Balancing transparency with protection is an essential element in most distributor-principal relationship.
Generally, the principal brings product knowledge and the distributor provide market knowledge. But the roles are often more complex. Adapting product to local markets or introducing new solutions requires that both parties participate in technical as well as market considerations. And often cooperation turns into competition.
An example is the newly resolved matter in Eltorque AS (“Eltorque “) vs Brødrene Dahl AS (“BD”) that was resolved by the Appeal court for eastern Norway (case LB-2022-134160.)
Facts
Since the1990s, Eltorque and BD cooperated closely on Eltorque’s product, the QT250 actuator, an electric and remote controllable device used on ships for e.g. opening and closing of valves.
Eltroque is a relatively small Norwegian company while BD is a major distributor of piping and related products owned by a multinational.
While Eltorque stood for the development and production, BD marketed the product and gave mercantile input. Initially BD acted as the exclusive dealer in Norway. Under this exclusive agreement BD was bound by noncompete, and also a minimum sales volume. In 2011 Eltorque wanted to evolve from a “part supplier” to a “system supplier” and terminated the exclusive arrangement with BD. However, the relationship continued a nonexclusive basis. The confidentiality clause was kept unchanged. The nonexclusive agreement further defined BD as a so-called “preferred partner”, which gave the BD very favorable prices compared to other customers.
In 2019, while BD still marketed the Eltorque product, BD launched a copy of the QT250. Eltorque became aware of the copy, and asked BD to stop marketing the copy product. BD did not accept and when the copy product was presented on an exhibition in 2021, Eltorque filed a lawsuit before Oslo District Court claiming that the copy product was developed in violation of the Marketing Act, and that production, marketing and sales should cease.
The Court found that BD had ordered/developed a direct replacement for QT250 by a Taiwanese company. An extensive email dialogue between BD and the Taiwanese company showed that BD deliberately had developed a copy of QT250 for the purpose of replacing it in the market.
The result was a copy that functioned similarly to the QT250, directly replacing the QT250 in the existing systems of Eltorque’s customers. The question is whether this imitation was unlawful.
The starting point is that it is permissible to imitate and copy others’ products and solutions, (the “principle of imitation”.) Being inspired by and imitating other products promotes innovation and further development. So-called “reverse engineering”, i.e., studying and drawing ideas and inspiration from others’ products when developing one’s own products, is fundamentally allowed as long as one does not infringe upon any exclusive rights.
As no part of the QT2501 was protected by patent or design rights the Court also had to consider whether BD had violated the Trade Secrets Act, the Copyright Act, and confidentiality obligations in the parties’ agreements.
While such rights are of a more universal nature – rules on unfair competition vary by jurisdiction. In Norway these rules are found in the Marketing Act § 25
Ruling of the Court
Like the District Court, the Court of Appeal found that BD had acted in violation of good business practice as regulated in the Marketing Act § 25 in the development of the copy product.
Initially, the Court of Appeal pointed out with reference to the supreme court’s decision in HR-2021-2479-A “(Bank Norwegian”[1]) that the prohibition against actions contrary to good business practice supplements both the provisions in the Intellectual Property Law Act and the specific provisions of the Marketing Act. Through case law, factors that are particularly relevant for assessing whether an imitation is a violation of the Marketing act includes;
- Whether the imitation has occurred in the wake of a previous connection between the parties, for example after a previous cooperation relationship, a customer or supplier relationship,
- whether the imitation is conscious and/or systematic; and
- whether the imitation is particularly conspicuous or near, or where not enough has been done to comply with the obligation of variation.
The Court of Appeal found that since BDs development of the copy product occurred “during or at least in the aftermath of a previous cooperation” this underline the duty of loyalty and lowers the threshold for breach of the provision. Furthermore, the Courl found that BD’s imitation of QT250 was deliberate, systematic and particularly close, and that the exploitation of Eltorque’s data file and test report gave BD savings in time and cost.
The Court therefor found it unnecessary to decide whether BD’s submission of Eltorque’s data file and test report in itself was a violation of the Trade Secret Act, the Intellectual Property Act or the confidentiality obligation in the parties’ cooperation agreement, as such actions regardless of “must be considered part of a systematic and particularly close counterfeiting of QT250”.
Also, the Court of Appeal stressed that the confidentiality obligation of the cooperation agreement implied “an obligation to exercise caution and an obligation to assess and possibly consult Eltorque before, among other things, technical information about QT250 is sent to third parties”.
Assessment
The decision demonstrates how rules related to “unfair competition” may capture issues that can be debated under more special provisions of Intellectual Property or trade secret Acts.
The decision maintains the starting point previously established in case law and theory, namely that in such cases there must be factors that are not captured by the special provision, and for which the consideration of healthy competition indicates that protection is needed,
The case differs from the previously mentioned “Bank Norwegian case” as in this case the court found additional disloyal factors that the special provisions do not address.
The Court of Appeal’s judgment also illustrates that an existing or previous cooperation relationship between two parties sharpens the duty of loyalty under Section 25 of the Marketing Act.
A stricter duty of loyalty means that one has a greater obligation to keep (i) distance from the other party, (ii) exercise special caution when developing “closely related products or services” and (iii) show consideration in the use of entrusted information. The judgment also shows that a “reverse engineering” defense is not sufficient when your copy product is unnecessarily close to that of your previous partner.
[1] See our article “Use of competitors marks as “key-words” on search engines“. (https://www.idiproject.com/news/norway-use-competitors-marks-key-words-search-engines/)
Carl Christiansen, IDI country expert for agency and distribution in Norway
