les Nouvelles December 2023 Article of the Month:
The Exhaustion Theory Is Not Yet Exhausted— Part 5
Deputy General Counsel
Valeo
Paris, France
Since the last overview on recent developments regarding the application of the exhaustion theory by the European courts that was published in les Nouvelles (September 2017), new issues have been brought to the attention of the courts that demonstrate once again that the exhaustion theory is not yet exhausted.
After a series of decisions regarding the importation of merchandise within the European market where either the original trademark was reaffixed following the repackaging of the goods, or the trademark of the country of importation was affixed on the goods through an operation of rebranding, the European Court of Justice (hereinafter ECJ) was asked to consider a case of debranding in the context of the importation of cars (judgment of 25 July 2018, Mitsubishi Shoji Kaisha Ltd and Mitsubishi Caterpillar Forklift Europe BV vs. Duma Forklifts NV and G.S. International BVBA). In the Netherlands, the court was asked to rule on the question of whether the rights of the trademark owner were exhausted in relation to the residual stock of a promotional sales campaign, which was returned as surplus to the original promoter (judgment of the Court of Appeal of The Hague, 20 November 2018, 4Everyware Stocklots vs. Guy Laroche SAS).
Likewise, in the Netherlands, the court was asked to rule on whether the use of multi-marking on packaging boxes by a distributor of cosmetic products infringed the trademark rights of the owner of one of those marks that appeared on the box (judgment of the Court of Appeal The Hague, 17 August 2021, Coty Beauty Germany vs. EasyCosmetics Benelux).
In Germany, the court had to address a case where luxury cosmetic products were offered by a discounter and the trademark owner relied on the luxury image of the goods in order to oppose exhaustion (judgment of Oberlandesgericht Dusseldorf, 6 March 2018, Kanebo vs. Real).
Likewise, in relation to the exhaustion of patent rights, the German Supreme Court was asked to rule on whether a product refurbishment where simple components were replaced qualified as repair for which the exhaustion of the original product continues to apply or must be considered as a re-manufacturing of the patented product (BGH, 24 October 2017).
1. European Court of Justice, 25 July 2018, Mitsubishi vs. Duma Forklifts and GSI
This is the first time that the ECJ has had to pronounce itself on the practice of debranding a trademark. Duma acquired forklift trucks from a company within the Mitsubishi group, outside the EEA, that it then brought into the EEA territory for resale. Its affiliated company GSI then removed the Mitsubishi marks from those goods, made the necessary modifications to render those goods compliant with EU standards, and sold those forklifts in the EEA with Duma signs affixed to those goods.
The case is not of direct importance to the current topic of exhaustion of rights in the European Union since the products were imported from outside the EEA, meaning that the products were not yet introduced on the EU market (and therefore subject to the laws of the free movement of goods) when they were acquired and commercialized to the public by Duma. However, the case deserves to be mentioned because it addresses an issue that is neither covered by the applicable Trademark Directive 2008/95/EC nor the Trademark Regulation 207/2009 of the European Union, i.e., the practice of debranding a trademarked product.
In its arguments, Mitsubishi advanced the idea that debranding negatively affects the various functions of the trademark that have been generally recognized by the ECJ; not only did the removal of the trademark harm the mark’s functions of indicating origin and quality, but also the functions of investment and advertising: despite that removal, the Mitsubishi forklift trucks remained recognisable to the consumer as such.
In its decision, the ECJ underscored the fact that the trademark proprietor’s goods were placed on the market before that proprietor had placed them on the market bearing that trademark, with the result that consumers knew those goods before being able to associate them with that trademark. Debranding the products in question therefore impedes the use of that mark by the proprietor in order to acquire a reputation likely to attract and retain consumers, and to serve as a factor in sales promotion or as an instrument of commercial strategy.
In addition, such actions deprive the proprietor of the possibility of obtaining, by putting the goods on the EEA market first, the economic value of the product bearing that mark and, therefore, of its investment. Finally, such practice circumvents the proprietor’s right to prohibit the importation of those goods bearing its mark, which is contrary to the objective of ensuring undistorted competition.
