Nespresso v. Denner - A Coffee Capsules Battle in Five Acts. What Else?

Nespresso v. Denner - A Coffee Capsules Battle in Five Acts. What Else?

I. Introduction Société de Produits Nestlé S.A. (Nestlé) and Nestlé Nespresso SA (Nespresso) are currently demonstrat ing before the courts that imitation - while it may be perceived as a compliment - is not always wel come. In an effort to keep their products exclusive, Nestlé and Nespresso are currently involved in a multi-way legal battle against Swiss discount super market chain Denner AG (Denner) which offered cheaper capsules that can be used in the Nespresso machines. Nestlé is defending one of its biggest and most profitable brands. On the strength of its machines' design, the high quality of its coffee and the well known actor George Clooney as the key part of its marketing campaign, Nespresso has posted double digit growth for much of the last decade. Its busi ness model rests on the fact that Nespresso machines take only its own capsules. By means of its patents and trademark rights as well as unfair competition law aspects, Nestlé is now trying to protect its crown jewels against Denner. This is, in short, the stuff the coffee capsules bat tle is made of. II. Act One The Nespresso story began in the 1970s when Nestlé anticipated the growing gourmet coffee mar ket. Nespresso is the pioneer and market leader in portioned premium coffee. The totally integrated Nespresso System, developed after long years of research and protected by a large number of patents and trademarks, revolutionised the portioned coffee market and started a new era of encapsulated coffee. Nespresso perfected its concept over many years, and today the company serves as the reference for premium portioned coffee worldwide. Three factors form the heart of its concept: portioned coffees, packaged in hermetically sealed capsules to ensure freshness and sold in packaging of ten capsules each; a range of coffee machines with a patented extraction and brewing system that manages the interplay of all factors necessary to produce coffee; and exclusive and personalized customer services available through the Nespresso Club. This trilogy was intended to create what the company described as; "the Ultimate Coffee Experience - moments of genuine pleasure and indulgence for coffee lovers worldwide"1. Nestlé and Nespresso own a considerable trade mark and patent portfolio protecting the Nespresso System. In addition to patents protecting the extrac tion method as well as the closed capsule system, protection has been granted by the Swiss registrar, the Swiss Federal Institute for Intellectual Property, for a 3D Swiss trademark covering the shape of the Nespresso coffee capsuleas2 well as the word mark WHAT ELSE?3. * Attorney at Law, Baker & McKenzie Zurich, Switzerland. 1 Press Release "The Avenches Milestone in the Nespresso Success Story", available at http://www.nespresso.com/mediacenter/xml/ int/resources/pdf/10.06.09_Avenches_MiIestone_in_Nespresso_ Success_EN.pdf. 2 Swiss trademark Reg. No. P-486 889, registered for "coffee, coffee extracts and preparations on the basis of coffee". 3 Swiss trademark Reg. No. 609 901, registered for „coffee". 4 See, e.g., Kraft Foods' TASSIMO coffee capsule system, available at http://www.kraftfoodscompany.com/brands/largest-brands/ brands-t/tassimo.aspx, Mars' MY FLAVIA system, available at http://www.myflavia.co.uk/, and Sara Lee's SENSEO coffee pods, available at http://www.senseostore.com/; only recently, Sara Lee and other competitors also launched Nespresso compatible cap sules, see press releases available at http://www.saralee.com/en/ NewsAndMedia/News/2011/SaraLeesellingLOREspressOonlinein Dutchmarket.aspx and http://www.ethicalcoffeecompany.com/.EFFL 412011 Nespresso v. Denner - A Coffee Capsules Battle in Five Acts. What Else? I 227 III. Act Two Until recently, Nespresso did not fear competition in Switzerland. Competitors struggled to find ways to circumvent Nestlé's product protection. Compa to circumvent Nestlé's product protection. Compa nies such as Sara Lee, Mars Inc. and Kraft Foods nies such as Sara Lee, Mars Inc. and Kraft Foods Inc. launched their own coffee system with differ ent capsules that do not work with Nespresso machines4. The situation changed, however, when Denner, owned by large Swiss retailer