Study On The Action Of Passing Off

While the significance of commercial signs in the market competition has been increasing the trademark right is also expanding in the legal practice, and such expansion has become the focus of academic research on trademark law and unfair competition law. What is the value basis for the legal system of trademark? How to draw the proper scope for trademark right? How is the trademark law distinguished from unfair competition law in regulating the competition relationship involving use of commercial signs? Sound answers to these questions requires retrospection to the origin of trademark protection system, and the study on passing off is such an attempt to understand not only the system as it is at present but also why and how it is by examining the system in the actual economic, political and legal cultural backgrounds of its origin and development. Such an examination discloses the dilemma in the legal regulation of living facts by abstract legal rules and principles indicates the value of such legal regulation, re-examining the justification of such rules and principles and explores the theoretical basis and realistic solutions of the above questions.Besides the introduction and conclusion, this dissertation comprises of 4 chapters, which study the origin, evolution of the legal system of passing off, its convergence with regulation in civil law countries and the retrospection of the system respectively.The 1st Chapter describes and analyzes the origin of the passing off action with the aim to disclose its value basis and function. Passing off actions occurred at the beginning of the development of capitalism when the feudal guilds were fading off, the mercantilism was very popular and the British market economy was gradually developing into free market economy(after the Glorious Revolution till 1750) after the phase of government-granted monopoly(Tudor and early Stuart) and phase against government-granted monopoly(early Stuart till the Glorious Revolution). The newly emerging class of merchants established their status as independent market participants and obtained equal right in market competition during their continuous combat against royal-granted monopoly, being liberated from the regulation by the guilds, individual merchants resorted to courts to protect their right of free competition by suing the competitors which passed off for deceiving consumers. By the mid 1800 s, the deceptive conduct of the defendants of passing-off suits became the important legal basis for holding them liable. Different from the traditional tort against deception, the plaintiff of the passing-off actions were not the deceived, so, the deception by using other's commercial signs in commercial activities was in essence a false competition of the competitor through misrepresentation. Since the common law action of passing off only provided the plaintiff with remedy of compensations and no injunction remedies were available, the concept of property right in commercial signs was introduced into actions of passing off in order to make equity remedies available to the plaintiffs. Although the concept of property in the mark itself was never fully recognized in legal practice, merchants and scholars lobbied for the system of trademark registration based on the property concept. As a result of such intensive lobbying, the “Trademark Registration Act” was enacted, which didn't create a new type of infringement lawsuit, instead, the traditional common law suits were retained to provide protection for registered trademarks. Thus, in dealing actions against passing-off of registered trademarks, the courts actually recognized the idea of property right in trademarks while the courts didn't rely on the idea of property in dealing passing off actions and the traditional idea of deception was “picked up” as the basis. Thus, deception still remained as the basis for the passing off action after it experienced its prosperous development during the last quarter of the 1800 s. However, the meaning of “deception” became very general, with the development of passing off action, the deceptive intent of the plaintiff was no longer required; instead, objective requirement of misrepresentation was sufficient to hold the defendant liable. In the early 1900 s, there were less passing off actions than before, and the development of passing off action experienced a “cooling” period until Lord Parker introduced the idea of “goodwill” in Spalding v Gamage, which made the action of passing off no longer a common law counterpart of trade mark infringement, instead, it was developed into a significant economic tort with good will as its new basis. From its origin till its modern phase, the action of passing off had provided commercial signs protection focusing on the communication function of the commercial signs, i.e. indicating the source of products. The introduction of idea of goodwill indicates that commercial signs themselves are not the object of protection, what is protected is the trust relationship between the business operators and the consumers. Such relationship is created based on the information communicated through commercial signs, and any misrepresentation by using others' commercial signs destroying such relationship is passing off. The fact that the action of passing off is the origin of trademark protection indicates that establishment of trademark right is the result of merchants' struggle to protect their competition interests, so, the trademark right was developed as a competition policy. The exclusive nature of trademark right is in essence to protect the communication function of trademarks. Actions destroying the function of trademarks in communicating the source of goods or services to consumers are both passing off and trademark infringement. Based on the belief of free competition, it was deemed as improper to have the courts to determine whether a competition conduct is fair or not, so “unfair competition” is not a formal cause of action in English courts. Relating to passing-off, the term of “unfair competition” in academic discussion and legal