Delhi High Court

Microsoft Corporation & Anr vs Jayesh & Anr on 21 February, 2014

Author: Rajiv Sahai Endlaw

         IN THE HIGH COURT OF DELHI AT NEW DELHI

%                                        Date of decision: 21st February, 2014.

+                             CS(OS) 1067/2007

         MICROSOFT CORPORATION & ANR           .....Plaintiffs
                     Through: Ms. Jaya Negi, Advocate.

                                     Versus

         JAYESH & ANR                                       ..... Defendants
                              Through:      None
CORAM:
HON'BLE MR. JUSTICE RAJIV SAHAI ENDLAW

1.

The right of the plaintiffs to restrain the defendants from selling or

distributing unauthorized importations of the plaintiffs' XBOX gaming

consoles, within the meaning of Section 30(4) of The Trade Marks Act,

1999, is the question for adjudication in the present case.

2. The case of the plaintiffs as laid out in the plaint is:

I. that the plaintiff No. 1 Microsoft Corporation is a company

organized and existing under the laws of the State of

Washington, USA and is the developer/owner of the XBOX

gaming console and XBOX games;

II. that the plaintiff No. 2 Microsoft Corporation India Private

Limited is the wholly owned marketing subsidiary of the

plaintiff No. 1 having its office at Nehru Place, Delhi and

provides marketing and promotion, anti-piracy awareness

campaigns and actions, and channel development support to the

plaintiff No. 1;

III. that as a result of widespread business activities of the

plaintiffs world over and in India and the roaring success of its

products, the consumers and members of trade in India are well

familiarized with the plaintiffs' trade mark/trade name

Microsoft and trade mark XBOX, and as such the aforesaid

trade marks are recognized and identified as the source

indicator of the goods, services and business of the plaintiffs

alone;

IV. that the plaintiffs are also the registered proprietors of the

aforesaid trade marks in various jurisdictions of the world and

their trade marks have acquired the status of well-known and

famous trade marks;

V. that the plaintiffs have also registered the trade marks

Microsoft and XBOX ('X' design) in India with respect to

software, electronic goods and components;

VI. that the plaintiff No. 1 is also the owner of copyrights in the

XBOX DVD games by virtue of the same being a 'computer

program' and 'literary work' under the Copyright Act, 1957;

VII. that the XBOX gaming consoles are packaged and earmarked to

be exclusively sold in various countries under strict warranty

guidelines and policies for the benefit of the consumers;

VIII. that an 'unauthorized import' (also known as a Gray Market

Product) is a genuine, non-counterfeit product which escapes

the authorized channel of shipment, distribution and sales of

the manufacturer/IP Owner and reaches another

country/territory for which it was not earmarked or authorized

to be sold or distributed;

IX. that such unauthorized imports being goods sold in a market

where they are not authorized to be sold, entail repercussions

for: (a) the seller - since the unauthorized trader uses his own

distribution network, the goods are susceptible to damage and

impairment during transport, handling and storage, (b) the

consumer - since they are unable to avail of any warranties or

after-sales support on such goods, and, (c) the Government -

which loses taxes and custom collection on account of such

goods being often smuggled or under-invoiced at entry ports;

X. that though the doctrine of 'exhaustion of rights' embodied in

Section 30(3) of the Trade Marks Act postulates that the legal

monopoly of the intellectual property rights owner is confined

to the first sale only and thereafter his rights are exhausted qua

subsequent dealings of the same product, Section 30(4) of the

Act nevertheless permits the proprietor to oppose further

dealings in the goods, in particular, „where the condition of the

goods has been changed or impaired‟ after they have been put

on the market;

XI. that plaintiffs in April 2007 received information that the

defendant No. 1 Mr. Jayesh as sole proprietor of defendant No.

2 M/s Stop Shop is infringing the plaintiffs' trade mark rights

by carrying on business of selling gray market / unauthorized

importations of the XBOX gaming consoles;

XII. that upon engaging an independent investigator to visit the

business premises of the defendants and to purchase an XBOX

gaming console, the plaintiffs learnt that the defendants had

infringed their trade mark rights by making the following

changes and impairments to the condition of the XBOX gaming

consoles after the same had been put in the market:

(a) tampering with the XBOX gaming console's built-in

hardware and software security mechanism, thereby

enabling a user to run counterfeited/pirated XBOX

games on the console, and which makes the XBOX

gaming console vulnerable and susceptible to

technical glitches and serious malfunction;

(b) selling XBOX gaming consoles earmarked to be sold

in South Korea only and containing instructions and

description in Korean language, thereby violating the

plaintiffs' terms of sale; and

(c) rendering such XBOX gaming consoles absolutely

ineligible for any warranty support on account of the

aforementioned changes in conditions and

impairment of the XBOX gaming console;

XIII. that in addition to the aforementioned infringement of the

plaintiffs' trade mark rights, the defendants have also infringed

the copyrights of the plaintiffs by selling counterfeit/pirated

versions of the plaintiffs' XBOX games.

