Flynn Pharma Ltd v Drugsrus Ltd & Anor

This appeal is concerned with the interaction of trade mark rights and the EU rules about the free movement of goods. The issues involve the application of Article 36 of the Treaty on the Functioning of the European Union (“TFEU”) which prohibits disguised restrictions on trade between member states. DrugsRus Limited and Tenolol Limited (together “the appellants”) appeal from the decision of Rose J dated 6 October 2015 in which she found that the appellants would infringe UK registered trade mark number UK 2630656 and Community registered trade mark number EU 11097383, each for the word FLYNN and belonging to Flynn Pharma Limited (“Flynn”), if they applied the sign “Phenytoin Sodium Flynn” to the packaging of the drug phenytoin sodium which they wished to import from other EU member states.

Phenytoin sodium is that drug’s international non-proprietary name (“INN”). It is principally an anti-epileptic drug or AED. It was originally developed by Parke-Davis in the 1930s. It is what is described as a mature drug, in that it is now prescribed very rarely to new patients. Nevertheless, it has a substantial cohort of patients for whom it continues to provide continuing and welcome therapy. A significant characteristic of the drug is that it has a narrow therapeutic index or window. This means that there is a small difference between the blood level of the drug which is necessary to achieve therapeutic efficacy, on the one hand, and the blood level at which the drug becomes toxic, on the other. Epilepsy patients must therefore achieve a high degree of stability of their blood level; even a small change in blood level may render the drug ineffective or toxic.

The narrow therapeutic index of phenytoin sodium caused the Medicines and Healthcare Products Regulatory Agency (“MHRA”) to issue guidance in November 2013 about prescribing AEDs (“the Guidance”). The MHRA was concerned that, even if two products have the same active ingredient and are presented in the same form, different sources of the active ingredient or different places or methods of manufacture might result in subtle differences in the product such that one product might not be therapeutically or clinically the same as another. The MHRA advised doctors to ensure that their patients were maintained on a specific manufacturer’s product, by which it meant the product of a particular marketing authorisation holder (“MAH”). It additionally advised pharmacists that they should ensure continuity of supply of a particular product when the prescription specified it.

Before September 2012 all phenytoin sodium capsules supplied in the UK were made by the pharmaceutical company Pfizer and were sold under Pfizer’s brand name Epanutin. Pfizer was the holder of a marketing authorisation granted by the MHRA. It made the active ingredient for Epanutin at its facility in Kalamazoo, USA and it was placed into capsules at a facility in Freiburg, Germany.

In September 2012, the price at which Pfizer could sell Epanutin was controlled in the UK by the pharmaceutical price regulation scheme (“PPRS”). It was sold at a price of about £3 per bottle containing 84 capsules of 100 mg. Although Pfizer never stated that continuing to market Epanutin at these prices was loss-making, it apparently regarded it as “economically challenging”.

Flynn is an entirely separate company from Pfizer. It sells a range of pharmaceuticals, some of which come from Pfizer, but others of which do not. Flynn’s products carry the Flynn name and a logo consisting of a bird in flight. Before 2012, Flynn had made extensive use of their name both as part of its company name and on its products, but had not yet registered it as a trade mark.

Before 2012, Flynn had had no involvement with Epanutin. By a series of agreements between Pfizer and Flynn in early 2012 the UK marketing authorisations for phenytoin sodium were transferred to Flynn. The intention at the time was to “genericise” the product in the UK, which would have meant removing the Epanutin branding on the packaging and selling the drug by reference to its INN, phenytoin sodium. Counterintuitively, the process of genericising the drug would allow Flynn to increase the price, because the drug would then be free from the constraints of the PPRS, which only applies to branded products. The price of generic products is assumed to be regulated by market forces, but for that to happen there must be a sufficient number of competitors in the generic market.

In pursuit of its genericisation plan, Flynn applied to the MHRA to change the name of the product from Epanutin to phenytoin sodium. The MHRA declined to permit this. Instead, its response was that the product should be called “Phenytoin Sodium Flynn”. The MHRA was at the time developing the Guidance, and it was the considerations underlying the Guidance which led them to make this suggestion. If the name had simply consisted of the INN, then it would be difficult to avoid products from different sources being indistinguishable, a state of affairs which the Guidance was concerned to avoid. After some initial resistance, Flynn ultimately agreed to this variation. Flynn received an assurance that the incorporation of the name Flynn into the regulatory name of the product would not cause the product to be treated as a branded product, and thereby brought back within the price constraints of the PPRS. It then applied to register the word “Flynn” as a trade mark, which, as I have said, it had not previously done. The word trade marks which I have identified above were in due course obtained. Nothing turns on the fact that one is a Community registered trade mark. Flynn launched Phenytoin Sodium Flynn on 24 September 2012. Pfizer stopped selling Epanutin capsules in the UK shortly afterwards.

