FIRST-PAST-THE-POST: PRE-EMPTIVE MARKETING AS UNLAWFUL COMPETITION

Monday, April 16, 2007
  • SHARE THIS ARTICLE

First-past-the-post: Pre-emptive marketing as unlawful competitionBy Wim Alberts

Introduction

The following situation is not uncommon in practice. A is about to launch a product on the market when B, a competitor, pre-empts him by commencing the marketing of a product under a similar name. What is A’s legal position? If a trade mark registration has been obtained, the registration can be a very effective way of preventing the use of B. If there is no trade mark registration, the remedy of passing off may be relevant. However, traditionally, it is a requirement for passing off that there must have been an entry of the market, and that a reputation must have been established. Where a mark has not yet established a reputation, and no trade mark registration has been obtained, it would seem that a business that is in the process of launching a product would have no protection. If a concerned client calls upon a practitioner for advice, the only option left may be to rely on the remedy of unlawful competition. What is the case law on this situation? In the discussion that follows, consideration will firstly be given to the manner in which our courts have dealt with the issue of the entry of a market in passing off cases, as well as in instances of unlawful competition. Secondly, it will be considered what the role of a competitor’s motive is in instances of unlawful competition. Thirdly, the question whether the use of a descriptive mark can also be prevented on the basis of unlawful competition, will be investigated.

Entry of the market as a relevant factor in passing off cases

A label of a competitor was obtained prior to the launching of a product in Stellenbosch Wine Trust Ltd v Oude Meester Group Ltd. 1972 (3) SA 152 (C). In this matter A planned an extensive advertising campaign for the launch of a new product. Twelve days before the start of the campaign, B commenced marketing of a product which had a label similar to that of A. B argued that the product had, at the relevant time, not yet been marketed and that the label had accordingly not acquired a reputation (page 159 H). This notwithstanding, the conduct of B was held to amount to passing off (the use of confidential information also constituted unlawful competition). In Pepsico Inc v United Tobacco Co Ltd. 1988 (2) SA 334 (WLD), A’s product, potato chips, to be branded Ruffles, was also not yet on the market. This product was introduced to the major retailers, and factory equipment was purchased, which was used to make samples. Thereafter the introduction of packaging took place, as well as the development of an advertising strategy and sales merchandising. B then launched a similar product under the name Ruffles. B adopted the approach that it had entered the market prior to A’s launch, that there was no reputation amongst end-users, and that, consequently, there was no passing off. The court concluded (page 346 D – I) that the consideration that the product had not gone through to the final consumer is not a disqualification. There was a reputation in some sectors of the market, and the conduct was held to amount to passing off (unlawful competition was also held to have been present).

A similar approach was followed in the British decision of Alida Gibbs Limited v Colgate Palmolive Limited [1983] FSR 95. Here A decided in March to launch a marketing campaign for a new toothpaste which would be based on a tree theme. A made presentations to the trade in August, and in September it was introduced to the press, professional bodies, and government departments. The public and in particular the television campaign, was to start on Monday, the 18th of October. B became aware of A’s intended public marketing campaign to be launched on the latter date, and on Sunday the 17th of October it placed an advertisement featuring a tree theme in a national Sunday newspaper, and the next day in two national newspapers, in an attempt to pre-empt A’s campaign and to assert their entitlement to the theme in question. On Monday the 18th of October A placed his advertisement in national newspapers. B adopted the approach that on the 17th and the morning of the 18th of October, A had no reputation amongst the general public to the tree theme and could not positively have acquired it because its television programme did not begin to show until some later time on the 18th. The court however still ruled in favour of A on the basis of passing off.

In summary, the Stellenbosch Wine Trust, Pepsico, and Elida Gibbs cases granted relief on the basis of passing off, even though there was not yet an entry into the market, at least as far as end-consumers were concerned.

Entry of the market as a relevant factor in unlawful competition cases

The issue of an entry into the market was also considered in the context of a claim based on unlawful competition in the decision of the Full Bench of the Transvaal Provincial Division in Carling National Breweries Incorporated v National Brewing Company Patent Journal December 1979 126. A more strict approach was adopted. Here a beer named Colt 45 was intended for marketing in South Africa. Marketing materials were prepared, strategic studies were done, and a short trial run was conducted. About a week prior to the launching of the beer by the appellants, the respondent advertised its intention to market a product to be called Stallion 54. Advertisements were placed in various newspapers and the product was available at certain liquor stores. The Colt 45 product was not yet available. The court, having dismissed the trade mark infringement action, remarked (page 128, own emphasis) as follows:

"I am equally of the view that the Court a quo rightly non-suited the appellants on their claim based on unfair competition. By the time the respondents placed their product on the South African market, the appellants had, save for a very small trial run, not yet come onto the market. How the fact that a competitor has entered the market which another is as yet only contemplating to do can be labeled unfair competition surpasses my understanding."

Motive as a relevant factor in unlawful competition cases

If a product is not yet on the market, can the motive of a competitor to disrupt the launching process amount to unlawful competition? This appears to be the case when regard is had to a number of decisions. In Kellogg Company v Bokomo Co-operative Limited 1997 (2) SA 725 (C) B allegedly brought forward the launch date of its product so as to interfere with A’s marketing plans. A submitted that B’s launch has been on a very limited scale, that it had no product on which to use its mark, urgently purchased a cereal biscuit from a large chain store, and that the pack design of this product was made in a number of days. B adopted a different approach. It stated that it had decided to introduce line extensions to its brand and that the plans faltered because of manufacturing difficulties and unavailability of technology. It also stated that it commenced the construction of a manufacturing plant at a cost of more than 60 million rand and that it intended to import products merely until its own facility was ready. The court ruled in favour of B, stating (page 739 E, own emphasis) the following:

"I am, on the facts at my disposal, satisfied that the respondent, by having brought forward the launch date of Nu-bix, was actuated by the advancement of its own economic interests which, generally speaking, is a legitimate motive for acting and not to the detriment of the applicants."

