UK COURT DIARY

Confusion May Not Prove Deception
Phones 4u Ltd. Misses the Call in Passing Off

It has long been loose language among lawyers that confusion is a necessary element of a successful passing off claim.

In fact, however, in the more precise language of the leading cases, it is deception, or the threat of deception, which the law of passing off is there to remedy. Confusion and deception often amount to the same thing, but not always. In March, the High Court rejected a passing off claim brought by the well-known mobile phone retailer Phones 4u Ltd. because of evidential weaknesses including the showing of confusion, not deception.

The outcome is a timely reminder that the courts see a subtle difference between the two concepts which can make the difference between winning or losing a claim. It also highlights the risks involved in waiting too long to sue, and the pitfalls in evidence preparation which, taken cumulatively, lost the Claimants’ case.

 

The Facts

Phones 4u Ltd. and Another v. Phone4u.co.uk Internet Ltd. and Others [2005] EWHC 334 (Ch)

Phones 4u Ltd. is a successful chain of mobile phone retailers in the United Kingdom. It adopted the name Phones 4u for two of its stores and its mail order business in 1995, and changed its corporate name and other shop names in 1997.

The business of Phones 4u expanded rapidly and by 1999 it enjoyed an annual turnover of nearly £44 million. The red, white and blue Phones 4u logo appeared on most of Phones 4u’s 63 shop fascias up an down the country, and by 2004 the number of such shops exceeded 350. Phones 4u registered the domain name phones4u.co.uk in 1999, and launched its website in October 2000.

The second Defendant was an individual, Abdul Heykali, who had worked for a small mobile phone retailer in London. Towards the end of 1999, Mr Heykali set up a mobile phone retail business called Mobile Communication Centre. Shortly before, in August 1999, he had registered the domain name phone4u.co.uk. In November 1999, the linked site read, “This site will be going mobile soon. The Internet home of Mobile Phones. Up and running by 1st of January 2000.” By September 2000, however, the site’s content included an image of a phone followed by “4U.co.uk.” It was opened to e-commerce in around July 2001. By that time, a disclaimer appeared as follows:

“Phone4U.co.uk are solely an Internet based company and do not have the costs associated with running high street shops…Phone 4U.co.uk is NOT connected with the high street mobile phone retailer Phones 4U.”

Although some key facts were disputed, the judge accepted that Mr Heykali had chosen phone4u.co.uk at the recommendation of a shadowy foreign friend and in ignorance of the Claimant’s business, for use in connection with an Internet-based mobile phone company. The court was persuaded that Mr Heykali thought it common practice on the Internet to combine descriptive words with the phrase “4U.” However, by February or March 2000 Mr Heykali had become aware of the Claimants while searching for a Vodaphone dealership which he obtained from the Claimants themselves in March 2000. The Claimants by that knew of Mr Heykali’s domain name, and expressed concern that emails intended for them were being misdirected to Mr Heykali.

In response to a cease and desist letter from the Claimants, Mr Heykali incorporated a company under the name Phone4U Ltd. (later changed to Phone4u.co.uk Internet Ltd.) and denied any wrongdoing. He also recognised that his domain name was potentially very valuable. The court found that he deliberately exaggerated the number of misdirected emails he had received, and falsely suggested to the Claimants that he had already been offered £100,000 for the domain name.

For reasons that were never adequately explained, the Claimants took no further steps to stop Mr Heykali’s activities until proceedings were issued in February 2004.

The Law

The judge applied the test for passing off established in Reckitt & Colman Products Ltd. v Borden Inc. and Others [1990] 1 WLR 491, requiring the Claimants to prove goodwill or reputation associated with the phrase “phones 4u,” and a misrepresentation by the Defendants at the relevant date, whether intentional or not, that their goods were those of the Claimants, causing damage or a likelihood of damage.

The relevant date was the date of the first actual or threatened passing off. The first such date was August 1999, when Mr Heykali registered the domain name phone4u.co.uk. Other alternative dates relating to the amendment of Mr Heykali’s website, the incorporation of his company, his use of the domain name and his adoption of metadata to increase his website’s exposure on Internet searches (later abandoned) were relevant only if passing off could not be proved on the first material date.

Goodwill: A Fall at the First Hurdle

Phones 4u had become well-known and highly successful by the date of the action. The judge appeared disposed to think that it was also known in August 1999. However, the evidence did not allow him to indulge that disposition.

In this regard, the court was heavily influenced by the descriptiveness of the Phones 4u name. The name, it considered, signalled no more prima facie than that the Claimants provided phones for sale to the public. The burden of proving that the public had come to associate the mark with the Claimants’ goods as of August 1999 was therefore unavoidably heavier than in the case of an inherently distinctive mark. Mere evidence of use, the judge observed, was unlikely to be enough.

The evidence supported a mainly descriptive understanding of “Phones 4u” as of August 1999. The Claimants had adopted the name because it sent a useful descriptive message, and their own advertising emphasised that it could help “find the right phones for you.” The judge thought that the style of the Phones 4u name meant that it was not exclusively descriptive, but the burden was still high, even if not quite as high as for a completely descriptive expression.

Even with this grace, however, the Claimants were found not to have proved goodwill in August 1999. There were then only 63 Phones 4u shops in the U.K., and the evidence suggested that they only acquired much prominence later on, as more shops opened and television advertising began. The court put little faith in “wholly speculative” evidence about shop visitor numbers based on “footfall counting” technology, and the Claimants’ evidence as to advertising spend left important questions unanswered, such as the extent to which the advertising figures given were said to have been “understated.” Brand awareness data was from August 2001, and any attempt to extrapolate it back to August 1999 was, as the Claimants’ own expert acknowledged, extremely problematic.

