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Unjust Enrichment-Copying an Unregistered Solar Memorial 'Candle'

District Court of Tel Aviv, Ilan Chanina v. Yevu VeYistu Rechovot Ltd. 36177-01-11

5 August, 2012,

Dr. Yonatan Drori

Unjust Enrichment-Copying an Unregistered Solar Memorial 'Candle'

Hon. Avraham Yaakov presided. Given 9 July, 2012.

 

Remedies Seeked

Plaintiff requested a permanent injunction instructing the defendants to cease and desist the import of a solar memorial 'candle' called 'Ner HaTamid' as well as a request to grant a permanent injunction for the destruction of any existing candles as well as the molds used for their creation. The plaintiff further requests monetary compensation without proof of damage in the amount of 100,000NIS, as per provision 13a of the Commercial Tort Act of 1999. Alternatively, the plaintiff requested restoration as per the provisions of the Unjust Enrichment Act of 1979, the plaintiff's losses estimated at 64,329 NIS.

\Case Background

In 2009 the plaintiff began marketing the candle and in 2010 plaintiff became aware of the competition of an additional distributor. Plaintiff claimed that after examining the candle it turned out to be an exact replica of the original candle-both externally and internally-distributed by the defendant, and has therefore brought suit.

 

Ruling

The court found partially in favor of the plaintiff and ruled that the defendants unjustly enriched themselves at the plaintiff's expense. The passing-off claim, however, was dismissed by the court, because of lack of Reputation proven by the plaintiffs.

A permanent injunction was not granted based on the unjust enrichment claim. Defendants were ordered to compensate plaintiffs in the amount of 10,260NIS, the amount that the court was convinced reflected the defendants' profits of the competing merchandise. In addition, court costs were awarded to the plaintiffs in the amount of 50,000NIS.

 

Note: This decision differs from the latest trend of the Israeli courts not to find in favor of plaintiffs in cases of unjust enrichment, in situations where they have legal alterative claims, for example patent infringement.

 

Main issues in the case

 

Passing-off

Israeli precedents have ruled that in order for the plaintiff to prove passing off they must prove the existence of two conditions: The first is Reputation in the sale of the product or services provided. The second, after proving Reputation, plaintiff must show that there is reasonable likelihood that a customer would be mislead by the product, in a manner that the customer will wrongly mistake the provider as the infringer and not the rightful manufacturer. In the case in hand, the plaintiff was not able to establish any Reputation he gained in the sale of the product, and can therefore not claim to the misleading of customers that goods or services provided by the defendant were in fact provided by the plaintiff. The plaintiff is therefore ineligible for damages set in the Commercial Tort Act.

The court ruled that the second element did not occur in this instance. All the defendants did was produce and sell a competing product in an open and free market. It is unfeasible to interpret the law in a way that limits the free market. Simply competing for customers in a free and open market cannot constitute restriction of business.

As Miguel Deutch explains in his book Commercial Torts and Trade Secrets, page 66: "Sec. 3 of the Commercial Tort Law did not intend to place a complete ban on unjust competition. Although customer 'poaching' could be considered as 'riding' on the Reputation of the plaintiff, does not constitute 'prevention of coming in contact' per se.

 

Unjust Enrichment

Sec. 1 of the Israeli Unjust Enrichment Law states as follows: "Whoever unlawfully acquires an asset, service or any other benefit (hereinafter the creditee) from another (hereinafter the creditor), must return it to the creditor, and if the physical return is not possible - return its monetary value." In order for an action to be considered as unjust enrichment it must fulfill three criteria:

  1. Enrichment;
  2. Taken from the creditor by the creditee;
  3. The actions of the criditee were unjust.

Unjust Enrichment in Intellectual Property-Unfair Competition

The Israeli Supreme Court has extensively discussed this issue in A.S.I.R Import, Export and Distribution v. Forum Avizarim Umutzarei Tzricha LTD. 5768/94 289 (hereinafter 'the A.S.I.R case'). However, there is a difficulty to produce a unified decision, as the court failed to reach a uniform decision in the matter.

In the A.S.I.R case, the court decided that when a product does not enjoy protection of intellectual property laws, one may file a claim Unjust Enrichment, if the defendant has violated the rules of fair trade which bind both parties.

In the case above, the court created a number of criteria for deciding what situations constituted 'unfair competition' in cases of imitation or copying: Is the plaintiff's product innovative, original, and unique; what effort and resources did the plaintiff put into the product; Is the infringement a one-time or minute infringement; the defendant's awareness of the infringement; the ability to create other functionally similar products; did the plaintiff invest time and resources in development, while the defendant sold his product for less indicating that he barely had expenses; The time that passed from the plaintiff's beginning of sales until the defendant entered the market; and more.

The court ruled that the defendants did indeed systematically copy the product, and were aware of their wrongdoing, according to the criteria set forth in the A.S.I.R case, making the actions of the defendant 'unfair competition'.

