News and insight within litigation and arbitration: Highlights from Q2, 2024

Insurance companies' obligation to discontinue customer relationships under the Anti-Money Laundering Act

The Supreme Court issued a ruling on 22 April 2024, regarding insurance companies' obligation to terminate customer relationships under the Anti-Money Laundering Act. The Supreme Court's ruling considers the rules and purpose of the Anti-Money Laundering Act and provide some guidelines on when an obliged entity is obliged to discontinue the customer relationship under Section 24(4) of the Act.

Two companies engaged in smolt production sought a temporary injunction against an insurance company after the insurance company notified them that their insurance policies would not be renewed after 1 September 2023. The insurance companies' decision was based on the assertion that the insurance customers failed to provide adequate documentation proving the transfer of shares from a Russian company to a Norwegian holding company in December 2022, as the customers had claimed. Thus, there were doubts with regards to the actual ownership of the two Norwegian companies. The insurance company argued that it therefore could not carry out the required "customer due diligence measures" as part of its ongoing customer follow-up. Customer due diligence measures under the Anti-Money Laundering Act refer to various measures aimed at ensuring that the obliged entity knows its customer and thereby can detect abnormal behaviour from the customer. Based on this reasoning, the insurance company claimed that it was obliged to discontinue the customer relationship under Section 24(4) of the Anti-Money Laundering Act, which states that an obliged entity shall terminate the customer relationship if customer due diligence measures as part of ongoing follow-up cannot be carried out.

The Court of Appeal disagreed with the insurance company that the customer relationship could be discontinued, but the majority of the Supreme Court (4-1) overturned the Court of Appeal's ruling due to a misinterpretation of the law.

In general, the Supreme Court states that the threshold for discontinuing a customer relationship is high.

More specifically, the Supreme Court considered that the obliged entity must have applied the necessary and available resources to implement the customer due diligence measures that the risk requires, even if this may be burdensome or costly for the obliged entity. The obligation to discontinue a customer relationship must be considered in light of the other obligations that the obliged entity has to carry out customer due diligence measures as part of ongoing customer follow-up. It is particularly relevant that the obliged entity, under Sections 13 and 14 of the Anti-Money Laundering Act, is obliged to identify the customer's ultimate beneficial owners and obtain necessary information about the purpose and intended nature of the customer relationship. In light of the risk of money laundering or terrorist financing, an assessment must then be made of the thoroughness of the investigations that the obliged entity shall carry out.

The Court of Appeal had not made an assessment in light of the above criteria. The Court of Appeal's interpretation of the law also gave the impression that identification of the ultimate beneficial owners under Section 13 of the Act was not a required customer due diligence measure, which the Supreme Court disagreed with. In our opinion, this must be a correct assessment of the rules of the Anti-Money Laundering Act and the purposes it is intended to serve.

The ruling (HR-2024-761-A) can be read here (in Norwegian only).

An English version of the Anti-Money Laundering Act can be found here.

The risk of losing insurance coverage by providing incorrect or incomplete information in claims settlements

In a judgment rendered on 31 May 2024, the Supreme Court addressed the issue of loss of insurance coverage due to the insured providing "knowingly incorrect or incomplete information that the insured knows or must understand may result in the insured receiving compensation he or she is not entitled to". This is regulated in Section 8-1(4) of the Insurance Contracts Act. The Supreme Court particularly considered what it means that the insured "must understand" that incorrect information may lead to excessive insurance compensation.

The case specifically concerned the insurance settlement following a fire at the production facilities of a crab processing factory. The insurance company declined coverage because the insured party, through the company's chairman/CEO, had provided incorrect information about the age of objects that had been damaged. The insurance company won in the District Court, but lost in the Court of Appeals. The Court of Appeals found that the insured party had knowingly provided incorrect information about the age of several objects, which could affect the insurance payment due to lower age deductions. However, the majority of the court of appeal found that it had not been proven that the company must have understood that these incorrect details could lead to an excessive compensation.