practice is used in three different senses: firstly, as a synonym of the doctrine of passing-off; secondly, as a generic name to cover the wider range of legal and equitable causes of action available to protect a trader against the unlawful trading activities of a competitor; and thirdly, to describe a new and general cause of action which protects a trader against damage caused by “misappropriation” of knowledge or information in which he has a quasi-proprietary right. But the English law has not recognized a general tort of unfair competition in the third sense. In the United States, the cause of action against passing off of others' commercial signs was further developed, and in the state laws, an independent general cause of action of unfair competition based on the prima facie tort theory became the legal basis for regulating the traders' competition activities of obtaining goodwill and commercial advantages. While in civil law countries, an independent protectable subject matter(achalandage, acciamento, or Recht am Unternehmen) was recognized as a kind of “moral right” based on the principle of honesty and morality, competitive acts which are contrary to the generally recognized principles of honest commercial practice are unfair, and will be restrained at the suit of a competitor.The second Chapter focuses on the analysis of the passing-off lawsuit itself, with illustrations of basic elements of passing-off, and discloses that goodwill, as a relational competitive advantage of the traders plays significant role in the dynamic market competition; with the increase of its significance in competition, the value of traditional passing off action is facing great challenge. The British passing off action requires the traditional three elements: actual goodwill, misrepresentation of the source of product and actual damage to the goodwill, and such requirement maintains static protection of competition order relating to the actually established goodwill. Passing off is only constituted if the plaintiff's use of commercial sign has actually established local goodwill, the defendant's use of such sign is a misrepresentation of source of good or service and such use has caused damage to the actual goodwill. In the United States, passing off was included in Lanham Act which protects goodwill by requiring two elements of passing-off: goodwill(actual good will) and likelihood of confusion(as to the source of product or service). With the increase of market competition, goodwill is becoming a more valuable competition advantage, the market competition shifted its main battle field from maintaining the actual goodwill to establishing and obtaining potential competition advantage. As a result, passing off action had to expand its scope. In UK, such expansion of passing off action was realized by the broadening of the concept of goodwill and weakening the requirement of damage: product goodwill which couldn't be exclusively owned by any particular producer, potential goodwill carried in images with reputation which haven't not been used in licensing trade, and the inherent goodwill which is independent from the product or service are all the targets of misappropriation. Such misappropriation will result in damage which does not involve confusion of source, such as free-riding of goodwill and dilution of trademark. And such damage was recognized in legal practice gradually. In the United States, the concept of likelihood of confusion was expanded to extend the static protection of the competition order relating to the use of commercial signs to the dynamic protection, and newly recognized confusions didn't involve source of product either: initial interest confusion is in reality a free-ride of goodwill, after-sale confusion and dilution involve only the misappropriation of inherent goodwill. The above expansion of passing off action by expanding the meaning of goodwill or adding new types of confusion managed to regulate such new types of unfair competition, nevertheless, such pragmatic and resilient solution is problematic: on the one hand, it damaged the systematic coherence of legal rules and shattered the value basis of passing off action; on the other hand, it caused uncertainty in the application of existing legal rules.The expansion of passing off action described in Chapter Two aims at regulating various misappropriation of goodwill, which had been regulated in the civil law countries under the framework of general unfair competition law in the forms of parasite competition, slavery imitation and comparative advertisement. Competitions by misappropriating others' goodwill were deemed as unfair since there were contrary to the honest trade practice in the legal practice of civil law countries. Nevertheless, such regulation of misappropriation of goodwill based on honesty and good commercial morality began to be criticized for neglecting the interests of consumers. And in the mid of 1900 s, the development of competition theories and consumer movements promoted the reform of unfair competition law in some civil law countries. Especially in Germany, unfair competition law experienced a reform from law protecting the competitors to a law regulating the competition order in general, the value of honesty and good commercial morality was weakened while the protection of consumer interests was strengthened. So, the different regulations of competition relationship involving the use of commercial signs tended to converge. The third Chapter analyzes this trend of convergence to disclose the essence of regulation of competition relationship involving use of commercial signs. The above convergence was particularly obvious in regulating the imitating commercial signs, misleading advertisement and merchandising. In the UK, free-riding of reputed marks, free-riding in merchandising images which have not been used in licensing trade and the free-riding of product goodwill can be restrained as extended passing off, and such regulation offers a very broad protection to commercial signs beyond protecting its communication function extending to investment function. Thus, such expansion