The Legal 500

When the consumers of a product do not know, or even care about, its true origin, the law of passing off still protects the originator of the product against any unauthorised exploitation of the goodwill it generates. But what happens to goodwill when the originator expressly allows a third party to rebrand and market its product as its own, under what is known as a ‘white label' arrangement? Is there a limit to the extent that the goodwill can be exploited? The High Court grappled with this issue in the recent case of ScanSafe Ltd v MessageLabs Ltd in the context of internet security services.

Website and e-mail scanning

ScanSafe developed a system of hardware and software for internet website security scanning. Its security service is a method of scanning and filtering websites that are accessed by employees of client businesses to detect those that contain viruses, pornography and any other undesirable content and prevent them from being accessed. The ScanSafe system comprises state-of-the-art, high-speed scanning software and a number of vast data centres which run the software and process the information. The unique feature of ScanSafe's system is that it is entirely off-site (no hardware or software is installed at the customer's premises) and merely involves the customer redirecting its web traffic.

MessageLabs, on the other hand, originally specialised in e-mail security scanning. Its e-mail scanning service is a method of scanning and filtering e-mails to detect and block those that contain viruses or any other undesirable content. It is also entirely off-site, involving the redirection of the customer's e-mail traffic. As far as the customer is concerned, this service performs the same function as ScanSafe's web scanning service, albeit applied to e-mails.

However, there are key differences between the two systems. The speed at which e-mail scanning occurs is not critical because a small delay between the sending and receipt of an e-mail is not usually noticed by customers. However, the speed of website scanning is critical because it is not normally acceptable for a person accessing the internet to experience a noticeable and persistent delay between entering the domain name in their browser and being connected to the website. This difference means that, on a technical level, the two scanning systems are completely different. Many companies were able to offer an e-mail scanning service. However, ScanSafe's website scanning service was the only one of its kind on the market.

White label agreement

MessageLabs wished to offer ScanSafe's web security service to its customers to complement its e-mail security service. For branding and marketing purposes it was highly desirable for it to offer the ScanSafe service under the MessageLabs brand so that it could sell both internet and e-mail security to customers under the same MessageLabs banner.

In July 2005 ScanSafe and MessageLabs entered into a ‘white label' reseller agreement (the white label agreement) whereby MessageLabs was allowed to rebrand and resell ScanSafe's website scanning service (the ‘white label service') to its customers as ‘MessageLabs Web Security Service'. MessageLabs then promoted and sold the white label service to customers of its existing e-mail security service as well as to new customers. Most customers of the white label service were not therefore aware that they were receiving ScanSafe's service. Only in unusual circumstances, such as when fundamental service problems arose, would customers receive technical support directly from ScanSafe and would therefore be made aware that the service was ScanSafe's.

As regards the intellectual property in the white label service, the white label agreement provided as follows:

‘All intellectual property rights in and to the white label service or otherwise created by ScanSafe during the term of this agreement are and shall remain, as between the parties, the sole property of ScanSafe.

All intellectual property rights in and to the ML hosted service (other than the white label service) or otherwise created by ML during the term of this agreement are and shall remain, as between the parties, the sole property of ML.'

Although MessageLabs was contractually licensed to use the commercial reputation of the white label service to make sales in its own name, ownership of the intellectual property rights in the white label service therefore remained with ScanSafe.

The white label agreement also envisaged that one day MessageLabs might wish to produce its own competing web security service. Subject to certain contractual restrictions, such as notice periods and covenants relating to transfer of customers, MessageLabs was allowed to develop, market and sell a product that would compete with the white label service.

Version 2: the competing service

In April 2006 MessageLabs notified ScanSafe that it had developed its own completely new and technologically unrelated web-scanning capability. Shortly afterwards, MessageLabs launched its competing service under the name ‘MessageLabs Web Security Service - Version 2'. In particular, MessageLabs' promotional material for its new service directly compared it with the white label service and called the two services ‘Version 1' and ‘Version 2'.

The term ‘Version 2' is commonly regarded in the IT industry as a development and an upgrade from a previous service or software. ScanSafe cried foul, claiming that MessageLabs was obtaining an unfair competitive advantage by marketing its brand new, untested service as Version 2 of the tried-and-trusted white label service, and thereby trading off the goodwill subsisting in the white label service. ScanSafe alleged that customers were being led to believe that the new system was simply an upgrade of the technology and systems employed in the white label service.

