The battle for brand supremacy in the consumer electronics industry has intensified with the emergence of refurbished hardware. Every brand is trademarked for a reason, representing a distinct identity, quality assurance, goodwill, and consumer trust. However, the secondary market for refurbished products poses a unique challenge to these brands. Independent third-party resellers (TRPs) compete with original equipment manufacturers (OEMs) in offering refurbished goods. In an attempt to direct this battle, the Delhi High Court’s judgment in Seagate Technology LLC v. Daichi International, delivered on May 21, 2024, has established directions on how to sell refurbished hard disk drives (HDDs).

Refurbishing: The Background of the Dispute

The case before the Delhi High Court posed a complex legal question. It centred on whether the sale of refurbished products without the original brand and any mention of the original manufacturers could infringe upon their trademark rights, thus breaking ties with the original trademark owner. In this case, the plaintiffs, Seagate and Western Digital (WD), are well-known manufacturers of HDDs. They initially sell their drive to OEMs, who integrate them into various devices such as laptops, desktops, and surveillance cameras. As the initial purchasers of the HDDs, the OEMs play a crucial role in the refurbishing process.

When HDDs reach the end of their life cycle, often marked by the expiration of the manufacturer’s warranty, they are carefully extracted and sent abroad for refurbishment. Although these drives are technically classified as “end-of-life”, they often remain fully functional. Once refurbished, the HDDs undergo a process that removes the original branding. Vendors then refresh and repackage them under their labels, offering the products to consumers with enticing two-year warranties. This practice, known as “reverse passing off,” is a form of unfair trade practice. The refurbished drives are marketed as new, thereby misleading consumers about the product’s true origin.

Passing off occurs when one party presents its goods as those of another, often leading to consumer confusion. Reverse passing off, however, happens when a certain Party Y buys Party X’s products, removes X’s trademark, and sells them under its own name. This misleads consumers into thinking that Y is the originator and manufacturer of the goods.

Hence, in this dispute, Seagate and WD sought a permanent injunction against several defendants, including Geonix, Daichi, and Cubicor, to prevent them from dealing in the refurbished HDDs.

Perspectives Presented: Parties’ Submissions

The plaintiffs contended that the distinctive features of their HDDs made the manufacturer easily identifiable, even without labels. They argued that the second-hand goods were imported for repair, refurbishment, reconditioning or re-engineering with the condition that the waste generated would be disposed of. The repaired goods should be re-exported back as per customs rules. This constituted “use of a registered mark” under Section 29(6) of the Trade Marks Act, 1999, leading to infringement under Section 29(1).

The plaintiffs accused the defendants of misrepresenting the refurbished drives as new, engaging in both passing off and reverse passing off. They contended that HDDs had their trademarks during the import, and hence, taking them out from old devices should be considered illegal. This deceptive practice allowed them to benefit from the plaintiffs’ brands without incurring legitimate costs. This also resulted in unfair competition and harm to their reputation and trade due to negative reviews.

The defendants, conversely, contended that HDDs remain deeply embedded in the equipment. Hence, it is unlikely that consumers could identify the manufacturer. On this ground, they claimed that customs rules were irrelevant. Knowing that the HDDs were being refurbished, the plaintiffs had already made an agreement with an importer in the past, settling any problems they had about the hard drives. Since they did not mention that they knew about the importing and refurbishing to the court, and because they had already settled the issue, they cannot file the present lawsuit.

The defendants asserted that the HDDs, considered at their end of life, did not present an impairment issue. They maintained that liability under Section 29(6) applies to the importers as buyers, not the defendants. Furthermore, they argued that de-branding did not invoke Section 29 or Section 30(4). Moreover, Section 30(3) is not applicable in the present case due to lawful acquisition and the principle of exhaustion.

