Facts:

The defendant and first and second counterclaim plaintiffs (together the LEGO Group) were the well-known manufacturers of toy building bricks and associated components.  LEGO Juris A/S was a proprietor of two registered trade marks in New Zealand for the word mark LEGO in class 28 in relation to toys, toy parts and toy accessories. Every stud on every LEGO brick bore the LEGO mark in word form.  The LEGO name and logo were used extensively on LEGO Group packaging as well as in advertising and promotional material.

The plaintiffs and the second and third counterclaim defendants (together ZURU) were toy companies.  ZURU decided to enter the toy building brick market after it saw how successful the LEGO Group had been in the manufacture and distribution of its products.  ZURU described itself as a “disrupter,” ie., entering established markets and endeavouring to obtain market share at the expense of established participants.

In 2017 ZURU approached Walmart in the United States with a proposal to sell toy building products.  Walmart subsequently issued a formal request for products having complete compatibility with LEGO products.  ZURU then put together a detailed proposal to build a product range under the MAX Build More trade mark.  This led to an agreement for ZURU to supply Walmart with toy building bricks.

ZURU added a compatibility statement stating that its bricks were compatible with LEGO bricks.  As part of this compatibility statement, ZURU also added a sample brick in a blister pack on the outside of its packaging.  Walmart told ZURU that it did not want the compatibility statements to mention LEGO by name.  ZURU amended the statement to read “Compatible with Major Brands.”

In late 2018 ZURU began selling its products in New Zealand through stores operated by The Warehouse.  The packaging in New Zealand contained compatibility statements stating LEGO BRICK COMPATIBLE. 

The LEGO Group lawyers sent cease and desist letters to ZURU and to The Warehouse in November and December 2018.  This resulted in The Warehouse withdrawing ZURU’s products from sale on 27 December 2018.  The Warehouse advised ZURU that it would only re‑stock products if the situation was resolved with the LEGO Group.  ZURU re-designed its compatibility statements to remove any reference to the LEGO trade mark.  The ZURU compatibility statements stated “COMPATIBLE WITH MAJOR BRANDS.”  ZURU advised the LEGO Group and The Warehouse that it had taken this step.  The Warehouse then agreed to re-stock stores with ZURU products in January 2019.

Two years later in February 2021, ZURU decided to re-introduce its original compatibility statements, ie., LEGO BRICK COMPATIBLE.  The LEGO Group reacted to this by requesting The Warehouse to remove products containing the new compatibility statement from their shelves.  The Warehouse advised ZURU that unless it provided a satisfactory explanation as to why the compatibility statement had been amended, The Warehouse would withdraw ZURU products from sale at ZURU’s cost.

On 7 May 2021 ZURU solicitors sought consent from the LEGO Group to use the following proposed compatibility statements on its packaging:

 

Consent was not provided by the LEGO Group. 

ZURU’s application for declarations

ZURU then filed this proceeding seeking declarations in the Court’s inherent jurisdiction.  ZURU sought three forms of declaration:

(1)           A declaration that the proposed compatibility statements did not constitute infringement under s 89(1) Trade Marks Act 2002 on three bases:

a)           the use of the word LEGO in the original and proposed compatibility statements would not be taken by consumers as being use of the LEGO trade   mark;

b)           if such use constituted use as a trade mark, it constituted a form of comparative advertising and therefore did not infringe by virtue of s 94 Trade Marks Act;

c)           such use indicated a characteristic of the MAX Build More products and/or was reasonably necessary to indicate the intended purpose of those products and therefore did not infringe the LEGO trade mark by virtue of s 95 Trade Marks Act.

(2)           A declaration that the proposed compatibility statements would not breach the Fair Trading Act 1986;

(3)           A declaration that ZURU’s use of the proposed compatibility statements would not amount to passing off.

The LEGO Group’s Counterclaims

The LEGO Group brought three counterclaims:

(1)           The first alleged that ZURU’s use of the LEGO trade mark in the original compatibility statement in 2018 amounted to trade mark infringement under s 89(1) Trade Marks Act 2002.  The LEGO Group alleged that any use of the proposed three compatibility statements in the future would also constitute infringement under s 89(1).  It sought remedies in the form of injunctions restraining ZURU from using the LEGO trade mark in any compatibility statement relating to ZURU’s MAX Build More products.

(2)           The second cause of action alleged that the original compatibility statement and the proposed compatibility statements breached ss 9, 10, 13 and 16 of the Fair Trading Act 1986 because they falsely represented that ZURU’s MAX Build More products were manufactured by the LEGO Group or were otherwise associated with, licensed by or endorsed by the LEGO Group.  It sought injunctions to prevent the future use of compatibility statements in that form.

