Abstract
Distinctive signs indicate to the informed user about the origin of a product and this has certainly been the case in relation to trademarks after the liberalisation of trade within the European Economic Community (EEC) in 1957. The way in which trademarks differ from other Intellectual Property Rights is manifold; they provide incentive for proprietors or entrepreneurs to invest in the quality of the goods and services offered enabling consumers to for example identify the origin of products and likewise for consumers and/or proprietors to be associated with a specific brand image.
The notion of exhaustion stipulates in Article 15.1 of the Trade Mark Directive (2015/2436) “A trade mark shall not entitle the proprietor to prohibit its use in relation to goods which have been put on the market in the Union under that trade mark by the proprietor or with the proprietor's consent.” The middle-ground between national exhaustion and international exhaustion is the doctrine of regional exhaustion, applied within the EU. Within the EU, once trademarked goods enter the European Union, from a non-EU country, then they are regionally exhausted, i.e. thereafter the proprietor of the goods cannot decide (in most cases, such as in the case of parallel imports, which we shed light on further on in this research) in which country the goods may be marketed or sold within the European Union.
Chapter 1 Introduction
Free movement of goods, services, persons and capital are cornerstones under EU Law whereby Articles 34 and 35 of the Treaty on the Functioning of the European Union (‘TFEU’) guarantee free movement of goods stating that “Quantitative restrictions on imports [exports]1 and all measures having equivalent effect shall be prohibited between Member States”.2 Articles 11 and 12 also guarantee free movement of goods under The Agreement on the European Economic Area (‘EEA agreement’). Article 36 of the TFEU, however, draws an exception to the free movement of goods within the EEC, stating that “The provisions of Articles 34 and 35 shall not preclude prohibitions or restrictions on imports, exports or goods in transit justified on grounds of [...]the protection of industrial and commercial property. Such prohibitions or restrictions shall not, however, constitute a means of arbitrary discrimination or a disguised restriction on trade between Member States.”
Now that it is established that free movement of goods is a cornerstone under EU law, the focus of this essay will mainly be on the exception to the free movement of goods as encapsulated within Article 36 of the TFEU, notably the exception of “protection of industrial and commercial property.” Under Article 36 of the TFEU, trademark exhaustion and legitimate parallel trade lies that determines the rules of a trademarks’ economic distribution within the EU. Trade mark exhaustion can thus be considered to be a compromise between will of the proprietor for his Trademarked goods to be marketed or sold or within a member state (i.e. trademark resale doctrine )and the restriction of a single or free [community] as enshrined in Articles 34 and 35 of the TFEU. Hence, exhaustion presupposes that the goods have “been put on the market in the Union under that trade mark by the proprietor or with the proprietor's consent” (according to article 15.1 of the trademark directive).
It is important to note that Trade Mark Exhaustion and Parallel Trade go hand in hand in the sense that both the notions can either limit trade of a trademark and or promote its resale by retailers or via the medium of license distribution following the consent of the proprietor, naturally. In other words, scope for “legitimate” “reselling” (or parallel trade) of good that are subject to trademark protection, is a mirror image of the rules on exhaustion.
This research therefore purports or seeks to clarify both concepts by analysing trade of trademarked products within the EU and their prerequisites. 1.1 Background Distinctive signs indicate to the informed user about the origin of a product and this has certainly been the case in relation to trademarks after the liberalisation of trade within the European Economic Community (EEC) in 1957. The way in which trademarks differ from other Intellectual Property Rights is manifold; they provide incentive for proprietors or entrepreneurs to invest in the quality of the goods and services offered enabling consumers to for example to identify the origin of products and likewise for consumers and/or proprietors to be associated to a specific brand image. 3 “For those reasons, the conflict between the exclusive right and free competition is less acute in trade mark law than in other areas of IP: rather than restraining competition, trademarks are an enabling tool without which meaningful competition would hardly be possible.”4 In turn, this also enables consumers to identify and distinguish goods, one from the other.
