04 Feb 2021

Down-N-Out on their luck: Burger appeal underlines difference between trade mark inspiration and misappropriation

By Dean Gerakiteys, Natalie Coulton

Where a trader develops its brand with the intention of causing customers to wonder whether the competing brands are associated, the balance may tip in favour of misappropriation.

The Full Federal Court of Australia has not only rejected every appeal ground advanced by the operators of the "Down-N-Out" burger restaurants, but the two directors of the company behind the restaurants, Hashtag Burgers, have also been found liable as joint tortfeasors for the conduct of the company. (Hashtag Burgers Pty Ltd v In-N-Out Burgers, Inc [2020] FCAFC 235)

At first instance Justice Katzmann found that Hashtag Burgers had engaged in trade mark infringement, misleading and deceptive conduct and passing off through its use of various "Down-N-Out" marks, and that the two directors of the company were personally liable for the infringing conduct up to the date of Hashtag Burgers' incorporation but not thereafter.

On appeal, the appellants sought to argue that Justice Katzmann's decision was wrong in a number of respects, but lost on all of them. Of particular interest are the Full Court's findings on three of the many grounds.

Inspiration, adoption, or misappropriation?

The appellants argued that the primary judge erred in finding that the Down-N-Out trade marks had been deliberately adopted to benefit from In-N-Out Burgers' reputation, rather than having merely been inspired by In-N-Out Burgers' marks. The Full Court held that although her Honour erred in finding dishonesty on the part of the directors (for which it noted there was no actual evidence), that error was not sufficient to undo her Honour's conclusions as to intent or deceptive similarity. This was because a finding of dishonesty is not a necessary part of that assessment and, her Honour had otherwise found, the requisite intention to cause confusion on the directors' part.

The intersection of Australian Consumer Law, passing off and trade marks

The appellants had contended that her Honour had erroneously considered the Australian Consumer Law and passing off claims by reference to the trade mark infringement analysis. The Full Court disagreed, noting that it is not inappropriate for a court to consider how consumers may remember a mark or trade livery, or to consider how only aspects of a sign may be remembered in a manner similar to imperfect recollection, when considering the Australian Consumer Law and passing off. The Full Court concluded that in referring to imperfect recollection, Justice Katzmann did not impermissibly apply a “caused to wonder test”. Rather, she correctly considered whether consumers had been enticed into the marketing web by an erroneous belief engendered by the person making the representation and concluded that the impugned conduct was or was likely to be misleading or deceptive because it would cause a not insignificant number of members of the relevant class of consumer into thinking that there was an association of some kind. 

Where's the business, the trade mark or the reputation?

The Full Court also confirmed that notwithstanding In-N-Out Burgers not having a place of business in Australia, this did not preclude it from succeeding in passing off. The Full Court noted that it was well settled that it is not necessary in Australia that a plaintiff have a place of business or a business presence in Australia; nor is it necessary that its goods are sold here. Rather, it is sufficient if a plaintiff's goods have a sufficient reputation to establish that there is a likelihood of deception among consumers, and potential consumers, and of damage to its reputation.

Here, the reputation that In-N-Out Burgers had generated through its pop-ups stores in Australia was sufficient.

Directors as joint tortfeasors

In-N-Out Burgers also cross-appealed, arguing that Justice Katzmann should have held the directors of Hashtag Burgers liable as joint tortfeasors for the company's conduct post-incorporation. The Full Court agreed, finding that the directors' actions went beyond the threshold of performing their proper roles as directors and that they were both acting as joint tortfeasors in the infringements of Hashtag Burgers. Of particular relevance to this finding were that:

  • they were the sole directors of the company;
  • they alone made the decisions as to the company's management;
  • they alone would receive the profits from the infringing conduct; and
  • there was no material difference in the way they conducted the business before and after the incorporation.

Eat in or take away?

This case is an important reminder of the fine line between inspiration and misappropriation. Where a trader develops its brand with the intention of causing customers to wonder whether the competing brands are associated, the balance may tip in favour of misappropriation.

This case also highlights that emerging competitors must undertake extensive due diligence, not only of registered trade marks, but of the market they intend to enter as a whole. Additionally, the fact that a business does not have a permanent business in Australia may not render their reputation here non-existent.

Directors should also be wary that they may also be liable for infringing conduct in certain cases and should be wary of ensuring that they do not seek to simply avoid responsibility for conduct that might otherwise be infringing by incorporating a company.

If you would like any assistance or advice conducting trade mark due diligence or are concerned that another trade may be infringing your trade mark rights, please contact Clayton Utz.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.