The European Court of Justice (ECJ) has provided guidance, which strengthens the ability of luxury trade mark owners to maintain and enforce a selective distribution network for branded goods. This guidance was given in a case concerning premium corsetry goods bearing the Christian Dior trade mark.

Dior had entered into a trade licence agreement with the manufacturer of the corsetry. However the ECJ made it clear that the question of whether or not goods have been put on the market with the "consent" of the trade mark proprietor is independent of whether or not the terms of such a licence had been complied with. Dior argued that any contravention of the licence agreement by its licensee, Société industrielle lingerie (SIL), meant that the marked goods had not been placed on the market with its consent - therefore its trade marks rights had not been exhausted and it could still rely on them. Copad (a discount retailer who had purchased the goods from SIL) in stark contrast submitted that such a trade mark licence agreement always constituted the unconditional consent of the proprietor of the trade mark to the licensee putting the goods bearing the trade mark on the market.

The ECJ adopted a middle way between these two extremes; it explained that only if the breached term relied upon was one specified in the exhaustive list in Article 8(2) of the Trade Marks Directive would it mean that the proprietor of the mark had not consented to their marketing.

Article 8(2) states: " The proprietor of a trade mark may invoke the rights conferred by that trade mark against a licensee who contravenes any provision in his licensing contract with regard to its duration, the form covered by the registration in which the trade mark may be used, the scope of the goods or services for which the licence is granted, the territory in which the trade mark may be affixed, or the quality of the goods manufactured or of the services provided by the licensee."

However, the ECJ also concluded that a provision relating to "the quality of the goods manufactured" should be interpreted widely to include a term that prohibits the sale by the licensee to third parties (for example discount stores) that are not part of a selective distribution network where the goods in question were luxury goods and breach of such a term might affect the "quality" itself of those goods as luxury goods. This is so in respect of such goods because, "... the aura of luxury emanating from them is essential in that it enables consumers to distinguish them from similar goods... Therefore, an impairment to that aura of luxury is likely to affect the actual quality of those goods".

This is excellent news for brand owners wishing to restrict those who can resell luxury goods bearing their trade mark. It is however bad news for those further down a supply chain. How will such resellers be able to determine whether a known licensee had agreed to and was in breach of such a term when it sold the marked goods?