^[2] Section 20(2) Trade Mark Ordinance (Cap. 559)

^[3] Zino Davidoff SA v A&G Imports Ltd [2000] Ch 127, at §45

^[4] L’Oreal SA v eBay International AG [2009] RPC 21