Delhi High Court issues directions on how to sell refurbished Hard Disk Drives

The article discusses the judgment of the Delhi High Court in Seagate Technology LLC v. Daichi International, regarding the refurbishment and sale of HDDs.
Royzz & Co - Mahua Roy Chowdhury, Jitendra Bohra
Royzz & Co - Mahua Roy Chowdhury, Jitendra Bohra

Two major manufacturers of Hard Disk Drives (HDDs) filed cases before the Delhi High Court against refurbishers of HDDs in India. The refurbishers used to remove the original marks from the HDDs, refresh and repackage them under their own brand names, and sell them as a refurbished product with an extended two-year warranty. 

As the matters were before two different coordinate Benches of the Intellectual Property Division of the Delhi High Court, the Court clubbed the matters together and listed them before the present Bench.

The issue before the present Court was whether an action for infringement or impairment could be considered if the refurbished goods were being sold after the removal of the original brand, with no reference to the original manufacturers, thereby severing the umbilical cord with the original registered trademark owner.

The submissions of the parties

The plaintiffs' submissions

  • The HDDs had unique features and the identity of the manufacturer. In other words, the plaintiffs could not be completely obliterated, and it was easy to identify the manufacturer of the HDDs even if the manufacturer’s label was not present on it.

  • The second-hand goods were imported in India for the purpose of repair, refurbishing, reconditioning or re-engineering, subject to the condition that the waste generated during the repair and refurbishment was to be treated as per Indian laws, and the imported item was expected to be re-exported back as per a Customs notification.

  • Since the import was of goods bearing a mark, it amounted to “use of a registered mark” in terms of Section 29(6) of the Trade Marks Act and amounted to infringement under Section 29(1) of the Trade Marks Act.

  • As the goods were imported with the trademark, the removal of these HDDs from the discarded computers and servers amounted to illegal acquisition.

  • The act of removing the labels, effacing the plaintiffs’ trademark, refurbishing, reformatting, removing the plaintiffs’ literature etc. amounted to changing the material condition of the goods and was tantamount to ‘impairment.'

  • The fact that one of the plaintiffs had entered into a full settlement with an importer for refurbished HDDs cannot be an estoppel and does not serve as res judicata.

  • The defendants were misrepresenting that the refurbished HDDs were brand new, manufactured/ imported by them, unused, and under their trademark, and this amounted to passing off old and used HDDs of the plaintiffs as new and unused, and ‘reverse passing off’ of the plaintiffs’ HDDs as the defendants.

  • The defendants’ conduct created a false impression that allowed the defendants to benefit from the plaintiffs’ effort without incurring legitimate costs which amounted to unfair competition and unfair trade practice and false trade description which would be violative of Section 2(i), 2(1)(za) read with Section 103 of the Trade Marks Act.

  • Due to the misrepresentation, the plaintiffs were receiving bad reviews which negatively impacted the business of the plaintiffs.

The defendant's submissions

  • The refurbished HDDs were embedded deep inside the equipment and the possibility of consumers associating them with a particular manufacturer was quite remote.

  • The Customs notification relied upon by the plaintiffs does not necessarily apply, considering that the goods were simply being imported into India as is, and then sold as refurbished devices.

  • The plaintiffs had not disclosed that they were aware that their HDDs were being imported and refurbished in India and they had entered into a full settlement with an importer. The plaintiffs, therefore, were precluded and estopped from maintaining the present suit.

  • There was no functional impairment which the defendants were causing to the product. The plaintiffs had no use of the product as according to them it was at its ‘end-of-life’ and they had “washed their hands off the HDDs."

  • Refurbishment was a regular industry practice worldwide, with the objective of extending “the lifespan of returned equipment and have the ability to restore devices to like-new condition."

  • The plaintiffs did not implement a “take-back” policy” for end-of-life HDDs and had in fact flooded the market with ‘end of life’ HDDs by entering into consent terms with another refurbisher.

  • The importers were liable to answer to the provisions of Section 29(6) of the Trade Marks Act since they were the buyers of goods and not the defendants.

  • Reverse passing off would not apply as there was no reference to plaintiffs’ trademarks and no association with the plaintiffs in any manner.

  • The “principle of exhaustion”  would apply to the goods which were being sold under the refurbishers’ warranty.

  • The de-branding of the product would not bring it under the purview of Section 29 or Section 30(4) of the Trade Marks Act.

  • The plaintiffs sold their product to original equipment manufacturers (OEMs), without any specific terms for resale in their contracts. The plaintiffs had also failed to advert to any action that had been taken against such OEMs for violations of terms of contract, if any, or had failed to produce any communication with the OEMs in this regard.

  • With regard to the alleged impairment, it was contended that the product was not diminished and the change added value to the life of the product. The purchaser would clearly understand that he was buying a used and refurbished drive.

  • Section 30(3) of the Trade Marks Act was not applicable since the HDDs were lawfully acquired and the “principle of exhaustion” would apply. Section 30(4) was not applicable as there was no impairment.