The plaintiffs have accordingly prayed for a permanent injunction

restraining the defendants from infringing their trade mark rights and

copyrights by selling or distributing gray market / unauthorized

importations of the XBOX gaming consoles and/or pirated/counterfeit XBOX

games; they have further sought delivery-up of the infringing material,

rendition of accounts and damages to the tune of Rs. 20 lakhs.

3. This Court issued summons in the suit to the defendants on

30.05.2007 and vide order of the same date granted an ex-parte ad-interim

injunction in favour of the plaintiffs. This Court, at the request of the

plaintiffs, also appointed a Local Commissioner to visit the premises of the

defendants and inspect the XBOX gaming consoles as well as the XBOX

games bearing the trade mark of the plaintiffs and to determine if the same

are unauthorized imports and/or infringing versions of the plaintiffs'

products, and to, if found to be so, seize and seal the same after making an

inventory thereof and entrust them on superdari to the defendants. The

Local Commissioner, in compliance of the aforesaid orders of this Court,

has filed his report.

4. Upon the failure of the defendants to appear despite due service of

summons, this Court vide order dated 02.12.2011 ordered the defendants to

be proceeded ex-parte and directed the plaintiffs to file their affidavits by

way of ex-parte evidence.

5. The plaintiffs accordingly examined their lone witness Col. J.K.

Sharma (Retd.) who tendered his affidavit into evidence on 12.11.2013 and

closed their ex-parte evidence. Col. J.K. Sharma (Retd.) in his affidavit

tendered in evidence before this Court has reiterated the averments in the

plaint, as reproduced above, and proved the following documents:

I. Notarized copies of the Power of Attorneys bearing Exhibits

PW1/1 to PW1/4 executed by the plaintiffs in favor of Mr.

Anand Banerjee (who has instituted the suit on behalf of the

plaintiffs) and Col. J.K. Sharma (Retd) for the purpose of

deposing on behalf of the plaintiffs before this Court.

II. Printouts of the webpages describing the XBOX gaming console

from its website bearing Exhibit PW1/5 to suggest that the

XBOX is a revolutionary video gaming system.

III. Copy of the warranty booklet of the XBOX 360 bearing Exhibit

PW1/6 to demonstrate that the changes made by the defendants

would render the gaming console ineligible for warranty under

the plaintiffs' terms and conditions.

IV. List of XBOX games owned and published by the plaintiffs

bearing Exhibit PW1/7.

V. Copy of the relevant extracts from „Brands, an Intenational

Review‟ bearing Exhibit PW1/8, which is stated to be a reputed

authority on brands and which has rated the plaintiffs' trade

mark Microsoft amongst the few well known trade marks of the

world.

VI. Finally and most importantly, the Trade Mark Registration

Certificates of the plaintiffs bearing Exhibit PW1/9 of the word

mark Microsoft and the 'X' design of XBOX, both under Class 9

with respect to software, electronic goods and components.

6. The report filed by the Local Commissioner pursuant to the orders of

this Court supra, records that upon inspection of the business premises, five

boxes of XBOX 360‟s and forty CDs of XBOX 360 were found to be

unauthorized imports, i.e. meant to be sold in the Korean market alone, and

were thus seized and sealed and released on superdari to the defendant No.

1. The 'On the Spot Proceedings' annexed to the report, and which contain

the aforesaid finding as well, is found to bear the signature of defendant No.

1, thereby indicating his acceptance of the contents thereof.

7. It is in the backdrop of the aforesaid unrebutted factual averments and

evidence that this Court has to reach the decision as to whether a case under

Section 30(4) of the Trade Marks Act has been made out by the plaintiffs,

so as to warrant restraining the defendants from selling or distributing such

XBOX gaming consoles and/or XBOX games.

8. Since the plaintiffs have predicated their entire case on the

applicability of Section 30(4) of the Trade Marks Act, it would be proper to

extract the same before any discussion in this regard is made and since sub-

section (4) is in terms a proviso engrafted upon sub-section (3), which

precedes it, to present a clear picture, both the sub-sections have been

reproduced below:

"(3) Where the goods bearing a registered trade mark are lawfully acquired by a person, the sale of the goods in the market or otherwise dealing in those goods by that person or by a person claiming under or through him is not infringement of a trade by reason only of-

(a) the registered trade mark having been assigned by the registered proprietor to some other person, after the acquisition of those goods; or

(b) the goods having been put on the market under the

registered trade mark by the proprietor or with his consent.

