TRADEMARKS AND SELECTIVE DISTRIBUTION: THE PROTECTION OF BRAND IMAGE AND IDENTITY

Transcription

1 TRADEMARKS AND SELECTIVE DISTRIBUTION: THE PROTECTION OF BRAND IMAGE AND IDENTITY By loránd paseczki (ii.) and márk rózsavölgyi (i., iii., iv., v.) 2018

2 Abbreviations and Expressions For the purpose of this essay, the abbreviations and expressions stated below shall have the following meanings: CJEU shall mean the Court of Justice of the European Union Community law shall mean European Union law Directive shall mean Directive 2008/95/EC ECJ shall mean European Court of Justice EEA shall mean European Economic Area EU shall mean the European Union TFEU shall mean the Treaty on the Functioning of the European Union UK shall mean United Kingdom US shall mean the United States of America VABE Regulation shall mean Commission Regulation (EU) No 330/2010 of 20 April 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices

3 i. Introduction Brand image and identity are vital matters to all brand owners; they provide them the chance to preserve and protect the prestige and reputation of their product or company. While brand identity represents the essence of the qualities a brand wants itself to be identified with it is a message of the brand s uniqueness to customers and other stakeholders1 the brand image is thus the perception customers discern from such aggregation of qualities2. This perception is therefore influenced by the brand identity as well as several other independent factors not related to the brand s owner and represents market value to economic operators that can also be realised as profit, since it may lead, through awareness and even loyalty, to brand value3. In this essay, we will examine two co-related tools in the protection of brand value; (i) the use of selective distribution systems, as instrumental legal structures to build up, maintain and protect brand image4, and (ii) trademark protection as an indispensable tool to preserve brand identity5 and the integrity of a selective distribution system. A trademark may be in the form of a word or phrase, it can be a symbol or design that identifies, but most importantly distinguishes products or goods by their source of origin.6 The purpose of a trademark is derivable from such distingusihment: it is to protect the trademarked goods or services from the confusion with other artefacts bearing the same or similar values.7 Trademarks therefore become part of a brand s identity8; they are important and legally protected component of the unique values and standards a brand identifies itself with. The registration of a trademark provides unique protection to this extent of the brand identity, and allows the trademarks to become part of the perceived brand image without the deception caused by any misuse or misrepresentation.9 1 Nandan, S., An exploration of the brand identity brand image linkage: A communications perspective. Journal of Brand Management, 12., 4., The Management Study Guide. Brand Image. [ONLINE] Available at: com/brand-image.htm. 3 Id. 4 Paseczki, L., Virág, P A márkaimázs védelme árulhat-e a viszonteladó az online piactereken?. Advocatus - A DLA Piper Jogi Blogja, [Online]. Available at: 5 The Management Study Guide. Sources of Brand Identity. [ONLINE] Available at: 6 United States Patent and Trademark Office (USPTO) Trademark, Patent, or Copyright?. [ON- LINE] Available at: 7 Howarth, W. C., Are Trademarks Necessary?. The Trademark Reporter, 60, The Management Study Guide. Sources of Brand Identity. [ONLINE] Available at: 9 United States Patent and Trademark Office (USPTO) Trademark process [ONLINE] Available at:

