UK: Further Clarification of Exhaustion of Rights

Originally published November 2005

Following on from the decision of Peak Performance late last year, the European Court of Justice has provided further clarification on the important question of the exhaustion of trade mark rights in the European Union.

What the law says

Under Article 5(1)(a) of the European Trade Mark Directive, a trade mark registration gives the proprietor of that registration the exclusive right to prevent third parties not having its consent from using in the course of trade any sign which is identical with the trade mark in relation goods or services which are identical with those for which the trade mark is registered. Articles 5(3)(b)(c) state that offering the goods, or putting them on the market or stocking them for these purposes under that sign, or offering or supplying services thereunder and importing the goods under the sign constitutes use of the sign for the purposes of Article 5(1).

However, the rights of the trade mark proprietor are constrained by the exhaustion of rights provisions of the Directive. Article 7(1) states that the trade mark registration shall not entitle the proprietor to prohibit its use in relation to goods which have been put on the market in the Community (the definition of which extends to all members of the European Economic Area (EEA)) under the trade mark by the proprietor or with his consent. The right to oppose any subsequent sale is thereby exhausted.

Essentially what the above provisions mean is that the trade mark proprietor can benefit from the first sale of goods under the registered trade mark in the EEA and no more. Such provisions are designed to enable the free movement of branded goods within the EEA and prevent trade mark proprietors from partitioning the EEA by use of national trade mark rights. However, the exhaustion of rights principle, as established by case law, is not global. A 'Fortress Europe' policy applies, as the use of a trade mark outside the EEA does not exhaust the proprietors trade mark rights in the EEA and although the parallel importation of goods within the EEA is allowed, it is prevented from outside the EEA.

Although the above provisions might seem simple, matters are not so straightforward. The Peak Performance case established that the mere intention to sell branded products within the EEA is not enough to exhaust the trade mark proprietors rights, the products must have been 'put on the market' in the Community and sales must have taken place for exhaustion to have occurred. However, what happens when branded goods are simply in transit on the way through the EEA? Can the mere storage of branded goods in the EU for onward transit outside be interpreted as being 'use of a sign in the course of trade' and if so could a parallel trader thus be held to infringe the rights of the trade mark proprietor in the EEA?

The GlaxoSmithKline Group, via its subsidiary companies, SmithKline Beecham and the Beecham Group ('SmithKlineBeecham'), are the proprietors of Community and Benelux Trade Mark Registrations for the mark Aquafresh for toothpaste. In February 2002, Class International brought into Rotterdam in the Netherlands a container full of Aquafresh branded toothpaste bought from a South African undertaking, Kapex International. GlaxoSmithKline being informed that the products could be counterfeit had the container impounded in March 2002. An examination carried out on the goods in April 2002 established that products were genuine and not counterfeit and ultimately would have originated from GlaxoSmithKline. Class International applied for the container to be released and for an order against GlaxoSmithKlineBeecham for the damages it had suffered as a result of the impoundment. Class International's application was rejected by an order of 24th May 2002.

Class International appealed the decision to the Regional Court of Appeal in The Hague arguing that the goods were merely in transit through the EEA. The Regional Court noted that no evidence had been provided of the identify of the ultimate purchaser of the products, but felt that such important questions were raised by the case concerning the transit of goods through the EEA that it referred the matter to the European Court of Justice ('ECJ').

The Community Customs Code allows the movement from one point to another within the Community customs territory of 'non-Community goods' without such goods being subject to import duties or commercial policy measures. Non-community goods being those goods not already put onto the EU market. Further, the Customs code states the customs warehousing procedure shall allow the storage in customs warehouses of 'non-Community goods' without such goods being subject to import duties or commercial policy measures.

It will be recalled that the trade mark proprietor can object to the importation of goods carrying the trade mark into the EEA if he has not consented to such use. However, does the mere transit of goods through the EEA or the holding of goods within EEA customs warehouses constitute importation into the Community? In short, the ECJ stated that the answer to that question was no, if the offering or sale of such goods is to destinations outside the EU.

The ECJ held that the entry of non-Community goods for customs procedures, such as external transit or warehousing, is distinguishable from placing them under the customs procedures of release for free circulation, which pursuant to the Customs Code would effectively convert non- Community goods into Community goods under the customs procedures. Unless the trader in question actively takes the decision under the Customs Code to convert non- Community goods into Community goods, then importation into the Community is deemed not to have occurred and the trade mark will be deemed not to have been used in the course of trade in the EEA.

The ECJ further held that a real and permanent 'risk' that the goods could be released into free circulation into the Community was not sufficient to deem the goods had been imported. The onus of proof is on the trade mark proprietor that goods are to be released into circulation as Community goods. The fact that Class International could not specifically identify the customers who were to purchase the goods following the onward transit outside the Community was not sufficient to deem the goods as being Community goods.

The conclusions of the Peak Performance and Class International decisions would appear to be consistent. The mere intention to place branded goods on the market is not sufficient for the exhaustion of rights. Similarly, the mere transit of goods through the EEA for onward sale outside the EEA or holding them in EEA customs warehouses was not use of a sign, providing that the goods are not released into free circulation into the EEA and the onus is on the trade mark proprietor to prove that the goods in question are to be released into free circulation.

It will also be recalled in the Peak Performance case that the ECJ held that the fact the trade mark proprietor had placed contractual obligations on the purchaser of its goods that they were not be sold in the EEA was irrelevant to the question of exhaustion of rights. The important question is whether the goods in question are ever sold in the EEA, if they are then the rights of the trade mark owner have been exhausted. Therefore, if you are a trade mark owner or act for a trade mark owner who is selling surplus branded stock manufactured or marketed outside the EEA and do not wish such goods to be released into the Community it would wise not only to impose contractual obligations on potential purchasers of the stock, but also make sure that such goods stay within Community customs warehouses, if they enter the EEA on transit (which effectively means the goods remain 'non-Community goods' for customs purposes) and make sure they do not enter into free circulation within the Community before they are released for importation into non-member states of the EEA.