Although the court declined on the evidence to find that goodwill had been established by August 1999, it was persuaded that goodwill as of August 2001 could be shown. That was, in the event, immaterial, however, because of the absence of any direct evidence of deception at any time during the 5-year period since the Defendants’ acts began.

The Second Failing: Confusion, Not Deception

The court took the view that the Claimants had enjoyed 5 years in which to collect evidence of deception arising from the Defendants’ activities, if such evidence existed. If none or very little was filed, that was evidence itself that no misrepresentation had been made.

The Claimants’ evidence showed that Mr Heykali had regularly received emails intended for them, including emails by the Claimants’ own staff which were misdirected due to typographical errors. About 20 such emails from 2000 alone were filed in evidence. The court declined to explain all of them away as typographical errors. However, their weight as evidence of misrepresentation was severely undermined by the fact that the authors had not been called as witnesses and could not be cross-examined. Their state of mind and the reasons for their conduct could not be examined. The court was only willing, therefore, to regard the misdirected emails as evidence of confusion, not deception.

The judge explained the distinction by reference to Lloyd J’s comments in HFC Bank plc v Midland Bank plc [2000] FSR 176, at 201, to the effect that even actual confusion does not prove a misrepresentation, but only shows “that people make assumptions, jump to unjustified conclusions, and put two and two together to make five.” What the court had to do was examine whether the Defendants’ acts would lead or had led customers or potential customers into thinking that they were dealing with the Claimants, or someone connected with the Claimants, when in fact they were not.

In this respect, most of the misdirected emails were from customers of the Claimants who were writing concerning their purchases. This the court saw as evidence of confusion, not deception. Only one of the misdirected emails appeared to suggest that the author had bought a mobile phone from Mr Heykali thinking that he was, or was related to, the Claimants. Crucially, however, the author of that email had not been called as a witness and could not be cross-examined.

There was evidence that some customers were entering Mr Heykali’s website by mistake. The court noted, in particular, “clickstream reports” showing that from March to June 2003, between 19.41% and 24% of Internet users visiting Mr Heykali’s website went to the Claimants’ website immediately thereafter. The Claimants argued that this unusually high figure showed that Internet users searching for the Claimants’ site were visiting the Defendants’ site first by mistake.

The court thought that the Claimants’ evidence of confusion was significant. Nevertheless, the absence of a single example of direct evidence of actual deception of a customer was telling, and ultimately fatal. The court found it a striking omission given the passage of

5 years since Mr Heykali had begun his activities, the Claimants’ rapidly rising profile over those years, and the amplified potential for deception taking into account that customers of mobile phone vendors often seek to come back to the seller for upgrades or services. The court dismissed the claim, finding no evidence of deception, as opposed to mere confusion.

For the same reason, the Claimants’ argument that Mr Heykali’s domain name amounted to an instrument of fraud in the One in a Million vein (British Telecommunications plc v One in a Million Ltd. [199] FSR 1) also failed. The court further distinguished this case on the basis that the domain name was “mainly descriptive,” and Mr Heykali was, the court found, not aware of the Claimants when he registered it (despite his unappealing eagerness to exploit the domain name’s value later on).

 

Comment

It is apparent that the judge reached this decision with great reluctance. He regarded the failings of evidence as borderline and had at least some of the misdirected email authors been called to give evidence, he might very well have reached a different conclusion.

Too many missed opportunities on evidence preparation contributed to the disappointing outcome for Phones 4u. However, Phones 4u might have been forgiven for thinking that the mass of misdirected emails and mistaken visits to the Defendants’ website pointed robustly toward a finding that the Defendants’ acts were working as a misrepresentation. Even if some of the misdirected emails could be explained as typographical errors, the senders of those emails were after all deceived by the similarity of the Defendants’ domain name into thinking that their messages had been sent to the Claimants. Even if people do jump to unjustified conclusions and add two and two to make five, should not the sheer number of times this happened have supported a finding of deception?

The court recognised that the likelihood of deception was far higher when there was already confusion. However, it was swayed in the end by the Claimants’ failure to put forward any direct, as opposed to indirect, evidence of a customer actually being deceived in a purchase over a period of

5 years. The Claimants’ evidence of confusion was treated as no more than that. No relevant deception was proved.

A court may have been more lenient in finding that confusion was likely to lead to deception if the action had been brought more promptly. The Claimants’ fate in this case was probably sealed by its having languished on its rights for 5 years. When the Claimants eventually did act, the court expected far more from them on the question of evidence than it might have done if the action had been brought within the first year.

Businesses can learn valuable lessons from this case.

• First and foremost, do not delay in seeking a legal remedy where it is clear that a swift commercial resolution cannot be achieved. The standard of evidence required will only grow higher and costs will inevitably rise with it. Moreover, the court will look extremely sceptically at pleas for it to extrapolate data relating to a later period to a much earlier one. It is much easier to gather relevant evidence nearer the date. Don’t expect your evidence or expert to perform miracles.

• Second, make witnesses as to deception available to explain their conduct and state of mind. Failure to do so seriously undermined the weight of the mass of misdirected emails submitted in this case. If just a few persuasive witnesses had stood up to cross-examination on the question of deception, the court may have been persuaded that more than “mere confusion” was at work here.

• Third, let your legal team look critically at your evidence. A fresh eye, either within the firm handling the case or through counsel, can reveal weaknesses that no one thought existed while there is still time to put them right. Just a few small omissions can add up to a finding against you on a key point like goodwill. The cost of bringing someone new but experienced in evidence matters on board for this exercise can be well worthwhile.