4 Selective distribution systems on the other hand influence rather the way customers contact with the goods or services of the brand in question. Their experiences, gained in a brand-conform environment regulated under the rules of these systems, contribute therefore not to the identity, but to the image the customers perceive of the brand. The operators of these systems (usually the owners of the brand) use pre-defined objective standards to control and decide if any distributor should be allowed to sell their range of products.10 These systems create a closed relationship between the supplier and the distributors, therefore these agreements fall under strict regulations of competition law in the EU.11 We will examine these restrictions, as well as their effect on the protection of brand image, in detail below. In the next few pages we will start by first taking an in-depth look at the latest developments in the regulation of selective distribution systems in the European Union, and then examining cases where trademark protection rights played a key role in preserving the brand-conform distribution of certain goods. Our primary objective with these examinations is to prove that with regards to the selective distribution of certain goods (especially high prestige and luxury products), there is a strong relationship of co-dependence between trademark protection and the use of selective distribution systems with special regards to the boundaries of competition law. ii. Protection of brand image A. the significance of selective distribution in the protection of brand image As we have also stated in the introduction, selective distribution systems are strong tools in the hands of the brand owners to protect the image customers discern from the brand identity.12 These systems are constituted by a special distribution agreement in which the parties also agree, that the distributor undertakes not to sell the products to other, unauthorised distributors in the same area.13 By such restrictions, these agreements provide that the distributor is able to gain a much wid- 10 Colgan, D., Dreyer, J. J., Kamerling, A., Fonseca, M. R., Deasy, G., Daniel, N Coty: Selective distribution and the luxury of prohibiting third party platform sales. International Trade Alert, [Online]. Available at: [Accessed 6 January 2018]. 11 Id. 12 Paseczki, L., Virág, P A márkaimázs védelme árulhat-e a viszonteladó az online piactereken?. Advocatus - A DLA Piper Jogi Blogja, [Online]. Available at: 13 Commission Regulation (EU) No 330/2010 of 20 April 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices. Article 1 (1) (e)

5 er market penetration (with a certainly broader reach than the distributors own resources would allow), without having to worry about any distortion in the brand image caused by resellers.14 The contracts that establish selective distribution systems qualify as vertical agreements15 under community law, therefore, as we have also noted above, require special assessment in terms of competition law standards.16 In the following parts, we will examine the legal landscape regarding the regulation of selective distribution systems in the EU. B. the legal landscape of selective distribution under community law The general requirement of the competition law in the EU is, that no agreement can be concluded between any parties that would distort the competition within the internal market of the Community, and that would affect the trade between member states of the EU.17 However, it is important to note that exceptions from the general restrictions can be made, if the result of such an agreement contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit.18 Selective distribution systems are generally considered to be economically beneficial, as they provide that the product or service of the supplier is sold in an environment that protects the quality and image of the object of the distribution.19 However, the effect of the agreement on competition and thus applicability of the restrictions in Article 101 of the TFEU are dependent on several other factors. For instance, the limits included in a selective distribution agreement may be pro-competitive in intra-brand competition, where these limits motivate resellers to invest into special equipment or highly trained staff, and thus raise the quality of the service received by the customer.20 On the other hand, if the number of authorised distributors is low, selective distribution systems may have an anti-competitive effect on the market.21 According to the practice of the CJEU, there is an objective standard of four cumulative conditions to determine whether a selective distribution system accommodates the norm pro- 14 Opinion of Advocate General Wahl delivered on 26 July 2017 in Case C 230/16 of the ECJ According to Article 1 (1) (a) of the Commission Regulation (EU) No 330/2010 of 20 April 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices, vertical agreement means an agreement or concerted practice entered into between two or more undertakings each of which operates, for the purposes of the agreement or the concerted practice, at a different level of the production or distribution chain, and relating to the conditions under which the parties may purchase, sell or resell certain goods or services 16 Colgan, D., Dreyer, J. J., Kamerling, A., Fonseca, M. R., Deasy, G., Daniel, N Coty: Selective distribution and the luxury of prohibiting third party platform sales. International Trade Alert, [Online]. Available at: [Accessed 6 January 2018]. 17 Article 101 of the Treaty on the Functioning of the European Union. Section 1 18 Id. Section 3 19 Bellamy, C., European Union Law of Competition. Oxford University Press Id. 21 Id.

