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Evidence Not Before Tribunal Shut Out By Court On Appeal

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Central Trading & Exports Ltd v. Fioralba Shipping Company (Kalisti S) [2014] EWHC 2397 (Comm)

When an arbitration award is appealed to the Court on the grounds that the Tribunal had no substantive jurisdiction, there is a complete rehearing of the issue of jurisdiction by the Court and not just a review of the arbitrators’ decision. This means that the Court effectively starts again and decides the jurisdictional issue for itself and does not have to give any particular weight to the arbitrators’ reasoning.

In general, a party is also entitled to put new evidence before the Court that was not put to the arbitrators. As this recent appeal decision in a shipping dispute demonstrates, however, this is not an unqualified right and the Court may, as part of its case management powers, refuse to allow a party to produce documents selectively where to do so would prejudice the other party or where the result would be a breach of the Court’s rules requiring evidence to be presented in a fair manner. Parties arbitrating their disputes should, therefore, keep in mind the importance of complying with the Tribunal’s orders for disclosure and presenting all relevant evidence to the Tribunal at the appropriate time. A failure to do so may result in such evidence being shut out in the event of a subsequent challenge to the Tribunal’s jurisdiction.

The background facts

The underlying claim was for loss and damage to a cargo of bagged rice shipped from Thailand to Nigeria. The Defendant ship-owners disputed the Claimant cargo interests’ title to sue under the bills of lading (which provided for English law and London arbitration). A LMAA tribunal decided as a preliminary issue that the cargo interests had not become holders of the bills of lading and so did not have title to sue. The cargo interests appealed this award to the Court on jurisdictional grounds. A hearing to consider the substantive issue of title to sue is scheduled for October 2014. In the meantime, the Court was asked to consider whether the cargo interests are entitled to submit new evidence in support of their title to sue claim which was not put to the Tribunal.

The Commercial Court decision

The Court stated that, in a challenge to the arbitrators’ jurisdiction, a party can in general present new evidence that was not before the arbitrators and that the Court will not normally exclude evidence that is relevant and admissible simply because it may cause prejudice to the other party. The Court would, however, as part of its case management powers, exercise control over the disclosure of documents and the service of evidence and would do so in accordance with the interests of justice and fairness.

In this case, the new evidence on which the Claimant sought to rely was available to it in the arbitration. Furthermore, the Tribunal had made an order for full disclosure with which the Claimant had deliberately failed to comply. The Claimant had apparently taken the view that it had presented sufficient evidence to satisfy its burden of proof in the arbitration and considered that the Defendant had been pressing the Tribunal to order it to produce evidence on irrelevant matters. Or, as the Court put it, “it thought it had done enough to win and was confident of victory” – a mis-judgment, as it turned out. Furthermore, the new evidence the Claimant now sought to present still did not represent full disclosure on title to sue and basic documents (such as the sale contract for the cargo and documents relating to the letter of credit to pay for the goods) remained outstanding.

The Court concluded that it would be unjust to allow the Claimant to rely on a selection of documents without giving full disclosure, which it had been ordered to give in the arbitration. This did not mean the Court was simply following the arbitrators’ decision that full disclosure should be given; rather, it had decided for itself that this was not a case where selective disclosure was appropriate. While the new and selected documents might make all the difference to the outcome on the title to sue issue, the Defendant could suffer an irremediable prejudice as a result of allowing them in. The Claimant was not therefore allowed to present the new evidence and the hearing of the title to sue issue would be limited to the material that was before the arbitrators.

Comment

This is a clear case of the Court refusing an appealing party “two bites at the cherry“. Arbitrating parties who think they may subsequently wish to challenge the tribunal’s jurisdiction should consider carefully the risks of giving limited or selected disclosure in the arbitration, where this is not done by mutual consent and with the blessing of the tribunal.

Interflora v M&S – The Saga Continues

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The 6 year legal battle between flower delivery giant Interflora and M&S has taken a new twist following the Court of Appeal’s latest appeal ruling in the case (Interflora Inc & Anor v Marks and Spencer plc [2014] EWCA Civ 1403). The appeal was brought by M&S in an effort to overturn the decision reached at trial last May by Mr Justice Arnold who held that M&S had infringed Interflora’s trade marks.