The father of Intellectual Property, namely: Josef Kohler5 coined what is now known to be the rule of exhaustion. According to Kohler’s view, exhaustion rights are important as they define the balance of power between firstly, the proprietor or producer of a product and secondly, the owner of the proprietors copy where the latter should be free to resell the goods as they are rightful owners of that property. Beier, on the other hand came to the conclusion that, “Concerning the interest of trademark owners in preventing parallel imports the decisions make it clear that in all instances, (…) the main purpose of a trademark infringement action against a parallel importer is to protect the marketing system in the import country from disturbance through the presence of undesired imports.”6
1.2 Purpose and Research questions
The purpose of this essay is to describe and analyse the prerequisites and scope of trademark exhaustion in EU Law, and to describe and analyse the related possibility of legitimate parallel trade within the EU. 1. What are the prerequisites and scope of trademark exhaustion in EU Law? 2. What are the related prerequisites and scope of legitimate parallel trade within the EU?
Chapter Outline
Chapter 1 – I mention one of the pillars of the TFEU or the European Union is the free movement of goods under EU law. The exception to the free movement of goods as encapsulated within Article 36 of the TFEU, notably the exception of “protection of industrial and commercial property.” Under Article 36 of the TFEU, trademark exhaustion and legitimate parallel trade lies that determines the rules of a trademarks’ economic distribution within the EU. Chapter 2 – I explain and elucidate the notions of Trade Marks, Trademark Exhaustion (First sale doctrine, parallel imports. Relevant legislation, cases and views of scholars are expressed pertaining to the aforementioned notions. Chapter 3 – In this chapter, I discuss the three forms of exhaustion, namely, national, regional and international exhaustion, delimitating their differences and, or similarities. Key topics to exhaustion are explained in detail, such as, - Acts leading up to exhaustion, - The necessity of consent of the proprietor, - Who bears the burden of proof and finally, - Damage to reputation: An exception to the main rule of Exhaustion Several seminal CJEU cases are presented with judgments that revolve trade mark exhaustion and parallel related to the aforementioned notions Chapter 4 – Here, I sum up my findings based on the body of my essay noting that Trade Mark Exhaustion and Parallel Trade go hand in hand in the sense that the both notions can either limit trade of a trademark and or promote its resale by retailers or via the medium of license distribution following the consent of the proprietor, naturally. 7
Chapter 2 Trademarks in general
The fundamental legal principles of European Trademark Law rest on two structures: the Trade Mark Directive (TMD)7 and the Community Trade Mark Regulation (CTMR)8 . A definition of protectable subject matter, ‘signs of which a EU trade mark may consist’ of is enshrined within Article 4 CTMR and Article 3 TMD. These signs are capable of being represented graphically, and they must be capable of distinguishing the goods or services of one undertaking from those of other undertakings. To add to this, there exists a non-conclusive types pf protectable signs capable of being trademarks.
Within the EU TMD Article 3, the directive applies to ”Signs of which a trade mark may consist A trade mark may consist of any signs, in particular words, including personal names, or designs, letters, numerals, colours, the shape of goods or of the packaging of goods, or sounds, provided that such signs are capable of: (a)distinguishing the goods or services of one undertaking from those of other undertakings; and (b)being represented on the register in a manner which enables the competent authorities and the public to determine the clear and precise subject matter of the protection afforded to its proprietor. Article 4 of the TMD consists of a substantive list of grounds for refusal or invalidity of a trademark. The notion of exhaustion or ‘first sale’ doctrine within the EU is dependent upon Article 15 of the trademark directive stating:
“1. A trade mark shall not entitle the proprietor to prohibit its use in relation to goods which have been put on the market in the Union under that trade mark by the proprietor or with the proprietor's consent. 7 Directive (EU) 2015/2436 of the European Parliament and of the Council of 16 December 2015 to approximate the laws of the Member States relating to Trade Marks. 8 Regulation (EU) 2017/1001 of The European Parliament and of the Council on the European Union Trade Mark.8 And the exception to the main rule under the same article, stating the 2. Paragraph 1 shall not apply 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.” One can state that in the national ‘first sale approach,’ the free movement of the trademarked goods is ‘limited’ or more ‘strict’ ‘conservative’ due to that the proprietor can control where their trademarked goods may be sold or marketed or where the first sale of the good(s) has occurred.