6 vided in Article 101 of the TFEU.22 This means, that the selective distribution shall not constitute a breach of the restriction provided in Article 101 (1) if (i) the requirements provided in the distribution agreement are legitimate regarding the nature of the object(s) of the selective distribution, (ii) the selection of the distributors is based on an objective, non-discriminatory standard, (iii) the criteria set forward in the distribution agreement is necessary for the purpose of the distribution, and (iv) the selective distribution system is restrictive to competition in only a proportionate manner.23 However, even if the above mentioned four elements of general criteria are not fully met, the Vertical Agreements Block Exemption (VABE) Regulation24 may provide exception from the restrictions under Article 101 (1) of the TFEU.25 This is subject to two further criteria: on one hand, neither the supplier nor the distributors can exceed 30% in terms of market share, and on the other, there must be no such serious departure from competition law restrictions, that qualify as those so called hardcore restrictions explicitly prohibited under Article 4 of the VABE Regulation.26 As we can observe from the analysis above, the selective distribution systems generally do not constitute a breach of the provisions under Article 101 (1). However, we must also take into account that the interpretation of hardcore restrictions as provided in the VABE Regulation is subject to current development.27 We will take a look at this development in the following. C. hardcore restrictions in selective distribution systems We must take a look at the purposes of these restrictions in each case individually to fully understand the permissibility of special restrictions in vertical agreements that constitute selective distribution system28. Generally, a hardcore restriction in the distribution agreement can be justified by circumstances that make the restriction objectively necessary.29 However, we need 22 Id Id. 24 as also in the citation above, Commission Regulation (EU) No 330/2010 of 20 April 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices 25 Colgan, D., Dreyer, J. J., Kamerling, A., Fonseca, M. R., Deasy, G., Daniel, N Coty: Selective distribution and the luxury of prohibiting third party platform sales. International Trade Alert, [Online]. Available at: [Accessed 6 January 2018]. 26 Paseczki, L., Virág, P A márkaimázs védelme árulhat-e a viszonteladó az online piactereken?. Advocatus - A DLA Piper Jogi Blogja, [Online]. Available at: 27 Colgan, D., Dreyer, J. J., Kamerling, A., Fonseca, M. R., Deasy, G., Daniel, N Coty: Selective distribution and the luxury of prohibiting third party platform sales. International Trade Alert, [Online]. Available at: [Accessed 6 January 2018]. 28 Faull, J., Nikpay, Faull and Nikpay: The EU Law of Competition. OUP Oxford Id

7 to take a look at the the relevant Community case-law to determine what qualifies as such necessity. As preliminary remark, we must also note that the Commission Notice on Vertical Restraints30 also describes numerous cases where the purpose of a certain special restriction allows the distribution agreement to be excused from the provisions under Article 101 (1)31. In the next few paragraphs, we will describe and compare two rulings from Community case-law, to demonstrate the perimeter of the notion of necessity as held by the CJEU in the aspect of the protection of brand image. In 2011, the CJEU issued its ruling in the Pierre Fabre Dermo-Cosmétique case32, providing a new benchmark in the permissibility of special restrictions in selective distribution systems. The main question in the case was, if the distributor can require the presence of highly qualified staff at each sale made under the selective distribution agreement and thus implicitly restrict distributors from selling their product on the internet.33 The Court held, that such requirement was not objectively necessary, proportionate and thus not justifiable, since it only provided advice for the customers against incorrect use of the product.34 The Court also rejected the claim of Pierre Fabre Dermo-Cosmétique to recognise the maintenance of the prestigious image of the product as a justifiable aim for restricting competition in such manner.35 The protection of the brand prestige, as justifying reason to special restrictions applied in a selective distribution agreement was also discussed in the Coty case36, in which the CJEU issued its ruling in December The amendment of the distribution agreement in question provided, that although distributors are not restricted from marketing the product on the internet, they can only do so if [t]he internet sales activity is conducted through an electronic shop window of the authorised store and the luxury character of the products is preserved 37. The provision also stated that no business name or design element of any third party could be displayed to the customer during the electronic marketing38, and thus implicitly implied that the marketing through online marketplaces (such as amazon.de, as referred in the judgement) would not be allowed in the selective distribution system.39 By contrast to the Pierre Fabre Dermo-Cosmétique case referred above, the court found, that the provision to exclude only third-party online marketing platforms from the internet sales does not itself constitute a restriction of customers or end users, and thus may be compliant with Community competition law standards.40 The Court also argued, that if such measure is proportionate with the protection of brand image, the 30 Commission Notice SEC(2010) Faull, J., Nikpay, Faull and Nikpay: The EU Law of Competition. OUP Oxford Case C 439/09 Pierre Fabré Dermo Cosmétique v. Président de l Autorité de la Concurrence 33 Id. para Id. para Id. para Case C-230/16 Coty Germany GmbH v Parfümerie Akzente GmbH 37 Id. para Id. 39 Id. para Id. para 69

