Through adequate due diligence, you can protect yourself by not investing in companies that are passing off their goods and services as those of another company, saving you time, money and problems.
New companies are being launched every day, bringing a host of goods and services to the market. Some of these goods and services are driven by disruptive innovation, while others simply aim to outperform their rivals through techniques such as competitive pricing.
These new companies often need working capital from investors like you, but before you invest, your due diligence team should look beyond financial data and check if the goods and services supplied by the target company aren’t misleading customers and amounting to passing off.
What is passing off
According to the Crown Prosecution Service, passing off happens when a defendant (could be an individual or a company) makes a misrepresentation – which itself may or may not involve the use of a trade mark – and causes damage to the goodwill of a claimant’s business which is known by ‘a distinguishing sign or mark’. The distinguishing sign or mark is an unregistered trade mark and could include a slogan, a visual image, or something that has become part of the goodwill or reputation of the claimant’s business. Strictly the right is not in the claimant’s unregistered trade mark but in the business conducted under that sign or mark.
Common passing off examples
- The defendant sells counterfeit goods that are highly similar to the goods produced by the claimant
- The defendant sells the claimant’s second-hand goods as new.
- The defendant sells the claimant’s goods in containers that are easily recognised as the claimant.
- The defendant falsely represents themselves as part of the same company as the claimant.
- The defendant falsely claims that the claimant has endorsed the defendant’s goods or services, or the defendant’s goods or services are authorised by the claimant.
- The defendant falsely claims the supplied goods or services were supplied by the claimant.
An example of extended passing off
Extended passing off happens when a defendant uses a description or a similar term that is widely known to associate with a particular product of the claimant. The 2013 FAGE UK v Chobani UK case is one of the best examples.
Since the mid-1980s, FAGE has imported yoghurt from Greece which they describe as “Greek yoghurt” and sell throughout the UK. For yoghurt that has a thick and creamy characteristic similar to Greek yoghurt but not produced in Greece, it is simply known as “Greek-style yoghurt” in the UK. In 2012, Chobani, a US-company, introduced US-made Greek-style yoghurt as “Greek yoghurt” in the UK, despite it being not produced in Greece. FAGE argued that by using the phrase “Greek yoghurt”, Chobani’s action would amount to a misrepresentation and caused deception and damage. At the trail, judge Briggs J held that Chobani’s use of the term “Greek yoghurt” amounted to extended passing off. Subsequently, he granted a permanent injunction to that effect.
Due diligence can save you time, money and problems
Passing off isn’t new and it can happen to products, services, or even a company’s marketing campaigns. In 2019, a UK-based fast-fashion company was ordered to pay US$2.8 million, plus legal fees, to a US-based celebrity for using the celebrity’s ‘persona and trademarks’ to sell replicas of their outfits.
The celebrity said that the fashion company didn’t just ‘replicate the looks of celebrities’ but ‘systematically used the names and image’ of stars to promote its website. For instance, the fashion company regularly tagged the celebrity on Instagram as part of their marketing campaigns.
When passing off is proven in court, the judge will usually order the defendant to pay financial compensation to the claimant which is proportionate to the actual damage caused. In addition, the judge may also order the following remedies when appropriate:
- An account of profits – a payment by the defendant to the claimant of the profit made from the passing off
- A permanent injunction to restrain the competitor from further passing off in the future
- Orders to destroy articles which pass off
- Other remedies deemed appropriate
If you have invested in a company that is accused of passing off, you may suffer monetary loss or even reputational damage, along with unwanted media attention. If some facts of a passing off case have given rise to a criminal offence, then you may be in bigger trouble. The good news is, you can protect your investment and your reputation from the beginning by asking your due diligence team to look beyond financial data and dig deeper into the target company to uncover dubious activities. For instance, our due diligence team can help you to understand better the target company’s culture, its business practices and the likelihood that it may give rise to civil liability.
Call the due diligence team at Blackhawk Intelligence today on +44 (0)20 8108 9317.