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07 November 2016
On October 13 2016 the Stockholm Patent and Market Court (B 6871-14) sentenced four company executives to up to 18 months in prison and ordered them to pay fines and damages amounting to several million Swedish kronor for copyright and trademark infringement through the online sale of counterfeit furniture.
Although the first-instance judgment is likely to be appealed, the case deals with several interesting issues, such as:
Designers Revolt is a company incorporated in the Isle of Man, which sold copies of iconic furniture from an online store located in the United Kingdom. The idea behind the company was to take advantage of the fact that for certain kinds of work (eg, furniture), UK copyright law had a shorter duration of copyright protection compared to most other countries (UK copyright law has since been changed). The furniture sold by Designers Revolt was thus legal to sell in the United Kingdom, but was still covered by copyright in most other countries, including Sweden, where most of the company's sales occurred. Designers Revolt paid for advertisements marketing the webstore and products in several Swedish newspapers and magazines. Delivery to Swedish customers took place via an external company called Idrottsbudet, which also stored goods for Designers Revolt in Sweden and assisted with certain other minor services.
Designers Revolt was ultimately owned by LN, who was also involved in running the company. Further defendants were CP (a product developer at Designers Revolt), AN (LN's wife, who handled the company finances and accounting) and EW (chief executive of Idrottsbudet and Designers Revolt).
The court began by referring to European Court of Justice case law on cross-border copyright infringement (C-5/11, Donner, C-98/13, Blomqvist and C-516/13, DImensione). It found that Designers Revolt's actions, in particular marketing aimed at the Swedish market and arranging transport to Sweden (with Idrottsbudet's assistance), were sufficient to infringe potential rights in Sweden. Additional facts – including that Designers Revolt had employees in Sweden and no real business in the Isle of Man – led the court to conclude that Designers Revolt's actual operations were handled in Sweden, which in turn meant that sales to other countries were considered to have taken place from Sweden. The court also found that all 105 products (ranging from lamps to wooden monkeys) were protected by copyright. Designers Revolt's sales were thus considered to infringe copyright.
Both LN and CP were sentenced to 18 months' imprisonment based on their substantial involvement in leading and developing the business. Their objection that they lacked criminal intent – since they thought that Designers Revolt's business was legal – was disregarded by the court. The court found that the legal opinion relied on by LN did not support the conclusion that the business would be legal, in particular not when it was aimed so strongly at the Swedish market, which was highlighted as a risk in the legal opinion, and since Designers Revolt received several cease and desist letters.
AN had assisted Designers Revolt with matters relating to accounting and invoicing, to the equivalent of an average of 15 to 20 hours a week. She knew that the legality of the business was at issue, but lacked detailed insight into the business other than in financial matters. Relying on email correspondence discussing copyright matters and her knowledge of certain ongoing disputes in relation thereto, the court nevertheless found that AN's actions were intentional. Even though she had not participated in any of the infringing acts, her assistance was considered important and necessary for the business. She was therefore sentenced as a co-perpetrator, not an accomplice, to a conditional sentence (nine months in prison) and a fine.
The chief executive of the delivery company, JW, was aware that the legality of Designers Revolt was in question, but he was also told by a third person that CP had informed him that their lawyers had said that "everything was ok". JW also denied criminal liability for himself and his company, arguing that delivery services should be considered a general service in society and that their potential assistance in illegal matters should not therefore give rise to criminal liability. The court reasoned that JW must have known that there was a risk that the goods were protected by copyright, and that considering his company's close relationship with Designers Revolt, he should have made more effort to ascertain the legality of the goods and business. He was considered grossly neglectful and sentenced as an accomplice to a conditional sentence (three months in prison) and a fine.
The prosecutor also requested forfeiture of Skr28 million – the proceeds from the infringements (net, with deductions made for purchase cost) from Designers Revolt and LN. The defendants contested forfeiture and in any event argued that overhead costs must be deducted. The court – in analogy with what the Supreme Court has ruled in relation to forfeiture relating to illegal sale of narcotics – refused to make deductions for additional costs, since the business concerned was fundamentally illegal. Half of the amount was therefore forfeited from Designers Revolt, but the court adjusted LN's amount to half (ie, Skr7 million), taking into account his liability to pay damages.
The copyright owners argued for a (hypothetical) licence fee of 32% on all sales, as well as a declaratory judgment on damages for additional harm. The defendants contested liability for damages but had agreed to a licence fee of 2% as being reasonable in and of itself. The court found that it appeared unlikely that a licensee would have agreed to a 32% licence fee and, after some discussion in making an overall assessment, ruled that a 15% licence fee on the consumer price was reasonable.
Apart from the owner, LN and JW, the court also held AN jointly responsible for the damages with Designers Revolt. Even though her involvement was less than that of the others, the court found no reason to make an exception to the main rule of joint liability, holding the four individuals liable to pay over Skr25 million in damages.
Criminal liability for company executives sends a strong message to infringers. That the owner and product developer were held liable is unsurprising, considering their heavy involvement in running the company. Designers Revolt's business has been discussed as being clearly illegal in the Swedish IP community for some time and the judgment must be considered as expected.
Less obvious may have been the fact that AN, whose part-time responsibilities related mostly to accounting and managing company finances, would be considered a co-perpetrator and held jointly liable for damages. If it is upheld on appeal, the sentence would definitely be an effective addition to Sweden's enforcement tool box. It should act as a strong deterrent as well as broadening the group of persons liable to pay damages, increasing the chances of actually receiving payment.
Another potentially useful possibility is that of holding transporters and their executives criminally liable for aiding infringement. Although JW's company's involvement went further than mere transportation, and included actual knowledge of potential legal issues, the judgment, if upheld, should make third-party service providers (eg, transporters) think twice before proceeding with assisting companies whose business model may be illegal. Particular care should be put into drafting cease and desist letters to such intermediaries and customers.
With rather considerable damages, forfeiture of illegal gains and criminal liability (including prison for persons with leading positions within the companies), the story is likely to continue with an appeal.
For further information on this topic please contact Ludvig Holm at Westerberg & Partners Advokatbyrå Ab by telephone (+46 8 5784 03 00) or email (firstname.lastname@example.org). The Westerberg & Partners Advokatbyrå Ab website can be accessed at www.westerberg.com.
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