Once Phenytoin Sodium Flynn had replaced Epanutin on the market, the price of a bottle of 84 capsules of 100 mg rose to about £66.50, a more than 20-fold increase. The price at the time of Rose J’s judgment was about £54, which is still 18 times the previous price. There are separate proceedings concerning the pricing of Phenytoin Sodium Flynn involving the Competition and Markets Authority and the Competition Appeal Tribunal.

It was important to Flynn that patients and healthcare professionals should be confident that Phenytoin Sodium Flynn was the same as Epanutin, so that patients stabilised on Epanutin could take it without risk. Flynn invested considerably in educating patients and healthcare professionals that Phenytoin Sodium Flynn was exactly the same as the product which they were used to prescribing, dispensing or taking under the brand name Epanutin. This was referred to in argument as “the information campaign”.

The appellants are two companies in a group established in about 1997 by Mr Naresh Shah and his wife to trade in parallel imported pharmaceutical products. The role of the second respondent (“Tenolol”) is that it applies for, holds and maintains product licences for parallel imports (“PLPIs”). The role of the first appellant (“DrugsRus”) is as an importer and wholesaler of pharmaceutical products, under Tenolol’s PLPIs. In 2010 the appellants started to import phenytoin sodium under the brand name Epanutin from Spain. Later they applied to amend their existing licence to permit the marketing of the imported product under its INN as well. The MHRA again objected, saying that the product could not be marketed under its generic name in accordance with the policy underlying the Guidance. The MHRA explained that the product name for a parallel imported AED product should be the name under which the UK cross-referred product is marketed (i.e. Phenytoin Sodium Flynn). Alternatively, the name of the product in the source country (Epanutin) might be used providing this would not lead to any confusion or doubt over continuity of supply to the patient. The MHRA, of course, takes no account of intellectual property rights when it makes recommendations such as were given to the appellants.

The appellants’ original position was that the option of marketing the product in the UK under the name Epanutin presented them with two problems. The first was that pharmacists would not be able to use that product to fill prescriptions written for Phenytoin Sodium Flynn: they could only use it where prescriptions were written by reference to Epanutin or the INN. The second problem was that the appellants could not, as parallel importers, guarantee the continued supply of Epanutin capsules. This latter problem was not one which Mr Shah wholly adhered to in cross-examination, when he explained that he would have no difficulty in maintaining a buffer stock of some two years’ worth of product.

The market for phenytoin sodium in the UK at the date of the trial was made up as follows. In terms of prescriptions, a very small percentage were for a product called Phenytoin Sodium NRIM. 7-9% of prescriptions were for Phenytoin Sodium Flynn. About 90% were written generically. In terms of market share Flynn had about 40% of the market with about 60% being supplied by other phenytoin sodium products, namely the NRIM product and parallel imports of Epanutin. Some of Flynn’s market share was due to pharmacists checking, in accordance with the Guidance, for continuity of supply, but it was common ground that it had also secured some share by simple competition. The market share which was available for competition was therefore well in excess of 60%.

The appellants’ principal case before the judge and before us was that the exercise of Flynn’s trade mark rights against parallel imports rebranded as Phenytoin Sodium Flynn was contrary to EU law. They contended that restricting importation by use of Flynn’s trade mark rights constituted a disguised restriction on trade between member states contrary to Article 36 TFEU. The appellants had a secondary case based on the propositions that their use of the trade mark Flynn was either not trade mark use at all, or was the kind of use protected by section 11(2)(b) of the Trade Marks Act 1994. Flynn, on the other hand, contended that in order for a trade mark owner’s claim to be defeated by EU law, the appellants had to show that the Epanutin which they were seeking to import into the UK was placed on the market in the exporting member state by or under the control of the same entity as was now trying to prevent its import. They joined issue with the appellants on their secondary case as well.

The judge rejected the appellants’ contention as to the test under Articles 34 and 36 TFEU, concluding, at paragraph 56, that the authorities showed that the appellants could only rely on Article 36 to defeat the claim of infringement if they could show that the Epanutin which they wished to import was placed on the market in the exporting member state by the same entity as was now seeking to prevent its import into the UK. She also rejected the “not trade mark use” and section 11(2)(b) defences.

The judge then went on to consider whether the connection between Pfizer and Flynn was such as to lead to the conclusion that the Epanutin which was sought to be imported was indeed placed on the market in the exporting member state by the same entity as was seeking to enforce the trade mark rights. This involved an analysis of the various agreements entered into between Pfizer and Flynn. These were:

The judge did not find it helpful merely to ask whether the agreements, looked at together, were more like an exclusive distribution agreement than an outright assignment of rights. At paragraph 71 she held that the correct question was whether there was anything (a) in the corporate relationship between Flynn and Pfizer or (b) arising from the agreements between them that indicated that the same entity could exercise control over the quality of the Epanutin sold in other member states and the product sold as Phenytoin Sodium Flynn in the United Kingdom.