In other words, the trade mark proprietor can control in which country their goods may be sold and marketed and thereby the goods are restricted of being sold outside of the country where the first sale occurred. 9 On the other hand, following the international exhaustion doctrine, the proprietor does not have the ability to control where there goods are marketed and sold, and hence, the goods have become ‘internationally exhausted’ i.e. can be sold and marketed worldwide. International exhaustion is the ultimate and broadest form of exhaustion and takes the least trade restrictive stance in comparison to the other two doctrines. In the latter form, the trademark proprietor does not have much control over the sale or marketing of their goods or services and thus limits their freedom to control the marketing and sale of their product.10 The middle-ground between national exhaustion and regional exhaustion is the doctrine of regional exhaustion, applied within the EU.
Within the EU, once trademarked goods enter the European Union or in relation to goods which have been put on the market in the Union under that trade mark by the proprietor or with the proprietor's consent., from a non-EU country, then they are regionally exhausted, i.e. thereafter the proprietor of the goods cannot decide (in most cases, such as in the case of parallel imports, which we shed light on further on in this research) in which country the goods may be marketed or sold within the European Union.
With the introduction of the TMD the European commission introduced the doctrine of exhaustion within the EU to set up barriers as towards countries outside of the EU, firstly to set up the single market and to be able to regulate trade within the EU, however, with some exceptions in regards to pharmaceutical products which will be discussed below.
Chapter 3 The Notion of Exhaustion and Parallel imports
Parallel imports-trade occurs when and where a proprietor of trademarked goods has not consented to their goods to be imported to a certain area11 [within the EU]. Therefore, when the trademark protections to the goods in question have been exhausted, then the goods may be re-sold – i.e. be subject to parallel trade (including imports) in the geographical area that is subject to the exhaustion. Parallel imports pharmaceutical products has been a long-standing issue within the EU. “The point of parallel imports of pharmaceuticals is arbitrage between countries with different prices. For several years, an important issue in the European Union (EU) has been the evident conflict between differing price regulations in the member states, on the one hand, and the consequences of parallel trade, on the other. In the EU, so long as the manufacturer has placed the good on the market voluntarily, the principle of free movement of goods allows individuals, or firms within the EU to trade goods across borders, without the consent of the producer.“12 A seminal case which elucidates parallel importation prerequisites is the Schweppes case13.
In the Schweppes case, the Schweppes Group held the exclusive rights of the trademark Schweppes in Spain whereas the Coca-Cola Group held exclusive rights over the Schweppes Brand in the United Kingdom. The Schweppes Group, after many restructuring instances of the company faced some unique issues with regards to some trade mark issued, yet in another EU country. The Coca-Cola Group of the United Kingdom started marketing and selling Schweppes products in Spain under the same Brand Schweppes through its distributors or licensees known by the name of Red Paralela in Spain. The Spanish S.A, Schweppes Group brought an action against Red Paralela under an infringement action claiming that the sale of the tonic water by the latter was an infringement of the Schweppes brand in Spain as they according the Schweppes S.A has the exclusive right of re-sale and marketing in Spain.