(3)           The third counterclaim alleged that ZURU’s use of the word LEGO on its original and proposed compatibility statements resulted in ZURU passing off its MAX Build More products as products manufactured by LEGO or otherwise associated with or licenced and/or endorsed by the LEGO Group.

In the judgment (for reasons set out below) Lang J declined to grant the declaratory judgments in the Court’s inherent jurisdiction that were sought by ZURU.  The Court further considered that in relation to trade mark infringement, there was considerable overlap between the issues raised in ZURU’s claims and the LEGO Group’s counterclaims.  The Court therefore dealt with those together [47].

There was no dispute that ZURU had used the word LEGO in its compatibility statements in the course of trade [54].  The LEGO Group relied on s 89(1)(a) and claimed that the sign LEGO was identical to its registered trade mark and that ZURU was using it for toy products for which the LEGO Group had registration [54].

ZURU relied on S89(2) which excluded from infringement any use of a trade mark that would not be likely to be taken as use as a trade mark [55].

The court held that the issues to be determined were:

A      Alleged trade mark infringement

1. Would the use of the word “LEGO” in the original compatibility statement be likely to be taken by a substantial number of prospective purchasers as being use of the word as a trademark?

2. If so, did ZURU use the trademark in accordance with honest practices in commercial matters?

3. If so, did the original compatibility statement constitute “comparative advertising”soastobesubjecttotheprotectionaffordedbys94ofthe Trade Marks Act?

4. Was the use of the word “LEGO” in the original compatibility statement protected by s 95 of the Trade Marks Act?

Passing Off

The issues for this cause of action were:

a)           What is the nature and extent of LEGO’s goodwill in its trade mark for toy building brick products in New Zealand?

b)          Does ZURU’s use of LEGO trade mark in the original compatibility statement constitute use of the LEGO trade mark that is likely to confuse or deceive the relevant public?

c)           If so, is that use likely to damage LEGO’s goodwill in the trademark for toy building brick products in New Zealand?

Fair Trading Act 1986

The issue here was whether the use of the original compatibility statement breached ss 9, 10, 13 or 16.

Held

Declarations of non-infringement in respect of ZURU’s proposed compatibility statements

1. Refusing to grant such relief, non-infringement declarations were a novel form of intellectual property relief in New Zealand with the leading statement of principles being that:

(a)         the correct approach to the question of whether to grant negative declarations is one of discretion rather than jurisdiction;

(b)         the use of negative declarations should be scrutinised and their use rejected where it would serve no useful purpose but where such a declaration would help ensure that the aims of justice were achieved, the Court should not be reluctant to grant a negative declaration;

(c)         before a Court can properly make a negative declaration, the underlying issue must be sufficiently clearly defined to render it properly justiciable.

New Transducers Ltd v Slab Technology Ltd CA71/01, 14 May 2001 at [11]referred to; Nokia Corporation v Interdigital Technology Corp [2006] EWHC 802(Pat), [2006] All ER (D) 182 at [20]applied.

2. ZURU had never labelled its products with the proposed compatibility statements, so no dispute had arisen about them to date.  ZURU was therefore seeking declaratory relief in relation to a course of action it might (or might not) undertake in the future.  ZURU was asking the Court for its advice or opinion [39].  The declarations sought went beyond asking the Court to declare the law and instead required it to apply the law to an insufficiently defined future issue.  The Court does not use its power to grant declaratory relief to give advisory opinions in this way. Further, the precise manner in which ZURU would place the proposed compatibility statements on the variety of current and likely future products was unknown.  The wording of the proposed declaration involved ZURU seeking to use an acceptable compatibility statement in a manner “substantially similar” to the packaging before the court [41].  A declaration as to future use of a compatibility statement may encounter difficulties where the format of the statement is not precisely in accordance with that for which ZURU now sought declarations of non-infringement [42].

3. In effect, ZURU was asking the Court to find a means by which it might avoid breaching the LEGO trade marks.  The unfairness of such an approach had been recognised in the United Kingdom and would undermine LEGO’s ability to respond to any changes that might be suggested by the court [43].

Millen v Karen Millen Fashions Ltd [2016] EWHC 2104 (Ch), [2017] FSR 7 at [265]–[267],  Skyscape Cloud Services Ltd v Sky Plc [2016] EWHC 1340 (IPEC), [2016] All ER (D) 28 at [12]– [15] referred to.

Trade Mark Infringement

Issue 1: Would the use of  LEGO in the original compatibility statements be taken by a substantial number of prospective purchasers as being use of the word as a trade mark: s 89(2) Trade Marks Act?