The court further ruled that different functional alternatives for creating the product did exist, however the defendant chose an almost identical design to that of the plaintiff's.

The copying of a product without the investment of effort, thought, time and resources constitutes Unjust Enrichment of the defendant on account of the plaintiff who invested time and resources into developing the product.

The plaintiff invested time in development while the defendants sold the products at a significantly lower price proving they did not have expenses.

Therefore the plaintiff has the right for compensation based on Unjust Enrichment laws.

 

Injunction Based on Unjust Enrichment Law

In A.S.I.R the court ruled that it could award an injunction (permanent or temporary) for unfair competition based on unjust enrichment law. However, the granting of an injunction is based on the unique circumstances of each case, as Justice Groskopf points out in his book Preserving Fair Competition:

"Indeed, there may be situations in which despite the fact that the actions of the defendant violate the rule of fair competition, a monetary ramification should suffice. For example, in a situation where an importer were to import goods in regards to which there is an exclusive importer or someone would use an idea even though that very idea existed in the mind of an inventor; these situations could, theoretically constitute unfair competition. However, we cannot deduct from this that the importer or the inventor are entitled to an injunction based on Unjust Enrichment laws. That said, the reason for the denial of the injunction is those circumstances would be the social benefit in the actions of the defendant (increasing the competition), and in balancing that with other interests, the proper remedy, based on Unjust Enrichment, would be damages."

In Shoham Mechonot Umavletim Inc. v. Shmuel Harar, 2287/00, 5.12.05 Justice Rivlin extensively discussed the courts options in granting injunctions or damages based on Unjust Enrichment laws. As clarified, different circumstances will affect the court's ruling, including the type of property taken as well as the degree of the defendant's wrongdoing-measured by the effort put in by the plaintiff, deterrence, and the degree of fault or lack of bona fide exercised by the defendant.

In this instance the invention does not have any revolutionarily distinguishing features, and most of the invention of the plaintiff is based on functional advancements to existing products. Notwithstanding, as the plaintiff testified, the development on his part included elements that aren't strictly functional, such as giving the product the feeling of a real candle. In regard to the actions of the defendant, as stated earlier, the plaintiff put major efforts in developing his product, and the defendant's actions were not in good faith and warrant deterrent ramifications.

Granting an injunction, as any other equity ruling, is entirely at the court's discretion. In these circumstances, the court must balance between the low property value of the product coupled with the fact that the product is not protected under IP laws, and the value of creating a free competitive market and avoiding the creation of monopolies. These circumstances lead to the conclusion that a permanent injunction would not be appropriate, since "a blanket restriction on copying of works could lead to the blocking of competition in the fields of invention and development, without taking into account the other negative ramifications of a monopoly in a certain field" (Goldenberg, A. Design Protection, Landoy (Third Vol)1159, 1161).

Due to the short period of time that the plaintiff had to make use out of the development of his product, the court felt it just to award a temporary injunction, but limit the plaintiff's exclusiveness of the product to one year and a half (in addition to the year and a half he sold the product before the defendant's copying).

 

Damages in Unjust Enrichment Laws

The plaintiff requested damages of 64,392NIS, 46,392 of which related to the development and advertising of the product, and 18,000 of which relating to the damages suffered by the sale of the product by the defendants.

The court rules that there was no basis for awarding damages for the cost of the development of the product, as that would lead to an absurd conclusion as if the plaintiff did not put any effort in developing the product; it also contradicts the plaintiff's request for damages.

The court awarded the plaintiff damages suffered by the profits of the defendants.

The defendants sold 1,000 units of the candle at 60NIS a unit. The defendant testified that due to the temporary injunction the deal was cancelled and therefore they were only given 18,000 of the 60,000 they would have gotten had the deal gone through.

The court estimated the cost of production and import of the defendant for 300 units at 7,740NIS, and estimated the profits at 10, 260NIS, the amount accordingly awarded to the plaintiffs.

The Development of a Reputation

Israeli law dictates that simply copying a product in and of itself does not establish a passing-off claim without establishing a Reputation in the product, regardless of the element of misleading the public as to the rightful supplier of the product.

The term 'Reputation' refers to the creation of a positive image in the eyes of the public, a result of which being that the product acquires a potential client base interested in purchasing the product.

Proving Reputation is a difficult task as each case will be decided independently based on its circumstances.

Reputation: Prolonged and Extended use of a Product

Customarily, prolonged and extended use of a product has been an accepted form of proof of reputation. However, in Civil Appeal Mifalei Zchuchit Yisraelim Finitsia v. Les VerreiesSaint Gobain, 18/86 M"H(3) 224, 241 the court ruled that "The prolonged and extended use of a product is not as important as the manner of use of the product-was there use of the product in a manner that will cause the public to identify the product with its rightful manufacturer".