However, according the Red Paralela they had not infringed any rights of Schweppes S.A as this constituted exhaustion of the rights of the trademark Schweppes Group in the territories in which it is the proprietor of the Schweppes trade mark, such as Spain, with the result that the Schweppes Group had no basis to challenge the marketing in Spain of the products of the brand ‘Schweppes’ of the Coca-Cola Group. In their Judgement, the CJEU ruled in favour of the Red Paralela (licensees of the Coca-Cola group) stating: “38 The essential function of the trade mark would be jeopardised if, failing any consent on the proprietor’s part, that proprietor could not oppose the import of an identical or similar product bearing an identical trade mark or one liable to lead to confusion, which had been manufactured and put into circulation in another Member State by a third party having no economic link with that proprietor. 14 4715
Indeed, if such proprietors were permitted to protect their territories against the parallel import of those goods, that would lead to a partitioning of the national markets which is not justified by the purpose of trade mark rights and is, in particular, unnecessary in order to preserve the essential function of the marks concerned. 4816 Thus, in the circumstances described in paragraph 46 above, it must be held that the product was put on the market in the exporting Member State with the consent of the holder of the trade mark rights protected by the importing Member State, within the meaning of Article 7(1) of Directive 2008/95, read in the light of Article 36 TFEU.
Hence, two limitations of trademark exhaustion were created , namely; (i) the proprietors have not, actively and deliberately, continued to promote the appearance or image of a single global trade mark, thereby generating, or increasing, confusion on the part of the relevant public as to the commercial origin of the goods; (ii) there are no “economic links” between the proprietors, in the sense that they coordinate their commercial policies or that they have agreed to exercise joint control over the use of the trade mark, so that it is possible for them to determine, directly or indirectly, the goods in which said trademark appears and to control its quality.17
In a nutshell, the case of the facts are whether low-class brand, Hartlauer who had imported out of fashion sunglasses from Bulgaria (who at that time was not a part of the EU) and the question arose whether the retailer Hartlauer could set up a country-wide press campaign to advertise the sunglasses of high-class brand and Trademark Silhouette. Silhouette had previously brought proceedings against Hartlauer for tarnishing the image and reputation of Silhouettes brand. The case was heard in the Austrian Supreme Court asked for a preliminary ruling from the CJEU with regards to the interpretation of then Article 7(1)19 on the following basis:
1. Is Article 7 (1) of the First Council Directive of 21 December 1988 to approximate the laws of Member States relating to trade marks to be interpreted as meaning that the trade mark entitles its proprietor to prohibit a third party from using the mark for goods which have been put on the market under that trade mark in a State which is not a contracting state?
2. May the proprietor of the trade mark on the basis of Article 7 (1) of the Trade Marks Directive alone seek an order that the third party cease using the trade mark for goods which have been put on the market under that mark in a State which is not a Contracting State? “ The Court of Justice of the European Union ruled in favour of high-class brand Silhouette, settling (prior to the enactment of the First Trademark Directive) that, within the EU member states must prohibit parallel imports coming from non-EU countries.
This approach gave term to the notion “Fortress Europe” for setting up barriers to trade from outside of Europe. As stated in its judgement. “(26) . . . the [TMD] cannot be interpreted as leaving it open to the Member States to provide in their domestic law for exhaustion of the rights conferred by a trade mark in respect of products put on the market in non-member countries. (27) This . . . is the only interpretation which is fully capable of ensuring that the purpose of the [TMD] is achieved, namely to safeguard the functioning of the internal market. A situation in which some Member States could provide for international exhaustion while others provided for Community exhaustion only would inevitably give rise to barriers to the free movement of goods and the freedom to provide services.”
A case which reiterates the notion of a fortress Europe being set is Sebago Inc. and Ancienne Maison Dubois. Even this case states that Member States of the EU shall not apply international trademark exhaustion. However, another notion which the case clarifies is that exhaustion shall only be applied to individual products that are marketed and sold within a Member state and that exhaustion does not apply to similar products being sold to a third party of the same quality in the EU under the same trademark or brand name.