This decision does not necessarily establish that motive is irrelevant, but is rather a finding on the particular facts. On the other hand, in the Carling case, the court formulated certain principles that would find application in instances of interference with a marketing campaign. It was said (page 128, own emphasis) that:

"One realises that in this field, as no doubt in many others, competition amongst rival traders is very keen and that there must inevitably be manoeuvres, sometimes skillfully conducted, to steal a march on a competitor, but that is part of the game, and a practice which in general can only redound to the public benefit. It is part and parcel of our free trade policy. A Court will only interfere if a rival uses methods which are manifestly unfair, and it does so with a weather eye on the public benefit. As long as the rivalry between competing traders is fair, and not to the detriment of the general public interests, a Court should, in my view, leave the competitors to fend for themselves. Should a competitor, through his diligence and foresight, steal a march on a rival competitor, he should not, merely because of that, be censured by a court of law."

This statement is, as a general pronouncement, with respect, open to criticism. When regard is had to the extensive preparations and considerable cost involved in the process of launching a new product it is, arguably, indeed against the "general public interests" to disrupt same. A more appropriate view was adopted in the Pepsico case, where the motive of the defendant was considered to be relevant. After considering the chronology of events, the court answered (page 349 G – H, own emphasis) the question whether the actions of the respondent amounted to unlawful competition as follows:

"In my view, fairness and honesty applied to their actions, manifest those traits by their lack of application by the respondent. With the knowledge that the product was to be launched, they scurried off and prepared a launching on a small scale with the express intention of preventing the applicant from carrying out its prepared introduction and final launch in October of its product."

It was said to be sharp practice constituting unlawful competition to attempt to pre-empt A’s launch. In summary, the Carling case seems to support the view that it is only in exceptional instances that sabotage marketing will be proscribed. The Pepsico decision, on the other hand, supports the view that mala fides can cause an act to be judged as unlawful competition.

Protection for descriptive marks by way of unlawful competition

Particular problems are experienced when there is prior use of a mark, but it is of a descriptive nature, as this would normally exclude protection on the basis of passing off. This would be the position because, if the mark is descriptive, it would be unlikely that it would have built up a reputation at the date that the respondent commenced use of the mark. The existence of a reputation at that date is a sine qua non for liability on the basis of passing off. However, can reliance be placed on the general ground of unlawful competition?

In regard to this question, it is important to bear in mind the decision in Bress Designs (Pty) Ltd v GY Lounge Suite Manufacturers (Pty) Ltd. 1991 (2) SA 455 (W). Here the court took into consideration the fact that the respondent’s actions had as their sole or dominant purpose the infliction of harm for its own sake. In this decision protection was granted although the shape of the product concerned, a sofa, was not of a distinctive nature. It is submitted that an analogy can be made with the position of a descriptive mark.

It is of value in this regard to consider the views of Van Heerden and Neethling Unlawful Competition who deal with situations where the lawfulness of the conduct of the second user of a descriptive mark is revoked. This would be where the second user’s purpose is to pass off his goods as that of the first user. This will, prima facie, be in conflict with the competition principle. They describe (page 174 note 149) another instance as follows:

"[T]his occurs where the second user’s exclusive aim is to injure the first user by his conduct. Because of the obvious absence of a legitimate interest on the part of the perpetrator in utilising the descriptive words – and here, as has been argued earlier…his improper motive is a strong indication of his lack of interest and therefore the unreasonableness of his act – his infringement of the first user’s [descriptive] mark is branded unlawful."

The position thus seems to be that even though there is interference with a marketing campaign relating to a descriptive mark, a business will still have protection on the basis of unlawful competition.

Conclusion

It appears that the courts have been prepared to grant protection, albeit that the relevant product has not yet been available on the market. Thus, in the Stellenbosch Wine Trust case, passing off was found to have occurred. The lack of a market presence, or rather the lack of a presence amongst end consumers, was also held not to exclude protection in the Pepsico and Elida Gibbs decisions. In contrast, in the Carling decision, the absence of a presence on the market was fatal to the applicant’s case. In relation to the motive and the possible unlawfulness of the pre-emption of a competitor’s marketing campaign, it was held in the Carling case that "maneuvers" may be employed "to steal a march" on a competitor, and such actions were seen to be acceptable in our economic structure, as long as the rivalry remained fair, and was not to the detriment of the public interest. On the other hand, in the Pepsico-case, it was held relevant that the respondent, with the knowledge that the product was to be launched, quickly launched their product with the express intention of thwarting the applicant’s marketing campaign. The business who plans to launch a product under a descriptive name is confronted with the requirement of the existence of a reputation, in order to be able to rely on passing off. This will, per definition, be absent. The availability of protection against sabotage marketing could thus hinge on the question whether unlawful competition can be established. It is submitted that such a business should, in appropriate circumstances, be able to obtain a remedy on that ground. The reasoning in the Bress Designs as well as the views of writers such as van Heerden and Neethling, would support this approach. It may be apt to observe, in conclusion, that in cases of doubt, the boni mores should be the appropriate norm to determine whether the first person past-the-post should in fact be the winner.