The decision is probably of limited interest to the teachings of the exhaustion theory because in many of its considerations as well as in the dictum of the decision, the ECJ stresses the factor that the products have not yet been marketed within the EU while bearing the trademark at issue. Whether the outcome of the case would have been the same (against the background of the various functions of the trademark that the ECJ highlights in its decision) if the dFiebranding occurred after the proprietor had placed them on the EU market bearing its trademark is therefore uncertain—and in my personal opinion unlikely. Although from an economic perspective the findings of the ECJ apply likewise in the setting of a product that is commercialized for the first time in, say, Greece and then exported to Finland, from a legal perspective the products have been legitimately introduced on the EU market from that moment and at that point the common market and related free movement of goods principles will take over.
However, it must be noted that legislation in certain countries expressly forbids debranding. For example, under the French Code de la Propriete Intellectuelle, debranding of trademarked products is not authorized. Since Article 36 of the EU Treaty specifically provides that the provisions of the free movement of goods do not preclude prohibitions or restrictions on imports justified on grounds related to the protection of industrial and commercial property, debranding is probably an issue that remains to be tackled on a local law level in many jurisdictions.
2. Court of Appeal Netherlands, 20 November 2018, 4Everyware vs. Guy Laroche
Who thought that Zombieland was fiction reserved for broadcast stations like Netflix? In the Netherlands case 4Everyware (4EW) vs. Guy Laroche, the question arose in the real world whether the dead could be resuscitated again to life. In other words, once a sold item has become subject to exhaustion, can it once again become subject to protection under the owner’s intellectual property rights as a result of a particular event that erodes the basis for exhaustion?
As part of a promotional action with the Carrefour retail chain of supermarkets, Guy Laroche, a French fashion house, offered certain products like bedlinen, bath towels, bathrobes, etc., at a discounted price if the shopping customer at the Carrefour supermarket collected a certain number of savings stamps. The action was organized through a certain number of participants: (1) Guy Laroche entered into a license agreement with Textiles Oliviers Mercier (TOM) authorizing the latter to manufacture and propose for sale, as part of the promotional action with Carrefour, certain products bearing the Guy Laroche trademark; (2) TOM entered into a subcontract with Promeco whereby the latter would organize the promotional operation at Carrefour in consideration of the payment of a royalty to TOM, part of which would be transferred to Guy Laroche; (3) Promeco then made the products available to Carrefour upon its order.
After the promotional campaign had come to an end, Promeco sold the products that remained in stock to Boxter (an affiliated company of Promeco), who, in turn, sold the products to 4EW; the latter subsequently offered the products to the public via its website. Guy Laroche brought 4EW before the courts claiming trademark infringement. 4EW opposed the claim by holding that the trademark rights of Guy Laroche were exhausted. Part of the dispute between the parties resided in the question of whether Promeco originally sold those products to Carrefour or whether Promeco only held those products available under consignment until they were distributed by Carrefour to the ultimate end-customer.
The license agreement between Guy Laroche and TOM authorized the latter to sell the products only within the frame of the Carrefour promotional campaign. However, the contract between TOM and Promeco contained an additional “end of campaign stock” clause that authorized Promeco to sell the remaining products to third parties within one month after the Carrefour action had ended. One salient additional fact: Guy Laroche received a copy of the agreement between TOM and Promeco without (at least according to the Court of Appeal; this part of the decision was criticized in the latter decision of the Supreme Court) objecting or otherwise presenting any comments on this clause.
When Guy Laroche learned of the availability of its promotional products on the website of 4EW, it asked the court to issue a cease-and-desist order for trademark infringement because the conditions of sale under which 4EW presented those products were such that it harmed the reputation and image of the Guy Laroche trademark.
After receiving a favorable judgment from the Rotterdam District Court, 4EW appealed the decision arguing that the trademark rights of Guy Laroche were exhausted following the authorized first sale of the products to Carrefour. Guy Laroche countered with two arguments: (1) the goods were never sold to Carrefour but were held in consignment until a consumer traded his savings stamps for the product in question, (2) even if the goods were sold and thus introduced on the market with the authorization of Guy Laroche, the latter could still oppose the resale to 4EW because of article 22 of the European Trademark Directive: “The proprietor of a Community trademark may invoke the rights conferred by that trademark against a licensee who contravenes any provision in his licensing contract with regard to (…) the quality of the goods manufactured or of the services provided by the licensee.”