ScanSafe alleged that nowhere in MessageLabs' marketing materials was there any clear statement that the old and new systems did not share a common technical origin. Both appeared to share a common origin as MessageLabs products. Had MessageLabs made the true position clear, its new untested technology would have been at less of an advantage against an existing system that had been successful in use.

ScanSafe issued injunctive proceedings to restrain MessageLabs from calling its competing service Version 2, on the basis that MessageLabs was thereby misrepresenting its new service as originating from the same source as the white label service.

(ScanSafe also sought to restrain MessageLabs from transferring the customers of the white label service to the new service. That application turned on the construction of a different clause concerning the applicable notice period and is beyond the ambit of this article.)

Bristol Conservatories considered

The application came before Patten J in July 2006.

It was common ground that this was not a case of passing off in its conventional sense (ie by confusing consumers into believing that MessageLabs' new service was ScanSafe's) because MessageLabs was not holding itself out to be connected to ScanSafe in a way that the public would be aware of. Instead, ScanSafe pleaded that MessageLabs' references to the white label service created a goodwill and reputation among the recipients of the materials, which accrued to ScanSafe as the trade source of the white label service and was owned by ScanSafe. There was no need for ScanSafe to show that customers to whom the representations were made should actually be aware of ScanSafe's identity, so long as they were aware of the existing service and were induced by the representations to believe that the new system came from the same source.

ScanSafe relied upon the Court of Appeal's decision in Bristol Conservatories Ltd v Conservatories Custom Built Ltd. In that case, a conservatory salesman employed by the defendant showed potential customers photographs of conservatories that were built by the claimant as an example of what the defendant could build. The Court of Appeal held that this amounted to a misrepresentation to the effect that the customers were led to believe that they would get conservatories from the same commercial source as the ones in the photographs. Goodwill in the photographs and conservatories accrued to the claimant from the showing of the photographs and was simultaneously misappropriated by the defendant. It did not matter that the customers viewing the photographs were completely unaware of the true origin of the conservatories shown in the photographs; the use of the pictures nonetheless amounted to passing off.

In the Bristol Conservatories judgment, Ralph Gibson LJ applied the principles laid down by Lord Greene MR in Plomien Fuel Economiser Ltd v National School of Salesmanship Ltd:

‘It is perfectly true that there is no evidence that a single person who purchased an economiser from the defendants had ever heard of the plaintiffs; but in passing off there is no necessity that the person who is deceived should have known the name of the person who complains of the passing off. In many cases the name is not known at all. It is quite sufficient, in any opinion, to constitute passing-off in fact, if a person being minded to obtain goods which are identified in his mind with a definite commercial source is led by false statements to accept goods coming from a different commercial source...

‘... not one single customer who went to the shop... had ever heard of the plaintiffs or ever heard that they put on the market an economiser. That, to my mind, matters not one bit when it is realised that those customers were coming with the intention of getting goods from a particular source, namely, the same source as those from which the satisfied customers had got their goods.'

To this Ralph Gibson LJ added:

‘... it would not matter that there was no allegation that there would be any confusion in the minds of the public. The concept of confusion, in my view, is irrelevant when the misrepresentation leaves no room for confusion. The prospective customer here is not left to perceive the difference between two allegedly similar products. He is told simply and untruthfully that Custom Built designed and constructed the conservatories which provide the evidence for the experience, skill and reputation of the plaintiffs.'

MessageLabs resisted the application on the basis that there was no arguable case in passing off. It argued that ScanSafe was largely invisible to the customers of the white label service and therefore the service generated no goodwill or reputation for ScanSafe. All goodwill in the white label service instead accrued to MessageLabs. The difference between this case and Bristol Conservatories was the fact that ScanSafe had allowed the white label service to be sold as MessageLabs' own; the effect of the white label agreement was that consumers associated the white label service with MessageLabs, and not ScanSafe. It also argued that there had also been no actual confusion caused and there was no misrepresentation because MessageLabs had provided a web security service (albeit ScanSafe's white label service) for ten months and it was not misleading to launch its new service as ‘Version 2'.