The Principle of Exhaustion in Trademark Law

The Delhi High Court, in Kapil Wadhwa & Ors v. Samsung Electronics Co. Ltd. (FAO(OS) 93/2012), acknowledged the principle of international exhaustion of trademarks. This principle is similar to giving a gift. When we give a gift to someone, we don’t claim that we still own it, right? Similarly, trademark rights are exhausted once a branded product is sold or transferred by the trademark owner or with their consent. This means the owner can no longer prevent others from reselling or using the product. This particular case refers to “international exhaustion” as the initial product sale happened on foreign soil. The only requirement is the lawful acquisition of the good. In this legal dispute, the plaintiffs argued that the defendants did not lawfully acquire the HDDs due to alleged illegality in importing the end-of-life drives.

Judgment: Can I refurbish goods?

Section 30(4) gives the trademark owner a right to object to the “further sale” of goods if there are valid reasons, such as a change in condition or impairment to the goods. The plaintiffs claimed that the defendants had removed the original manufacturer’s mark and repackaged the HDDs under their own brand names.

Notably, the Delhi High Court had previously issued an ex-parte injunction in a case involving one of the plaintiffs in Western Digital Technologies Inc & Anr v. Geonix International Private Limited (CS(Comm) 168/2024). In this case, Geonix removed WD’s mark and replaced it with its own. This judgment has significant implications for the refurbishing industry, as it sets a precedent for the treatment of refurbished goods and the rights of trademark owners.

In the present case, the court said that the plaintiffs failed to provide any rule, regulation, or policy prohibiting the import of discarded HDDs or equipment into India. The end-of-life HDDs were not subject to import restrictions or official notice prohibiting their export. The plaintiffs could not provide any agreement preventing the removal of HDDs from equipment or their subsequent export. They did not give any evidence of illegality in the import process. Furthermore, they had not complained to the Customs or relevant authorities.

The court noted a document trail with formal invoices covering the sale and purchase of HDDs. The defendants paid taxes to the appropriate government body, reflecting legitimate transparency in their transactions. However, the court emphasised that “full disclosure” is essential to protect a manufacturer’s reputation and goodwill. Consumers must know what they are purchasing. The court stressed the importance of balancing the interests of trademark owners, refurbished in the secondary market, consumers looking for affordable options, and the imperative to conserve resources and reduce waste. The court extended leniency to refurbishers as long as they adhered to the guidelines provided.

The Guidelines

The court provided the following guidelines as instructions for selling refurbished goods:

1. Source Identification: The packaging must clearly indicate the original manufacturer’s name, ensuring it is noticeable but not overwhelming to avoid deceiving consumers.

2. Use of Word Mark: The defendants should refer to the plaintiffs using their wordmark, not their device mark.

3. No Warranty Statement: To avoid confusing the consumer, the packaging must explicitly state that the product does not come with a manufacturer’s warranty.

4. Condition Disclosure: A prominent label must indicate that the product is “used and refurbished.”

5. Extended Warranty Information: The defendants should clearly inform the consumers about any extended warranty the refurbished provides, including consumer care contact details.

6. Accurate Feature Description: The refurbishers should provide a truthful, accurate, and precise description of the refurbished product’s features and their intended use, thereby avoiding misleading statements.

7. Compliance Across Platforms: These requirements should, in addition to the goods, apply to promotional materials, websites, e-commerce listings, brochures, and manuals of such goods.

Conclusion

The guidelines for refurbishing HDDs aim to equally protect trademark owners and promote the refurbishment market while harmonising consumer concerns. These regulations require clear disclosures about the origin and condition of refurbished goods to maintain the reputation of the original manufacturers and build consumer trust. This transparency can improve consumer satisfaction, support a thriving secondary market, and encourage sustainable practices. Ensuring such accurate representation may drive innovation in refurbishment processes, ultimately improving product quality and service. While concerns about competition impacting brand value exist, this framework should promote responsible refurbishment practices, protect consumer rights, and provide long-term benefits for both consumers and manufacturers. Nonetheless, one must still acknowledge the potential competition involved in the refurbishing market and its impact on the brand reputation of the original trademark owners.