The costs of IP enforcement for innocent intermediaries

When an injunction is obtained against an innocent intermediary to prevent the use of his facilities by wrongdoers for unlawful purposes, who should pay the cost of complying with the order?

This was the question posed by the UK Supreme Court in its recent judgment of 30th June 2018, in the case of Cartier International AG and Ors. (Respondents) vs British Telecommunications PLC and Anr (Appellants)

The question arose in a litigation initiated by Cartier International AG and two of its associate companies, (“Cartier”) in relation to a website blocking order obtained by Cartier. All these three companies are a part of the Richemont Group.

The website blocking order had been obtained against internet service providers (or “ISPs”), and this was an appeal brought by two such internet service providers, who, together with three other ISPs involved in the litigation, were the five largest ISPs serving the United Kingdom, with a combined market share exceeding 90%. They provided networks by which subscribers were able to access content on the internet. But they did not provide or store content.

Cartier design, manufacture and sell luxury branded goods such as jewellery, watches and pens under well-known trademarks including Cartier, Montblanc and IWC. At the start of this litigation, Cartier had identified as many as 46,000 websites offering infringing copies of their branded goods. The court observed that “The internet has provided infringers with a powerful tool for selling counterfeit copies of branded luxury goods, generally of lower quality than the genuine article and at lower prices. It allows them access to a world-wide market, as well as a simple way of concluding sales and collecting the price with practically complete anonymity.”

On 17 October and 26 November 2014 Cartier obtained injunctions from a single judge requiring the ISPs to block or attempt to block access to specified “target websites”, their domains and sub-domains and any other IP address. It was noted by the Court that, in the UK, “This is the first case in which a website-blocking injunction has been granted”.

The appeal was concerned with costs, and in particular with the costs to the ISPs of implementing website-blocking orders. The court classified these costs into five categories (i) the cost of acquiring and upgrading the hardware and software required to block the target sites; (ii) the cost of managing the blocking system, including customer service, and network and systems management; (iii) the marginal cost of the initial implementation of the order, which involves processing the application and configuring the ISP’s blocking systems; (iv) the cost of updating the block over the lifetime of the orders in response to notifications from the rights-holders, which involves reconfiguring the blocking system to accommodate the migration of websites from blocked internet locations; and (v) the costs and liabilities that may be incurred if blocking malfunctions through no fault of the ISP.

The main question at issue in the appeal was, whether the rights-holders should have been required as a term of the website blocking order in their favour, to indemnify the ISPs for implementation costs under heads (iii), (iv) and (v) enumerated by the Court.

The Court looked into the English precedents which enabled English courts to grant such injunctions and blocking orders, as well as the EU Directives on the issue. It appeared to be generally assumed that the ISPs would have to bear such costs, even though they were a “mere conduit” and were innocently “mixed up” in the infringing activities of others.

The Court pointed out that “Website-blocking injunctions are sought by rights-holders in their own commercial interest. They are wholly directed to the protection of the claimant’s legal rights, and the entire benefit of compliance with the order inures to the rights-holder. The protection of intellectual property rights is ordinarily and naturally a cost of the business which owns those rights and has the relevant interest in asserting them. It is not ordinarily or naturally a cost of the business of an ISP which has nothing to do with the rights in question but is merely providing a network which has been abused by others. There is therefore no reason why the rights-holder should be entitled to look for contribution to the cost of defending his rights to anyone other than the infringers.”

On this basis the court held that the rights-holders should indemnify the ISPs against their compliance costs. The indemnity must be limited to reasonable compliance costs. The indemnity should be for costs resulting from categories (iii) to (v) enumerated by the Court, namely, the marginal cost of the initial implementation of the order, which involves processing the application and configuring the ISP’s blocking systems; the cost of updating the block over the lifetime of the orders in response to notifications from the rights-holders, which involves reconfiguring the blocking system to accommodate the migration of websites from blocked internet locations; and the costs and liabilities that may be incurred if blocking malfunctions through no fault of the ISP.

The case is interesting because it recognises that innocent ISPs, who comply with such website blocking orders, or injunctions, are not to be made to bear all such compliance costs and these must be shared by the true beneficiary of such orders, namely, the holders of the relevant intellectual property rights.