3.2 Acts leading up to exhaustion
In the Peak Holding Case22 it was established that merely importation of a trademarked good or product is not sufficient to amount to exhaustion of a good and that it has to be actually be sold within the EU. As stated below, the CJEU held that “(40) [Only a] sale which allows the proprietor to realise the economic value of his trade mark exhausts the exclusive rights conferred by the [TMD] . . . (41) On the other hand, where the proprietor imports his goods with a view to selling them in the EEA or offers them for sale in the EEA, he does not put them on the market . . . (42) Such acts do not transfer to third parties the right to dispose of the goods bearing the trade mark. They do not allow the proprietor to realise the economic value of the trade mark. Even after such acts, the proprietor retains his interest in maintaining complete control over the goods bearing his trade mark, in order in particular to ensure their quality . . . (44) [Therefore], goods bearing a trade mark cannot be regarded as having been put on the market in the European Economic Area where the proprietor of the trade mark has imported them . . . without actually selling them.”
3.3 Consent
In the joined cases of Zino Davidoff v Tesco,23 the CJEU found that even if inter alia the UK courts would imply the proprietor’s consent for the import into the UK of aftershave which had been released on the market in Hong Kong, as the bottles had not been marked with an import ban, and retailers had not been under an obligation to bind their customers to a duty not to import into the EU.
Hence, " . . . [consent] must be expressed positively and . . . the factors taken into consideration in finding implied consent must unequivocally demonstrate that the trade mark proprietor has renounced any intention to enforce his exclusive rights . . . (55) [Implied consent] cannot be inferred from the mere silence of the trade mark proprietor. (56) Likewise, implied consent cannot be inferred from the fact that . . . the goods do not carry any warning that it is prohibited to place them on the market within the EEA. (57) Finally, such consent cannot be inferred from the fact that the trade mark proprietor transferred ownership of the goods bearing the mark without imposing contractual reservations. . . . (58)
A rule of national law which proceeded upon the mere silence of the trade mark proprietor would not recognise implied consent but rather deemed consent. This would not meet the need for consent positively expressed required by Community law.
3.4 Burden of proof
As a general rule of law and bringing a legal claim to court, it is established that the plaintiff has the burden of proof to prove that the conditions for exhaustion have been met. The CJEU explained the matter of parallel trade and importation of sales of garments allegedly imported through ‘grey channels’ from the US24 in the following manner. (37) However, the requirements deriving from the protection of the free movement of goods . . . may mean that that rule of evidence needs to be qualified. (38) This must be so where that rule would allow the proprietor of the trade mark to partition national markets and thus assist the maintenance of price differences which may exist between Member States . . . (39) . . . [T]here is a real risk of partitioning of markets . . . where . . . the trade mark proprietor markets his products in the EEA using an exclusive distribution system (40) [I]f the third party were required to adduce evidence of the place where the goods were first put on the market . . . the trade mark proprietor could obstruct the marketing of the goods purchased and prevent the third party from obtaining supplies in future from a member of the exclusive distribution network of the proprietor in the EEA . . .
Accordingly, where a third party against whom proceedings have been brought succeeds in establishing that there is a real risk of partitioning of national markets if he himself bears the burden of proving that the goods were placed on the market in the EEA by the proprietor of the trade mark or with his consent, it is for the proprietor of the trade mark to establish that the products were initially placed on the market outside the EEA by him or with his consent. If such evidence is adduced, it is for the third party to prove the consent of the trade mark proprietor to subsequent marketing of the products in the EEA.”
