European Union: Court Of Justice Clarifies Exhaustion Of Trademark Principles And Broadens Test For Economic Links Between Trademark Owners

On 20 December 2017, the Court of Justice of the European Union ("ECJ") handed down its judgment in Case C-291/16 Schweppes v Red Paralela and Others. The ECJ held that the owner of a trademark may not oppose the parallel importation of goods bearing an identical trademark but originating in another Member State in circumstances where the owner has assigned the parallel trademark to a third party but is responsible for maintaining the image and impression of a unified global trademark.

In his non-binding opinion, Advocate General ("AG") Mengozzi had earlier proposed to develop the case-law on the exhaustion of trademark rights in the case of a voluntary fragmentation of parallel rights by significantly broadening the interpretation of 'economic links' between the parallel rights owners (see VBB on Competition Law, Volume 2017, No. 9, available at www.vbb.com).

The ECJ now largely follows AG Mengozzi's views. It concludes (i) that the trademark owner's rights are exhausted if it promotes, independently or in coordination with a parallel trademark holder, the appearance of a single global trademark; and (ii) that economic links will exist between parallel rights holders if they coordinate their commercial policies in such a way as makes it possible for them to determine, directly or indirectly, the goods to which the trademark applies and to control the quality of those goods.

Facts

The Coca-Cola Company ("TCCC") owns the Schweppes® brand in the United Kingdom and in ten other EU Member States, while Orangina Schweppes Holding BV ("OSHBV") owns the brand in Spain and in 16 other EU Member States. Schweppes SA ("Schweppes") is the exclusive licensee of the Schweppes® brand in Spain. This fragmented situation arose in the late 1990s as a result of the Commission's objection to the transfer of the Schweppes trademarks in all Member States to TCCC alone.

Schweppes took issue with parallel imports of UK products into Spain (and therefore TCCC-originated) and commenced proceedings in Spain against Red Paralela, the main parallel importer, as well as OSHBV. In the main proceedings, Red Paralela counterclaimed that Schweppes had committed acts of unfair competition and acted in breach of Article 101 TFEU by making agreements with suppliers to restrict parallel imports of Schweppes®-branded products.

This counterclaim was withdrawn when the Spanish Competition Authority began an investigation into Schweppes's behaviour. That investigation concluded without a finding of infringement after Schweppes agreed to a number of amendments to the agreements. These were: first, that the restriction of parallel imports would concern only products originating in the UK and manufactured by TCCC; second, that the scope of any future agreements would be similarly restricted to UK products; and third, that, in relation to on-going judicial proceedings in which Schweppes was challenging certain distributors, Schweppes would similarly limit its arguments and urge the court to rule in a manner consistent with this commitment (see VBB on Competition Law, Volume 2017, No. 7, available at www.vbb.com). While this appeared to be consistent with the settled case law of the ECJ on the principle of exhaustion, the ECJ's judgment appears to extend the principle more broadly.

Judgment

The referring Spanish court sought guidance as to the scope of the principle of exhaustion provided for by Article 7(1) of Directive 2008/95/EC and Article 15(1) of Directive 2015/2436. These articles are identical and provide that a trademark does not give its proprietor the right to prohibit its use in relation to goods which have been put on the market in the Union under that trademark, whether by the proprietor itself or with its consent. The case law has established that the proprietor's consent includes situations in which the trademarks have a common origin (Case 192/73 Van Zuylen, but reversed in Case C-10/89 HAG GF), or are held by 'economically linked' entities (Case C-9/93 IHT Internationale Heiztechnik). Conversely, if a trademark is no longer under 'unitary control' (e.g., as a result of an assignment limited to specific territories), the original proprietor of the mark loses the ability to regulate the quality of products manufactured in territories controlled by the new proprietor and therefore cannot be considered to have given its consent to their commercialisation (Ibid.)

In essence, the ECJ develops the principle of exhaustion to cover branded products whose trademarks do not have common ownership but are nonetheless considered to be 'economically linked' in substance if not in form.

  1. Principle of exhaustion and 'essential function' test

The ECJ reiterates that the essential function of a trademark is to guarantee the identity of the origin of the trademarked product to the end user. The end user may thereby distinguish that product from goods which originate elsewhere. If, however, a trademark owner has assigned some parallel national trademarks to a third party but continues to promote the trademark as a single global trademark, there will be increased confusion on the part of the consumer as to the commercial origin of the products. This confusion is inconsistent with the essential function of the trademark. If the trademark can no longer fulfil its essential function for this reason, then the trademark owner is deemed to have itself compromised or distorted that essential function and its trademark rights are exhausted. The ECJ clarifies that merely evoking the common historical geographical origin of the parallel trademarks does not, however, deprive the trademark of its essential function.

  1. Principle of exhaustion and 'economic links' test

Even if the trademark owner has not promoted the image of a single global trademark, the principle of exhaustion may still apply if there are 'economic links' between the trademark owner and the parallel trademark holder.

In IHT Internationale Heiztechnik, the ECJ held that the principle of exhaustion applies, 'where the owner of the trade mark in the importing State and the owner of the trade mark in the exporting State are the same or where, even if they are separate persons, they are economically linked. A number of situations are covered: products put into circulation by the same undertaking, by a licensee, by a parent company, by a subsidiary of the same group, or by an exclusive distributor.' The ECJ confirms that the "concept of 'economic links [...] refers to a substantive, rather than formal, criterion". What matters is not the form of the parties' relationship but rather the effects of their relationship. In the case at hand, for instance, Schweppes and TCCC were legally distinct businesses and independent of each other.

For the ECJ, the decisive factor is the possibility of determining, directly or indirectly, the goods to which a trademark is affixed and of controlling the quality of the goods in question. This, it held, may arise in the case where, following the division of national parallel trademarks resulting from a territorially limited assignment, the owners of those trademarks coordinate their commercial policies or reach an agreement to exercise joint control over those goods. It is not necessary that such control is in fact exercised: the mere possibility is sufficient. This appears to be a development of the principle in IHT Internationale Heiztechnik in a direction which points to an increased erosion of trademark rights.

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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