The Court of Appeal held in favor of 4EW. In its opinion, the rights of Guy Laroche were exhausted through the first sale of the goods by Promeco to Carrefour for the purpose of the promotional campaign. Since the transaction between Promeco and Carrefour qualified as a sale, the subsequent return of (surplus) goods by Carrefour to Promeco did not, as a result thereof, revive the intellectual property rights of Guy Laroche on those goods: “once exhausted, forever exhausted.” In considering that the goods were effectively sold (and not simply held in consignment), the Court attached particular importance to (a) the words of the agreement between TOM and Promeco where the latter was authorized to resell the surplus stock at the end of the promotional campaign, (b) the reference in this agreement to “ventes” (= sales) by Promeco to Carrefour, and (c) the fact that Guy Laroche was aware of this agreement between TOM and Promeco, an agreement to which it had not expressed any objections. Also, Guy Laroche had received the royalties over these sales to which it was entitled and had therefore reaped an economic reward from these sales; even if the economic reward turned out to be less than the usual profit margins that Guy Laroche could expect from those sales (because the conditions were tailor-made for a promotional campaign), this did not overturn the fact that Guy Laroche had realized an economic value over these transactions.
The Court went one step further, holding that, even if it should be considered that the trademark rights were not exhausted when Promeco made these goods available to Carrefour, they were subsequently exhausted through the sale by Promeco to Boxter, which sale was authorized under the terms of the agreement between TOM and Promeco. This sale took place before the expiry date set forth in the agreement between TOM and Promeco and was therefore an authorized sale. Unfortunately, the Court did not address the argument of Guy Laroche that, because Boxter was an affiliated company of Promeco, the goods were not put on the market since the sale was only made as part of an intra-group transaction; for procedural reasons (the argument was only raised in the second instance, contrary to Dutch procedural rules) the Court discarded the argument. Under Peak Holding, if that finding was considered correct, Guy Laroche could legitimately argue that “a transfer between companies within the same group should be regarded as an internal measure within the group, which does not bring about exhaustion of the rights.”
Finally, where license agreements are involved, a licensee who puts goods bearing a trademark on the market in disregard of a provision in a license agreement can prevent exhaustion of the trademark rights where it is established that the provision in question is included in those listed in Article 8(2) of the EU Trademark Directive 89/104/EEC of 21 December 1988 (likewise, article 25 of the EU Trademark Regulation 2017/1001 of 14 June 2017). Amongst those provisions that authorize a proprietor to invoke its trademark rights against a licensee figures the breach of “any provision in the licensing contract with regard to the scope of the goods or services for which the licence is granted.”Guy Laroche’s reliance on the aforementioned “escape route” is also dismissed by the court; although Guy Laroche may be considered a luxury brand, which normally authorizes the trademark holder to oppose sales of the product under conditions which could damage the reputation of the trademark, the court finds that since Guy Laroche had already consented to the sale of its luxury products in the retail stores of Carrefour, whose means of advertising were not radically different from those used by 4EW, it could not rely on the provisions of article 15 of the EU Trademark Regulation to oppose further commercialization.
The Supreme Court has reversed the decision of the Court of Appeal on legal grounds that bear no direct relationship to the above general arguments, so it is worthwhile to have a closer look at this decision of the Court of Appeal that provides some interesting clarifications to the demarcation line between exhaustion and non-exhaustion of the owner’s intellectual property rights—and raises at the same time some further interrogations in this respect.
At first hand, the judgment of the Court raises some questions. The Court qualifies the nature of a transaction between Promeco and Carrefour, which is at the heart of the question of whether the trademark rights of Guy Laroche were exhausted, on the basis of the wording of a clause that figures in an agreement between TOM and Promeco. Although Guy Laroche requested that 4EW hand down copies of the sales invoices from Promeco to Carrefour (which it could not produce), the Court considered that this would be irrelevant since 4EW was not a party to the transactions between Promeco and Carrefour. This is certainly true, but on the other hand, the invoices could shed light as to whether the products were effectively sold to Carrefour, as 4EW argued. The decision of the Court, therefore, implies that the contractual qualification of what happens “downstream” in the supply chain (Promeco— Carrefour) may be determined by the choice of words used in an agreement “upstream” of such chain (TOM—Promeco).