8 distribution agreement shall not be in infringement with Article 101 of the TFEU, provided that general requirements that we also described above, such as the non-discriminatory selection of distributors, are met.41 D. the protection of brand identity, as the aim of selective distribution We can conclude from the two cases described above, that the protection of luxury brand image is generally a justifiable aim to restrict competition by establishing selective distribution networks, however, attention must be paid to the restrictions applied in the distribution agreement. The CJEU most recently held, that the restrictions applied to protect luxury bands may only be appropriate if all potential resellers are chosen based on an open, non-discriminatory standard that only includes requirements necessary to the protection of the brand image42. On the contrary, previous rulings have shown that general and unnecessary restrictions, such as the restrictions of customers or end users from online purchase in general, cannot be regarded as proportionate for the protection of the brand s luxurious image.43 iii. Protection of brand identity A. importance of trademarks Erosion of brand identity is inevitable without constant efforts on legal and marketing protection. Marketing and innovation clearly play an essential role but without the proper legal protection all marketing and innovation attempts will become a waste of resources.44 Even a highly appreciated and well-marketed brand from the top can quickly sink to rock bottom if left without proper legal protection.45 Therefore protecting brand identity with trademarks is not an option but a necessity for brands that want to project a certain image and maintain selective distribution system. This especially true for those brands that position themselves to the higher class 41 Id. para Id. ruling 1 43 see Case C 439/09 Pierre Fabré Dermo Cosmétique v. Président de l Autorité de la Concurrence as cited above 44 Crass, D., Schwiebacher, F The importance of trademark protection for product differentiation and innovation. Economia e Politica Industriale. [ONLINE] Available at: [Accessed 12 January 2018]. 45 Retail Insider The Vicious Cycle of Brand Erosion. [ONLINE] Available at: [Accessed 12 January 2018].

9 of the market and want to be associated with high prestige and luxury.46 However the mere fact that a brand has trademarks does not necessarily mean safe heaven.47 Thus, it comes down to the actions of the brand owner, how it uses its trademark rights to protect brand identity against unauthorized use, parallel importation, etc. In the following paragraphs we will demonstrate the use of the most effective legal instrument in brand identity protection, namely the rights conferred by the trademark onto it s proprietor. However they are not limitless, as it is described in the paragraph below. B. exhaustion of rights exhaustion refers to one of the limits of intellectual property rights.48 Once a trademarked product has been marketed either by the proprietor or by others with his consent, the right of commercial exploitation over this given product can no longer be exercised by the proprietor, as they are exhausted.49 Within the EU the exhaustion is recognized not on a national but on a regional level. Thus, when a product is marketed anywhere within the EU, the proprietor s right shall be exhausted throughout the Union and therefore may not prevent the sale of products any more. However, in certain situations the proprietor can still prohibit the further commercialization of the marked goods even after they already been marketed with his consent.50 This is essential to brand owners in order to maintain a selective distribution network since otherwise their marked goods could be bought and imported from other EU countries thus they would not be able to control who is eligible to sell their marked goods.51 This will be discussed in detail below in section Parallel importation between the EU countries?. 46 Colgan, D., Dreyer, J. J., Kamerling, A., Fonseca, M. R., Deasy, G., Daniel, N Coty: Selective distribution and the luxury of prohibiting third party platform sales. International Trade Alert, [Online]. Available at: [Accessed 6 January 2018]. 47 Cohen, S. J:, Donoian J. H.,Lewin, H. I A new strategy for protecting luxury and fashion brands in the digital space. World Trademark Review. [ONLINE] Available at: Intelligence/Online-Brand-Enforcement/2015/Chapters/A-new-strategy-for-protecting-luxury-and-fashion-brands-in-the-digital-space. [Accessed 12 January 2018]. 48 WIPO. International Exhaustion and Parallel Importation. [ONLINE] Available at: sme/en/ip_business/export/international_exhaustion.htm. 49 Id. 50 See Case C-337/95, Parfums Christian Dior SA v. Evora BV, 1997 E.C.R. I Gauberti, A Why selective distribution makes sense for luxury and premium businesses. World Trademark Review. [ONLINE] Available at: Features/Why-selective-distribution-makes-sense-for-luxury-and-premium-businesses-2. [Accessed 07 January 2018].