Background

Interflora originally brought its infringement claim against M&S in the High Court back in 2008.  It had objected to M&S paying Google for the right to use the keyword “interflora” as a search term to help generate adverts promoting its own (i.e. M&S’s) competing flower delivery service.   As a result of M&S’s actions, consumers using “interflora” as a Google search term were led to a search results page in which M&S’s service was prominently advertised.

Interflora argued that M&S was infringing its very well-known Interflora trade mark and that it was unfair for M&S to use someone else’s brand in this way to drive internet traffic to its own competing service.  To add insult to injury, in order to stop M&S’s advertising appearing higher up the search results page than their own, Interflora were forced to spend large sums of money “outbidding” M&S for the right to use their own name as a paid for keyword.  Google, meanwhile, was laughing all the way to the bank.

The case has been very hard fought on both sides and a number of interim rulings have been made both before and since the trial.  Indeed, prior to it reaching trial in 2013, there had already been several reported High Court decisions in Interflora including two trips to the Court of Appeal and a reference to the Court of Justice of the European Union (CJEU).

The CJEU had also, in the meantime, issued judgments in a number of other keyword advertising cases and in doing so has created a new test for infringement in such cases.  According to the CJEU, there will be infringement if the keyword advertising “does not enable [average consumers] or enables them only with difficulty to ascertain whether the goods or services referred to in the advert originate from the [trade mark owner, a connected party]..or a third party.”

At the trial, applying that test, the judge Arnold J narrowly found in Interflora’s favour.  In a substantial judgment running to over 300 paragraphs, he ruled that there had been an infringement of Interflora’s trade mark by M&S through the use by M&S of the Interflora keyword.

However, M&S appealed the decision and on 5 November 2014, the Court of Appeal gave its judgment in the appeal – itself a lengthy affair running to 189 paragraphs spread over 69 pages!

The result of the appeal

In its judgment, the Court of Appeal has accepted many of M&S’s criticisms of the judge’s decision- making process and his approach to the burden of proof.  It has upheld his approach on other matters such as the correct application of the “average consumer” test.  But it has allowed M&S’s appeal.

The finding of infringement made at trial has thus been set aside.  However, somewhat unusually, the Court has not substituted a decision of its own on the question of infringement (which in this case

could well have resulted in the dismissal of Interflora’s action).  Instead, the Court has chosen to send the matter back to the High Court for a retrial.

The implication is that if the trial judge adopts the approach approved by the Court of Appeal, this will result in a different decision by the judge compared to last time.  But despite this, the Court did not feel quite able to save the parties the time and cost of another trial.   So the possible outcome remains uncertain.  Although the trial judge will have to disregard some of the evidence that had previously assisted Interflora and abandon the idea that M&S bears any burden of proof, this does not mean that M&S’s defence will automatically succeed.

It does seem incredible that this case could have lasted so long and that even now, after so many hearings and appeals, we still do not know who has won.   It remains to be seen whether the High Court will reach a different conclusion when the case is heard at trial for the second time – and whether that ruling will itself be appealed!

Meanwhile, there must also be a possibility of an appeal to the Supreme Court or even another reference to the CJEU.

Strong support for the CJEU

One of the difficult issues facing the Courts throughout – both in this case and more generally in similar “adwords” cases – has been reconciling the apparently irreconcilable judgments of the CJEU in its previous case law on keyword advertising.  In particular the judgments in Google France and Die BergSpechte

To the surprise of many IP lawyers, the Court of Appeal has now endorsed that case law (described at one point earlier in the proceedings as “unfathomable” as making “no sense” by M&S’s leading counsel).  Instead, the Court appears to have glossed over some of the problems created by the CJEU which have since troubled both judges and IP lawyers alike.  For example, why is the CJEU’s test for trade mark infringement exactly the same for infringement under Article 5(1)(a) of the Trade Marks Directive as it is for cases under Article 5(1)(b) –  the key point being that both provisions have clearly different requirements.  One requires a likelihood of confusion and the other does not.  Does it really make sense to treat them as being the same as the CJEU has apparently done and to ignore the wording of the legislation?

The Court of Appeal has now answered this question in the affirmative and basically said that this doesn’t matter – at least in the context of keyword advertising cases.   It is all rather puzzling.

The Court has also confirmed that Arnold J’s analysis of the conundrum created by the CJEU is wrong and that the burden of proof in a keyword advertising infringement case lies squarely on the trade mark owner not the alleged infringer.