Migros Genossenschafts-Bund, believed it found "holes in the wall" in Nestlé's trademark and patent portfolio. In early December 2010, Denner announced the launch of its competing coffee capsules, and pub lished Swiss-wide advertisements with the claims "Compatible with your Nespresso* machine - and your budget" and "Denner - was suscht", a literal translation of Nestlé's registered word mark WHAT ELSE? into Swiss-German. The asterix, referred to in significantly smaller letters, read "Nespresso is a registered trademark of Société de Produits Nestlé S.A. and not associated with Denner AG". On 15 December 2010, Denner launched its ver sion of the Nespresso System compatible capsules with four different flavours, and offered an initial introductory price of CHF 0.25 per capsule - com pared to the average price of CHF 0.50 per capsule of the Nespresso brand. The Denner capsules are transparent, and plain. They are not airtight but instead wrapped in four differently colored sealed bags. 12 sealed bags are sold per unit in cardboard packaging and marketed under the marks "Denner Espresso Milano" "Denner Indian Summer", "Denner Ethiopian Dream" and "Denner Dolce Vita". IV. Act Three At the beginning of January the Commercial Court of St Gallen issued an interlocutory injunction pro hibiting the sale of Denner's coffee capsules5. Nestlé 5 Decision of the Commercial Court of St Gallen, 10 January 2011, HG.2011.10-HGP, available at http://www.gerichte.sg.ch/home/ dienstleistungen/rechtsprechung/kantonsgericht/entscheid_2011/ hg_2011_10.Par.0001 .DownloadListPar.0001 .File.tmp/Entscheid% 20Handelsgericht%20vom%2010.%20Januar%202011 .pdf. 6 SR 232.1 1 - Bundesgesetz vom 28. August 1992 über den Schutz von Marken und Herkunftsangaben (Markenschutzgesetz, MSchG. 7 BGE 129 III 514, E. 2 (BGE is the abbreviation for Bundesgericht sentscheid, Decision of the Swiss Supreme Court). and Nespresso had filed their complaint on 6 Janu ary 2011, claiming infringement of their 3D trade mark and their word mark as well as unfair compe tition law infringement. The Commercial Court of St Gallen handed down the decision ex parte and only few days later on 10 January 2011, despite the fact that Denner had filed a protective brief setting forth arguments that there is no infringement. For obvious reasons, the 3D trademark infringement part which aimed at prohibiting Denner from mar keting Nespresso System compatible capsules was the most important part of the injunction. 1. The Legal Background The crucial question was and still is whether the 3D trademark on which the claims are based is valid and enforceable under Swiss trademark laws. In terms of the legal background, while 3D trademarks can in general be registered under Swiss law, the fact that they may be identical with the product as such increases the tension between the trademark owner's desire to obtain exclusive rights in the shape and certain fundamental limits to intellectual property rights, such as the freedom to copy. Besides this, trademark law cannot grant rights which are incompatible with basic parameters of certain other intellectual property rights, in particu lar the statutory terms for patent, design and copy right protection. This makes it necessary to exclude certain shapes of products or packaging from trade mark protection. The current trademark law, the Swiss Trademark Act (MSchG)6, which introduced protection of 3D trademarks in Switzerland, entered into force in 1993- Article 1 (2) MSchG provides for the types of signs protected by trademark law, and explicitly includes 3D trademarks. Article 1(1) MSchG enacts the essential function of trademarks, and states that trademarks must be capable of distinguishing goods and services of one undertaking from those of other undertakings7. Often, consumers tend to perceive the shape of a product or its packaging as the product or packag ing itself, and not as a conceptually different and abstract identification of origin, i.e. not as a distinc tive trademark. For this reason, the Swiss Supreme Court (the Bundesgericht, BGer) held that in order to qualify for registration, 3D trademarks must not only distinguish the relevant goods from other228 I Nespresso v. Denner - A Coffee Capsules Battle in Five Acts. What Else? EFFL 412011 goods, but also function as a source of origin8. The 