Having considered the CJEU jurisprudence and in particular Case C-9/93 IHT Internationale Heiztechnik GmbH v Ideal Standard GmbH [1994] ECR I 02836 (“Ideal Standard”), the Judge concluded at paragraphs 77 and 78:

“77.

I do not accept, however, that the fact that Flynn Pharma is obliged to or chooses to acquire its supplies of Phenytoin Sodium Flynn for the UK from the same manufacturer as makes Epanutin for other Member States means that the same entity is responsible for the quality of the two products for the purposes of applying the free movement provisions. What is more important is whether responsibility for the quality of both products lies with the same entity so that it is not misleading for the parallel importer to attach the Flynn name to the Epanutin. When considering responsibility here, I am referring to responsibility to the ultimate consumer for the quality of the product. Of course Pfizer is responsible to Flynn Pharma for the quality of the product it supplies under the agreements and the specification of that product is set by Flynn Pharma and monitored by them. What matters is whether there is anything in the suite of agreements which gives Flynn Pharma power to control the quality of the Epanutin supplied by Pfizer in other Member States or anything that entitles Pfizer to control the specification of the Phenytoin Sodium Flynn supplied in the UK if, for example, Flynn Pharma decided to change it. I do not see any such control granted to either company over the other's product. Pfizer can sell Epanutin anywhere else it likes - Flynn Pharma has no control over Pfizer's other products and no control over the trade mark that Pfizer uses elsewhere. Flynn Pharma can put its own trade mark on the products made for it, and Pfizer has no control over that. Only the products Pfizer manufactures for Flynn Pharma at its direction can be packaged as Phenytoin Sodium Flynn. As the holder of the marketing authorisation it is Flynn Pharma that takes the responsibility for those products. Legal responsibility for manufacture at all levels (API, product formulation & packaging) to ensure compliance with authorisation lies with Flynn Pharma for the Phenytoin Sodium Flynn product. It could manufacture in-house if it chose and where, as here the manufacture is contracted out, it must have a supply agreement, technical agreement and quality agreement in place.

78.

Having considered the agreements between Pfizer and Flynn Pharma, it would not be right to say that the owner of the right in the importing State is, directly or indirectly, able to determine the products to which the trade mark may be affixed in the exporting State and to control their quality. I therefore hold that Flynn Pharma's trade mark rights in the name Phenytoin Sodium Flynn are not exhausted in respect of packages of Epanutin placed on the market in other Member States. Flynn Pharma is therefore entitled to prevent the relabelling of the parallel imported product by the Defendants.”

Those conclusions were sufficient, in the judge’s view, to dispose of the Article 36 defence. However the judge also considered, in the alternative, whether it was necessary for the appellants to rebrand in order to gain effective access to the United Kingdom market for phenytoin sodium. Having considered the decision of this court in Speciality European Pharmaceuticals Pharma Limited v Doncaster Pharmaceuticals Group Limited and another [2015] EWCA Civ 54 (“SEP”), she concluded that it was necessary. This was principally because the appellants would be excluded from a significant part of the market, namely that in which the product was prescribed by the name Phenytoin Sodium Flynn. However, Flynn’s market share was significantly greater than the percentage of prescriptions which included their name. This was in part due to pharmacists following the Guidance, so that when a patient presents with a generic prescription, he checks what the patient was on before and fulfils the prescription with the Flynn product and not others. This expanded the share of the market which was effectively closed to the appellants beyond the share represented by Phenytoin Sodium Flynn prescriptions.

Article 34 TFEU provides:

"Quantitative restrictions on imports and all measures having equivalent effect shall be prohibited between Member States."

Article 34 is the fundamental free movement of goods provision of the TFEU. Article 36 provides for certain permissible exceptions to this broad provision, provided they are justified:

“The provisions of Articles 34 … shall not preclude prohibitions or restrictions on imports … justified on grounds of … the protection of industrial and commercial property…. Such prohibitions or restrictions shall not, however, constitute a means of arbitrary discrimination or a disguised restriction on trade between Member States.”

Industrial or commercial property includes national trade mark rights. Thus, subject to the second sentence of Article 36, the free movement provision, Article 34, does not prevent a trade mark owner from enforcing a trade mark so as to stop the importation of goods bearing the mark if it is justified for the protection of that trade mark.

In order to ensure the peaceful co-existence of a rule about free movement of goods and a regime of territorially limited trade mark rights, something has to give way. One approach would be to give the national rights their full scope and effect, so that the trade mark owner would be able to oppose the importation of anything which under national law is an infringement of those rights. The CJEU has, however, recognised that to do so would, in some cases, allow the erection of artificial barriers to trade between member states. (The court uses the term “artificial barriers” as synonymous with the Treaty language “disguised restriction”). Hence Article 36, read as it must be as a whole, recognises that there are cases where, although enforcement of the right would be justified, it should nevertheless be prohibited because it would amount to a disguised restriction on interstate trade.

