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02 February 2021
Does the governing law for passing-off claims fall under Article 6 or 8 of the EU Rome II Regulation? The High Court recently explored this question in Lyle & Scott Limited v American Eagle Outfitters Inc.(1)
Lyle & Scott Limited and American Eagle Outfitters Inc are both well-known clothing brands. Lyle & Scott is incorporated in England and American Eagle Outfitters is incorporated in Delaware. Both companies use a branded flying eagle image on their clothing, Lyle & Scott since at least 1968 and American Eagle Outfitters since 1982. Although there are certain differences between the eagles, they are very similar.
Following a discovery that American Eagle Outfitters had been using its image on clothing sold in the United Kingdom and the European Union, Lyle & Scott contended that American Eagle Outfitters had infringed its registered trademarks in the United Kingdom and the European Union.
The parties met in London to negotiate the use of the image and a hand-written memorandum was drawn up setting out an agreement that American Eagle Outfitters would sell clothing featuring the branded device only in American Eagle Outfitters stores or stores within stores or on its website. Negotiations subsequently broke down and American Eagle Outfitters sought a declaration that the hand-written memorandum constituted a valid and binding agreement. This was ultimately upheld by the US Court of Appeals for the Third Circuit.
On 4 August 2020 Lyle & Scott brought proceedings against American Eagle Outfitters, alleging that it was selling clothing with the eagle image on UK websites ASOS and Zalando, in breach of contract and in an act of passing off.
Having been granted permission, Lyle & Scott served the claim out of the jurisdiction in Pennsylvania, and American Eagle Outfitters applied to set aside that order. The appeal was rejected.
The relevant principles to be applied when seeking permission to serve a claim outside of the jurisdiction are set out in Civil Procedure Rule 6.37, summarised as:
1. there is a serious issue to be tried on the merits. This is the same as a test for (reverse) summary judgment [first limb];
2. there is a good arguable case that the claim falls with one of the jurisdictional gateways [second limb]; and
3. in all the circumstances of the case England and Wales is clearly or distinctly the appropriate forum for the trial of the dispute, and that in all the circumstances the court ought to exercise its discretion to permit service of the proceedings out of the jurisdiction [third limb].(2)
It was agreed that the second limb had been met as the agreement had been made within the jurisdiction, and that it was sufficiently arguable that damage which had been incurred as a result of the passing-off claim would have been sustained in the jurisdiction. However, American Eagle Outfitters argued that the first and third limbs had not been successfully met.
The test under the first limb was whether there was a real (as opposed to fanciful) prospect of success. Justice Miles concluded that the two images were closely similar and that there was potential for confusion between them. At trial, the court would be able to assess through evidence any factual assumptions made by American Eagle Outfitters – for example, about customers' knowledge and understanding of both brands, among other issues. Further, an absence of evidence about actual confusion did not assist American Eagle Outfitters on the current state of the evidence. The judge concluded that the passing-off case raised a serious issue to be tried.
The third limb of the test was also satisfied; the courts of England and Wales were the appropriate forum for the case. The judge explored the various factors that played into his decision.
Governing law under Rome II
It was likely that the governing law in this cause of action would be English law, in accordance with EU Rome II Regulation.(3) The claim of passing off fell within Article 6(2) of Rome II (on unfair competition affecting the interests of a specific competitor) rather than Article 8 (on infringement of IP rights). Consequently, the default applicable governing law was that of the country in which the damage occurred (the test to determine governing law under Article 4). The test under Article 8 differs, as it judges governing law on the law for which protection is claimed. Passing off did not require infringement of an IP right as defined in the recital, as the purpose of the cause of action is to protect the goodwill of traders against deceptive conduct, and goodwill is not an IP right.
Other important factors in the judge's decision included that the tort had been committed within the jurisdiction and that the claim related to damage of the goodwill of Lyle & Scott, a territorial concept. Further, at trial, the passing-off claim would likely involve factual or expert evidence about consumers based in the United Kingdom, which would favour the jurisdiction of England and Wales. In addition, any injunctive relief would be granted in respect of conduct taking place in the United Kingdom (ie, American Eagle Outfitters would be required to stop selling clothing on UK third-party websites). However, the judge did note that the parameters of the dispute extended beyond the United Kingdom, as the outcome of the proceedings would have global ramifications for both parties. Any contract claim would be governed by Pennsylvania law. However, on balance, the connecting factors were found to be in favour of the claim being appropriately tried in the courts of England and Wales.
When determining the governing law of a passing-off claim under Rome II, it will fall under the umbrella of Article 6, rather than Article 8, as an act of unfair competition. This decision remains relevant to English law in light of Brexit as the United Kingdom has legislated to incorporate Rome I and II into English law following the end of the transition period.(4)
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