When Australia’s new registered designs regime was introduced in 2003, it included a defence to infringement for spare parts used for repair work (section 72 of the Designs Act 2003 (Cth)). The scope of this repairs defence has now been explained in an illuminating court decision concerning car body parts, highlighting the defence’s complexity.
In GM Global Technology Operations LLC v S.S.S. Auto Parts Pty Ltd  FCA 97, the court was asked to consider whether an importer and wholesaler of car parts, SSS, infringed several registered designs owned by Holden. Those designs were for exterior body parts belonging to its sports range of Commodores (such as its “S” and “SS” models) and HSVs (a range of premium cars based on the Commodore), including bonnets, bumpers, grilles and fog light covers. SSS had imported unauthorised copies of these parts sourced from overseas manufacturers, and sold them in Australia to panel beaters and retailers. These parts were identical to Holden’s official products and (more importantly) its registered designs. Holden started legal proceedings against SSS, arguing that SSS had infringed those designs. In response, SSS’ relied on the repairs defence.
The Repairs Defence: Restoring the Product
According to the repairs defence, there is no infringement where a part is used for the purpose of repairing a product to restore its overall appearance. SSS argued that, as its imported parts were used to repair Holden vehicles, the defence applied to its conduct.
A key aspect of the defence is the requirement that the repair restores the product’s overall appearance. The defence does not apply where a part is used to enhance, or modify, the product. This became an important issue to SSS’ case.
SSS’ business model was to import and sell parts for use in repairing cars that had been damaged, a purpose clearly permitted by the defence. However, a significant market exists in Australia for the use of sports Commodore and HSV body kits (like SSS’ impugned parts) to make lower-spec models look like the more expensive sports models. Holden suggested that a significant portion of SSS’ parts had been used to enhance these lower-spec models. On Holden’s case, any such use would not qualify as a “repair”, and thus would not be exempted.
The operation of the defence
Under the repair defence, it was for Holden, as the owner of the registered design, to prove that SSS knew, or ought reasonably to have known, that the part was not used for repair purposes. By placing the onus of proof on the registered owner, the defence provides a significant degree of protection to alleged infringers, as it can be very difficult to prove matters within another person’s knowledge.
In order to persuade a court that the defence did not apply, Holden had to establish that:
- SSS’ purpose of the importation and sale of the parts was not for repair; and
- SSS knew, or reasonably ought to have known, that its purpose was not repair.
By referring to SSS’ purpose and knowledge of that purpose, the defence unfortunately becomes rather convoluted. These concepts are, however, somewhat related, as is explained in the following sections.
The repair defence contemplates that a part might be capable of multiple uses, such as repair and enhancement (as was true for SSS’ parts). The existence of multiple potential uses does not mean the defence cannot apply. It was SSS’ purpose for importing and selling the parts that determined whether it could rely on the defence.
Whether SSS’ purpose was to enhance lower-spec cars or repair the relevant sports-models was answered by balancing all of the surrounding circumstances. Despite SSS’ overarching policy of only supplying for repair purposes, some sales were found to have been made for non-repair purposes. This generally occurred where Holden established that SSS knew that the relevant customer intended to use the part for enhancement. Unless SSS’ had knowledge, some customers’ use of the parts to enhance vehicles was irrelevant.
It was not enough for Holden to prove that one of SSS’ employees had knowledge that a particular part would be used to enhance lower-spec cars. Holden had to prove that SSS, as a company with many employees and offices throughout Australia, knew of that purpose. (This issue is less important where the alleged infringer is an individual or small business.)
In defining Otsuka’s knowledge, the court focused on its employees that were authorised to make decisions regarding importation and/or sales on its behalf. For importation, this was SSS’ senior management, as they were responsible for deciding which parts would be imported. For sales, this was staff authorised to conduct sales on SSS’ behalf. In both instance, information known by lower-level employees without the requisite authority was not imputed to SSS.
Information within the possession of separate staff members could not be aggregated unless they shared, or were under a duty to share, that information. Accordingly, before SSS could know that certain parts were imported or sold for the purpose of enhancing vehicles, all of the requisite information had to be held by a single, authorised staff member.
It was not enough for SSS to have knowledge that its spare parts might be used for enhancement; SSS’ had to have knowledge that the parts would be used for that purpose. This sets a high bar for design owners.
Holden had the option of proving that (a) SSS actually knew its products were sold for enhancement purposes, or alternatively that (b) SSS “ought to have known” this based on its knowledge, capacity and circumstances (i.e., their “constructive knowledge”). Establishing an alleged infringer’s constructive knowledge is usually easier than establishing its actual knowledge. The court also made it clear that, if SSS was aware of facts indicating that a customer would use the parts for enhancement, SSS could not simply turn a blind eye to the issue. It would need to investigate and satisfy itself that the customer was using the part for repairs, or else cease supplying the part to them.
Applying the Defence to SSS’ Parts
The court considered the importation of the parts separately from their sale.
When determining SSS’ purpose behind the parts’ importation, the court was particularly persuaded by a number of strategies that SSS introduced, at the direction of its senior management, in an effort to ensure that its customers only used the imported parts for repair purposes. SSS printed notices on its website, invoices and packaging stating that the parts were only authorised for use in repairs. Its sales software was modified to ensure that sales of the parts had to be approved by managers. It took action against customers whom it believed were using the parts for enhancement. It required customers to provide photos of the damaged car before releasing the parts to them. It required customers to provide VIN (Vehicle Identification Numbers) of the vehicles for which the products would be used, so SSS could verify that it was not a lower-spec Commodore. SSS prohibited bulk sales of the products, since VIN numbers could not be provided for bulk sales. Staff were instructed not to sell to any customers that mentioned modifying cars. Staff were also required sign a letter stating that they agreed not to sell the products for customisation purposes.