One of the ways in which the CJEU has sought to address what is meant by a disguised restriction on trade between member states is through the concept of the specific subject matter of a trade mark right. This concept recognises that there is a central core to the right which the trade mark owner will normally be justified in seeking to safeguard. This concept has been explained and developed in a number of cases: Case C-102/77 Hoffmann-La Roche& Co. AG v Centrafarm [1978] 3 CMLR 217, paragraph 7; Case C-3/78 Centrafarm BV v American Home Products Corporation [1979] 1 CMLR 326 paragraph 11; Case C-10/89 CNL-Sucal v Hag (Hag II) [1990] 3 CMLR 571, paragraphs 13 and 14; Joined cases C-427-93, C-429/93 and C-436/93 Bristol Myers Squibb Co v Paranova A/S [1997] 1 CMLR 1151, para. 44; Case C-379/97 Pharmacia & Upjohn SA v Paranova A/S [2000] 1 CMLR 51, para. 15. The specific subject matter is:

“to guarantee to the proprietor of the trade mark that he has the exclusive right to use the trade mark for the purpose of putting a product into circulation for the first time and therefore to protect him against competitors wishing to take advantage of the status and reputation of the trade mark by selling products illegally bearing that trade mark.” Hoffmann La Roche paragraph 7.

The court has also used the notion of the essential function of the trade mark, which is to guarantee to consumers the origin of the product, by enabling him to distinguish without any possibility of confusion that product from the products of others. In Hag II the court expanded on the specific subject matter of the trade mark right, its essential function and the free movement rules:

“12.

According to settled case law, Article 36 allows exceptions to the fundamental principle of freedom of movement of goods in the Common Market only in so far as such exceptions are justified for safeguarding the rights which are the specific subject matter of the property and, consequently, an owner of an industrial and commercial right protected by the law of a State cannot rely on that law in order to prevent the importation or marketing of a product which was lawfully sold in the market of another member-State by the owner of the right himself or with his consent, or by a person connected with him by ties of legal or economic dependence. (citations omitted)

13.

With regard to trademark rights, it should be observed that such rights constitute an essential element of the system of undistorted competition which the Treaty aims to establish and maintain. In such a system enterprises must be able to gain customers by the quality of their products or services, which can be done only by virtue of the existence of distinctive signs permitting identification of those products and services. For a trademark to be able to play this part, it must constitute a guarantee that all the products bearing it have been manufactured under the supervision of a single enterprise to which responsibility for their quality may be attributed.

14.

Consequently, as the Court has stated on many occasions, the specific subject-matter of a trademark right is to grant the owner the right to use the mark for the first marketing of the product and, in this way to protect against competitors who would like to abuse the position and reputation of the mark by selling products to which the mark has been improperly fixed. To determine the exact effect of this exclusive right which is granted to the owner of the mark, it is necessary to take account of the essential function of the mark, which is to give the consumer or final user a guarantee of the identity of the origin of the product by enabling him to distinguish, without any possible confusion, that product from others of a different provenance. (citations omitted).

In Hag II the Hag trade marks for decaffeinated coffee had originally been in common ownership in Germany and Belgium, but as a result of the sequestration of enemy property, the marks in those two countries had become independent. The action before the national court, which resulted in the questions referred to the CJEU, concerned an attempt by the German company to use the mark to oppose imports of coffee made by the Belgian company into Germany. The court explained that, when dealing with a situation where the marks were in separate ownership of independent companies, it was necessary to examine whether there was any element of consent by the owner of the national right to the marketing of the product in the exporting state:

15.

In assessing in the light of the foregoing considerations a situation such as that described by the national court, the decisive factor is the absence of any element of consent, on the part of the owner of the right protected by national legislation, to the marketing in another member-State, under a mark which is identical or may cause confusion, of a similar product manufactured and marketed by an enterprise which has no tie of legal or economic dependence with that owner.”

If there was no consent, and no legal or economic link between the companies, the essential function of the mark would be compromised if the owner could not exercise his trade mark rights to prevent the importation of products likely to be confused with his mark. This was because consumers would no longer be able to identify with certainty the origin of the goods “and the bad quality of a product for which he is in no way responsible could be attributed to the owner of the right.”

The relevance of economic links between companies in the exporting and importing states was considered further by the CJEU in Ideal Standard. In that case the trade mark Ideal Standard for heating equipment was originally under the control of a group of companies. The mark in Germany was owned by the German subsidiary but the mark for France had been assigned to a company outside the group who themselves manufactured the equipment in France. The German company sought to oppose the importation into Germany of the French-manufactured equipment. The court explained, at paragraph 34, that a national law which would give the trade mark owner in the importing state the right to oppose the marketing of products which have been put into circulation in the exporting state by the trade mark owner or with his consent would be contrary to Articles 30 (now 34) and 36. This would be so even where the owner of the trade mark in the importing state and the owner of the trade mark in the exporting state are not the same person but are economically linked. The court continued:

“34.