2. Swiss Case Law On Three 3D trademark must stand out, deviate from the Dimensional Trademarks known and expected, and thereby leave a mark in the memory of the consumers9. Accordingly, 3D The time after the introduction of protection for 3D trademarks can be protected under Swiss trade- trademarks by the MSchG until 2004 was character mark law only if their shape possesses certain dis ized by a relatively liberal registration practice, but mark law only if their shape possesses certain dis ized by a relatively liberal registration practice, but tinctiveness. This presupposes that the shape of the also by a lack of case-law and thus by uncertainty, tinctiveness. This presupposes that the shape of the also by a lack of case-law and thus by uncertainty, goods or their packaging (a) is not necessary to ful- This lead to confusion about the possible scope of fill a certain function and that (b) has inherent, or trademark protection for shapes. One exception was acquired, distinctiveness. the decision of the BGer of 1994 in the case "The The requirement that the shape is not necessary Original" in which a watch design was refused to fulfill a certain function is regulated in article 2 tection as a 3D trademark as it was considered (b) MSchG which states that trademark protection generic10. Only in 2003 the BGer clarified shall not be afforded to shapes which result from requirements for protection of shapes as the nature of the goods and shapes of the goods or marks in its leading "Lego III" case11. their packaging that are technically necessary. According to the BGer, article 2 (b) MSchG Importantly, if a shape falls into this category of porates the following taxonomy of three article 2 (b) MSchG, it can not (never) qualify for sional trademarks: trademark protection, not even if and when it has - Shapes that determine the nature of acquired distinctiveness. The barrier which article 2 The BGer held that such shapes are ineligible (b) MSchG sets to the protection of shapes as trade- protection as they simply represent the marks is absolute and cannot be overcome by any gory they belong to12. means. Without the barrier to protection set up by - Shapes technically necessary ("technisch article 2 (b) MSchG, certain goods could benefit dig"). According to the BGer, these shapes from a potentially unlimited protection as trade not protected, because they are absolutely marks, although they would not or no longer be pro- tial for the manufacturing process. Their tected under patent or design laws. tion would deprive competitors of any alterna If a certain shape neither results from the nature tives required for competition13. As to the shape of the goods nor is technically necessary, it can be which is technically necessary in the sense of protected as a trademark if it is capable of distin- article 2 (b) MSchG, the BGer held that it is at guishing the goods of one undertaking from those hand when there are no alternative shapes avail of other undertakings. However, given that the able or when the creation of an alternative shape shape often corresponds to the goods or the packag- cannot be reasonably expected given cost con ing itself, it is often not perceived by the public as a straints and the need to be competitive, trademark and is therefore often generic (Gemein- - Shapes technically required ("technisch bedingt"), gut). In this case, trademark protection is excluded These are shapes required by the intended use of because of article 2 (a) MSchG which states that the good but that are not absolutely essential for trademark protection shall not be afforded to signs the manufacturing process. According to the that are in the public domain, unless they have BGer, these shapes regularly lack distinctiveness gained a secondary meaning as a trademark for the unless proven to be original or having acquired goods or services for which they are claimed. secondary meaning14. Shapes which fall into this category can therefore - Shapes technically influenced ("technisch mit be registered as trademarks provided they have beeinflusst"). These shapes are technically useful acquired distinctiveness or, in other words, if they but neither required nor absolutely essential, have gained a secondary meaning as a trademark. The shapes are principally eligible for trade 8 SR 232.11 - Bundesgesetz vom 28. August 1992 über den Schutz von Marken und Herkunftsangaben (Markenschutzgesetz, MSchC). 