10 C. parallel importation from non-eu countries Parallel import means that marked goods are purchased in a foreign market52 and then resold in the domestic market, which in this case the means anywhere in the EU.53 Naturally, parallel importation goes against the very nature and purpose of selective distribution networks. Due to the fact that its goal is to bypass the brand owner and take advantage of cheaper prices in one country to make profit by selling these goods in another country where they are generally sold at a higher price.54 As we described earlier, the brand owners may set certain requirements for their approved retailers in order to protect the brand image and prestige. These requirements usually include but are not limited to the appearance of the store, placement of goods, advertising, pricing, customer service, and many other factors. These all play an essential role in the way customers come in contact with the products and consequently with brand itself. However, in most cases parallel importers do not meet these requirements and are not concerned with brand identity since their main objective is not to maximise the value of the brand, but solely their profit.55 This not only reduces the profit of the brand s owner, but causes serious harm to the brand image and the reputation of the trademark.56 Therefore, a brand associated with high prestige and exclusivity is not only concerned to block parallel importation due to its negative direct monetary consequences, but also to indirectly protect brand identity from the degradation by unauthorised distributors. 57 Importation may only take place with the trademark proprietor s consent. As we will describe in detail below, such consent may be explicitly expressed as well as otherwise implied. However, according to the practice of the CJEU, when it comes to parallel importation or the right of exhaustion, the consent must be explicitly expressed. 58 When the ECJ issued its final decision on the case of Levi Strauss & Co. v. Tesco Stores Ltd.59, affirming Levi s right to keep low priced imported jeans out of the EU market, the gener- 52 Foreign market means a market that is not part of the EEA 53 WIPO. Parallel importations. New perspectives. [ONLINE] Available at: sme/en/wipo_smes_rom_09/wipo_smes_rom_09_workshop12_3.doc. 54 UK Parliament - House of Commons - Trade and Industry - Eighth Report [ONLINE] Available at: [Accessed 07 January 2018]. 55 Delaney, L Learn About the Complexities of Parallel Importing. The Balance. [ONLINE] Available at: [Accessed 07 January 2018]. 56 Morriss, N ECJ rules. Bird & Bird [ONLINE] Available at: [Accessed 07 January 2018]. 57 Waldheim, S. J., Pronk, S., Relange, M Non-price competition in selective distribution - the landmark opinion of AG Wahl on online platform bans. Bird & Bird. [ONLINE] Available at: com/en/news/articles/2017/global/non-price-competition-in-selective-distribution. [Accessed 07 January 2018]. 58 See case C-414/99 and C-415/99 and C-416/99 59 Case C-415/99, This case was joined with two other cases involving the same issues, Zino Davidoff SA v. A&G Imports Ltd. (C-414/99) and Levi Strauss & Co. v. Costco Wholesale U.K. Ltd. (C-416/99)