…A number of situations are covered: products put into circulation by the same undertaking, by a licensee, by parent company, by a subsidiary of the same group, or an exclusive distributor.

35.

There are numerous instances in national case law and Community case law where the trademark had been assigned to a subsidiary or to an exclusive distributor in order to enable those undertakings to protect their national markets against parallel imports by taking advantage of restrictive approaches to the exhaustion of rights in the national laws of some States.

36.

Articles 30 and 36 defeat such manipulation of trade marks rights since they preclude national laws which enable the holder of the right to oppose imports.

37.

In the situations described above (paragraph [34]) the function of the trademark is in no way called in question by freedom to import. As was held in Hag II: “for the trademark to be able to fulfil [its] role, it must offer a guarantee that all goods bearing it have been produced under the control of a single undertaking which is accountable for their quality” (paragraph [13]). In all the cases mentioned, control was in the hands of a single body; the group of companies in the case of products put into circulation by the subsidiary: the manufacturer in the case of products marketed by the distributor; the licensor in the case of products marketed by licensee. In the case of a licence, the licensor can control the quality of the licensee’s products by including in the contract clauses requiring the licensee to comply with his instructions giving him the possibility of verifying such compliance. The origin which the trademark is intended to guarantee is the same: it is not defined by reference to the manufacturer but by reference to the point of control of manufacture (see the statement of grounds for the Benelux Convention and the Uniform Act).

38.

It must further be stressed that the decisive factor is the possibility of control over the quality of goods, not the actual exercise of their control. Accordingly, a national law allowing the licensor to oppose importation of the licensee’s products on grounds of poor quality would be precluded as contrary to Articles 30 and 36; if the licensor tolerates the manufacturer of poor quality products, despite having contractual means of preventing it, he must bear the responsibility. Similarly if the manufacture of products is decentralised within a group of companies and their subsidiaries in each of the Member States manufacture product whose quality is geared to the particularities of each national market, a national law which enabled one subsidiary of the group to oppose the marketing in the territory of that State products manufactured by an affiliated company on grounds of those quality differences would also be precluded. Articles 30 and 36 require the group to bear the consequences of its choice.

39.

Articles 30 and 36 thus debar the application of national laws which allow recourse to trademark rights in order to prevent the free movement of a product bearing a trademark whose use is under unitary control.

An attempt was made by the European Commission in Ideal Standard to argue that, by assigning the trade mark to a company outside the group, the group had given its implied consent for the assignee to put heating equipment into circulation in France bearing that trade mark. The court rejected that argument. For the necessary consent to be present:

“… the owner of the right in the importing State must, directly or indirectly, be able to determine the products to which the trademark may be affixed in the exporting State and to control the quality. That power is lost if, by assignment, control over the trademark is surrendered to a third party having no economic link with the assignor.”

So even if, in one sense, by assigning the mark, the trade mark owner has given his consent to the future marketing of the goods in question, he may still enforce his trade mark rights against those goods provided that he has no continuing control over the goods to which the mark is to be affixed.

The CJEU has explained in a series of cases the principles to be applied where a parallel importer has to remove or alter existing packaging (and in the process re-affix the trade mark to the goods) in order to gain effective access to the market for the imported product. These cases start from the premise that (subject to the problems which repackaging gives rise to) there is a right to import the goods, because the decisive elements of consent to marketing in the exporting state and control over their quality are both present. The repackaging cases arise because it has been held that the mere repackaging and re-affixing of a trade mark to the trade mark owner’s goods can affect the essential function of the trade mark. Repackaging affects the guarantee that the goods have not been changed or interfered with since leaving their point of origin. Thus if the trade marks were to be enforced to their full extent, repackaging would not be possible. In these circumstances the court has held that it is the free movement principle which prevails, subject to compliance by the importer with certain conditions. In Joined Cases C-427/93, C-429/93 and C-436/93 Bristol-Myers Squibb v Paranova [1997] 1 CMLR 1151; [1997] FSR 102 the court explained these conditions. They have become known as the BMS conditions. Rather than set them out in full from that case, I will quote Jacob LJ's summary of them from a later national case Boehringer Ingelheim v Swingward [2004] EWCA Civ 129; [2004] ETMR 65 at [28]:

“So the importer who repackages and re-applies the mark will infringe unless he satisfies all five of the BMS conditions. I summarise these:

(1)

Necessary to repackage to market the product;

(2)

No effect on original condition and proper instructions;

(3)

Clear identification of manufacturer and importer;

(4)

Non-damaging presentation;

(5)

Notice."