In the Supreme Court proceedings, it was established that the insured had knowingly provided incorrect information. The crucial point was whether the insured must have understood that incorrect information about the age of the objects could lead to excessive payout.

The Supreme Court determined that what the insured must understand, does not depend on a consideration of diligence or reasonableness. Similar to how the term "must understand" is interpreted in other legal acts, this expression in Section 8-1 of the Act means that, through a "normal assessment", possible ignorance becomes incomprehensible. Whether it is considered incomprehensible that the insured did not understand that the incorrect information could lead to an excessive compensation – in our case, indicating a lower age for damaged objects which in turn could affect the settlement – depends on an "objective assessment of the relevant circumstances".

After reviewing the legal sources, the Supreme Court summarised its view as follows (office translation):

"What the insured party 'must understand' is that the knowingly incorrect or incomplete information will likely result in an excessive compensation if it is used for the settlement. The requirement is met when possible ignorance appears incomprehensible based on an objective assessment of the relevant specific circumstances. In general, it can be assumed that this is the case when the insurance company has asked for the information in, for example, a claim or loss form."

Thus, it is presumed that the insured must understand that providing incorrect information about inquired matters in the claims settlement can lead to an excessive compensation. For most people, it should be quite obvious, for example, that indicating a lower age for damaged objects may result in a higher compensation under the insurance policy.

The court of appeal's judgment was set aside because the court of appeal had placed too much emphasis on irrelevant factors.

In our opinion, the Supreme Court's judgment appears well-founded and not particularly surprising. Strong evidence is required to successfully prove that the insured party knowingly provided incorrect information. If that is proven, it is generally not unreasonable that the insured loses insurance coverage as a general rule, even though it may be perceived as dramatic. The Insurance Contracts Act also allows for a reduction as an alternative in such cases, so that the insured may still in such case receive a certain reduced compensation.

The ruling (HR-2024-989-A) can be read here (in Norwegian only).

What is the liability of banks when carrying out payment transactions resulting from fraud?

The Supreme Court's ruling on 31 May 2024 clarifies the extent of banks' liability for compensation when the customer itself has approved payment transactions that turn out to be the result of fraud.

The basis of the case, was that the CEO of an energy company had been tricked by fraudsters posing as senior management into transferring approximately 130 million Norwegian kroner to accounts in Hong Kong. The defrauded company filed a claim for damages against its bank. The bank was initially found liable for compensating parts of the company's losses in the district court and court of appeal. However, the Supreme Court acquitted the bank.

The main issue was whether the bank was liable for not having notified the customer about the payment transactions.

As with the District Court and the Court of Appeal, the Supreme Court concluded that the payments were not unauthorized by the customer and that the bank was therefore not liable under section 35 paragraph 1 of the Financial Agreements Act, which stipulates that the bank is liable for losses due to unauthorized payment transactions.

The question was then whether the bank had acted negligently by not warning the customer about the payment transactions.

Based on section 43 in the Financial Contracts Act (1999), the Supreme Court established "a starting point that the customer is responsible for their own mistakes." Furthermore, the Supreme Court concluded that at the time of the damage, there were no legal requirements, regulations, or directives for banks to implement systematic measures against the risk of fraudulent payments approved by the customer, nor was there any normative industry practice. Based on this, the Supreme Court concluded that banks must have the opportunity to control approved payments in the manner they deem appropriate.

The Supreme Court also considered whether the claim for damages against the bank could be based on violation of anti-money laundering regulations. The Supreme Court concluded that any such potential violations must be of a gross nature and that there would have to be an additional violation of the law or norms. That was not the case here, and the bank could therefore not be liable on the basis of negligence.

In summary, the judgement limits a bank's liability for damages in cases of fraud when the customer itself has approved the payment. The judgment was based on the then in force Financial Contracts Act (1999), but our assessment is that the judgement would not have been different under the new and current Financial Contracts Act.

Thommessen represented Finance Norway, which had intervened as a party in support of the bank in the Supreme Court.

