Doctrine of lifting of corporate veil in trademark law

Corporate personality is considered as one of the most dynamic concepts of company law. It is premised on the principle that a company is regarded as an entity distinct from the shareholders constituting it. Recently, the Karnataka High Court indirectly applied this doctrine in the field of trademark law.

Factual background

Cothas Coffee (Respondent-Plaintiff), a registered partnership firm filed a suit against M/s Avighna Coffee Pvt. Ltd. (Appellant-Defendant), before the Trial Court inter-alia praying for:- a) permanent injunction restraining the Appellant-defendant and their agents etc., from infringing Respondent-plaintiff’s trademark “Cothas Coffee” and “Cothas”; and b) permanent injunction restraining the Appellant – defendant from manufacturing or selling any goods particularly Coffee, Tea or allied products under the trademark “cothagiri” either in Kannada or any other language, which is identical with or deceptively similar to the Respondent-plaintiff’s trademarks “Cothas” and “Cothas Coffee”. The Respondent-plaintiff also filed an I.A. under Order XXXIX Rules 1 and 2 CPC praying for an order of temporary injunction and the Trial Court granted an ex-parte ad- interim order of injunction on 30.4.2015. Later, by impugned order dated 20.2.2016, Trial Court rejected an I.A. filed by the Appellant-defendant to vacate the ad-interim order and made it absolute. The Appellant- Defendant filed a Miscellaneous First Appeal in the Honb’le High Court of Karnataka challenging the Trial Court Order dated 20.2.2016 allowing IAs No.1 & 2 filed under Order XXXIX Rules 1 & 2 read with Section 151 CPC.

Contentions of the parties

Appellant-Defendant:

• Under Section 29 of the Trade Marks Act, 1999, only two situations would constitute infringement. The first one is the use of an identical mark to the one registered and the second is use of a mark which is identical or deceptively similar. It was contended that neither of the situations has occurred in the instant case. Citing the packing material and its distinguishing features, it was argued that there is no infringement as defined under Section 29 of the Act.

• The Appellant-defendant is protected under Section 35 of the Act. It has coined and chosen ‘Cothagiri’ as its trade name for its product because ‘Cotha’ is the family name of director’s respective spouses. Under Section 35 of the Act, a registered user of a trademark shall not be entitled to interfere with any bonafide use by a person of his own name or that of his place of business or of his predecessor. Further, ‘giri’ means mountains, where coffee is grown. Thus, defendant is protected under Section 35 of the Act against any action.

• The ex-parte ad-interim order passed by the Trial Court was also non-est in law because the Respondent-Plaintiff did not comply with the mandatory provisions of Order XXXIX Rule 3 CPC which states that, “Every document filed by the plaintiffs themselves, on the basis of which they obtained an ad interim ex parte injunction, has to necessarily be "delivered" to the Defendant.”

• The Respondent-Plaintiff questioned the Appellant-Defendant's ethical correctness in incorporating its Company and to market Coffee whilst the respective spouses of Girija Chandan and Satyavati Prakas, both Directors of the Company had received large sums of money at the time of dissolution of the firm 'Cothas Coffee Co' on 23.12.2013. It was contended that the Appellant is a Private Limited Company and a juristic person. It is separate and distinct from its members. Its rights and obligations are different from those of its shareholders.

Respondent-Plaintiff:

• Appellant-defendant is selling coffee under the trade name ‘Cotha giri’ which is deceptively similar to ‘Cothas Coffee’ and it amounts to infringement of trademark as defined under Section 29 of the Act. The words ‘cotha’ and ‘giri’ are written in two different lines in the packaging covers used by the defendant. ‘Cotha’ is written in the first line and ‘giri’ in the second line. This is deceptively similar to the manner in which Respondent-plaintiff has written ‘Cothas’ in the first line and ‘coffee’ in the second line. Therefore, coffee powder marketed by the Appellant-defendant can be easily passed off as ‘Cothas Coffee’.

