Enhance Control over Post-License Inventory Through Fair Trade Act

An issue often encountered by brand owners in their businesses in Taiwan is how to deal with the licensed products not yet sold out by the local licensee when the license terminates. To cope with this issue, licensors have multiple options of contractual arrangements which will not be spelled out here, but licensors should take extra caution suppose they consider granting the licensee a post-license privilege to sell the inventories free of any conditions other than a sunset clause. With no more commercial ties to the brand owner, it is only human nature for an ex-licensee to exploit whatever value that is left in the inventory at the expense of the licensor.

For example, the inventory, especially if about to complete its life cycle in the target market, might be sold (or “plattered” in the local trade argot) to a (second-tier) distributor and eventually re-sold somewhere in Taiwan to compete with the licensor and its new licensee, or impair the repute of the brand, while all this is, more often than not, protected by the doctrine of exhaustion or first sale principle. Even worse, the inventory may eventually be abused as a “bait” to attract consumers into the reseller’s premises so that the reseller has the chance to switch the consumers to like products of questionable origin.

This is basically the fact pattern of the case Crocodile Int’l Pte Ltd. v. Zhuang, a civil lawsuit in which Saint Island lawyers represented Crocodile the brand owner since the second instance against a reseller. The case came to an end recently after the Supreme Court rendered a decision this May in Crocodile’s favor. Crocodile Int’l Pte Ltd. v. Zhuang, 107 Tai Shang 1067, Taiwan’s Supreme Court (May 2019).

The post-license inventories at dispute were manufactured by a local company during the period of a license granted by Crocodile to produce and sell garments bearing an old version of the house mark “Crocodile.” The license however was terminated in June 1999, but with a clause permitting the licensee to continue selling the inventory garments until March 2000. Some ten years later, Crocodile was informed that there were nomadic outlets coming out in mid and south Taiwan and promoting themselves as “Biggest Genuine Crocodile Clearance Sale in 2014,” or “New Crocodile Garments for 2014 – Genuine Goods.”

Left: photo of an advertising banner of the defendant (attached to the IP Court decision)
Right: our English translation of the banner

Most of the spotted promotional materials printed the Chinese characters “鱷魚” pronounced as /ehr-yu/, which is the Chinese word for “Crocodile” and also a registered mark in Taiwan owned by Crocodile the brand owner. However, per Crocodile’s pre-suit investigation, there were few, if not none, genuine Crocodile garments proffered at these outlets. The outlet holder’s assertion that his Crocodile garments were third-handed goods sourced from the said ex-licensee appeared to Crocodile to be nothing more than a bait, if not a sham.

However, the vagabond nature of these temporary outlets (usually lasting less than a week in one location) created great difficulties for Crocodile to conduct a thorough investigation. This in turn placed Crocodile at a disadvantageous position in its lawsuit, which started as a trademark infringement lawsuit, against the outlet holder. The situation became more daunting when the defendant was able to produce before the IP Court asserted samples of genuine Crocodile goods as support for his trademark exhaustion defense (although the sources of these samples were difficult to identify since all licensees then including the ex-licensee were subject to limited traceability control.) Moreover, the judge held that the defendant’s advertising was protected by the privilege of “indicative use” under the Trademark Law. That is, the defendant’s use of “Ehr-Yu” and “Crocodile” in the advertising materials is deemed by the court as indicative in nature, as the defendant needed these wordings to identify the goods sold at his outlets, the court said.

However, for all these obstacles resulting to Crocodile’s loss in the first instance, there was a white knight yet to be summoned to Crocodile’s help, which was the Fair Trade Act (FTA). Among the rich array of provisions in FTA which is often called “the fundamental law of economy” in Taiwan, at least two articles are applicable in the scenario like this to augment brand owners’ control over sale and resale of post-license inventories by curbing promotional activities that abuse these inventories. First, Article 21, which proscribes false or misleading advertising. Second, Article 25, which as a catch-all provision stipulates that “no enterprise shall otherwise have any deceptive or obviously unfair conduct that is able to affect trading order.”

As such, the Saint Island team brought with them into the second instance an FTA claim based upon the said two articles, and requested for a set of equitable remedies consisting of injunctive reliefs and performance orders as follows, which were all accepted by the IP Court:

  1. The defendant shall not use the phrase “Biggest Genuine Crocodile Clearance Sale in 2014 (or any year thereafter)” or any similar phrase in his outlet signs, commercial documents or advertising materials;
  2. If the defendant is allowed to use the wording “Crocodile” or “Ehr-Yu” in his outlet signs, commercial documents or advertising materials, he shall insert in these materials a remark “the products are inventory made by 2000” in the same proportion/font size in the same space;
  3. The defendant shall additionally insert a remark “the products have no relationship whatsoever with the ‘Crocodile’ mark Reg. 1186787 (which is the current version of the “Crocodile” house mark) when he uses the word “Crocodile;” and
  4. The defendant is prohibited from including in his advertising and promotional materials any new garment goods falling within a list submitted by the Plaintiff, and shall remove and/or destroy all signboards, advertisements, web-pages and other marketing materials that contain these new garment goods.

We are happy to see that the Supreme Court also found the above carefully worded remedies resting on justified grounds and dismissed the defendant’s appeal. Suppose these court orders are to be conscientiously complied (we are quite optimistic about this), we believe the disputed phantom-like inventories which should have left the market almost two decades ago will ultimately be at rest and not to be misused to lure consumers and haunt the brand again.