The ruling (HR-2024-990-A) can be read here (in Norwegian only).

Principled clarification regarding the (lack of) possibility to bring declaratory actions for violations of the Constitution

The Supreme Court's decision on 3 May 2024 clarifies that one cannot file a declaratory lawsuit regarding constitutional violations.

The background of the case was that two women, who had been subjected to intrusive coercive measures while under compulsory mental health care, filed a lawsuit against the state claiming that the coercive measures violated the provisions of the Constitution, the European Convention on Human Rights (ECHR), and the International Covenant on Civil and Political Rights (ICCPR), the latter two conventions incorporated into Norwegian law through the Human Rights Act of 1999. The question before the Supreme Court was whether the lawsuit was admissible.

The Supreme Court's majority (4 out of 5 judges) concluded that the Dispute Act Section 1-3 do not allow for declaratory actions for violations of the Constitution. The Supreme Court unanimously agreed that claims of violations of the ECHR and ICCPR must be permitted, provided that the plaintiffs could demonstrate sufficient relevance of the claim.

The Dispute Act Section 1-3 states that lawsuits can only be brought for legal claims (office translation):

"(1) An action may be brought before the courts for legal claims.

(2) The claimant must demonstrate a genuine need to have the claim decided against the defendant. This shall be determined based on an overall assessment of the relevance of the claim and the parties' connection to the claim."

The majority's conclusion was primarily based on the assessment that claims of violation of the Constitution do not constitute a "legal claim" under the Dispute Act Section 1-3. This conclusion was derived from, among other things, the preparatory works of the constitutional amendments in 2014 and the preparatory works of the Dispute Act, considered in conjunction.

The majority's conclusion is based on a clear and logical reasoning, but it also provides grounds for debate. The dissenting opinion, which reaches the opposite conclusion (provided the case concerns constitutional provisions equivalent to provisions in the ECHR and ICCPR), is, in our view, worth highlighting. It points out several reasons why the majority's solution is problematic, particularly in paragraphs 80, 81, and 82.

• It is not reasonable that rights of higher domestic legal rank shall be subject to a different and less effective legal enforcement compared to equivalent rights in the ECHR and ICCPR (paragraph 80);
• The majority's solution may lead to a non-examination of provisions containing stricter requirements before a breach can be demonstrated, which in turn would imply that more serious violations are not examined (paragraph 81); and
• In practice, the domestic constitutional rights are overshadowed by the provisions in the ECHR and ICCPR , making it difficult to interpret, clarify, and develop these constitutional rights (paragraph 82).

The majority's conclusion is the current law. The consequence of the judgment is that it is not possible to obtain a declaratory judgment for violations of the Constitution.

The ruling (HR-2024-826-A) can be read here (in Norwegian only).

For context, a transaltion of the Norwegian constitution can be found here.

Ruling from the Oslo District Court on revocation and prohibition of marketing and sale of "Freia Boble"

On 7 June 2024, the Oslo District Court issued a judgment in a case between Orkla Confectionery & Snacks Norge AS and Mondelez Norge AS. The case concerned a claim for revocation and prohibition of marketing and sale of Mondelez's chocolate product "Freia Boble," as well as a claim for compensation. The case has received extensive media coverage.

The main issue in the case was whether the blue colour Pantone 2144 C had acquired protection as a source identifier for porous milk chocolate from Nidar/Orkla (Stratos) under the Trademarks Act and/or the Marketing Act, and if so, whether the packaging of Freia Boble infringed this protection.

The court first assessed whether the blue colour Pantone 2144 C had acquired distinctiveness as a trademark for Stratos. Orkla had previously been denied registration by the Board of Appeal for Industrial Property Rights ("KFIR") for Pantone 2144 C within the category of "chocolate" (KFIR-2024-5). Before the district court, distinctiveness was claimed only for the limited product category of "porous milk chocolate." This narrowing had several implications. It led to a significant increase in Stratos' market share, which from 2000 to 2022, ranged from 6.9% to 13.5% for "chocolate bars" and from 64% to 100% for "porous chocolate." With the exception of Freia's porous chocolates in 2000 and 2012-2017, there was no other significant provider of porous milk chocolate in Norway during the years 2000-2022 or earlier.

After an overall assessment of presented market surveys, as well as Stratos' marketing and dominant market share over time, the court concluded that Pantone 2144 C was sufficiently well-known as a distinctive feature for Orkla's porous milk chocolate. The court found no basis for Mondelez's argument that the relevant consumer group would perceive the colour Pantone 2144 C as an indicator of air or porous milk chocolate in general. The court relied, among other things, on presented market surveys revealing that 71% of the test group associated Pantone 2144 C with Stratos/Nidar/Orkla. Despite the high threshold for trademark protection of colours, the conditions for distinctiveness were considered fulfilled.

To our knowledge, this is the first time a colour mark has been granted trademark protection under Norwegian law. Previous attempts, such as the attempt to obtain trademark protection for the purple shade Pantone 2587 C, have not been successful, as evident in the Supreme Court's judgment on 11 December 2017 regarding the use of the purple shade Pantone 2587 C for medicinal products.

The court then assessed whether the packaging of Freia Boble infringed Orkla's rights to the "Stratos blue" under the general clause in section 25 the Marketing Act and section 4 of the Trademarks Act. The court found that Mondelez deliberately chose a blue colour resembling Stratos' blue shade to take advantage of consumers' association with the market-leading Stratos' porous milk chocolate. This was considered an unfair exploitation of Orkla's efforts and results, while exposing the "Stratos blue" to the risk of degeneration and creating a false impression of a commercial collaboration between the parties. Therefore, the court concluded that the use of the packaging was in violation of the Marketing Act Section 25.

Furthermore, the court concluded that the packaging of Freia Boble infringed Orkla/Stratos' established exclusive right to use Pantone 2144 C under section 4(1)(a) of the Trademarks Act, as the colour difference between the packaging and the "Stratos blue" was so miniscule that consumers would regularly overlook it when making a purchase. Orkla's claims for prohibition of sale and revocation were therefore granted, and Orkla was awarded a discretionary compensation of 20 million Norwegian kroner.

Mondelez has announced that they will appeal the judgment. (article in Norwegian)

The ruling (TOSL-2023-186489) can be read here (in Norwegian only).

The duty to disclose trade secrets in legal proceedings

We focus on two recent procedural decisions regarding the obligation to disclose trade secrets in lawsuits where the opposing party is a competitor. The background is that the Supreme Court has referred an appeal concerning this issue to a panel of five judges for consideration.

The first decision, which is the one to be considered by the Supreme Court, is a ruling from the Borgarting Court of Appeal on 8 January 2024. The case concerned the question of whether the defendant was obligated to disclose an unredacted version of the company's SkatteFunn application. The underlying main case involved a claim for compensation for economic loss in connection with the establishment and launch of a competing business. The plaintiff argued that the defendant had used the plaintiff's trade secrets in the establishment of their business, in violation of the Marketing Act and the Trade Secrets Act. The defendant had submitted a redacted version of the SkatteFunn application, but the plaintiff claimed that the redacted text could conceal evidence of the unlawful use of trade secrets.

The second decision was awarded by Borgarting Court of Appeal on 12 April 2024, and addressed whether the defendant was obligated to disclose specific accounting documentation. The underlying main case was the case between Orkla Confectionery & Snacks Norge AS and Mondelez Norge AS, referenced above, where Orkla demanded a halt to the sale of the chocolate product "Freia Boble", and compensation for unlawful sales. Orkla argued that the accounting documentation was necessary for the calculation of compensation based on "the profits obtained from the infringement", an alternative for compensation that was introduced into the Marketing Act and the Trademarks Act after legislative amendments in 2013.

Section 22-10 of the Dispute Act set out the exemption from disclosure of trade secrets and states that (office translation):

"A party or a witness may refuse to provide access to evidence that cannot be made available without disclosing a trade secret. However, the court may order that the evidence be made available when, after a balancing of interests, it finds it necessary."

Both of the mentioned decisions were based on the premise that the information constituted trade secrets. The question was whether disclosure was still "necessary." The court referred to previous Supreme Court precedents stating that such orders must be strongly justified, particularly when it comes to disclosing trade secrets to a competitor. In such cases, confidentiality and closed-door proceedings, an alternative under section 22-12 of the Dispute Act, would normally not be sufficient. Therefore, the threshold for demanding disclosure in cases between competitors is high.

In the specific assessments of disclosure, the Court of Appeal reached different conclusions in the two cases.

In the "SkatteFunn" decision, the balancing of interests led to the conclusion that the defendant was not required to disclose the unredacted SkatteFunn application. It was not sufficient, as argued by the plaintiff, that the document might contain "interesting information." The Court of Appeal believed that the plaintiff had not sufficiently specified what the information they were seeking consisted of. The interest in clarifying the case was therefore given less weight. Considering that the trade secrets were considered crucial for the defendant's future commercial activities, an assessment of the potential harm led to the conclusion that the information should not be disclosed.

In the "chocolate" decision, the balancing of interests led to the conclusion that Mondelez had to disclose the accounting documentation in question. As the accounting documentation contained information about Mondelez' sales of the disputed product, the consideration of case elucidation, including Orkla's ability to claim restitution as a compensation alternative, was given more weight than Mondelez's (legitimate) interest in not sharing sensitive sales information with a competitor.

It will be interesting to see the outcome of the Supreme Court's consideration of the "SkatteFunn" decision. The question of whether parties in lawsuits are obligated to disclose trade secrets, and the balance between the legitimate interest parties have in keeping business-sensitive information confidential and the interest in clarifying the case is a practical issue that frequently arises in civil cases. We will follow the development and keep you updated.

Ruling I (LB-2023-149747) can be read here (in Norwegian only).

Ruling II (LB-2024-53756) can be read here (in Norwegian only).

Arbitration in the Nordic region – NOMA Rules and Best Practice

Thommessen observes a trend towards commercial disputes being increasingly resolved through arbitration rather than by ordinary court proceedings. In arbitration, the parties can appoint a panel of arbitrators with the desired expertise and experience. It is also becoming increasingly common for arbitration cases to be prepared and conducted different from the "Norwegian tradition." In short, arbitration is nowadays more often characterized by a front-loaded case preparation phase with a clear path for the arbitral proceedings.

The Nordic Offshore and Maritime Arbitration Association (NOMA) Rules and Best Practice provide a good framework for conducting commercial arbitration cases in a predictable and cost-effective manner. Despite having "Offshore and Maritime" in its name, the rules are well-suited for all types of commercial disputes. They facilitate a binding schedule with much less avenues available for what we may call "unnecessary tactical play".

In an article from April 2024 - Lessons learned - Time and Cost Efficiency in NOMA Arbitration - two lawyers from the Danish law firm Hafnia write that parties in arbitration cases in London (LMAA London arbitration) "often find themselves bugged down by costs even in smaller cases". London arbitrations are characterized by what sometimes is called "Pleading Style," with extensive written submissions in separate phases for the parties' arguments, disclosure of evidence, written witness/expert statements, and written closing submissions before a (potential) oral hearing. This differs from the Nordic tradition
or Nordic best practice, where it has become common to have a more front-loaded preparation phase where arguments, evidence, and statements/reports are presented at once.

Hafnia has found NOMA arbitration to be "overwhelmingly positive in terms of speed and cost efficiency". Often, awards have been rendered within nine to ten months after the case was initiated. Thommessen has similar experiences.

We therefore endorse and highlight Hafnia's conclusion:

"It should not be difficult to ‘pitch’ NOMA arbitration to more users and adopt NOMA arbitration clauses in more contracts knowing that the average arbitrator’s fee can be less than DKK 100,000 with a lead time of approximately 9 months from Notice of Arbitration until the parties hold the award in hand."