9 BGE 120 II 310 E. 3 a, b "The Original"; BGE 129 III 525 E. 4.1 "Lego". 10 BGE 120 II 307 - "The Original". 11 BGE 129 III 514-"Lego". 12 BGE 129 III 514, E. 2.4.1 and 3.1.1 - "Lego". 13 BGE 129 III 514, E. 2.4.2 - "Lego". 14 BGE 129 III 514, E. 2.4.3 - "Lego".EFFL 412011 Nespresso v. Denner - A Coffee Capsules Battle in Five Acts. What Else? I 229 mark protection provided they are not within the public domain according to article 2 (a) MSchG15. This distinction of the BGer was confirmed in several subsequent decisions16. 3. The Decision of the Commercial Court of St Gallen In essence, the Commercial Court of St Gallen had In essence, the Commercial Court of St Gallen had to decide whether Nestlé's 3D trademark was tech to decide whether Nestlé's 3D trademark was tech nically necessary, which would have made it invalid, or technically required. Only in the latter case it could have acquired distinctiveness, and be a valid and enforceable trademark. Under the unified Swiss Code of Civil Proce dure1 7, which came into force as recently as 1 Janu ary 2011, an interlocutory injunction can be issued in order to avoid irreparable damages18. Preventive measures, as a consequence, can be taken if the applicant makes it plausible that a right, which he is entitled to, is infringed or such an infringement is imminent and that such an infringement is likely to cause a damage that hardly can be repaired. In cases of urgency, particularly when there is a risk of frus tration, the court may take preventive measures immediately and ex parte, without prior hearing of the defendants. The Commercial Court of St Gallen granted such ex parte preventive measures and prohibited Den ner to continue selling the Nespresso compatible coffee capsules, as it concluded that Nestlé and Nespresso have rendered plausible that Denner infringed Nestlé's trademarks and acted unfair. Nestlé and Nespresso made it sufficiently plausible that the 3D trademark is valid and that, due to intense efforts in advertising, it acquired distinc 15 BCE 129 III 514, E. 2.4.4 - "Lego". 16 BGE 131 III 121 - „Smarties"; BGer sic! 2006, 666 "Zigarettenverpackung"; BGer in sic! 2005, p. 646 - „Tooth paste", BGE 133 III 342 - „Plastic Packaging"; BGE 134 III 547 - „Panton". 17 Schweizerische Zivilprozessordnung (Zivilprozessordnung, ZPO). 18 Article 261 para 1 ZPO. 19 SR 241 - Bundesgesetz gegen den unlauteren Wettbewerb (UWG). tiveness. Furthermore, the Court held that Nestlé and Nespresso made it plausible that by producing, distributing and advertising the coffee capsules, Denner used these signs as trademarks and there fore infringed the Nestlé's trademark rights in the 3D trademark as well as the word mark WHAT ELSE?. The Commercial Court of St Gallen, in particular, found that the shape of the 3D Nespresso Capsule trademark was not technically necessary ("technisch notwendig"). Nestlé argued that capsules compatible with the Nespresso machines did not have to have the trademarked 3D shape, and the Court appar ently found this convincing. Nestlé showed by means of a survey that more than 50 percent of the Swiss general public associated (unsupported) the trademarked shape with Nespresso (supported recall 73 percent) and the Commercial Court of St Gallen held that Nestlé and Nespresso made plausible that a literal translation of WHAT ELSE? into Swiss-German does not suffice to distinguish the marks. Finally, the Commercial Court of St Gallen held that Nestlé and Nespresso sufficiently substantiated that Denner acted in violation of the relevant provi sions of the Swiss Unfair Competition Act19, by using capsules of a nearly identical form and mak ing reference to Nespresso in their advertisements, which has to be considered as an unnecessary imita tion of the Nestlé's and Nespresso's products and exploitation of their reputation. Eventually, but in consideration of the Denner's protective brief, the Commercial Court of St Gallen confirmed that damages resulting from this infring ing behaviour would not be easily provable in the future, and that there was a risk of confusion in the market which justifies that the decision is ex parte. As a consequence of the decision, Denner had to immediately cease and desist from marketing the