The death of “initial interest” confusion”?

Another of the issues touched on by the Court of Appeal in its lengthy 69 page judgment in Interflora, isthe subject of so-called “initial interest confusion” (IIC)

This is a doctrine that is well established in the US and which has gained some traction in recent years, at least in the UK, following another decision of Arnold J in OCH Ziff Management v OCH Ziff Capital.

IIC is a term used to describe a scenario in which a person may be initially confused by the use of a sign identical or similar to a trade mark prior to making a purchase of the goods or services involved (as opposed to still being confused at the point at which they actually make the purchase).

The judge in OCH Ziff held that IIC was good enough to constitute confusion for the purposes of both passing off and trade mark infringement.  (By the same token, so called “post-sale” confusion has also become an accepted way in which trade marks may be infringed).

However, in Interflora, the Court of Appeal has gone out of its way to frown on the whole doctrine of IIC and the Court has expressly stated that IIC should play no part in trade mark infringement cases – at least where those cases involve disputes about keyword advertising.

As the Court’s observations about IIC were specifically directed at cases concerning keyword advertising, this does not necessarily mean that IIC is now dead in other trade mark cases.  But it is certain that the comments of the Court in Interflora will be relied upon by future defendants who are faced with claims based on IIC.  The Court of Appeal has seemingly reopened an aspect of the law that was thought to have been fairly well settled.

The “average consumer”

One of the issues that has occupied considerable judicial time in the Interflora case is the correct approach to be adopted by the Court when assessing the question of likelihood of confusion or the new CJEU-created test for infringement in keyword advertising cases.  It is well established that these have to be judged by reference to the “average consumer who is reasonably well informed and reasonably observant and circumspect”.   But exactly how this doctrine should be applied by the Court remains a contentious subject.

In Interflora, M&S argued that the judge had been wrong to take into account that although the majority of average consumers were unlikely to be confused, a significant percentage of them nevertheless were.  The M&S approach was that once you had identified who the notional average consumer was, it was only that person’s perception that mattered.  So the judge should have looked at the question from the perspective of the notional average consumer and answered the question one way or the other – in the negative.

The Court of Appeal rejected this approach.   The Court’s conclusions on the application of the “average consumer” test were summarised thus:

“…we think it makes no difference whether the question is asked and answered from the perspective of the single hypothetical well-informed and reasonably observant internet user or whether that hypothetical person provides the benchmark or threshold for the purposes of identifying the population of internet users whose views are material.”

“…We do not accept that a finding of infringement is precluded by a finding that many consumers, of whom the average consumer is representative, would not be confused. To the contrary, if, having regard to the perceptions and expectations of the average consumer, the court concludes that a significant proportion of the relevant public is likely to be confused such as to warrant the intervention of the court then we believe it may properly find infringement.”

“…we consider the judge was entitled to have regard to the effect of the advertisements upon a significant section of the relevant class of consumers, and he was not barred from finding infringement by a determination that the majority of consumers were not confused….”

This part of the Court’s ruling is important for would-be claimants because it underlines that you can still win an infringement case even if only a minority of the relevant population are confused or (at least in the case of keyword advertising cases) unclear as to the origin of the advertisement or advertiser.

Negative-matching

Having allowed M&S’s appeal on liability, the Court went on to comment on the follow up judgment that had been made by Arnold J when he came to make the orders implementing his decision on liability.

Interestingly, the Court of Appeal has held that it is appropriate in these types of cases that where an injunction is imposed to stop the use of a trade mark as a keyword, the infringer can also be required to set up “negative matching” against the trade mark on its Google account.  This is because due to the way Google works, in some cases even if M&S were to be barred from using “interflora” as a keyword, it nevertheless remains possible that where a consumer enters the word “interflora” as a keyword, this may still bring up M&S adverts.   The Court agreed with Arnold J’s analysis that in such cases, the infringer should ensure that the offending term was “negative matched” by Google so that this would not happen.

This is a somewhat surprising (if pragmatic) part of the ruling but appears to be a sensible one as it should reduce the prospect of further disputes in cases where a party has been banned from using an infringing keyword.

Where next for this case?

It is a sorry state of affairs that after so long and despite so much judicial water having gone under the bridge, the parties still do not know where they stand.  One can only imagine how much money has now been spent on legal costs in this case.