In this instance, the plaintiff failed to prove that in the short period of time that the product was distributed by him, one year and a half, the plaintiff acquired Reputation in a manner that identified his goods with the his brand.

Other than the plaintiff's testimony, no other evidence was introduced to point to the volume of profits made by the candle. The plaintiff produced accounting records pointing to the general profits of 'Ner VaShem', but none that could point to the exact amount of profit from the sale of the product itself. In addition, the plaintiff failed to establish his claim that the sale of 2,000 units is sufficient to establish Reputation.

Even if we operate under the assumption that the sales of the product were extended  and prolonged, this still does not lead directly to the conclusion that the plaintiff has acquired said Reputation under the law, but may rather lead to the conclusion that, as the plaintiff himself claimed, 'the public was happy to see other players in the market'.

 

Reputation: the Uniqueness of the Product and the Visual Imitation vs. Functional Properties

The uniqueness of a product may also lead to the conclusion that Reputation has been acquired. Therefore, the plaintiff may also prove that unique features in his product distinguish it and identify it in the eyes of the customer. The stronger the uniqueness of the product makes it identifiable by the customer, the less the plaintiff will need to prove the other elements of Reputation.

Israeli courts have distinguished between imitation of the product itself and imitation of the visual elements of the product. In order to prove passing-off the plaintiff must prove that the infringing product is unique enough to be confused for the real one by the customer.

In addition the plaintiff must prove that the copying by the defendant is of the designed elements of the product that do not have functional purpose. The court has differentiated between imitation of the product itself (its shape and design), which is not considered passing-off barring any other legal protection, and imitation of the appearance of the product (its shape and design at the time of purchase), which main function is customer recognition.

 

Reputation: Recognition of the Public

The plaintiff must show that customers associate the product, by its appearance, with the plaintiff's merchandise. In order to prove this it is customary to bring testimonies from merchants, the public, as well as evidence regarding advertising and marketing expenses.

Evidence regarding the advertising and marketing expenses of the product could point to a development of Reputation of the plaintiff regarding the product. To that effect the plaintiff produced a receipt for the procurement of a website, advertising pamphlets, receipts for advertising expenses on Google's search engine, including search results from the same website, proving that 'Ner VaShem' appears as one of the first results. However, after reviewing the pamphlets it become evident that the plaintiff has advertised only the product itself and not the company, and since the product was sold by other vendors prior to the plaintiff, he may not claim his Reputation for the product.

 

Reputation: Results of Search Engines

Regarding using Google search results in evidence to prove Reputation, the court ruled in Lee Compant inc. v. Yunayev Yagoor, TA2391-05, 16.12.09:

"The use of Google search results regards the number of times that a word or a phrase is used in a specific website. This information may be used as an indication, albeit not an exclusive one, of the existence of Reputation. It must be noted in this regard that the results of a Google search are not always limited to the specific phrase. For example, a search for the phrase 'Lee' will include phrases such as 'Lee Cooper' or other companies not related to the plaintiff. Notwithstanding, a search for the plaintiff's name will, in most cases, produce results that are connected to the plaintiff.

The fact that a certain phrase is referenced many times in a Google search can be an indication of the popularity of a trademark and the familiarity of it to the public. As previously stated, it cannot be the sole indication when trying to prove that a product has awarded Reputation. However, when added to other indications and pieces of evidence, it cannot be overlooked."

In this case, the plaintiff presented search results with the key words 'Solar Memorial Candle' which do not prove a thing about the reputation that the plaintiff's company, 'Ner VaShem' has acquired. Even had the plaintiff shown that his company is at the head of search engine results this would not prove a thing since it doesn't link between the product and the name of the company (which is what is searched for in reputation). Moreover, the plaintiff could have used search optimization software to promote the company and therefore the results would not prove a thing.

 

Reputation: Does the Act of Imitation Itself Point to the Existence of Reputation?

Although there may be some merit to a claim that the fact that an imitation took place could point to the existence of reputation, this is not the case here. The product has been on the market for a short period of time, the name 'Ner VaShem' itself was not copied, and the product is of a nature that is not tied by the public to a specific manufacturer.

 

 

The likelihood for Misleading the Customer

Only after a Reputation has been established will the court examine whether the public would be misled by the imitation. The misleading will be examined by the "appearance and the sound" of the infringing product in comparison to the original product, the type of product and the type of a likely customers base, and the 'rest of the circumstances'.

 

Unjust Competition

The Sec. 3 of the Israeli Commercial Tort Law restricts one practitioner from unjustly interfering in the business of another. The law is comprised of three criteria:

  1. There are two practitioners (the plaintiff and the defendant);
  2. The defendant is preventing or restricting customers, employees or agents from coming in contact with the plaintiff;
  3. The actions of the defendant are unjust.

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