UK: When are Trade Mark Rights Exhausted?

Originally published January 2005

A recent case before the European Court of Justice has provided further clarification on the question of the exhaustion of trade mark rights in the European Union.

The question of the exhaustion of trade mark rights is a controversial issue and has raised great debate in the UK, as it is the legal concept which lies behind many questions concerning the parallel importation of so-called branded ‘grey goods’ around and into the EU. The most easily recognisable example of the parallel importation of goods and the controversy it raises is the importation of designer goods, in particular jeans, by many supermarket chains.

Under the European Trade Marks Directive, which is incorporated into the national trade mark laws of all EU member states, the proprietor of a trade mark registration has the exclusive right to prevent the use of a sign either identical or similar to the registered mark in relation to goods or services identical or similar to those for which it has been registered. However, under Article 7(1) of the Directive, the trade mark registration shall not entitle the proprietor to prohibit the use of the mark in relation to goods, which have been put on the market in the European Economic Area (EEA) under that mark by the proprietor or with his consent. In layman's terms, the trade mark owner has the right to benefit from the first sale of goods carrying his trade mark in the EEA, but is not entitled to prohibit the further supply of those goods across the EEA. The exhaustion principle is designed to stop the use of trade mark rights to partition the EEA and prevent the free movement of goods across the EEA.

The issue of the exhaustion of trade mark rights is controversial because European Trade Mark Case Law has firmly established that there is no such thing as ‘international exhaustion’ and the exhaustion principle only applies on a pan-EEA level. A ‘Fortress Europe’ policy is essentially in place and accordingly, the parallel importation of branded goods from outside the EEA is generally prohibited.

On 30 November 2004 in a case between the Scandinavian companies Peak Holding AB and Axolin-Eilnor AB, the ECJ provided guidance on whether there is a need for actual sales of goods to take place in the EEA for trade mark rights to be exhausted, or that merely the trade mark proprietors intent on placing them on the market, even if they are not sold, is sufficient for exhaustion to apply. The ECJ also answered the question as to whether trade mark rights are understood as having been exhausted by the sale of the goods to another trader within the EEA, if the trade mark proprietor upon sale imposed a restriction on the buyer under which he was not entitled to resell the goods in the EEA.

The Danish company Peak Holding was the proprietor of the trade mark Peak Performance that was used and registered in respect of clothing and accessories in Sweden and other EU countries. The Swedish company Axolin-Eilnor AB, previously called Factory Outlet, sold clothing through various stores in Sweden. Factory Outlets sold predominately branded goods, which were parallel imports or reimports or were obtained outside the normal distribution channels of the proprietors of the trade mark concerned.

In late 2000, Factory Outlet marketed a consignment of approximately 25,000 garments under the Peak Performance trade mark, after placing advertisements offering the sale of these goods at half price. The articles came from Peak Performance collections dating from 1996 to 1998. The goods had been manufactured outside the EEA on behalf of Peak Holding and had been imported into the EEA in order to be sold there.

In November and December 1999, all the garments, which formed part of the aforementioned consignment, had been offered for sale to consumers in Copenhagen in the Base Camp store supplied by Carli Gry Denmark A/S, a sister company of Peak Performance Production, which is under the control of Peak Holding. The goods were not eventually sold and Peak Performance Production sold the consignment to the French company COPAD International. According to Peak Holding, the contract of sale between Peak Performance Productions and COPAD provided that the consignment was not to be resold in European countries other than Russia and Slovenia (all then outside the EU), apart from five percent, which could be sold in France.

Factory Outlet asserted it had acquired the goods from a Swedish company Truefit Sweden AB, who presumably had acquired them either from COPAD or from companies to whom COPAD had sold the goods. It was common ground between the parties that the consignment did not leave the EEA from the time it left Peak Performance Production's warehouse in Denmark until it was delivered to Factory Outlet in Sweden.

Peak Holding initiated a trade mark infringement action against Factory Outlet on the basis that the goods on sale had never been sold in the EEA by it or with its consent and thus its trade mark rights had not been exhausted in respect of the goods. The circumstances surrounding this case aptly sum up the objections brand owners have to ‘grey imports’ in that third parties often sell old stock at low prices, undercutting the brand owners’ own distribution channels and in the eyes of the brand owners devaluing their brand image.

So did the fact that Peak Holding had imported the goods in question into the EEA with an intention to sale them in the Base Camp store in Copenhagen, even if they had not eventually been sold, exhaust their trade mark rights? Well, the ECJ said no, one nil to the brand owner then! To understand the reasoning of the ECJ, one must go back to Article 7(1) of the Trade Mark Directive which states that the trade mark registration shall not entitle the proprietor to prohibit the use of the mark in relation to goods, which have been put on the market in the European Economic Area (EEA) under that mark by the proprietor or with his consent. The words ‘put on the market’ is the crucial phrase in this provision and it must be remembered that the wording of this clause of the Directive is designed to enable the trade mark proprietor to benefit for the first sale of the branded goods anywhere in the EEA, as held in the many cases such as Zino Davidoff and Levi Strauss, Sebago and Maison Dubios and Bristol Myers Squibb and others. The mere importation of goods into the EEA, if they are not actually sold, does not give the trade mark proprietor any benefit of that first sale. The brand owner gains no benefit from unsold goods and thus its trade mark rights are not exhausted.

However, it did not go all Peak Holdings way. Peak Holding had sold the goods to COPAD and this ‘sale’ took place in the EEA. The ECJ held that the fact that Peak Holding had placed contractual restrictions of the resale of the goods in question in the EEA were irrelevant and concerned merely a question of the contractual relations between COPAD and Peak. The important point was that a sale of goods had occurred in the EEA and that this must be interpreted as ‘putting the goods on the market’ and thus Peak had exhausted its trade mark rights by reason of this sale. 2-1 to Factory Outlet! Peak Holdings however presumably could claim that COPAD had breached its contract with Peak.

So what are the conclusions to be drawn from this case? Well, the mere intention to sale or the importation of goods into the EEA does not exhaust trade mark rights, the goods in question must be actually sold in the EEA to be considered as being ‘put on the market’. The second important point to note, is that a trade mark owner should not only impose contractual obligations of the resale of branded goods in the EEA by third parties, but also make sure that the actual sale of such goods to the ‘reseller’ takes place outside the EEA. Even then this may not be enough to avoid the exhaustion of its trade mark rights in all cases, as if the goods are sat in a warehouse in the EEA where does the sale take place? No doubt this is a question for another ECJ decision on another day.