All in all the Interflora case is not exactly a good advertisement for IP litigation.  Lawyers will have their own views as to where the blame lies for this sorry state of affairs.  But one of the obvious issues here is surely the fact that the Courts are having to apply to the modern-day internet age, trade mark laws that were drawn up more than 25 years ago.  That is clearly proving difficult, both at European and UK level.

Meanwhile, notwithstanding the Court of Appeal’s supportive tone, the debate about the qualities of the CJEU’s jurisprudence in this area will surely continue.

UK Leverage Ratio Requirement: A Cornucopia Of Capital Complexity?

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The Bank of England Financial Policy Committee’s (FPC) recently published review on the role of the leverage ratio in the UK proposes moving ahead of international standards to introduce new requirements for the biggest UK banks and building societies from next year. It recommends those banks eventually meet a ‘static’ requirement of up to around 4% on an ongoing basis (comprising a minimum of 3% and a supplementary buffer capturing systemic risk). There would also be a time-varying component that varies with the credit cycle and could add around 90 basis points more for some banks at the top of the cycle (on the FPC’s current assumptions).

Calibration, complexity and risk-sensitivity were important topics of debate in advance of the report. The fixed part of the requirement came out close to most industry expectations, although considerably lower than some. The overall package is simpler than in the previous consultation, although it remains more complex than some would have liked. The FPC highlighted that 3% leverage is consistent with the minimum Tier 1 risk-weighted capital required against mortgage lending under the Basel Standardised Approach, so as not to disincentivise banks and building societies from (new) mortgage lending.

The government will now lay legislation before Parliament to effect the recommendations (giving the FPC the power to direct the Prudential Regulation Authority (PRA)). Once approved, the minimum requirement of 3% will be applied straightaway for the largest banks and building societies (superseding the current supervisory expectation that these firms meet a 3% minimum). Buffers within the ratio will be implemented subsequently. Other PRA-regulated firms will be required to meet the 3% minimum from 2018.

UK leverage ratio: simples

The complexity of the proposed leverage ratio framework is borne out of symmetry with the risk-weighted framework, which the FPC argues is required to maintain the relationship with the risk-weighted ratio (and therefore its effectiveness). The ratio will comprise:

  • A minimum requirement of 3%, for all PRA-regulated firms.
  • A supplementary leverage ratio buffer (SLRB) for UK G-SIBs, ring-fenced banks and large building societies. The G-SIBs buffer will be set at 35% of the risk-weighted systemic risk buffer and will be phased in from 2016. The appropriate calibration of the buffer for the other firms will be reviewed next year and will apply from 2019.
  • A countercyclical leverage ratio buffer (CCLB) that varies with the (macro prudential) countercyclical capital buffer (CCB). The FPC expects to set the CCLB at 35% of the CCB. The CCLB will apply to all PRA-regulated firms, as the CCB does, and will be introduced at the same time as the minimum requirement.

The requirements will initially apply at a consolidated level. The FPC will review in 2017 whether the requirements should be extended to apply at the solo level.

Banks will need to meet the requirements using a minimum amount of Core Equity Tier 1 (CET1) capital (at least 75 per cent) for the baseline requirement. All leverage ratio buffers should be met using CET1 exclusively. The Chancellor has asked for this to be aligned with international standards, when they are reviewed – in particular the eligibility of AT1 instruments.

The FPC says that in future it expects the PRA to consider the leverage ratio when determining the regulatory response to stress testing. It does not though give an indication of a minimum requirement for the leverage ratio under stress scenarios.

What it all means

While the new framework provides an important missing piece of the capital jigsaw, the picture is by no means complete. The Financial Stability Board‘s (FSB) proposals for Total Loss Absorbing Capacity are due early this month, and the Bank of England will consult on the “PRA buffer” in January 2015. In addition, both the Basel Committee and the EU Commission are due to review aspects of the leverage ratio in coming years, and further changes may follow. So it will still be some time before the overall capital requirements for the major UK banks are fully specified and an assessment can be made of their aggregate impact.

Looking to implementation, an increasingly important challenge for banks will be managing capital planning and business model decisions within a capital framework that considers simultaneously a risk-weighted capital ratio, leverage ratio, stress testing and loss absorbing capacity requirement. The leverage ratio also interacts with other prudential measures, such as the liquidity coverage requirements