In the same case, at paragraph 74 Jacob LJ said this:

“If one looks at the BMS conditions one can see that they are all about protecting the reputation of the mark. A fair summary of the position may be that (1) re-affixing creates a risk of jeopardising the reputation (2) but if the conditions are satisfied that risk is removed.”

In the later case, Case C-379/97 Pharmacia & Upjohn SA v Paranova A/S [2000] 1 CMLR 51, the court has gone further and explained that a parallel importer might not merely repackage, but also replace the trade mark which the trade mark owner uses in the country of export with that which he uses in the country of importation. Upjohn marketed an antibiotic using the trade mark “Dalacin” in Denmark, Germany and Spain, “Dalacine” in France and “Dalacin C” in other member state of the European Union. Paranova, the parallel importer, purchased “Dalacine” and “Dalacin C” in France and Greece respectively and imported them both into Denmark where it marketed them under the trade mark “Dalacin”. The court confirmed that if the circumstances prevailing at the time of marketing in the member state of import make it objectively necessary to replace the original trade mark by that used in the member state of import in order that the product in question may be marketed in that state by the parallel importer, then the condition of artificial partitioning was met. Although the court does not expressly say so, the parallel importer must also comply with the remaining BMS conditions, to ensure that the specific subject matter of the mark is not put at risk. The court reasoned the extension from repackaging to rebranding in the following way:

“37.

… there is no objective difference between re-affixing a trademark after repackaging and replacing the original trademark by another which is capable of justifying the condition of artificial partitioning being applied differently in each of those cases.

38.

In the first place, the practice of using different packaging and that using different trademarks for the same product, in contributing similarly to the partitioning of the single market, and adversely affect intra-Community trade in the same way; secondly the re-affixing of the original trademark on the repackaged product and its replacement by another trademark both represent a use by the parallel importer of a trademark which does not belong to him.

39.

Consequently where the trademark rights in the importing Member State allow the proprietor of the trademark to prevent it being re-affixed after repackaging of the product or being replaced, and where the repackaging with re-affixing or the replacement of the trademark are necessary to enable products to be marketed by the parallel importer in the importing Member State, there are obstacles to intra-Community trade giving rise to artificial partitioning of the markets between Member States within the meaning of the case law cited, whether or not the proprietor intended such partitioning.”

In all the repackaging and rebranding cases the trade marks in question were in the hands of the same entity as was seeking to prevent the parallel imports.

These legal principles are, to some extent, reflected in the Trade Marks Directive (Directive 2008/95/EC of the European Parliament and of the Council of 22 October 2008 to approximate the laws of Member States relating to trade marks). The provision has been transposed into national law by Section 12 of the Trade Marks Act 1994. It is sufficient to refer to Article 7, which provides:

“Exhaustion of the rights conferred by a trademark

1.

The trademark shall not entitle the proprietor to prohibit its use in relation to goods which have been put on the market in the Community under that trademark by the proprietor or with his consent.

2.

Paragraph 1 shall not apply where there exist legitimate reasons for the proprietor to oppose further commercialisation of the goods especially where the condition of the goods is changed or impaired after they have been put on the market.”

Article 7 only applies where the mark sought to be enforced is the same as the one under which the goods were placed on the market in the Community by the proprietor or with his consent. The rule it creates has both intra-state and interstate effect. It is a principle of Community exhaustion of rights. Nevertheless, Article 7(1) shows that what is destructive of the trade mark owner’s prima facie right to enforce his mark is the consent which he has given to the placing of the goods on the market. Where he has done so, as Ideal Standard explains, he will have had at least the opportunity to control the quality of the goods. Article 7(2) then provides the trade mark owner with a more limited right, which is to complain about further commercialisation only where there are “legitimate reasons”, such as changes to quality after the goods have left the trade mark owner’s hands.

Mr Martin Howe QC, who appeared on behalf of the appellants with Mr Henry Ward, accepted that the present case was one where the enforcement of the trade mark right was justified within the first sentence of Article 36, because the mark Flynn had not been applied to the parallel imported goods by the trade mark owner or with his consent. He contended, however, that the authorities did not support the judge’s restrictive view, which he described as the “same entity rule”, of the circumstances in which the attempt to invoke trade mark rights can be regarded as artificially partitioning the market. The whole purpose of the second sentence of Article 36 was to prevent reliance on rules which as a matter of formality appear to justify restrictions on the import of goods, but which as a matter of substance are being used to restrict trade rather than truly to protect a legitimate interest. To restrict the scope of the second sentence of Article 36 TFEU by a rigid rule of the kind formulated by the judge was inconsistent with Article 36 as a whole.

Mr Howe submitted that whether the enforcement of a trade mark right amounts to a disguised restriction on trade between Member States requires a balance to be struck between the ability of a trade mark owner to enforce his rights and the free movement rules. He relied on a phrase I used in SEP at paragraph 12:

“… The BMS case struck a balance between the ability of a trademark owner to enforce his right, and the free movement rules.”