If, as Guy Laroche argued, Carrefour held the goods in consignment, those particular goods were not, as such, put on the market, but only available to be put on the market. Availability alone is not sufficient for exhaustion to occur: Peak Holding (Case C-16/03 of 30 November 2004). The fact that Carrefour could dispose of the goods for only a limited time in the context of the special offer did not alter the Court’s conclusion on the exhaustion. Since under the agreement, Carrefour had the right to dispose of all the goods (including the right to return the goods after the end of the campaign), the rights of Guy Laroche must still be considered exhausted.
Whatever the foregoing queries, looking at the economic context of the transactions, where (i) Guy Laroche was aware of the contents of the Memorandum of Understanding between TOM and Promeco and did not raise any objections (although the Supreme Court annulled the Court of Appeal’s decision on this aspect, holding that 4EW did not bring sufficient proof of that awareness) and (ii) Guy Laroche received (via TOM) royalties over all products (including the unsold surplus products) that Promeco made available to Carrefour, the Court concluded that the transaction between Promeco and Carrefour exhausted the trademark rights on those products. Through point (i), the court derived that Guy Laroche consented to the further sales by Promeco (which fulfills the specific subject-matter of the IP right). Through point (ii), the Court concluded that Guy Laroche had received financial consideration for its trademark rights through the royalties that Promeco paid to TOM (which fulfills one of the essential functions of an IP right). It is irrelevant that Carrefour did not subsequently succeed in selling all those products to end-customers during the loyalty program, and consequently returned the surplus of goods to Promeco at the end of this program. “Once exhausted, always exhausted”—the court held that a trademark right cannot revive simply because the goods, after having been sold with the consent of the trademark holder, are “returned to sender” as unsold surplus goods.
This decision shows that the trademark rights of the owner are as strong as the weakest link in the contract chain. Although Guy Laroche had introduced a clause in the agreement with TOM that after the end of the promotional action, TOM could not dispose of the goods without the consent of Guy Laroche, this restriction was not reproduced in the agreement between TOM and Promeco. Because Promeco sold (according to the Court) the goods to Carrefour, this sale exhausted the trademark rights, and the return of those goods at the end of the campaign did not revive those trademark rights. The “post-sale” non-exhaustion arguments based on the conditions of resale by 4EW were also insufficient for the court.
3. Court of Appeal Netherlands, Coty Beauty Germany vs. easyCOSMETIC Benelux.
In this decision, the trademark right holder, Coty Beauty, opposed the use of two trademarks for which it was the selective distributor (Jil Sander and Davidoff) as part of a packaging strategy implemented by easy- COSMETIC, a wholesale trader that resells cosmetic products through an internet website, where those products are shipped to the customer in packages using a “multi-mark” presentation, as follows: (See Figure 1).
It was not disputed that the resale of the cosmetic products itself could not be further prohibited—the exhaustion of the trademark rights in relation to the resale itself was not at stake. However, Coty argued that under article 15 of the EU Trademark Regulation 2017/1001 of 14 June 2017, exhaustion shall nevertheless not apply “where there exist legitimate reasons for the proprietor to oppose further commercialisation of the goods.”
First, Coty relied on the ECJ’s decision of July 8, 2010, Case C-558/09, where the Court held that “in the case where a third party’s ad suggests that there is an economic link between that third party and the proprietor of the trademark, the conclusion must be that there is an adverse effect on the function of indicating origin” for which the trademark owner’s rights are preserved.
This argument is dismissed by the Court of Appeal. The multitude of trademarks that are reproduced on the boxes and that represent a “wordcloud” of more than 80 product references, cannot mislead the average consumer to believe, especially in a context where these same products are offered through a variety of sales channels including department stores and commercial websites, that the reseller has an economic connection (in the sense of an authorized distributor) with the respective trademark owners. This impression will be reinforced through the mode of presentation where the trade name “easyCOSMETIC” is prominently displayed, whereas the trademarks only figure in the context of a “wallpaper presentation.” Finally, the overall context in which the consumer purchases these products, where the receipt of a box including the products is only the final link in the supply chain, and where the e-shop where the consumer makes its purchase decision promotes the products through a general slogan “Beauty For Less,” also avoids the creation of a mistaken belief that the seller acts as the authorized (selective) distributor of the original manufacturer of those products. Rather, such slogan confirms that easyCOSMETIC acts as a discounter and not as an authorized distributor. The mere fact that the reseller derives an advantage from using another person’s trademark in advertisements for the sale of goods covered by the mark, which are in other respects honest and fair, this lending of an aura of quality to his own business does not constitute a legitimate reason to oppose these practices: Case C 63/97 BMW [1999].