  • The consumer could not be confused as the plaintiffs’ trademark did not appear on the packaging for the sale of the HDDs. During the process of refurbishing, the plaintiffs’ trademarks are removed and replaced by the defendants who provide a unique serial number and model number which are not that of the manufacturer.

Submissions by Amicus Curiae

The Amicus Curiae highlighted three major legal issues :

  • Is there an infringement at all under Section 29 of the Trademarks Act, in the present case?

  • Is the ‘principle of exhaustion’ applicable to the present case?

  • Even if there was lawful acquisition and exhaustion, could the plaintiff have a right to challenge dealing in goods under Section 30(4) of the Trade Marks Act?

On the first issue, the amicus curiae opined that in the present case, the goods had been de-branded, which could occur where the brand was not visible at all or where it would be visible only when it is activated.

On the second issue of ‘exhaustion’,  since the defence taken under Section 30(3) would be by the defendants, the defendants would have to establish ‘exhaustion’ and prove that the import was not in violation of the terms for which the goods were put into the market.

On the third issue, the onus would be on the plaintiffs to prove impairment or other reasons under Section 30(4) of the Trade Marks Act.

The Amicus Curiae referred to the decision of the US Supreme Court in Champion Spark Plug Co. vs. Sanders, 331 U.S. 125 (1947) wherein it was held that refurbishment and rebranding were permissible with sufficient disclosures and disclaimers and there should not be any misrepresentation or damage to the brand in terms of source and quality.  The absence of such disclosure and disclaimer would create confusion and misrepresentation and would fall within the realm of passing off.

Analysis and order

The Court observed that neither were the plaintiffs able to produce any rule, regulation or policy which prohibited the import of discarded HDDs/ equipment into India nor was there any restrictive or prohibitive import policy or circular which could lead to a conclusion that the importation of these end-of-life HDDs were in any manner whatsoever prohibited in India.

The Court further observed that the plaintiffs were unable to produce any agreement or term which prohibited the detachment of the HDDs from the equipment and prevented further disposal, inter alia, through export to other countries. The plaintiffs had not produced any material to indicate that the import was illegal or any complaint in this regard had been initiated by the plaintiffs with the customs authorities or the appropriate government department.

The sale and purchase of the HDDs were through a formal invoice with tax being paid to the relevant government authority which indicates there was no attempt to hide the transaction, or to not disclose the same, or indulge in some surreptitious activity.

The Court opined that it was necessary to balance the interests of the trademark owners, the refurbishers in the secondary market, consumers requiring a different price point and the necessity to preserve resources and reduce waste while passing any orders/ directions.

Conclusion

The Court observed that refurbished, second-hand, pre-owned goods exist in most countries of the world since they cater to a different market, that of a lesser paying customer. Once the warranty on these products manufactured by OEMs has expired, they are not liable for any repair or servicing from the manufacturer. This is where the principle of exhaustion comes into play and therefore, under Section 30(3)(b), the registered owner/ manufacturer has no right to object to any dealing.

The Court emphasised that  ‘full disclosure’ was necessary to prevent the loss of reputation and goodwill of the manufacturer and also to ensure that the customer is fully aware of the goods that they are purchasing.

To achieve this, the court passed the following directions for sale of refurbished goods:

(i) Packaging to identify the source of the product: The packaging of the refurbished product is to indicate the name of the original manufacturer/ plaintiff. It should be clear, but not dominating the packaging, so that the customer is not deceived.

(ii) Reference to the original manufacturer is to be made through their word mark and not the device mark: The Defendants should use the word mark of the plaintiffs.

(iii) Packaging must specify that there is no original manufacturer’s warranty: A clear statement must be made to the effect that there is no manufacturers’ warranty or service on the product.

(iv) Packaging must specify that the product is “Used and Refurbished’: A prominent statement on the front of the packaging to the effect that the product is “Used and Refurbished” by the concerned defendants.

(v) Statement as to extended warranty by the Refurbisher: A clear and prominent message that the warranty or service of specified years is being provided by the concerned defendants along with customer care details and contacts.

(vi) Packaging must reflect an accurate description of the features: An accurate, truthful,  precise description of features and purpose of the refurbished product, without any misleading, half-truth, deceptive, ambiguous statements (which could potentially misinform the consumer as to the features of the product and the purposes for which it could be used).

(vii) All of the above should also be complied with by the defendants on promotional literature, website, e-commerce listings, brochures and manuals.

The Court, after studying the judgements passed by other courts, has adapted the same to the Indian context, so that maximum benefit can be offered to Indian consumers and businesses while safeguarding the rights and interests of OEMs and the actual manufacturers.

While the present case offers directions specifically for refurbished HDDs, the directions could be used for other refurbished goods also.

About the authors: Mahua Roy Chowdhury is the Managing Partner of Royzz & Co. Jitendra Bohra is a Partner at the Firm.

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