That statement reflected what the Advocate General said in BMS at paragraph 77:

“In order to determine what restrictions on trade are permitted by Article 36 on grounds of trademark protection it is necessary to bear in mind at all times the interests defined above in paragraph 72. It is necessary to balance those interests against the fundamental concern of article 30, which is to ensure that goods can circulate freely within the community and the trade between Member States is not hindered any more than necessary. That is what the Court means when it emphasises, as it has on numerous occasions, that Article 36, as an exception to a fundamental principle, must be construed narrowly and can only be invoked in favour of restrictions which are necessary in order to safeguard the specific subject matter of an industrial property right.”

Mr Howe submitted that the factors on each side of the balance would differ widely from case to case, but it was fundamental to the balancing exercise to consider both the nature of the right to be protected, and the extent to which the proposed use impinges on the interest protected by that right. In the present case, the use of the trade mark Flynn as part of the regulatory name together with the INN, phenytoin sodium, had a highly unusual function, namely to indicate that the goods sold under that mark can be taken by the patient to be products which are precisely the same as the products which they have previously been used to using. The primary purpose of the use of the name Flynn was to guarantee patient safety by providing this indication. If, and to the extent that, the word also has an origin function, any such function is wholly secondary to the principal function. Accordingly, the enforcement of the mark against the appellant’s proposed imports does not protect the guarantee of patient safety, since the patient’s safety is equally guaranteed by the use of the word Flynn on the parallel imported product. The enforcement only protects the secondary and incidental origin function which is, in any event, protected to a degree by BMS condition 3, the requirement to identify the manufacturer and importer. The limited, if any, protection of the origin function through enforcement is outweighed by the demonstrable harm to free movement of goods.

Mr Howe submitted that Flynn’s use of the trade mark Flynn was also unusual in another sense, because the use which Flynn could make of it was highly constrained. He submitted that there was no practical way that Flynn could alter the composition of the product supplied by Pfizer, or go to another source of supply. The evidence showed that to source the product elsewhere to a standard where it could be sold under the same mark would require 18 months’ work and would cost some £2-4 million.

Mr Howe also relied on Doncaster Pharmaceuticals Group Limited v The Bolton Pharmaceutical Company 100 Limited [2006] EWCA Civ 661. [2007] FSR 3 in which the Court of Appeal had set aside a summary judgment for trade mark infringement where the defendant had sought to rely on a defence under Article 36. The trade mark in question had been assigned by Astra Zeneca, along with manufacturing rights, to independent entities in different member states. Mummery LJ, with whom Longmore and Lewison LJJ agreed, explained that the judgment of the CJEU in Ideal Standard did not support the proposition that a voluntary assignment of a mark in a particular territory was a surrender of control in that territory and therefore did not constitute a consent to the circulation of the goods. At that stage of the proceedings it was not clear that the assignment was not part of a planned process of deliberately and artificially partitioning and manipulating the EU market for the drug so as to amount to a disguised restriction on trade between member states. Further, the assignments in question were accompanied by other transactions which “kept AZ in the frame”. A trial was necessary to determine whether, in all the circumstances that were also economic links or the possibility of control between AZ and its assignees which might prevent the enforcement of the mark from being justified on the essential function principle.

In the present case there was a common point of control of the product, namely Pfizer, who manufactured both the product sold by Flynn and the proposed parallel import. To have a strict rule that that control had to coincide with the party enforcing the mark, as that which the judge had formulated, was too narrow. There could be cases of artificial division of the market where control remained vested in one party but the trade mark was in other hands.

Mr Howe submitted that the judge had failed to analyse the substance of the agreements. She had been excessively impressed by the fact that regulatory responsibility for the product in the UK lay with Flynn, when that was simply a consequence of the assignment of the marketing authorisation. Mr Howe relied on the fact that the agreements did not confer a right to use the technical information for the purposes of manufacturing. The judge had been wrong to say that Flynn could manufacture the product in-house if by that she meant that Flynn could use the technical information for that purpose. He characterised Flynn’s evidence about the timing and costs of going to an alternative source as “pie in the sky”. He also relied on the fact that the assignment of the marketing authorisations was, at least initially, dependent on the continuation of the exclusive supply agreement. He submitted that the arrangements were more in the nature of a lease of the marketing authorisations than a true assignment. Flynn’s responsibilities under the quality agreement were comparatively limited.