competing capsules in Switzerland, and recall all capsules from its stores. V. Act Four Flying on the wings of this success, Nestlé decided to file for another interlocutory injunction against Denner, and brought forward an action with the Commercial Court of Zurich based on two of the large number of patents protecting its portfolio for the Nespresso System. The subject matter of the230 I Nespresso v. Denner - A Coffee Capsules Battle in Five Acts. What Else? EFFL 412011 two patents is a coffee extraction method20 and the capsule containing coffee as a closed package21. The Commercial Court of Zurich carefully con sidered the case, but eventually held that there is no infringement of the two patents on which the inter locutory injunction was based22. With regard to the method patent, the Commercial Court of Zurich stated that the coffee machines, by which the extraction method is performed through an act of the buyers of the machines, had been brought on the buyers of the machines, had been brought on the market with the consent of Nestlé. The use of the market with the consent of Nestlé. The use of the extraction method performed by the buyers of the machines was, for this reason, considered to be a lawful act. The Commercial Court of Zurich concluded that Denner, by selling coffee capsules to be lawfully used in the machines by the buyers, did not contribute to any patent infringement23. For the patent on a coffee capsule the Commer cial Court of Zurich held that the Denner capsules, which are not fully closed but have holes, do not fall within the scope of the patent as these capsules do not provide optimum conservation. The decisive argument was that the Denner capsules are not air tight; freshness is guaranteed by the wrapping of the capsules in sealed bag. The Commercial Court of Zurich found Nestlé did not make plausible that these sealed bags have the same technical effect as the patented closed capsules. The Commercial Court of Zurich, for these rea sons, dismissed Nestlé's application for interlocu tory injunction. VI. Act Five On 4 March 2011, the Commercial Court of St Gallen lifted the ex parte injunction granted before24. After having heard both parties, the Com mercial Court of St Gallen, in essence, held that Denner has the right to distribute capsules compat ible with the Nespresso System. The Commercial Court of St Gallen - deviating from its initial findings - argued that, in order to be compatible with the Nespresso machines, the cap sules need to have a certain shape, namely a conical shape essentially conforming to the chamber of the Nespresso machines. It held that the shape of the Nespresso Capsule is technically necessary and that the registration of the Nespresso Capsule as a 3D trademark has been made in violation of article 2 (b) MSchG. Nestlé failed to show that it was techni cally possible to produce compatible capsules with out incurring substantial disadvantages (according to the Commercial Court of St Gallen, it needed to show that alternative solutions were as practical, solid and cheap to make as the Nespresso capsule). While Nestlé argued that it was possible to manu facture compatible capsules that had convex side walls (like a waistline), the Commercial Court of St Gallen noted that such shapes would contain 20 percent less coffee and, for this reason, were infe rior to the original shape. As a consequence, it held that the conical shape of the capsules was merely due to technical considerations. Shapes of packaging which are technically neces sary cannot qualify for trademark protection, regardless of the distinctiveness of the product and regardless of whether the public might perceive the shape of the packaging as an indication of origin. Technically necessary shapes are not registrable even if there is evidence in support of an acquired distinctiveness of the shape. For this reason, it made no difference that Nestlé proved that the Nespresso capsules were well known in Switzer land. The mark was presumed to be invalid and for this reason could not serve as a basis for a prelimi nary injunction. 20 European Ratent EP 0 512 470. 21 European Estent EP 0 512 468. 22 Decision of the Commercial Court of Zurich, 21 (anuary 2011, HE110003-0. 