Patten J took the view that the position in the instant case was, if anything, less stark than it was in Bristol Conservatories because the white label service was known to customers, had been used by them and therefore enjoyed a reputation on that basis. The real issue between the parties was whether ScanSafe was entitled to complain about the association made between the white label service and the new service given that it had permitted the existing service to be branded and sold as MessageLabs'.

Patten J's judgment

The judge decided that the answer was to be found within the terms of the white label agreement. Although MessageLabs was entitled to brand the white label service as its own, the white label agreement preserved the intellectual property rights owned by ScanSafe in its own property. The essence of the tort of passing off was the misuse of the claimant's property. The licence only granted MessageLabs limited rights in that property. ScanSafe had never consented to MessageLabs representing that it was the creator of the white label service technology, whose reputation MessageLabs was now seeking to appropriate.

Finding that the white label agreement did not permit MessageLabs' new marketing activities, Patten J concluded:

‘A permission to brand goods as one's own entitles the licensee to use the commercial reputation of the goods or services to make sales of that product in its own name. To that extent, it permits the licensee to accrue goodwill generated by the product for its own benefit. But it does not, without more, carry with it the right to trade on the reputation of those goods in order to market a similar product which does not originate from the same source as if it does. Such conduct would be a misrepresentation by that defendant and not one authorised by the agreement.'

The judge thought that the question of whether the misrepresentation was actionable by ScanSafe as passing off when it had allowed any goodwill and reputation to be enjoyed by MessageLabs was a difficult one. He found that, even though MessageLabs was allowed to represent itself as the origin of the white label service, it could only do so up to a point because the law would notionally attribute to ScanSafe the reputation built up in the product for the purpose of protecting it from misuse in relation to other products. The judge felt that this was ‘difficult law', and that it may be that the correct answer is that this was not passing off at all but ‘a species of injurious falsehood actionable on slightly different principles'.

Finding that it was at least seriously arguable that ScanSafe had a cause of action in passing off, and that the balance of convenience lay with ScanSafe, Patten J held that it was entitled to interim protection from passing off in respect of MessageLabs' use of ‘Version 2'. Rather than imposing a blanket ban on the use of the phrase ‘Version 2', as ScanSafe had sought, however, the judge of his own motion granted a mandatory injunction ordering MessageLabs to accompany any reference to customers to ‘Version 2' with a prescribed form of wording, six paragraphs long, to the effect that MessageLabs' ‘Version 2' service was an entirely new service and not based on any ScanSafe software, technology or infrastructure as its previous service had been. Patten J considered this to be adequate protection for ScanSafe from any confusion in the marketplace as to the true source of the various web security services.

Conclusion

This case serves as an important exposition of the difficulties inherent in white label arrangements. According to this judgment, even though the reseller was entitled to call the originator's services its own and the goodwill generated by doing so, its attempt to link its new, competing product with the old one crossed the line into arguable passing off.

Where parties to a white label arrangement envisage that one day they may be competitors, it is vital from the reseller's standpoint that the question of future goodwill is given proper consideration. If appropriate, express provisions should be included in the arrangement to the effect that the reseller is entitled to goodwill in the original product, for example by way of a non-exclusive licence. Equally, the originator of the product will be anxious to retain exclusive goodwill in the original product and would be wise to make express provision for this, as ScanSafe did.

The Court of Appeal is set to review Patten J's finding of arguable passing off early in 2007. Parties to white label arrangements will await with interest the Court's views on this type of arrangement in the context of passing off, and indeed whether it considers the activities in question to constitute an actionable tort of any description. A finding of no arguable passing off would clearly have serious implications for rights owners who enter into white label arrangements with (as they often will be) potential future competitors. If that happens, the provisions of such arrangements, and indeed the suitability of this type of agreement at all, will necessarily require closer scrutiny.

James Dennis and Geoff Hussey are solicitors in the Intellectual Property Litigation Group at Field Fisher Waterhouse LLP. Field Fisher Waterhouse acted for ScanSafe Ltd in the ScanSafe Ltd v MessageLabs Ltd case.

ScanSafe Ltd v MessageLabs Ltd [2006] EWHC 2015 (Pat)

Bristol Conservatories Ltd v Conservatories Custom Built Ltd [1989] RPC 455

Plomien Fuel Economiser Ltd v National School of Salesmanship Ltd [1943] 60 RPC 209