• Appellant-defendant is a company which is promoted by Mrs. Girija Chandan, wife of C.P. Chandan and Mrs. Satyavati Prakas, wife of Cothas K. Prakas. Respective husbands of both directors are the retiring partners and signatories to the ‘Deed of Retirement’ dated 23.12.2013 of the Partnership Firm “Cothas Coffee Co.”. Under the said Deed, Cothas K. Prakas has received a sum of Rs.11,74,25,000/- and C. Chandan has received Rs.59,90,000/- in full and final settlement of their claims. The retiring partners have covenanted not to engage in any activity similar to the one carried on by the plaintiff either directly or indirectly for a period of three years. However, in violation of the said covenant, Appellant-Defendant-Company was incorporated on 25.7.2014. Therefore, it shall not be entitled for any protection under Section 35 of the Act.

• In the application filed before the trademark authorities, Appellant-Defendant has shown it's address as No: 514/1, 80 feet Road, I Block, Koramangala, Bengaluru-560 034. Therefore, Plaintiff has mentioned the same address in the plaint. Appellant-Defendant did not deny that the address given in the cause title is incorrect in it's written statement. Hence, the Appellant-Defendant's any grievance with regard to non-compliance of Rule 3(a) of Order XXXIX CPC is untenable in law.

Decision of the Court

There were two points for consideration before the Hon’ble Karnataka High Court:

1. Whether the plaintiff has made out a prima facie case entitling itself for a temporary injunction pending disposal of the suit?
2. Whether the impugned order requires any interference?

With respect to the first point of consideration, the Hon’ble Court found that as per the Retirement Deed, the retiring partners agreed on a full and final settlement of their respective claims, which included all claims against immovable and movable properties, leasehold rights, possessory rights, receivables, claims, credits, goodwill, trade mark, patents and product names etc. Further, Clause 14 of the Retirement Deed reads as follows:-

“14. The Retiring Partners shall not engage, for a period of 3 years from the Retirement Date, in any activity which is similar to the activities carried on by the Partnership as on this date, either directly or indirectly in any capacity including as a Proprietor, Partner, Share Holder, Director, Managing Director, employee, consultant or agent.”

Accordingly, it was observed that:

“Whatever be the explanation and justification on behalf of the defendant, it is indelible on record that prior to 25.7.2014 Defendant-company was not in existence. On facts, it is not in dispute that the Plaintiff has been producing and marketing its product as ‘Cothas Coffee’ for several years. The Defendant-Company is floated by the two ladies, whose respective spouses are retired partners of ‘Cothas Coffee Co.’ The retiring partners have covenanted not to indulge in a business similar to the ‘Cothas Coffee Co.’ either ‘directly’ or ‘indirectly’. They have expressly given up the trade mark. In these circumstances, they cannot be heard to contend that defendant is an independent entity created under the Companies Act and enjoys an independent right to indulge in business similar to that of plaintiff oblivious of the covenants executed by the retiring partners of plaintiff- firm.…..Having perused the pleadings and re- examining the material on record, it is reasonable to presume that the defendants did have full knowledge of the trademark of plaintiff and its reputation in the market and yet, attempted to sell their product with similar name and style.”

Hence point no 1) was answered in favor of Respondent-Plaintiff.

With respect to the second point of consideration, the Court relied on the case of Wander Limited & Anr., v. Antox India P. [see end note 1] and refused to interfere with the determination of the Trial Court stating that:

“A Court of appeal should be slow in interfering with the discretionary orders passed by the Trial Court, even if, a contrary view is possible by an appellate Court.”

The High Court, therefore, refused to interfere with Trial Court Order making ad-interim injunction absolute. The Court, in a way, lifted the corporate veil of the Appellant-defendant because they used a corporate structure to evade the legal restriction imposed on them by the Retirement Deed.

[The author is a Junior Associate, IPR Practice, Lakshmikumaran & Sridharan, Delhi ]