4. The purpose of s 89(2) is to exclude non-distinctive or merely descriptive uses of a trade mark from the scope of infringement.  The focus is not on whether the trade mark may confuse or deceive prospective customers regarding the origin of the goods or services to which the trade mark relates [64].  An assessment of whether use is likely to be taken as use of a trade mark involves close consideration of the context in which the use occurs [61].  The fact that a feature of an article may have a functional purpose does not however mean that the feature cannot also serve as a trade mark.  A sign may fulfil more than one function, and a mark can have a descriptive element but still serve as a badge of trade origin.

Mainland Products Limited v Bonlac Foods (NZ) Limited [1998] 3 NZLR 341 (CA), Coca-Cola Company v Frucor Soft Drinks Limited [2013] NZHC 3282, (2013) 104 IPR 432 followed.

5. The Court was required to form a view as to how ZURU’s use of the word LEGO in the original compatibility statement would be taken by those who viewed it.  This was a matter of impression, taking into account the Mainland considerations and the circumstances in which the product was sold [78].

6. Viewing the following factors in combination, a substantial number of consumers would be likely to take the use of the word LEGO in the original compatibility statement as being more than a description of ZURU’s products.  Many prospective customers would be likely to perceive LEGO in the compatibility statement as being use as a trade mark [106].  Therefore, ZURU’s use fell outside the exclusionary scope of s 89(2) [108].  The cumulative factors were:

(a)   the word LEGO had no meaning beyond its association with products made by the LEGO Group.  It was highly likely that prospective customers would be well acquainted with the LEGO trade mark.  Those who saw the word LEGO would immediately take the compatibility statements as a reference to the LEGO brand [103];

(b)   the original compatibility statement containing LEGO was a prominent feature of all three forms of packaging.  While not the central feature, the eye was immediately drawn to the word LEGO due to its size and the distinctive colours used in the compatibility statement.  It was the most prominent feature of the panel other than the word MAX [104].

(c)   The fact that the word LEGO was significantly larger than the words “BRICK COMPATIBLE” meant that it was not immediately apparent that it comprised part of a compatibility statement.  That fact only became apparent when the counterstatement was read as a whole.  The prominence of the compatibility statement on the plastic container and the packaging for the figurines was further enhanced by the presence of the red brick in the blister pack protruding from the container and packaging. [105]

7. Observed: the leading Australian decision in Allergan was distinguishable on the facts [87-91].

Self care IP Holding Pty Ltd v Allergan Australia Pty Ltd [2023] HCA 8, (2023) 408 ALR  195distinguished.

Issue 2: Did ZURU use the LEGO trade mark in accordance with honest practices in commercial matters?

8. The Court found that:

(a)         ZURU included the comparative statement to provide express confirmation that ZURU’s MAX Build More products were compatible with those provided by the LEGO Group [119];

(b)         there was no dispute that ZURU knew of the LEGO Group’s reputation for making high quality products and its dominant position in the toy building brick market worldwide [120];

(c)         ZURU was involved in proceedings in the United States in which it was endeavouring to have the LEGO Group LEGO trade mark revoked in the United States on the basis that it had become generic.  The Court’s concern must be that ZURU intended its actions in New Zealand to bolster the proceedings it had commenced in the United States.  If so, this would amount to use of the trade mark for a collateral purpose [121].

(d)         ZURU did not advise or obtain the consent of the LEGO Group or The Warehouse in its comparative statements when it launched MAX Build More in New Zealand.  At that point, ZURU knew that Walmart was not prepared to allow the use of LEGO on compatibility statements in the United States.  ZURU took a calculated risk [122];

(e)         the fact that an alleged infringer has used a trade mark after obtaining competent legal advice based on proper instructions may be taken into account when assessing whether such use was in accordance with honest commercial practices [123];

(f)           evidence from ZURU’s CEO was clearly designed to give the impression that ZURU had obtained general legal advice about the legality of compatibility statements at an early stage [124].  That legal advice (provided to the Court after a successful waiver of privilege application) was manifestly inadequate.  It did not refer to the legal position in New Zealand as governed by the Trade Marks Act or to relevant case law on the use of trade marks in New Zealand or Australia.  Such legal advice as ZURU received was not sufficiently thorough to provide it with any legal justification for the use of LEGO’s trade mark on the compatibility statements [128].

9. The Court was satisfied that ZURU sought to use the LEGO Group’s LEGO trade mark on the compatibility statements to gain leverage from the reputation LEGO had built up over many years, both in New Zealand and worldwide.  It sought to do so by positioning the LEGO trade mark in a prominent location, size and colour on the front panel of its containers and packaging to draw the attention of prospective customers to its products [133].

10. Viewed objectively, the matters referred to would cause persons involved in the toy building brick market place to view the use of the LEGO trade mark on the original compatibility statement as an aggressive attempt by ZURU to obtain leverage for its products from those manufactured by the LEGO Group.  ZURU’s decision to re‑introduce the original compatibility statement of March 2021 would be regarded as even more aggressive because it knew beyond any doubt by that stage how the LEGO Group would react and failed to obtain sufficient legal advice to support its position.  The use of the LEGO trade mark on the original compatibility statement was not in accordance with honest practices in commercial matters [133].

