The Tesco ruling – what does it mean for grey MS software?

Trademark owners strengthened

Levi Strauss' victory over Tesco in the European Union's highest court yesterday prevents the supermarket selling cheap jeans imported from outside the European Union. The decision sends a strong signal that will see grey importing in the IT industry greatly curtailed within the EU.

Levi's won the right to limit imports from outside the EU, and by extension, the European court's decision means trademark holders can stop businesses importing their products from outside the EU and then selling them without the trademark holder's OK.

The court said a trademark holder, such as Levi Strauss, must give explicit permission to a retailer to let them sell grey goods. Without such explicit authority the trader has to prove it had received implied consent.

In a statement the court said: "Consent must be expressed positively, the factors taken into consideration in finding implied consent must unequivocally demonstrate that the trademark proprietor has renounced any intention to enforce his exclusive rights."

So what does this mean for grey importing -say Microsoft - software.

Even before yesterday's case, Microsoft UK argued that there is no such thing as a legal grey market There's only authorised Microsoft sales channels or piracy. Nothing in between.

This means, according to Microsoft, you can't buy Microsoft software that was legitimately manufactured by, or on behalf of, Microsoft which started its life on an authorised Microsoft route to market, but at some stage was sold in manner that Microsoft didn't intend.

Microsoft's UK anti-piracy manager Julia Phillpot says: "I've yet to see any product submitted to us as legitimate grey product that isn't counterfeit."

According to Phillpot, anyone who sells cheap Microsoft software, and explains the low price as a grey market product, is really selling pirated goods.

"It's a classic scam to dupe the customer," she says.

Microsoft's licensing agreements don't enter into the discussion. It is irrelevant that it would be against Microsoft's licence agreements for an OEM to sell on the software they've bought to bundle with their PCs - be it to another country, or to subdistribute it into their own market. Because that isn't happening. If it were happening there would be non-counterfeit grey market software on sale. But there isn't.

The question of whether there is a grey market for Microsoft software is timely for a couple of reasons. Microsoft UK is locked in legal argument with two UK PC resellers which it claimed at been selling pirate software earlier in the year.

The resellers argues that they dealt with "legitimate grey market products, a trade which is entirely lawful (as has been proved by Tesco v. Levi's Jeans)," one wrote to us. "Microsoft is trying, by intimidation, to prevent us dealing in the lawful grey market and we are advised that the court proceedings are no more than a form of intimidation by the giant company over the small company and are an abuse of the legal process."

Grey Affray

As for OEMs selling on Microsoft software. It happens. A top five UK system builder admitted to doing it, but wouldn't go on the record for the same reasons he is very careful about how he sells on software. "You don't want to get on the bad side of Microsoft."

"Microsoft is difficult to grey but it can be done. "We dump our stock. You can sell it on as long as you've got a licence," he said.

He noted the one sure-fire way that Microsoft software can enter the grey market. "If a business goes bust what else is going to happen to their stock?"

So what can Microsoft do about this - a UK company reselling software on the grey market to - say - another company within the EU. A right to free trade within the EU is protected under European law, and the Tesco Levi's judgment does not affect this.

IT law consultant Dai Davis of law firm Nabarro Nathanson says: "The judgment doesn't get Microsoft off the hook. This is one battle won by the trademark owner, but this is not the last fight in the war.

"I am absolutely certain another test case will come up in two, five or ten years. If for no other reason than the supermarkets will want to continue getting publicity for what they consider to be an unfair trade practice."

Davis also feels that the EU has not given a clear judgment, especially as to which side had to prove unequivocal consent for distributing goods. "Essentially the EU has come up with a set of words which has to be applied in each case."

And we can look to the example of Germany, where courts have ruled that Microsoft can't stop dealers selling software it intends should ship only with new PCs separately ®

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