11 al public was outraged at the perceived blow to consumer rights.60 In fact, the ECJ allowed Levi s to prohibit the importation of their very same jeans from the US to the UK to be resold in Tesco with a much cheaper price tag. In the UK Levi s has built a selective distribution network of approved retailers with special branded stores and only these were allowed to sell their products within the UK.61 When Levi s refused to sell products to anyone other than their approved retailers Tesco decided to buy them from wholesalers in the U.S., then import those into the UK. It is important to notice that the jeans sold by Tesco were completely identical to the ones sold by Levi s approved retailers. The manufacturer s suggested retail price for UK distributors were between 45 to 50 compared to Tesco s offer on the very same jeans at Tesco claimed that their importation was lawful because Levi s impliedly consented to such import and sale simply by not taking stricter measures in order to hinder such activities.63 For example they could have labeled the jeans sold on the US market as not for sale outside the US or enforce stricter contractual prohibition throughout their retail network in the US. The ECJ stated that since the consent in this case had the serious effect of waiving the rights of the trademark proprietor the «consent must be so expressed that an intention to renounce those rights is unequivocally demonstrated.(...) Such intention will normally be gathered from an express statement of consent.»64 While in this particular case the ECJ ruled that the consent must be explicitly expressed, it also adds that there are situations where the consent may be implied and could be derived from facts and circumstances.65 The ECJ stated that the mere silence of the trademark proprietor is insufficient to show the necessary unequivocal consent. Similarly insufficient the trademark proprietor s failure to communicate his opposition to third party sales in the EU or his failure to provide either contractually or physically on the trademarked product that consent is not being given.66 Considering the above, it is discernible that brand owners situated in the EU could very well protect themselves against the depreciation of their brand identity and trademarks trough preventing parallel importation by their rights conferred by their trademarks. More importantly, the integrity of their selective distribution network can be well protected based on this same principal. 60 Reed, K., Levi Strauss v. Tesco and E.U. Trademark Exhaustion: A Proposal for Change. Northwestern Journal of International Law & Business: Northwestern Pritzker School of Law. 61 BBC News The Tesco-Levi battle. [ONLINE] Available at: [Accessed 07 January 2018] 62 Pook, S Tesco loses fight to sell Levi s at American prices. Telegraph. [ONLINE] Available at: html. [Accessed 07 January 2018]. 63 Reed, K., Levi Strauss v. Tesco and E.U. Trademark Exhaustion: A Proposal for Change. Northwestern Journal of International Law & Business: Northwestern Pritzker School of Law. 64 Case C-415/99, See paragraph 46. in the judgement 65 Id. 66 Reed, K., Levi Strauss v. Tesco and E.U. Trademark Exhaustion: A Proposal for Change. Northwestern Journal of International Law & Business: Northwestern Pritzker School of Law.

12 D. parallel importation between the eu countries The subtitle itself might seem as a contradiction at first sight, since the EU follows the regional principle when it comes to the exhaustion of rights.67 Although parallel import in general should not be an issue within the Community, but as it can be seen from the following case, it is indeed a relevant matter even within the EU.68 Mainly, because even after the exhaustion of rights took place, there is still an exception when a proprietor - even at this point - can oppose further commercialization of goods.69 According to the EU Trademark Directive70 in order for such exception to be applied there must exist a legitimate reason for the proprietor to oppose further commercialisation of the goods.71 However the Directive does not concretely define under what circumstances would exist such legitimate interest. Therefore, it is for ECJ s practice to serve as an interpretation.72 E. luxurious aura as legitimate interest The case of Dior v. Evora73 had multiple aspects74 relevant to this topic. Evora is a chain of drug stores in the Netherlands, who parallel-imported and sold luxury cosmetics made by Dior. At the time, Dior had solid network of approved retail stores in the Netherlands and refused to sell its products to Evora. This part is very similar to what we found in the previously discussed case of Levi s v. Tesco75, that we covered above. Like Levi s refused to sell jeans to Tesco, Dior refused to sell products to Evora. Both of their reasoning was that their product is positioned to higher-end of the market and therefore they do not want their products to be marketed anywhere else but in their approved retail stores. However, what sets these two cases apart is while Tesco s parallel import was from outside the EU, Evora managed to import the goods from an EU country. Consequently, due to the exhaustion of rights, Dior would not be able oppose the importation and sale of the products. During the Christmas season Evora had advertised these products at a discounted price along with other cheap, low-quality products. Therefore, Dior claimed that this manner of advertising is not worthy to its brand, and thus the high prestige and good reputation of the trademarks had suffered. 67 See section Exhaustion of rights above 68 Ginter, C., Free Movement of Goods and Parallel Imports in the Internal Market of the EU. European Journal of Law Reform Vol. VII. no. 3/4, pp : Eleven International Publishing. 69 Directive 2008/95/EC of the European Parliament and of the Council of 22 October 2008 to approximate the laws of the Member States relating to trade marks 70 Id. 71 See Article 7 (2.) of Directive 2008/95/EC 72 Calboli, I., Trademark Exhaustion in the European Union: Community-Wide Or International? The Saga Continues. Marquette Intellectual Property Law Review: Intellectual Property Commons. 73 Case C-337/95, Parfums Christian Dior SA v. Evora BV, 1997 E.C.R. I Chronopoulos, A & Maniatis, A Trademark Exhaustion and Its Interface With EU Competition Law. Research Handbook on IP Exhaustion and Parallel Imports: Irene Calboli & Edward Lee, eds. 75 Case C-415/99, This case was joined with two other cases involving the same issues, Zino Davidoff SA v. A&G Imports Ltd. (C-414/99) and Levi Strauss & Co. v. Costco Wholesale U.K. Ltd. (C-416/99)

