Norway: The Duty of Loyalty Between Former Business Partners

by Jenny O. Nondal, Anna K. O. Eide and Sigurd Fjærtoft-Andersen

On 1 June 2023, Borgarting Court of Appeal ruled in the appellate case concerning the legality of Brødrene Dahl AS' ("Brødrene Dahl") development, manufacture and sale of an actuator device ("BD Device"). The Court of Appeal unanimously upheld the Oslo District Court's decision that Brødrene Dahl had made an intentional and systematic, and thus illegal, imitation of Eltorque AS' ("Eltorque") actuator device for opening and closing valves in ships and more ("Eltorque Device"), entailing that development, manufacturing, marketing and sale of the BD Device constitutes a breach of section 25 of the the Norwegian Marketing Control Act ("Marketing Act") on good business practice.

Brødrene Dahl is a leading Norwegian wholesaler, offering technical products in the fields of industry, hydropower, cooling, tools etc. for sale to a wide range of industries, and collaborating with associated manufacturers to develop products. Eltorque specialises in the development and sale of actuators and control systems in the maritime market.

In 2003, Brødrene Dahl and Eltorque entered into a distributor agreement governing collaboration within development, marketing and sale of , amongst other things, the 'Eltorque Device'. In 2016, Brødrene Dahl initiated the development and manufacture of its own BD Device, with similar specifications as the Eltorque Device, through a collaboration with the Taiwanese company Haitima. The collaboration led to the launch of the BD Device in 2019. Following the launch of the BD Device, Eltorque sued Brødrene Dahl on 20 October 2021, claiming that Brødrene Dahl should be prohibited from producing, marketing, and selling the BD Device in Norway, due to a breach of section 25 of the Marketing Act on good business practice.

Brødrene Dahl acknowledged that the development of the BD Device was inspired by the Eltorque Device through reverse engineering, and that the BD Device was meant to replace and have the same functions as the Eltorque Device. However, Brødrene Dahl claimed that a breach of good business practice requires an infringement of intellectual property rights or trade secrets. Brødrene Dahl argued that they had committed no such breach, as their reverse engineering was based on publicly accessible information. Furthermore, Brødrene Dahl argued that they had not been disloyal, as the development of the BD Device had started after the expiry of the parties' collaboration.

Illegal imitation or lawful reverse engineering?

The main question of the case was whether Brødrene Dahl, through the development and manufacture of the BD Device, had made an imitation of the Eltorque Device; and whether this imitation was in breach of section 25 of the Marketing Act on good business practice.

The Court of Appeal held that section 25 of the Marketing Act protects loyalty between commercial parties, and that the provision refers to a general loyalty assessment. The Court of Appeal went on to say that section 25 supplements other provisions in the Marketing Act, such as section 30, and other acts regarding protection of intellectual property rights. However, the Court of Appeal emphasized that, as a legal starting point, a party can seek inspiration from other products, for example by way of reverse engineering.

However, in the overall assessment of Brødrene Dahl's actions, the court concluded that the use of the Eltorque Device in the development of the BD Device went beyond what is permitted under section 25 of the Marketing Act on good business practice.

The Court of Appeal referred to how the Eltorque Device was used for more than just inspiration, as the BD Device was developed more or less solely based on Eltorque's product. This was evidenced by the fact that Brødrene Dahl had instructed its subcontractor to develop an actuator that could directly replace the Eltorque Device with similar specifications, by systematically providing the subcontractor with data and technical solutions taken directly from the Eltorque Device.

Furthermore, the Court of Appeal found that the two parties' previous collaborative relationship was of significant relevance; even though this collaboration had more or less ended by the time the BD Device project was initiated.

The Court of Appeal thereby concluded that, due to the parties' previous collaboration, Brødrene Dahl had an enhanced duty of loyalty towards Eltorque. Additionally, the Court of Appeal emphasized that the enhanced duty of loyalty required Brødrene Dahl to keep a greater distance from Eltorque's products than other competitors.

Key takeaways

The ruling illustrates that section 25 of the Marketing Act imposes a significant duty of loyalty on parties to a commercial collaboration. This duty lasts for a significant period of time after the collaboration has ceased and requires such parties to keep a greater distance between one another, than they do to their other competitors.

The ruling also emphasizes that the general section 25 of the Marketing Act supplements section 30 on illegal imitations, as well as other intellectual property legislation.

This article is intended to be a general summary of the law and does not constitute legal advice. Consult with counsel to determine applicable legal requirements in a specific situation.