23 Under Swiss law, acts that may potentially aid or facilitate or otherwise contribute to a direct infringement of a patent are not per se prohibited. Rather, illicit contributory infringement under Swiss law requires that the person in question contribute to an act that qualifies as direct infringement. Contributory infringement is accessory to a direct infringement. For this reason, under the prevailing legal literature and case law there is no contributory infringement under article 66 lit. d of the Swiss Fbtent Act without a direct infringement. It is an open and debated issue whether the required direct infringement can also be an act by a private person, who enjoys a fair use privilege, and who can not be held liable for the patent infringement. Please see Rudolf E. Blum/ Mario M. Pedrazzini, Das schweizerische Ratentrecht, Kommentar zum Bundesgesetz betreffend die Erfindungspatente vom 25. |uni 1954, 2. Aufl., Bern 1975, Art. 66; Peter Heinrich, PatC/EPÜ, Kommentar zum Schweizerischen Patentgesetz und den ent sprechenden Bestimmungen des Europäischen Patentüberein kommens, Zürich 1998, para 66.07; BCE 129 III 588 E 4.1; Commercial Court Zurich, decision of 22 October 1998, sic! 1999, 148 pp. 24 Decision of the Commercial Court of St Gallen, 4 March 2011, HG.2011.10-HGP; available at http://www.gerichte.sg.ch/home/ dienstleistungen/rechtsprechung/kantonsgericht/entscheid_2011 / O.Par.0001 .DownloadListPar.0001 .File.tmp/Entscheid_HG_2011_ 10-HGP 2_.pdf.EFFL 412011 Nespresso v. Denner - A Coffee Capsules Battle in Five Acts. What Else? 1231 As discussed above, this is due to the inherent limi tation of the trademark law, which must not be in contradiction with basic principles of patent law. The trademark law shall enhance and not limit competition between companies. If and when the shape of the Nespresso Capsule is not or no longer protected by a patent, the exclusive right to use this shape for a packaging of coffee cannot be extended by means of trademark law, since this would result in a de facto unlimited monopoly in relation to the Nespresso technology. The court did, however, affirm its ex parte injunc The court did, however, affirm its ex parte injunc tion insofar as it prohibited Denner from using a tion insofar as it prohibited Denner from using a literal translation of Nestlé's slogan "WffAT ELSE?" in promotion of the capsules. 25 Decision of the Swiss Supreme Court of 28 June 2011, 4A_178/2011. The full grounds are not yet available. For this reason, it is not possible to comment on the findings of the BGer in more detail, nor on the consequences of the decision. Denner announced that it would not recall the Denner capsules from the stores for the time being. It argues that the operative provisions of the judgment of the BGer are not clear, and do not impose any obligation on Denner to cease and desist from selling its compet ing capsules. Apparently, the Commercial Court St Gallen con firmed this view. The parties are now waiting for the supporting grounds of the decision. See Denner's press release dated 1 July 2011, available at http://www.denner.ch/de/ueber-uns/medien/ medienmitteilungen/news-detail/article/2011/07/01 /denner verkauft-sei ne-kaffee-kapsel n-weiter/. Denner immediately announced that it would resume offering Nespresso-compatible coffee cap sules, and placed advertisements in Switzerland stating "That went espresso. Denner coffee capsules available again soon!" Shortly after the Denner coffee capsules were (and still are) available again. VII. The Final ... and they lived happily ever after. No, the fight is not yet over. Nestlé filed an appeal against the decision of the Commercial Court of St Gallen to the BGer. The BGer issued its decision on 28 June 201123. It held that the Commercial Court of St Gallen violated Nestles right to a court hearing when it - based on its own knowledge - held that the form of the cap sule was technically necessary. In particular, the BGer held that the Commercial Court of St Gallen did not sufficiently consider Nestlé's request to obtain an expert opinion in that regard. The BGer remanded the case, and the Commercial Court of St Gallen will need to reconsider its decision. The new decision will likely be issued this autumn. Besides this, Nestlé filed full proceedings on the merits. It remains to be seen how the coffee cap sules battle further develops.

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