13 The most significant aspect of Dior v. Evora case is the recognition that the damage to the trademarked good s luxurious aura constitutes a legitimate interest of the rights-holder within the meaning of Article 7 of the Directive.76 Which allowed Dior to oppose to the further commercialization of goods already placed on the market with his consent.77 The decision of the ECJ acknowledged advertising as a function of a trademark, perceiving that function as the capacity of a trademark to generate sales via the appeal of the brand image associated with it.78 Consequently, the use of a trademark in an inappropriate advertisement which results as loss in good reputation of the mark will create legitimate interest for the proprietor to oppose the further commercialization. With regard to the case above, it is safe to say that brand owners, who possess prestigious trademarks with good reputation, have a legitimate interest to oppose the sale of parallel imported goods, even after the exhaustion of rights. Therefore the integrity of their selective distribution network can be well protected based on this same principle. F. disobedient distributors Most of authorized distributors are tempted to sell outside their selective distribution network, but because they are bound by their restrictive contracts with the brand owner, they are not allowed to do so.79 Nevertheless, it is not unprecedented at all, in fact happens quite often. That argument was also addressed in Copad v. Dior80 case. As known from the previously mentioned Dior v. Evora case, Dior is a brand of various luxury goods and creates selective distribution on every market they enter. In 2002, SIL81, one of their French distributors, was faced with economic difficulties, and sold goods bearing the Dior trademark to Copad, a company operating a discount store business.82 Considering that such resale outside the distribution network was prohibited by the distributor agreement, Dior brought an action against both SIL and Copad for trade-mark infringement. However, the resellers pleaded exhaustion of Dior s trademark rights, because the goods had been put on the market in the EU with Dior s consent.83 The Court first stated that the proprietor of a trademark can invoke the rights conferred by that trademark against a licensee (in this case SIL) who contravenes a provision in a licence agreement prohibiting, on grounds of the trademark s prestige, sales to discount stores.84 Provided it has been established that that contravention damages the allure and prestigious image 76 Chronopoulos, A & Maniatis, A Trademark Exhaustion and Its Interface With EU Competition Law. Research Handbook on IP Exhaustion and Parallel Imports: Irene Calboli & Edward Lee, eds. 77 Id. 78 Case C-337/95, Parfums Christian Dior SA v. Evora BV, 1997 E.C.R. I European Commission. Antitrust: Commission publishes final report on e-commerce sector inquiry. [ON- LINE] Available at: [Accessed 14 January 2018]. 80 Case C-59/08, Copad v. Christian Dior, 2009 E.C.R. I Société Industrielle Lingerie 82 Case C-59/08, Copad v. Christian Dior, 2009 E.C.R. I 3421, see paragraph in judgement 83 Id. 84 Id. see paragraph 37. in judgement

