HONG KONG COURT AWARDS INDEMNITY COSTS TO ALIBABA GROUP DUE TO PLAINTIFFS' MATERIAL NON-DISCLOSURE AND FORUM SHOPPING

The internet is borderless, but trademarks are not. A recent Hong Kong case serves as a reminder of the territorial nature and limitation of intellectual property rights.

In Mary Kay Inc and Others v Zhejiang Tmall Network Co, Ltd and Others [2021] HKCFI 1403, the Hong Kong Court of First Instance awarded indemnity costs against the plaintiffs for attempting to establish jurisdiction in Hong Kong under the guise of intellectual property infringement for a complaint not recognised under Hong Kong law and for failing to disclose material matters when making an ex parte application for leave to serve proceedings out of jurisdiction. The plaintiffs subsequently attempted to seek permission from the Court of Appeal to appeal against the first instance decision but leave to appeal was also refused unanimously by the Court of Appeal recently in [2022] HKCA 360.

The first instance judge, notably, had held that the case marks another attempt by a brand owner to use the Hong Kong court to establish jurisdiction for alleged infringing activities that have mainly occurred in mainland China.

Whilst the judge recognised that there may be a lot of legitimate and strategic reasons for a brand owner to commence an action in Hong Kong as opposed to the Mainland court, this case is certainly not one that should have been brought in Hong Kong.

Trademark owners must take great care when bringing intellectual property claims in a jurisdiction that has limited connection to their claims.

This decision also sends a clear warning that a litigant risks an indemnity costs order if they attempt to commence claims at an inappropriate forum and deliberately choose not to give full and frank disclosure when making an ex parte application.

Background

The plaintiffs are a group carrying on business in the marketing of skin care and cosmetics products under the trademark of "Mary Kay" through the "direct-selling" or "network-marketing" model. In other words, the plaintiffs' direct sale representatives can only sell the plaintiffs' products by direct selling and are prohibited from selling those products at retail levels including online.

The 1st to 3rd Defendants belong to the Alibaba Group, which operates e-commerce platforms including Taobao and Tmall (D1 and D2, together the two Tmall Companies; D1 to D3, together the Alibaba Group Companies). The 4th Defendant (D4) and the 5th Defendant (D5) are Mainland Chinese companies that operated shops on Tmall.

Plaintiffs' claims were for trademark infringement and passing-off based on trap orders placed by the plaintiffs' solicitors with the shops operated by D4 and D5 on the online platforms of D1 to D3. These trap orders involved genuine “Mary Kay” products but with the production lot codes removed.

D1 and D2 applied to set aside an order granting leave to serve the writ out of jurisdiction on them, while D3 opposed the plaintiffs' application for default judgments against D4 and D5.

First Instance Decision

Lok J of the Court of First Instance (CFI) set aside the service of the writ on the two Tmall Companies, with indemnity costs awarded against the plaintiffs, and refused to grant default judgment.

Regarding the setting aside application, the CFI found no serious issue to be tried against D4 or D5 (thus the two Tmall Companies were not liable as joint tortfeasors) in respect of (i) the trademark infringement; and (ii) passing-off claims. In particular, the CFI held the following:

1. Not all changes to the physical condition of goods give the proprietor a legitimate excuse to rely on their trademark to prevent further commercialisation of his goods. It is only if the condition of the product inside the packaging is adversely affected that the proprietor can rely on their trademark rights. Since cutting a small hole in order to remove the production codes did not change or impair the conditions of the products, Ds were entitled to rely on the “Exhaustion of Rights” defence under section 20 of the Trade Marks Ordinance (Cap. 559) (TMO). Further, the CFI had serious reservations as to whether the alleged trademark infringement did occur in Hong Kong, as trademark rights are strictly territorial in nature.
2. The passing-off claims were unmeritorious as, first, there was no misrepresentation made by D4 or D5, let alone misrepresentation made in Hong Kong; and second, the products in question were genuine products that originated from the plaintiffs.

Relying on L'Oreal v eBay [2009] RPC 21, the CFI also held that there was no triable issue on whether the two Tmall Companies were liable as online platform operators. In Lok J's words, the plaintiffs' "obvious aim [was] to halt online sales by framing this action as a typical infringement action, bringing in the operators of the neutral online platforms for, inter alia, publicity and deterrent effect", despite the fact that the two Tmall Companies had taken prompt action to respond to the complaints made by the plaintiffs and had removed the online stores or the products in the complaint before the plaintiffs applied for service out.

Further, the CFI found that there was no basis for the plaintiffs to serve the writ outside the jurisdiction and Hong Kong was not an appropriate forum in which to try the claims, as the plaintiffs only relied on the trap purchases placed by their solicitors to create jurisdiction.

Critically, the plaintiffs had deliberately omitted to disclose a number of significant and material matters to the CFI when making the ex parte application for service out, including (i) that the products in the complaint were genuine; (ii) the Alibaba Group Companies' reliance on the legal defence of "Exhaustion of Rights" under the TMO; (iii) that there was no evidence that D5 committed any acts within the jurisdiction; (iv) that the online stores in question were all targeted at mainland Chinese customers; (v) the defence available to neutral online platform operators as demonstrated by L’Oreal v eBay; and (vi) that there may exist another potential and perhaps more appropriate forum to try the claims.

Regarding the default judgment application, the CFI exercised its discretion not to grant default judgment against D4 and D5 at this stage, for the following reasons:

1. Given the two Tmall Companies' successful setting aside application, the CFI would have to proceed on the basis that leave to serve the writ out of jurisdiction on D4 and D5 was improper.
2. The CFI should consider the potential risk of injustice to the Alibaba Group Companies if judgments were entered against D4 and D5 at this stage.
3. There was no substantial prejudice caused to the plaintiffs if the CFI did not grant default judgments at this stage, because all the alleged infringing acts had ceased before the commencement of the action.

The CFI ordered costs of the setting aside application in favour of the two Tmall Companies against the plaintiffs on an indemnity basis.

Appeal

The plaintiffs applied for leave to appeal against Lok J's decision on issues including material non-disclosure, submission to jurisdiction and default judgments. The application was dismissed by the Court of Appeal (CA), in particular:

1. The CA rejected the plaintiffs' broad proposition that in an application for service out, a failure to refer to potential grounds of defence will not amount to material non-disclosure and held that this is not only wrong in principle but is also not supported by the cases. As a matter of law, whether materials relevant to a potential ground of defence ought to be disclosed in an application for service out must depend on the circumstances.
2. The CA also had considerable reservation on the plaintiffs' argument that "because Tmall has stringent onboarding requirements, it is therefore not to be regarded as a 'neutral' platform operator." The Court was convinced that it defies common sense to say that the more conscientious a platform operator is in protecting intellectual property rights, the more easily it will fall victim to allegations of joint tortfeasance.
3. Regarding the plaintiffs' submission that D3 had no locus standi to oppose default judgment applications on the merits on behalf of D4 and D5, the CA held that since the plaintiffs were seeking orders which expressly referred to “www.tmall.com”, “www.taobao.com” and “Tmall platform”, and that they had not taken out any application to strike out D3's evidence which they considered to have been improperly filed, D3 has sufficient interest to oppose the applications.

The CA further ordered that the plaintiffs shall pay the costs of D1-D3.