(4) Sub-section (3) shall not apply where there exists legitimate reasons for the proprietor to oppose further dealings in the goods in particular, where the condition of the goods has been changed or impaired after they have been put on the market." (emphasis supplied)

9. To place the aforesaid provisions in perspective, it must be, at the cost

of repetition, pointed out, that sub-section (4) carves out an exception to

sub-section (3) thereby enabling a proprietor to, for legitimate reasons and

in particular where the condition of the goods with respect to which his

trade mark rights subsist have been changed or impaired, oppose further

dealings in such goods - notwithstanding the principle of exhaustion

enshrined in sub-section (3) which deems such further dealings in the goods

by a person who has lawfully acquired them to not constitute infringement

under the Act.

10. Fortunately, the scope and ambit of this proviso has received the

meticulous attention of the Division Bench of this Court in Kapil Wadhwa

Vs. Samsung Electronics Co. Ltd. 194 (2012) DLT 23, though only at the

stage of Order 39 Rule 1&2 CPC. This Court in that case was called upon to

determine whether the rights of the plaintiff Samsung to oppose further

dealings stood exhausted only in the domestic market where its goods had

been lawfully acquired or world-wide i.e. even in international markets

where such goods may be exported and sold. This Court after an extensive

analysis of the provisions of the Trade Marks Act, particularly sub-sections

(3) and (4) of Section 30, came to the conclusion that the legislature has

adopted the principle of 'international' exhaustion of trade mark rights and

that the plaintiff Samsung was precluded from challenging further dealings

in its goods not only in the national market where its goods were first

legitimately purchased but also in the markets of other countries where such

goods may land up. However, the Court recognized the availability of sub-

section (4) as a mode of redress to the registered proprietors of trade marks

and expounded its ambit as thus:

" 68. With reference to sub-section 4 of Section 30 of the Trade Marks Act 1999 it would be relevant to note that further dealing in the goods placed in the market under a trade mark can be opposed where legitimate reasons exist to oppose further dealing and in particular where the condition of the goods has been changed or impaired. With respect to physical condition being changed or impaired, even in the absence of a statutory provision, the registered proprietor of a trade mark would have the right to oppose further dealing in those goods inasmuch as they would be the same goods improperly so called, or to put it differently, if a physical condition of goods is changed, it would no longer be the same goods. But, sub- section 4 of Section 30 is not restricted to only when the conditions of the goods has been changed or impaired after they have been put on the market. The section embraces all legitimate reasons to oppose further dealings in the goods.

Thus, changing condition or impairment is only a specie of the genus legitimate reasons, which genus embraces other species as well. What are these species? (i) Difference in services and warranties as held in the decisions reported as 423 F.3d 1037 (2005) SKF USA v International Trade Commission & Ors.; 35 USPQ2d 1053 (1995) Fender Musical Instruments Corp. v. Unlimited Music Center Inc.; 589 F. Supp. 1163 (1984) Osawa & Co. v. B&H Photo. (ii) Difference in advertising and promotional efforts as held in the decisions reported as 70 F.Supp 2d 1057 PepsiCo Inc v Reyes; 589 F. Supp. 1163 (1984) Osawa & Co. v. B&H Photo.

(iii) Differences in packaging as held in the decision reported as 753 F. Supp. 1240 (1991) Ferrerro USA v. Ozak Trading.

(iv) Differences in quality control, pricing and presentation as held in the decision reported as 982 F.2d 633 (1992) Societe Des Produits Nestle v. Casa Helvetia. (v) Differences in language of the literature provided with the product as held in the decisions reported as 423 F.3d 1037 (2005) SKF USA v International Trade Commission & Ors.; 70F.Supp 2d 1057 PepsiCo Inc v Reyes; 816 F.2d 68, 76 (2nd Cir. 1987) Original Appalachian Artworks Inc. v. Granada Electronics Inc." (emphasis supplied)

11. Thus, the Division Bench of this Court has prima facie held that

'legitimate reasons' which entitle a proprietor to oppose further dealings in

his goods under sub-section (4), even in the teeth of sub-section (3) thereof,

has a capacious connotation and includes not only physical change or

impairment in the condition of the goods, but also disparities in warranties

as well as differences in the language of the literature provided with the

product.

12. In view of the aforesaid dicta of this Court in Kapil Wadhwa supra,

though on a prima facie view of the matter, at the stage of Order 39 Rules

1&2 CPC and the defendants herein having failed to contest the suit, it is

held that the plaintiffs have established a case for grant of permanent

injunction restraining the defendants from selling or distributing XBOX