Telemarketing – trading by deception – BSkyB triumphs against telesales operations

High Court tackles endemic passing off by call centres in telesales of warranty cover for Sky equipment

British Sky Broadcasting Group Plc & others v Satellite Direct UK Limited & others [2006] HC05C01651

Herbert Smith was successful in acting for BSkyB in this case.

Today, the High Court handed down judgment in the first case before the UK courts to consider misselling of goods or services through telemarketing from call centres.

The facts

Sky operates the leading pay television satellite broadcasting and entertainment service in the UK. Sky offers its customers the opportunity to take out an extended service plan to repair their Sky satellite reception equipment (primarily the set top box) branded SKY REPAIR PROTECTION PLAN (previously SKY CARE). Sky authorises an official provider, Domestic & General, to provide the extended service plans under the SKY mark.

The Defendants also provide service plans or warranties for Sky satellite reception equipment. However, they have not been authorised by Sky to use the SKY marks.

The dispute concerns a wide range of misrepresentations made by way of telemarketing and written marketing materials to the effect that service plans or extended warranties provided by Satellite Direct and the other Defendant companies are provided by Sky, or are otherwise authorised, endorsed or approved by Sky. The Defendants had built a large customer base in a short period, making up to 6 million calls per annum.

Written misrepresentations ranged from the use of deceptive trading or company names such as "Skycare", "Sky Home Services" and "Subscriber Services", through to marketing materials addressed to "Dear Sky Digital Viewer" sent in an envelope marked "this envelope contains important information for all Sky digital viewers", often accompanied by an insert offering Sky+ boxes for sale.

However, the bulk of the misrepresentations related to what the telesales agents actually said to customers when cold-called. Satellite Direct had created various call scripts which were intended to be followed by its operators. The early call scripts used "Subscriber Services" as the name of the company calling and informed the customer that their manufacturer's warranty had expired and invited the customer to "renew your warranty". Later versions used "Satellite Direct", but still suggested Sky customers "renew" an extended service plan or warranty in fact not provided by the Defendants in the first place. However, the evidence collated by Sky demonstrated a significant volume of complaints from members of the public that had taken out a policy with the Defendants, believing that they were doing so with Sky. It was clear that the sales operators deviated from the script frequently, indicating that they had an existing relationship with the customer, when in fact they did not. For instance, they stated that "according to our records" the customer's manufacturer's warranty had expired, that they knew what equipment the customer had or that they had the customer's bank details, when in large part this was a sham.

After it became clear in correspondence that the Defendants did not intend to stop what they were doing, Sky issued legal proceedings for passing off.

The law

To succeed in passing off, Sky needed to demonstrate 3 elements:

1. goodwill in the use of SKY in the supply of extended service plans, such that the public identified use of SKY for these services with the Sky group of companies;

2. a misrepresentation made by the Defendants to the public leading (or likely to lead) the public to believe that the service plan or warranty offered by the Defendants was that of Sky or its authorised provider; and

3. it has suffered (or is likely to suffer) damage by reason of the erroneous belief induced by the misrepresentation that the services were from Sky, or are authorised or endorsed by Sky.

Issues

Three main issues arose in the case:

1. whether the number of complaints were sufficient to demonstrate endemic or institutional passing off or, rather, were they just evidence of isolated instances of passing off by rogue agents?

2. whether a misrepresentation arises by "silence" where a trader makes no express misrepresentation to the customer, but realises from something that the customer says that the customer is under a self-induced misapprehension that the caller is from, or is connected to, Sky?

3. whether the Court is able to draw an adverse inference from the deliberate destruction of relevant records (or failure to preserve relevant documents), to conclude any uncertainty in favour of Sky that the records would have confirmed that passing off was endemic and extensive?

Mr. Justice Briggs found that both groups of Defendants had passed themselves off as Sky, or as authorised or endorsed by Sky. Rather, the "issue had become one of extent and degree".

1. The Judge concluded that Satellite Direct intended, through the marketing strategy put in place, to suggest a connection with Sky and intimate a current relationship with the customer to create a bond of trust. It set out deliberately to exploit "grey areas" for economic gain. Here was a strategy designed to gain the trust of the intended customer by hinting at a pre-existing relationship, necessitating an assumption that they were speaking to Sky. It was a culture in which this assumption was believed to be good for business and where it was not thought to be wrong to take advantage of it, or even encourage it, just short of making a direct assertion that they were from Sky.

   The Court concluded that the period from 2002 to the point when Satellite Direct gave undertakings in a parallel trading standards action involved "habitual or institutional passing off", such that up to 80% of sales were immediately preceded by passing off. Even when Satellite Direct introduced disciplinary measures, training and call-monitoring, the Judge concluded that "the previously systematic invasion of [Sky's] rights was not immediately or even quickly reduced to a trickle". The specific instances of deception remained the "tip of an iceberg", such that even by today 10% of sales amounted to passing off which "still represents a serious continuing infringement of [Sky's] rights".

2. The Court found that if a party has a strong position in the market for particular goods or services, where a competitor adopts a marketing method which will cause or contribute to confusion by an implied misrepresentation, then that competitor is under a duty to take such care as will prevent his chosen marketing method from conveying a misrepresentation that there is a connection between the competitor and the market leader. Further, where an agent is aware that the customer is under a self-induced misapprehension as to who he is dealing with and the agent fails to put that mistaken belief right, then this amounts to a misrepresentation by conduct, analogous to "switch-selling" (customer asks for product A and is given indistinguishable product B without being told that it is product B). Again, rather than taking steps clearly to distinguish his competing product from that of Sky, the Defendants positively exploited the business advantage which they identified as flowing from that risk.

3. The Court fell short of concluding that the unexplained absence of disclosure of relevant classes of documents amounted to deliberate destruction of, or culpable failure, to preserve documents. However, the Judge concluded that the result was to deprive the Defendants of the means of challenging inferences about the extent of passing off to be made from the more limited evidence. The failure to preserve and disclose relevant documentation would lead "to a lack of any inclination on the part of the court to give them the benefit of the doubt which might have been resolved by production of the missing material". Accordingly, "the broadest of brushes" must be used in assessing the level of sales induced by passing off and the Defendants "have only themselves to blame", if it works with "a degree of harshness", as a result of their failure to preserve relevant documents.

This is an important case for brand owners tackling attempts to "divert" customers away from them by unlawful means, as well as those in the telesales industry who will need to ensure that proper procedures are in place to prevent this kind of abuse. The case analyses the sophisticated type of suggestive marketing used by telemarketing to persuade customers to purchase the products or services of a competitor and the boundaries to be drawn between what is legitimate and what is not.

This case demonstrates the risks that a new entrant to a market runs, if he decides to deliberately "sail close to the wind" and exploit certain assumptions that the customer base make about the incumbent provider in the market. If that new entrant fails to take steps clearly to distinguish himself from that incumbent trader, then the new entrant may fall foul of the law of passing-off.

Further, the case has established the proposition that a trader may make a misrepresentation by conduct (even silence), by failing to correct a self-induced misapprehension that the customer has mistakenly fallen into, where that trader is aware of the mistaken belief of the customer.

It also demonstrates the importance of factual evidence in passing off cases, principally in the form of members of the public giving evidence (24 in this case). The Court showed less enthusiasm about considering large numbers of complaint records from a database of complaint calls logged by telesales operators, admitted as evidence under a Civil Evidence Act Notice. However, these can be valuable to demonstrate that the witnesses heard are but the mere tip of an iceberg.

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© Herbert Smith LLP 2006