Issue 3: would the use of the LEGO trade mark in the original compatibility statements be protected by s 94 of the Trade Marks Act? 

1. Given the Court’s finding that use of the word LEGO in the original compatibility statement was not in accordance with honest practices of commercial matters, for ZURU to obtain the protection of s 94, the use must occur in the context of comparative advertising and not take unfair advantage of, or be detrimental to, the distinctive character or reputation of the LEGO trade mark [137].

Did the use occur in the context of comparative advertising?

2. As to comparative advertising, there was no difference in principle between promotional material that a trader provided to the general public (or to a targeted audience by traditional forms of paid advertising) and that which was displayed on packaging for consideration by those who viewed it in retail stores.  [145].

3. The original compatibility statements did not compare ZURU’s products with those manufactured by the LEGO Group in any way.  Nor did they claim that any feature or characteristic of ZURU’s products was superior or even equivalent to those of the LEGO products.  The statement that the ZURU products were compatible with LEGO products meant that they could be used interchangeably.  The wording used in the original compatibility statement prevented it from falling within the interpretation of comparative advertising so that ZURU was not entitled to the protection afforded by s 94 [155-156].

Did the use of the LEGO trade mark, without due cause, take unfair advantage of or cause detriment to, the distinctive character or the repute of the trade mark?

4. ZURU did not have good cause to use the LEGO trade mark as it did [157].  ZURU took unfair advantage of the trade mark [158].  By using LEGO on the original compatibility statements ZURU sought to align its products in consumers’ minds with those produced by the LEGO Group.  It also sought to create a reputation for its own products without going to the expense and effort the LEGO Group had undertaken to promote its trade mark to the position it was in today.  Had the use continued, the LEGO Group stood to lose market share to ZURU [159].  The court was therefore satisfied that ZURU’s use of the LEGO trade mark took unfair advantage of it.

Issue 4: Was the use of the word LEGO in the original compatibility statement protected by s 95 of the Trade Marks Act?

5. The Court’s conclusion that ZURU did not use the LEGO trade mark in accordance with honest practices in commercial matters meant that it could not avail of itself of the protection afforded by s 95 [163].

As to reliance on s 95(c)(i), did the use of the LEGO trade mark indicate a characteristic of ZURU’s products?

6. Obiter The use of the word LEGO in the original compatibility statement did indicate a characteristic of goods or services.  Had ZURU’s use of the LEGO trade mark been in accordance with honest practices, the court would have found that ZURU could qualify for protection pursuant to s 95(c)(i) [168].

As to reliance on s 95(d), was it reasonably necessary for ZURU to use the LEGO trade mark to indicate the intended purpose of its products?

7. Obiter It was not reasonably necessary in terms of s 95(d) for consumers to be advised of the compatibility of ZURU’s products with those made by LEGO through use of the LEGO trade mark [170].

8. The LEGO Group had succeeded in establishing trade mark infringement of its LEGO trade mark [237].

Passing Off

Did the LEGO trade mark possess an element of reputation or goodwill?

9. This element was not in dispute and ZURU accepted that the mark had acquired very strong goodwill and reputation in the field of toy building bricks in New Zealand and worldwide.  The evidence established this beyond any doubt [178].

Had ZURU used the LEGO trade marks so as to confuse or deceive the relevant public?

1. Prospective purchasers of toy building brick products were likely to have at least a moderate level of involvement in their purchases.  That meant they were likely to take some care in choosing the products they wished to purchase and would recognise that those displayed under the MAX Build More label were different products to those made by the LEGO Group.  Accordingly, the presence of the word LEGO on the original compatibility statement was not likely to confuse or deceive consumers who viewed ZURU’s products for the first time in the store.  Consumers would likely realise that the words LEGO® BRICK COMPATIBLE did not mean that the products were likely to be made by or associated with the LEGO Group.  Consumers would understand that the words meant only that the products were compatible with LEGO bricks [210].  LEGO had failed to establish that ZURU had used the LEGO trade mark so as to confuse or deceive the relevant public or that was likely to do so if not restrained. [220]  Accordingly this cause of action failed [238].

Breach of the Fair Trading Act 1986

1. The use of the word LEGO in the original compatibility statement did not constitute conduct that was misleading or deceptive or was likely to mislead or deceive in terms of s 9 of the Fair Trading Act [224] nor was it liable to mislead the relevant public by causing them to believe that ZURU products were made or otherwise endorsed by the LEGO Group (s 10) [228].  The allegations under ss 13 and 16 could not be sustained [231] and [235].