is shifting the theoretical basis of passing off action from communication theory aiming at protecting competition order as a whole to “misappropriation” theory which focuses more on protecting the competitors' interests. Such shift has actually turned the traditional passing off action into a general unfair competition law. In the United States, under the framework of Lanham Act, expansion of likelihood of confusion and recognition of dilution is expanding trademark right making trademark itself a property. However, the regulating of comparative advertisement still sticks to the requirement of source confusion and misrepresentation, and it ensures the free flow of information between the consumers and traders, imposing no excessive interference on the free competition involving advertising. Such practice helps to maintain the normal competition order in dynamic competition and to overcome the potential anti-competition effect which will harm the welfare of consumers. In comparison, comparative advertising under the unfair competition law in civil law countries began to be allowed in principle, instead of being prohibited in principle in the past. But the prohibition of comparative advertisements which unfairly use or harm the reputation of a mark still protects goodwill as a property, and such protection is based on the theory of misappropriation. The amendment of German Unfair Competition Law still recognizes the goodwill as a protectable “legal interest”, but modifies the standard to determine the unfair competition by relying on the principle of proportionality and weakening the application of honesty and commercial morality. Such modification allows the various interests in competition(freedom of consumers to be informed, freedom of speech, investment of traders in obtaining competition advantage, guarantee of market transparency) to be taken into account in determining whether a use of free-riding of others' goodwill is unfair competition or not, a consumer is no longer the one who need to be specially protected, instead, a consumer ordinarily informed and with ordinary diligence is set as the standard. Such modification helps to balance the need to encourage investment in advertising to establish differentiated business and the need to deter the anti-competition effect of advertising.After the analysis of historical development and current expansion of passing off action, Chapter Four provides retrospection on the passing off in regulating the competition relationship involving use of commercial signs based on the analysis of modern competition theories. According to modern competition theory, competition is a dynamic process in which the consumers' preference is the key factor to determine the production. Businesses try to establish competition advantage through innovative differentiation. However, no competition can enjoy the monopoly of any differentiated product: once a new differentiated product establishes its goodwill, it will be imitated. Imitation and substitution is the natural cycle of any new product, through which the market initiator's monopoly can be broken by competition in price or quality eventually benefiting consumers. So the purchasing decision of consumers is the key to determine the death or life of a new product and it is also the dynamic of the whole market competition. There is an information asymmetry between the producers and consumers in complicated market with producers in control of information and consumers greatly disadvantaged in obtaining information. The law should interfere only when the consumers' freedom in making purchasing decisions is not affected by false or misleading information. Consumers are no longer passive market participator who should only be protected and taken care of, instead, they are active market participators with property diligence and sense. Although unfair competition law usually stay neutral to competition theories and policies, the function of consumers as active market competitors has made the protection of freedom of consumer choice the center of protecting consumer interests. And it is also the reason why the passing off action rejects the general idea of “unfair competition” in responding to the need of dynamic protection of goodwill, and also the reason why some civil law countries reform their unfair competition law to include the protection of consumer interests in determining unfairness of a competition. Thus, it is the protection of the freedom of consumer choice that drives the passing off action to converge with unfair competition suits to some extend. Therefore, how to regulate various misappropriation of goodwill carried in commercial signs which do not involve source confusion without harming the freedom of competition is the challenge for both passing off and unfair competition actions. Currently, both the United States and the EU are regulating misappropriation of goodwill carried in commercial signs by trademark law, which has many defects since trademark right is strong exclusive right. Understanding the “unfair competition” nature of trademark dilution helps us to curb the improper expansion of trademark right. In the second part of Chapter Four makes a proposal to construct our system of protecting the goodwill carried in commercial signs based on both trademark law and unfair competition law. Firstly, trademark law should be based on the communication theory to protect the communication function of trademarks, and likelihood of confusion of source should be the standard in determining trademark infringement. Secondly, dynamic protection of goodwill in commercial signs should rely on the unfair competition law to prevent traders from improper brand proliferation which will become barriers of market entry, deprive consumers of their freedom of choice. Lastly, the regulation of competition relationship involving use of commercial signs should be reformed, categorization of passing off should be made based on protection of goodwill, free riding of goodwill should be restricted based on the analysis of competition interest instead of general consideration of moral factors.