The Supreme Court has unequivocally upheld the rights of a trademark owner to the first marketing rights of its products in the European Economic Area (EEA), notwithstanding complaints from a parallel importer that the exercise of those rights was anti-competitive.(1) The decision will no doubt be unpopular among parallel traders operating outside of recognised distribution networks, but will be welcomed by European trademark owners that continue to benefit from the unambiguous legal protection afforded by the EU Trademarks Directive.
In 2009 M-Tech supplied to a UK purchaser 64 Sun disk drives that had previously been sold in the United States, China and Chile, and which had been sourced by M-Tech through a US broker. The drives had not previously been sold or marketed in the EEA, nor had Sun (the trademark owner) ever consented to them being placed on any EEA market.
Sun sued for trademark infringement, seeking to enforce its rights under Article 5(1) of the Trademarks Directive, which confers upon a trademark owner the exclusive right to control the first marketing in the EEA of goods bearing its trademark. This right applies even if the goods are entirely genuine and have been previously marketed outside the EEA by the owner or with its consent. The rights are exhausted if they have been marketed in the EEA by the owner or with its consent.
At first instance, Sun successfully persuaded the court to give summary judgment (ie, judgment without the need for a full trial), ordering (among other things) an inquiry into damages and to impose an injunction preventing M-Tech from marketing the goods in the EEA. However, the Court of Appeal, while not offering any legal conclusion on the merits of the case, felt that M-Tech's "competition defences" were at least arguable and thus ruled that summary judgment should not have been granted. Sun, as trademark owner, subsequently appealed to the Supreme Court.
In its appeal, Sun invited the Supreme Court to make a reference to the Court of Justice of the European Union (ECJ) on whether an entity that has imported and sold goods in the EEA without the consent of the trademark owner can defend an action for trademark infringement on the basis that the owner has engaged in conduct designed to obstruct the free movement of goods within the EEA. The Supreme Court decided that such a reference would be required only if this were an arguable defence.
M-Tech's defence was three-fold. It argued that Sun should not be permitted to enforce its trademark rights because:
- enforcement would have the object and effect of partitioning the internal market in violation of the principle on the free movement of goods within the EEA – a principle which goes to the very heart of the successful operation of the European Union;
- Sun was seeking to exercise rights connected with distribution agreements that contained restrictive provisions contrary to Article 101 of the Treaty on the Functioning of the European Union – a crucial treaty provision that seeks to prevent companies from entering into agreements which have as their object or effect the prevention, restriction or distortion of competition; and
- enforcing Sun's trademarks would constitute an abuse of rights under EU law.
According to M-Tech, Sun was seeking to reserve the secondary market for its products – estimated to be worth approximately $1.07 billion – for itself and its authorised distributors by refusing to disclose information on whether the goods in question had already been legitimately marketed in the EEA, a practice which (in conjunction with Sun's aggressive trademark enforcement) would have a "chilling effect" on the ability of independent resellers to market and resell goods.
The Supreme Court ruled in Sun's favour. This is perhaps unsurprising given that its ruling follows case law dating back to 1976 – affirming the principle subsequently enshrined in the Trademarks Directive – that trademark owners have an exclusive right to control the first marketing of their goods in the EEA.
On M-Tech's key argument in its defence, that Sun's enforcement of its trademark rights violated EU law on free movement of goods, the Supreme Court held that the logic of that defence was simply incorrect. Free movement principles apply only to intra-EEA trade once goods have been lawfully put onto the market within the EEA. Given that Sun's entire case was based on the products not having been lawfully put on the EEA market and without its consent, free movement objections did not apply. Thus, free movement and trademark rights exhaustion go hand in hand – they both apply only when products have been first marketed lawfully within the EEA with the brand owner's consent.
The court also held that the exercise of Sun's rights constituted neither an abuse of rights under EU law nor the conclusion of agreements in violation of Article 101. The court found no relevant connection between Sun's alleged policy of withholding information about previous marketing within the EEA and the prevention, restriction or distortion of competition. It seems that even if M-Tech had established that Sun had been in breach of the treaty provisions, it would still have been difficult for M-Tech to justify the trademark infringement because of the longstanding principle that a person or entity may not profit from its own illegal act. As such, establishing a breach of a treaty provision (which it failed to do) would not necessarily have conferred on M-Tech a legitimate defence to an action for trademark infringement.
In addition to denying M-Tech's defence (described as "extreme") and reinstating the summary judgment award, the court declined to make a reference to the ECJ – a clear indication that the exhaustion of rights principles remain, for the moment at least, unimpeachable. If there is insight to be gained, it is in the Supreme Court's elegant analysis of how free-movement principles can be said to co-exist with trademark law, explaining that free-movement principles do not come into play until products are lawfully on the market with the trademark owner's consent.
For further information on this topic please contact Jeremy Drew or Paul McComb at RPC by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email (firstname.lastname@example.org or email@example.com).