14 which bestows on those goods an aura of luxury.85 With regard to the above, Dior can still exercise its right provided by the trademark against SIL since it violated the licence agreement. However, a noteworthy aspect of this case probably is not, that Dior was able to exercise its rights against SIL, but also against Copad as well. The Court also held that if a sale that takes place in disregard of a provision prohibiting resale to discount stores outside the selective distribution network may be considered to have taken place without the consent of the proprietor.86 Thus, when SIL put goods on the market in disregard of a provision in a licence agreement, this precluded exhaustion of the rights conferred by the trademark on its proprietor Finally the Court held that damage done to the reputation of a trademark may be a legitimate reason, allowing the proprietor to oppose the use of his trademark for further marketing of luxury goods put on the market in the EU by him or with his consent. In summary, the Court recognised that Dior s rights were not exhausted after such sale has been made, and it shall be able to prevent the use of its trademarks as well as the further commercialisation of the goods for both the non-compliant distributors and their retailers. iv. Conclusion Rights conferred by trademarks are strong tools in the hands of brand owners to protect the brand identity and allows to pose serious restrictions on resellers and retailers regarding their marked goods.89 However, the exercise of these rights may not result in breaching the rules of competition law, i.e. restraining competition.90 From a legal point of view, the constant maintenance of such selective distribution systems appear to be much more difficult than their establishment.91 Indisputably, due to the conferred rights, the proprietor is entitled to have total control over every element in its products market appearance.92 Notwithstanding the previous statement, the exercise of these rights are not without limitation.93 It is a balancing act for the brand owner. 85 Id. 86 European Commission Press Release No 35/09, The Propertitor of a trade mark can oppose the release of his luxury goods by discount stores. [ONLINE] Available at: [Accessed 14 January 2018] 87 Id. 88 Case C-59/08, Copad v. Christian Dior, 2009 E.C.R. I 3421, see para 41. in judgement. 89 Paseczki, L., Virág, P A márkaimázs védelme árulhat-e a viszonteladó az online piactereken?. Advocatus - A DLA Piper Jogi Blogja, [Online]. Available at: 90 Id. 91 Frazier, G., Organizing and Managing Channels of Distribution. Journal of the Academy of Marketing Science. 92 Directive 2008/95/EC, see Article Id. see Article 6.

15 While the brand owner must provide the broadest possible protection to its brand, yet it needs to stay within the boundaries set by competition law.94 The EU makes it possible for a brand to restrain the competition via selective distribution, but only if certain conditions are met.95 As we pointed out in connection with the Coty96 case, such restrictive measures against distributors and the selective distribution itself, may be a justified action from the perspective of commercial law, when it comes to luxury goods.97 Notwithstanding the previous statement, as seen in the Pierre Fabre case98, if a brand owner is unable to fulfil those requirements, such as eg. cannot justify the reason for the selective distribution due to the lack of the luxurious aura of the goods, thus failed provide legitimate interest, then it will endanger its distribution network, as would be restraining competition unnecessarily.99 Trademarks are just as crucial and provide very strong foundation when it comes to protecting the integrity of selective distribution systems. As it can be seen from the cases covered in this article, the three main issues that undermine selective distribution systems, thus providing basis for the grey market are; (i) parallel importation from outside the EU, (ii) parallel importation between the EU countries, (iii) non-compliant distributors who sell to unauthorised parties.100 The cases we covered showed that if a brand has the necessary level of prestige all three of these can be successfully prevented by the brand owner using his rights conferred by its trademarks.101 With the right reasoning, these actions were justified as necessary and proportionate restrictions on free trade and competition.102 If for some reason, any of these three activities cannot be prevented by the brand owner than the selective distribution will not be sustainable on the long run.103 In summary, every prestigious brand that wants to preserve its reputation is in need to control the distribution in a restrictive manner with respect to the boundaries of competition law. As it is indispensable when it comes to protecting a prestigious brand. 94 Cohen, S. J:, Donoian J. H.,Lewin, H. I A new strategy for protecting luxury and fashion brands in the digital space. World Trademark Review. [ONLINE] Available at: Intelligence/Online-Brand-Enforcement/2015/Chapters/A-new-strategy-for-protecting-luxury-and-fashion-brands-in-the-digital-space. [Accessed 12 January 2018]. 95 Bellamy, C., European Union Law of Competition. Oxford University Press Case C-230/16 Coty Germany GmbH v Parfümerie Akzente GmbH 97 Id. 98 Case C 439/09 Pierre Fabré Dermo Cosmétique v. Président de l Autorité de la Concurrence 99 Id. 100 Cohen, S. J:, Donoian J. H.,Lewin, H. I A new strategy for protecting luxury and fashion brands in the digital space. World Trademark Review. [ONLINE] Available at: Intelligence/Online-Brand-Enforcement/2015/Chapters/A-new-strategy-for-protecting-luxury-and-fashion-brands-in-the-digital-space. [Accessed 12 January 2018]. 101 See case C-59/08, C-414/99, C-337/ Id. 103 Paseczki, L., Virág, P A márkaimázs védelme árulhat-e a viszonteladó az online piactereken?. Advocatus - A DLA Piper Jogi Blogja, [Online]. Available at: