UK: Advocate General Gives Opinion On Exhaustion Of Rights

Last Updated: 6 June 2001
Article by Sahira Khwaja

Introduction

On 5 April 2001, Advocate General Stix-Hackl delivered her Opinion (available at www.curia.eu.int) on the questions referred to the European Court of Justice by the English High Court in Davidoff, Levi Strauss v Tesco and Levi Strauss v Costco & Others. The ECJ, which usually follows its Advocate General's Opinions, will deliver its full judgment later this year.

These cases raised once again the problem of the principle of exhaustion of the rights conferred by a trade mark under Article 7 of the EC Trade Marks Directive, in the context of parallel imports, and the interpretation of the concepts of consent and legitimate reasons of the owner of the trade mark to oppose marketing of trade marked goods in the EEA.

In 1998, in Silhouette v Hartlauer [1998] ECR I-4799, the ECJ had held that a trade mark owner could prevent the importation of goods into the EEA if he had not "consented" to the imports. The Court elaborated on this in Sebago v. GB Unic SA [1999] ECR I-4103, holding that trade mark rights were only exhausted if the trade mark owner had consented to the placing on the market in Europe of each item.

In an English case, Zino Davidoff SA v. A&G Imports [1999] 3 All ER 711, Davidoff sold or consented to the sale of genuine Davidoff perfume and aftershave, which bore its registered trade marks, in Singapore. Bar codes, containing source information, had been affixed to the products in accordance with Davidoff's obligations under the EC Cosmetics Directive.

A&G Imports Limited bought the goods and somewhere along the distribution chain, the bar codes were removed. When Davidoff sued for trade mark infringement, A&G alleged that Davidoff had impliedly consented to the importation of the goods into the EEA. Laddie J concurred, and held that, unless express instructions confirming that no such consent had been given were imposed on all parties in the distribution chain, Davidoff was presumed to have consented. Nevertheless, he decided that the proper construction of aspects of Articles 7(1) and (2) had not been determined and so referred a set of extremely detailed questions to the ECJ. ([2000] 2 CMLR 750).

In two unrelated trade mark infringement cases, Levi Strauss & Co and its licensee had refused to supply jeans bearing its marks to the UK's leading supermarket chain, Tesco, or to Costco UK Ltd, a membership-only discount warehouse chain. Tesco and Costco accordingly obtained them from other suppliers, including some who sourced their goods from North America, and none of whom stipulated where the goods could be sold.

Tesco and Costco both argued that they had an unlimited right to sell the jeans wherever they wished, whilst Levi Strauss said that it had imposed contractual restrictions on the resale of the jeans in North America, effectively prohibiting their importation into the EEA. Again, the English High Court decided that the cases raised fundamental questions on the meaning of "consent" in Article 7(1) and referred the matter to the ECJ (OJ 2000 C79 18/03/2000), which decided to join the three cases.

Article 7 Of The Directive

The concept of exhaustion of rights is spelled out in Article 7(1), which states that:

"The trade mark shall not entitle the proprietor to prohibit its use in relation to goods which have been put on the market in the Community under that trade mark by the proprietor or with his consent."

The effect of Article 7(1) can be negated by Article 7(2) where:

"there exist legitimate reasons for the proprietor to oppose further commercialisation of the goods, especially where the condition of the goods is changed or impaired after they have been put on the market."

In Davidoff, Laddie J had decided that consent within the meaning of Article 7(1) should be construed on the basis of the law applicable to the first contract in the distribution chain. The Advocate General initially rejected this argument because of the practical difficulties it would cause. She also thought that such an approach was contrary to the directly stated objectives of the Directive as it was likely to re-import international exhaustion and impede the harmonisation of European trade mark laws. "Consent" should therefore be interpreted under Community law rather than under the relevant national law governing a particular contract.

The Advocate General then reviewed the case law concerning the condition of consent in relation to exhaustion of rights. She concluded that, as Article 7(1) draws a distinction between the marketing of goods by the trade mark proprietor or with his consent, "consent" must be more than the expression of legal intent necessary to conclude a contract. Consent is the action attributed to the trade mark proprietor which allows the legal consequences arising from exhaustion to take effect and which prevents him impeding the free movement of goods by artificially partitioning the market. The aim of the Community's national courts should be to determine objectively whether consent was given, although this is subject to the condition that he had or could have had an opportunity to exercise his right to first market the goods bearing the trade mark within the EEA.

This right should however be balanced against general commercial interests, including those of the parallel importer. Consent under Article 7(1) solely relates to this exclusive right and control over marketing so that the proprietor should only be able to counter parallel imports if he had not yet exercised his exclusive right to control marketing of the goods within the EEA or had been unable to do so. A third party cannot therefore assume that the proprietor has consented to goods being placed on the market or has waived his right to do so, although he will not be protected if he has simply failed to act.

In order to determine whether the proprietor had exercised consent or had been given an opportunity to do so, it was crucial to determine who was responsible for the distribution chain. The national court, having regard to Community law, would have to balance the requirements of free movement of goods against the need to protect the trade mark and examine whether the trade mark proprietor’s conduct, in all the circumstances of the case, could sufficiently justify a subsequent purchaser’s belief that the proprietor had waived the exercise of his trade mark rights in the EEA. The court would then have to consider its conclusion against the principle of Community wide exhaustion rights set out in Article 7(1) so that it was not made practically impossible for the trade mark proprietor to rely on his exclusive right to first marketing in the EEA.

Batch/Bar Codes And Article 7(2)

The Court was also asked by the English High Court in Davidoff whether there were circumstances in which the removal or obliteration of a batch code number affixed to a product in pursuance of a statutory obligation could be treated as a "legitimate reason" within the meaning of Article 7(2).

In Davidoff, the batch code numbers had been damaged or erased so that it would be more difficult for Davidoff to trace the goods. The Advocate General considered that "legitimate reasons" in the context of Article 7(2) would mean that further sales of the goods bearing the trade mark would affect the essential function of the trade mark in a way that the trade mark proprietor could not be expected to tolerate. Such sales must be liable to damage seriously the value, allure or image of the trade mark.

The Advocate General concluded that, in the absence of other repackaging or relabelling, damage to bar codes would only be relevant if it had a disproportionately adverse effect on the specific subject matter of the trade mark. This was the only case where an infringement of the EC Cosmetics Directive would be directly relevant to trade mark rights although the Advocate General thought that the position might be different if such an infringement imposed criminal liability on the trade mark proprietor.

Conclusion

Brand owners who felt that the English Courts' attitude was out of step with other jurisdictions, may take some comfort from this Opinion. In Davidoff & Joop v M&S Toiletries Ltd [2000] 2 CMLR 750, on facts almost identical to those in the English Davidoff case, the Scottish court reached the opposite, and perhaps more orthodox, conclusion and was altogether less tolerant of parallel importers' efforts to demonstrate consent. An appeal against this decision was unfortunately abandoned on 29 May 2001, just before it was due to be heard, and so the Advocate General's Opinion will not now be tested until the ECJ issues its judgment later this year.

Until then, brand owners would be wise to review their standard terms and conditions to check that they have not consented, or apparently waived their right to consent, to the importation of trade marked goods in to the EEA. Parallel importers should assess critically whether they will be able to prove that such consent, or a waiver equivalent to it, was given.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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