Taking all of this into account, the court was satisfied that SSS’ senior management had a genuine desire to ensure that its repair policy-only was enforced. Holden tried to cast doubt that desire by pointing out that demand for the parts for repair work was quite low, while demand for the parts for enhancement purposes was high. However, while this may have been true, SSS’ senior management was unaware of it, so it could not affect SSS’ purpose. SSS’ importation of the parts was protected by the defence.
Consistent with its approach to importation, the court considered that SSS’ above policies were an important, but not determinative, factor to determining the purpose behind SSS’ sales. The court considered the circumstances surrounding a number of individual transactions to determine whether SSS’ global policy was usurped by the knowledge and conduct of the employees making those sales.
For each sale, the defence was only jeopardised if a staff member authorised to conduct sales was personally involved in making or approving the sale, and they had knowledge of the relevant circumstances indicating that the purpose of the sale was enhancement. Holden pointed to a number of things to show SSS sold the parts for the purposes of enhancement.
- Sales managers were aware that some customers were in the business of supplying parts for enhancement rather than repairs, through the name of the business, information on its website or emails, or from visiting their premises. Holden argued that it could be assumed that parts sold to those businesses would be used to enhance, not repair, vehicles.
- Bulk orders were more suspicious than orders for individual parts. Damaged parts were generally replaced sporadically, and might only be ordered when they were repairing a car that needed that part. However, the court noted that bulk orders may have been placed simply to take advantage of the discounts SSS offered.
- While most accidents only damaged one side of a car, an owner seeking to enhance their lower-spec car would need to purchase an entire kit. Orders for entire kits, rather than individual parts, were therefore more suspicious. However, again, discounting could have explained these kit orders.
- Customers purchasing the impugned parts together with other parts that could only be used for enhancement also suggested that the customer was engaged in selling to owners seeking to enhance their cars. Again, this was not conclusive.
- Some customers provided incorrect VINs to SSS to circumvent that requirement. However, unless there was a reason for SSS’ staff to notice the error, SSS would not know the sale was for enhancement purposes.
- On occasion, the VIN provided was for a different model of car to the model to which the ordered part related. Where the VIN was for a completely different model, such a lower-spec Commodore owner seeking an HSV part, a sales person should have known that the part would not be used for repair, and that the purpose of the sale was enhancement. However, if the VIN related to a similar model of car, the sales person could not be expected to notice the inconsistency.
In any transaction, each of these factors, together with all of the other circumstances, needed to be weighed up before the court could decide whether it was captured by the repair defence.
The court took a realistic, rather than idealistic, view as to what should be expected from SSS in terms of verifying that customers would only use the parts for repairs. SSS operated a busy wholesale business in which staff did not have time to conduct detailed investigations. It would take a reasonably obvious event that one would expect to have been noticed by the authorised sales staff, to alert them to the potential for a part to be used for enhancement. Authorised staff were not expected to conduct their own detailed enquiries, or exercise perfection in performing their duties. On the other hand, on those occasions where authorised staff had deliberately circumvented SSS’ policies, the court found that SSS’ purpose was enhancement. In the end, the court found that the defence applied to most, though not all, sales.
So what does this mean for those manufacturing and selling spare parts?
We now have greater clarity with respect to how this defence operates, and it is mostly good news for those manufacturing, selling or using spare parts. The repair defence has a broad application. There are several reasons for its breadth. First, the onus rests on the design owner to show that the alleged infringer knew that the purpose of its sale of the part was not repair. This is no easy task.
Second, it is the alleged infringer’s purpose that is relevant to the defence. If the alleged infringer is supplying the parts to third parties, the relevant purpose is still that of the supplier. This gives the supplier control over its legal position. That said, the supplier’s purpose can be overwhelmed by its customers’ intention to put the part to a non-repair use if that intention is clear to the supplier.
Third, where the alleged infringer is a company or business, it is only the knowledge of those authorised to make decisions regarding importation and sales that is relevant to the defence. Businesses should not be held liable for the actions of a renegade, lower-level employee. Further, all of the relevant information must be known by a single decision maker.
Fourth, the question is whether the alleged had knowledge that its product would, not might, be used for a non-repair purpose. This is a high bar for the design owner to reach.
That said, while the repair defence is expansive, its protection has its limits. Sales made with knowledge that the customer will not use the part for repair purposes are not protected.
Applying the defence will not always be straightforward. Determining whether a business can take advantage of the exception will require careful consideration of all of the surrounding factors. Steps that may be taken to ensure the defence benefits your business may include:
- establishing and strengthening policies and procedures to ensure, as much as possible, that spare parts are only used by customers for purposes of repair;
- taking steps to ensure staff, and particularly senior staff, comply with those policies and procedures, including monitoring their activities and incorporating appropriate safety checks throughout your business; and
- where possible, only authorising trusted staff to approach sales of any parts protected by a registered design.
If you believe that your business could benefit from relying on the repair defence, it is strongly recommended that you have an experienced intellectual property professional review your internal policies to maximise your protection.