Finally Mr Howe relied on Case C-201/94 R v The Medicines Control Agency, ex parte Smith & Nephew Pharmaceuticals Ltd and Primecrown Ltd v The Medicines Control Agency [1997] 1 CMLR 812 (“the MCA case”), a case about data exclusivity rights, but which he submitted provided a useful analogy. One of the questions which the court was asked was whether the licensing authority in member state A was entitled to grant a marketing authorisation to product Y which was sought to be imported from member state B in circumstances where product Y was not made by or under the control of the person holding the marketing authorisation in member state A or a member of the same group of companies. The court concluded on the basis of its earlier case law that it was not necessary that the product was manufactured by the same group of companies. Where independent companies produced medicinal products which have a common origin by virtue of the fact that they were manufactured pursuant to agreements concluded with the same licensor, that was sufficient. The court’s reasoning was that it should not be necessary for the licensing authority to require all the pharmaceutical data to be produced independently by the parallel importer, where it was already in possession of all that data in relation to an identical product for the purposes of granting the original marketing authorisation. If it were not so, such licensing agreements could lead to partitioning the national markets of the member states.

Mr Howe summarised his submissions in seven points:

In the circumstances there was no lie being told about the origin of the product by the appellants’ proposed use of the sign Phenytoin Sodium Flynn, or the trade mark considerations were so subordinate to the barrier which the trade mark creates that the barrier should be treated as artificial.

Mr Howe touched only very lightly on the appellants’ secondary case which raises the logically prior question as to whether Flynn’s use was trade mark use at all or whether it was use of an indication of a characteristic of the goods protected by section 11(2)(b) of the Trade Marks Act 1994 (and the corresponding provision in the Trade Marks Regulation) which provides so far as material:

“11.

(1)

(2)

A registered trademark is not infringed by –

(a)

…

(b)

the use of indications concerning the kind, quality, quantity, intended purpose, value, geographical origin, the time of production of goods or of rendering of services, or other characteristics of goods or services,…

(c)

…

provided the use is in accordance with honest practices in industrial or commercial matters.”

Mr Howe submitted that the public had been educated to understand that Phenytoin Sodium Flynn meant a product which was the same as Epanutin and which could safely be taken in substitution therefore. This was a characteristic of the goods indicated by the use which the appellants proposed to make.

Broadly speaking, the submission of Mr Guy Burkill QC, who appeared on behalf of the respondents with Mr Nicholas Saunders, was that the judge’s order should be upheld for the reasons she gave. Alternatively, if the judge was wrong then her order should still be upheld on the grounds set out in their cross-appeal, namely that it was not necessary for the appellants to re-brand to Phenytoin Sodium Flynn in order to gain effective access to the market for phenytoin sodium in the United Kingdom.

On the main appeal Mr Burkill relied on the CJEU’s jurisprudence on the specific subject matter of the mark, and its essential function. In relation to the parallel imported goods, the trade mark owner had not consented to the first (or any) placing into circulation of the relevant goods, and had therefore not enjoyed the specific subject matter of the rights. Moreover, if the appellants were permitted to apply the trade mark to goods which the trade mark owner has never consented to being placed on the market, responsibility for their quality cannot be attributed to the trade mark owner. The use complained of would therefore jeopardise the essential function of the mark. In circumstances such as those, enforcement of the mark cannot constitute a disguised restriction on trade between member states.

Mr Burkill recognised that this analysis did not fully explain the rebranding cases, because in those cases it is the parallel importer who is applying the trade mark to the goods for the first time. He submitted, however, that these cases were a form of “extended exhaustion of rights”, where, because the trade marks were owned by the same entity, the trade mark owner can be regarded as having exhausted his trade mark rights as a whole by placing the goods on the market under one of his marks. He cannot then assert another mark in his portfolio, the one he uses in the member state of import, to interfere with their free circulation.

Mr Burkill submitted that the judge was right to say that the second sentence of Article 36, and the BMS conditions, were not engaged in a case where the goods had not been placed on the market by the trade mark owner or under his control. However, if a balancing of interests was required, he submitted that the fact that the goods had not been placed on the market by or under the control of the trade mark owner was a decisive factor.

Mr Burkill illustrated his arguments with the homely example, canvassed before the judge, where the same hay fever medicine, from the identical source in another EU member state, is sold under a brand name and also under the own brand of a well-known high street pharmacist. He asks forensically whether the common origin of the goods allows a third party importer who has obtained goods from the same source to label them either under the brand name or the pharmacist’s own brand.

Mr Burkill stressed the absence of any connection between Pfizer and Flynn beyond the suite of agreements. He also submitted that Flynn was effectively sub-contracting manufacture of its product to Pfizer, given the expiry of the exclusive supply agreement, and was free, subject to obtaining MHRA consent, to source the goods which it chose to sell under the Flynn name elsewhere. He also stressed the obligations which Flynn has as the MAH for the product. In essence Flynn stands fully behind the product which it sells under its mark.

On the cross-appeal Mr Burkill submitted that the judge had been wrong to hold that it was necessary for the appellants to rebrand in order to gain effective access to the market in phenytoin sodium. The appellants had a realistic alternative name and could ensure reasonable continuity of supply. The judge had been unduly influenced by a comparison with the facts of SEP where there was no such realistic alternative.

I agree.

I also agree.