Another issue that was only addressed sideways concerned the necessity of the “wordclouded” configuration of this shopping box. According to the main case of the ECJ on reaffixing trademarks, Bristol-Myers Squibb vs. Paranova A/S (C-427/93), “The power of the owner of trademark rights protected in a Member State to oppose the marketing of repackaged products under the trademark should be limited only in so far as the repackaging undertaken by the importer is necessary in order to market the product in the Member State of importation.” Although this case concerned not so much a case of repackaging but rather the mere use of the trademark for marketing purposes, the principle of necessity remains applicable because the use of the trademark is the prerogative of the trademark holder, as the ECJ underscored in its landmark decision Hoffmann Laroche vs. Centrafarm (Case 102/77), and the only exception thereto is an exercise of the trademark as a disguised restriction on trade between member states, e.g., in order to compartmentalize markets.
Thus, in the case Christian Dior vs. Evora (Case C-337/95), it was held that the proprietor of a trademark may not oppose the use of the trademark by a reseller who habitually markets articles of the same kind, but not necessarily of the same quality, as the trademarked goods. This is done in ways that are customary in the reseller’s sector of trade for the purpose of bringing the further commercialization of those goods to the
public’s attention.
However, the reaffixing of numerous trademarks on those shipping boxes appears as a use of the trademark after the purchase of the related goods has already been made. Hence, the trademark is not used as a prospective instrument. This is even more so since the box is only addressed to the purchaser (and not to the public at large) so the question can legitimately be asked: is the use of the trademark in this particular context necessary for the purpose of further commercialization of the product, once it has been legitimately put on the market for the first time by the original manufacturer? Without surprise, the decision of the Court of Appeal
has been confirmed by the Netherlands Supreme Court.
4. Oberlandesgericht Düsseldorf, 6 March 2018, Kanebo vs. Real
Apart from the right of the trademark owner (or its authorized distributors) to oppose an abusive “free ride” that a reseller appropriates by misleading the public to believe that he entertains an immediate business relationship with the trademark holder, the latter may also oppose further commercialization when the means used by the reseller in order to promote and market those goods damages the allure and prestigious image of the goods for which the trademark owner has created an aura of luxury: Case C 59/08, Copad vs. Christian
Dior [2009].
An illustration thereof was provided by the German courts in a case where skin and hair care products, makeup and perfumes from a Japanese luxury cosmetics manufacturer (Kanebo) were offered for sale by the retail chain Real, which mainly sells groceries, but also household products, electrical appliances, textiles and cosmetics. Real placed Kanebo’s products on the market in both physical stores and through its webstores. The Court had particular regard to the sales environment, both online and offline, which it considered not comparable to the luxurious environment in which the products were usually sold by the manufacturer through its selective distribution system. Particular items that the court highlighted in its decision were that Real sold the goods together with mass-produced and discounted products of all kinds, that no product consultation took place, and that its marketing and advertising focused on price rather than quality. In the overall commercial context, these means of offering for sale the trademarked products of Kanebo detracted from the exclusive and luxurious appeal of its branded products.
5. BGH, judgment of October 24th 2017, case no. X ZR 55/16 (“Drum Unit”)
It is a well-known expression in patent law that “to repair ≈ to infringe,” which functions as a warning to third parties that where repair turns into remanufacturing the patented products, the third party will be infringing
those patents.
As so often happens, the case tuned in on the issue of the replacement of toner cartridges for printer machines, where the original unit is “stripped down” and where the relevant (used) components (not the ink itself) are replaced. In this particular case, the dispute concerned the replacement of a so-called photosensitive drum unit and its connection to the original coupling device. A pertinent detail: the patent claim addressed the combination of a photosensitive drum unit and a coupling device, whereas the replacement only concerned the photosensitive drum unit.
The Regional Court of Dusseldorf found that the defendants infringed the patent because the replacement of the drum constituted an impermissible reconstruction. However, the Federal Court of Justice overruled this decision: the FCJ regarded the replacement of the drum as a permissible repair, since the technical effects of the invention are not so much reflected in the drum itself, but more particularly in the coupling member (which was not replaced). The replaced drum is a mere object participating in the inventive effect of the overall component. Hence, the patented claim is not reproduced by this action and the underlying patent remains exhausted. ■