UK Supreme Court rules on threshold for establishing goodwill

In Starbucks (HK) Limited v British Sky Broadcasting Group PLC the UK Supreme Court has ruled on the question of whether a brand that has its main business overseas but a reputation in the United Kingdom can establish an action for passing off.

While the decision confirms the orthodox approach taken in the United Kingdom when considering goodwill, it does leave a number of questions unanswered.

The test for passing off is as follows:

• Goodwill has been established in the United Kingdom (in the sense that customers associate a mark or get-up with the claimant’s products or services);
• The public believe that the defendant’s goods or services originate from, or are connected with, the claimant; and
• This causes damage.

The Supreme Court’s ruling centred on the first limb: what is required to establish goodwill in the United Kingdom.

Claimant Starbucks (HK) Ltd ran a successful paid-for internet television service in Hong Kong called NOW TV, which had a reputation among the Chinese-speaking UK community. In addition, there was evidence that UK-based consumers viewed free NOW TV programmes and trailers on NOW TV’s YouTube channel and on the NOW TV website. Sky then launched an internet television service in the United Kingdom called NOW TV and Starbucks commenced an action for passing off against Sky.

Starbucks was unsuccessful at first instance and on appeal. The Supreme Court upheld the decisions, confirming that to establish goodwill in the United Kingdom, reputation alone is insufficient. Instead, it is necessary to have customers or clients in the United Kingdom. Therefore, even where a business is based overseas, it must show that it supplies products or services to customers in the United Kingdom. This decision reaffirms the so-called ‘hard-line’ UK approach and declines to follow some of the more permissive approaches adopted in other common law jurisdictions.

For example, the Federal Court of Australia has previously ruled that it is not necessary to sell goods in the jurisdiction to establish goodwill there for the purposes of passing off; a reputation in the minds of consumers there is sufficient. The Supreme Court thought that the Australian approach would create uncertainty and allow international brands to prevent others from using their names in the United Kingdom even where no product or service was provided to UK-based individuals. In this respect, the Supreme Court was disinclined to allow a foreign trader which had no business in the United Kingdom to gain an effective monopoly in the brand.

In future cases, the question of whether a product or service is provided to a UK individual may give rise to a factual dispute. This was a decision that depended heavily on its facts and, as Justice Arnold said at first instance, to find that goodwill had arisen in this case would stretch the concept of ‘customer’ to breaking point. The NOW TV YouTube programmes had a total of 238,246 views in the United Kingdom between November 2008 and July 2012. However, there was no evidence of subscriptions to the channel from the United Kingdom or any other transactions from UK viewers. Further, the Supreme Court considered it important that the UK viewers of Starbucks’ programmes had not paid for a subscription, which was the way that the NOW TV service was provided in Hong Kong – that was its main business and how it made its profit. In addition, it was relevant that the free online videos were primarily broadcast for promotional purposes.

However, consider a slightly different scenario, in which Starbucks’ service in Hong Kong was free and relied only upon advertising to generate profit, and some of those programmes were also viewed online by UK-based individuals with the same advertising. It is unclear whether this would suffice to constitute provision of a service to customers in the United Kingdom. Perhaps it would, because the actual service was no longer subscription based and instead was performed by the user watching the programme on any medium in any country. Moreover, perhaps it would suffice if the advertising served to the UK-based individuals were UK targeted or from UK-based companies.

Ultimately, whether a business is online or bricks and mortar, it is necessary to identify its product or service (in Starbucks’ case, a paid-for internet television service) and then ask whether it is being provided to customers who are present in the United Kingdom. In this case it was not, because those individuals would subscribe to the service only if and when they went to Hong Kong.

It is still possible to establish a claim for passing off where services are received and based abroad, but for which customers place orders or reservations in the United Kingdom, particularly services in the travel industry. For example, in Hotel Cipriani v Cipriani (Grosvenor Street) Ltd ([2010] EWCA Civ 110) the Court of Appeal held that Hotel Cipriani could establish goodwill in the United Kingdom because it had a substantial body of customers from England who made reservations from the United Kingdom directly or via travel agents. What is apparent from the Supreme Court decision in Starbucks is that some sort of transaction or business connection must occur in the United Kingdom, even if the business or service is provided overseas.

Any business that intends to provide products or services in the United Kingdom should apply to register its trademarks in the United Kingdom. However, it is important to consider goodwill because registered marks may be found to be invalid (which was the case for Starbucks), meaning that passing off is the only means of protecting that mark. The Supreme Court decision tells us that evidence of payments or reservations made by customers in the United Kingdom is essential, if that is what your business relies upon. If a business makes money through other means (eg, advertising), the situation is less clear; but it is likely that evidence of UK-targeted advertising would be relevant in order to establish goodwill.

The Supreme Court decision confirms that the tort of passing off depends on having customers in the UK territory. It declined to favour a cross-border approach taken by some other common law courts and instead supports local and smaller traders. However, it arguably restricts or leaves uncertainty around the ability of some online businesses to protect their brands in the United Kingdom.