3.5 Damage to reputation: An Exception to the main rule of Exhaustion
The proprietor may refuse the resell of a product where they consider that damage to reputation of their brand may occur.26 The issue was addressed in Dior v. Evora where the reseller was of a low-class chemist store wanting to re-sell products of the high-class bran “Dior”. Even though the CJEU stated that the re-sellers were allowed by law to sell Dior products, for legitimate reasons the trademark proprietor may prevent them from doing do for legitimate reasons, being ; “(43) The damage done to the reputation of a trade mark may, in principle, be a legitimate reason . . . allowing the proprietor to oppose further commercialization of goods which have been put on the market in the Community by him or with his consent . . . (45) As . . . concerns prestigious, luxury goods, the reseller must . . . endeavour to prevent his advertising from affecting the value of the trade mark by detracting from the allure and prestigious image of the goods in question and from their aura of luxury. (46) However, the fact that a reseller . . . uses for trade-marked goods the modes of advertising which are customary in his trade sector . . . does not constitute a legitimate reason . . . allowing the owner to oppose that advertising, unless it is established that . . . the use of the trade mark in the reseller’s advertising seriously damages the reputation of the trade mark.” 25 Now encapsulated in Article 15.2 of the TMD 26 Now encapsulated in Article 15.2 of the TMD 15
Chapter 4 Discussion and Conclusion
Parallel trade and the notion of exhaustion are interlinked. This is demonstrated in the case of Silhouette.27 The Court of Justice of the European Union ruled in favour of high-class brand Silhouette, settling (prior to the enactment of the First Trademark Directive) that, within the EU member states must prohibit parallel imports coming non-EU countries. This approach gave term to the notion “Fortress Europe” for setting up barriers to trade from outside of Europe. As stated in its judgement. “(26) . . . the [TMD] cannot be interpreted as leaving it open to the Member States to provide in their domestic law for exhaustion of the rights conferred by a trade mark in respect of products put on the market in non-member countries. (27) This . . . is the only interpretation which is fully capable of ensuring that the purpose of the [TMD] is achieved, namely to safeguard the functioning of the internal market. A situation in which some Member States could provide for international exhaustion while others provided for Community exhaustion only would inevitably give rise to barriers to the free movement of goods and the freedom to provide services.”28 The requirements deriving from the protection of the free movement of goods . . . may mean that that rule of evidence need to be qualified. (38) This must be so where that rule would allow the proprietor of the trade mark to partition national markets and thus assist the maintenance of price differences which may exist between Member States . . . (39) . . . [T]here is a real risk of partitioning of markets . . . where . . . the trade mark proprietor markets his products in the EEA using an exclusive distribution system [I]f the third party were required to adduce evidence of the place where the goods were first put on the market . . . the trade mark proprietor could obstruct the marketing of the goods purchased and prevent the third party from obtaining supplies in future from a member of the exclusive distribution network of the proprietor in the EEA . . . Accordingly, where a third party against whom proceedings have been brought succeeds in establishing that there is a real risk of partitioning of national markets if he himself bears the burden of proving that the goods were placed on the market in the EEA by the proprietor of the trade mark or with his consent, it is for the proprietor of the trade mark to establish that the products were initially placed on the market outside the EEA by him or with his consent. If such evidence is adduced, it is for the third party to prove the consent of the trade mark proprietor to subsequent marketing of the products in the EEA. To sum up, It is important to note that Trade Mark Exhaustion and Parallel Trade go hand in hand in the sense that the both notions can either limit trade of a trademark and or promote its resale by retailers or via the medium of license distribution following the consent of the proprietor, naturally. This research therefore purports or seeks to clarify both concepts by analysing trade of trademarked products within the EU and their prerequisites. The middleground between national exhaustion and regional exhaustion is the doctrine of regional exhaustion, applied within the EU. Within the EU, once trademarked goods enter the European Union, from a non-EU country, then they are regionally exhausted, i.e. thereafter the proprietor of the goods cannot decide (in most cases, such as in the case of parallel imports, which we shed light on further on in this research) in which country the goods may be marketed or sold within the European Union. Parallel imports-trade occurs when and where a proprietor of trademarked goods has not consented to their goods to be imported to a certain area29 [within the EU]. Therefore, this leaves a grey area within the law where the proprietors (of the trademarked goods) to not have control over where his/her products are being sold. For example, parallel imports pharmaceutical products has been a long-standing issue within the EU. A case which reiterates the notion of a fortress Europe being set is Sebago Inc. and Ancienne Maison Dubois.30
Even this case states that Member States of the EU shall not apply international trademark exhaustion. However, another notion which the case clarifies is that exhaustion shall only be applied to individual products that are marketed and sold within a Member state and that exhaustion does not apply to similar products being sold to a third party of the same quality in the EU under the same trademark or brand name. 31
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