Review of the Judgment of the Court of Justice in Case C-59/08 Copad SA -v- Christian Dior Couture SA, Société Industrielle Lingerie (SIL)
In a landmark ruling, the European Court of Justice (the ECJ) has confirmed that a trade mark owner may limit the kind of customers to whom their licensees can sell where this would damage the reputation of the trade mark.
The ECJ held that Christian Dior was entitled to enforce a term in its trade mark licence agreement which prohibited sales by the licensee to discount stores: the ECJ accepted that the reputation of the Christian Dior trade mark would be damaged by sales to inappropriate retail outlets. The ECJ held that Christian Dior was entitled to intervene to prevent such stores reselling its branded products.
The judgment, delivered on 23 April 2009, interprets EU Directive 89/104, the Trade Mark Directive (the Directive). We believe that trade mark proprietors will welcome this decision which may prove to be influential as to how selective distribution networks are set up in the future. At the same time, the judgment might lead to a number of additional questions being directed to the ECJ.
In May 2000, Dior entered into a trade mark licence agreement with SIL to manufacture and distribute luxury corsetry goods bearing the Christian Dior trade mark. The agreement stated that ‘in order to maintain the repute and prestige of the trade mark the licensee agrees not to sell to wholesalers, buyers’ collectives, discount stores, ... without prior written agreement from the licensor, and must make all necessary provision to ensure that that rule is complied with by its distributors or retailers’. Faced with economic difficulties, SIL asked Dior for permission to market its goods outside its selective distribution network, Dior refused to grant that request.
Despite the refusal and in breach of its contractual obligations, SIL sold goods bearing the Christian Dior trade mark to Copad, a company operating a discount store business.
Dior brought an action against SIL and Copad for trade mark infringement. Proceedings in the French courts raised questions as to the extent to which Dior could rely on its trade mark rights as against SIL and Copad. On appeal, the Cour de Cassation stayed the proceedings and referred three questions to the ECJ on its interpretation of various aspects of the Directive.
Dior’s rights under the licence agreement
The question asked here was whether Dior, under Article 8(2) of the Directive, could invoke the rights conferred by its trade mark against SIL, who contravened a provision in its licence agreement which prohibited sale to discount stores on grounds of the trade mark’s prestige?
Article 8(2) of the Directive expressly enables the proprietor of the mark to invoke his rights against a licensee where the latter contravenes certain provisions in the licence agreement, i.e. 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.
The ECJ ruled that the proprietor of a trade mark can invoke the rights conferred by that trade mark against a licensee who contravenes a provision in a licence agreement provided it has been established that that contravention damages the allure and prestigious image which bestows on the goods an aura of luxury. The ECJ found that this was in line with the proprietor’s express rights under Article 8(2) with regard to maintaining the quality of the goods manufactured.
While the ECJ found that ‘an impairment to that aura of luxury is likely to affect the actual quality of those goods’ they were also of the opinion that national courts were best placed to examine whether damage has been inflicted to the ‘aura of luxury’, taking into consideration:
- the nature of the luxury goods;
- the volumes sold
- the nature of the goods normally marketed by the discount stores; and
- the marketing methods normally used in that sector.
Had Dior consented to the resale by SIL?
The ECJ next addressed the question of whether a licensee who sells trademarked goods on the market in the EEA, - in disregard of a provision of the licence agreement prohibiting, on grounds of the trade mark’s prestige, sale to discount stores,- does so without the consent of the trade mark proprietor under Article 7(1). If this was the case, then the trade mark owner’s rights would be ‘exhausted’ and no further action could be taken under the Directive.
The ECJ found that a licensee who puts goods bearing a trade mark on the market in disregard of a provision in a licence agreement does so without the consent of the proprietor of the trade mark where it is established that the provision in question is included in those examples listed in Article 8(2) of the Directive.
It was established in the ECJ’s judgment that this list is exhaustive, and that Dior’s arguments regarding the quality of its goods being affected by the resale in discount stores fell within it.
Position of the discount store
The final query was whether the proprietor of a mark could use the licensee’s contravention of a provision to oppose further sale of the goods by the discount store, on the basis of Article 7 of the Directive. The Directive states that a trade mark proprietor cannot prohibit the use of his trade mark in relation to goods which have been put on the EEA market by himself or with his consent. Had Dior allowed discount stores to be included in the selective distribution network clearly its consent would have been given.
Under Article 7(2) of the Directive a proprietor can object to the resale of his goods only where there exists ‘legitimate reasons to oppose further commercialisation of the goods’. Unlike Article 8(2), Article 7(2) provides a non-exhaustive list of legitimate reasons, referring generally to cases ‘especially where the condition of the goods is changed or impaired after they have been put on the market’.
The decision delivered by the ECJ therefore considered that, if it can be established that, taking into account the particular circumstances of the case, such resale damages the reputation of the trade mark, then this is a sufficiently legitimate reason to be able to hold that Dior had not exhausted its rights in the trade mark; i.e. Dior could rely on the licensee’s contravention of the provision relating to the ‘repute and prestige of the trade mark’ to oppose a resale of the goods by the discount store.
Implications for Trade Mark owners/licensees
While companies owning luxury brands and trade marks will certainly welcome this judgment due to the control they will now be able to assert over their sales outlets by way of their selective distribution networks and agreements with licensees, there do seem to be some points which the ECJ judgment has failed to clarify completely.
The main issues seem to be:
- Where will national courts draw the line as to which goods qualify as possessing an aura of luxury? And further, why should only luxurious goods be afforded such strong trade mark protection as opposed to less luxurious but equally valuable trade marks?
- From the guidance given by the ECJ to national courts, it seems that the frequency with which licensees sell to certain suppliers outside the network should be taken into account. This could arguably put the onus on trade mark owners to vet their prospective licensees from this perspective before entering into contracts with them and by extension, without stronger selective distribution networks being put in place, it could weaken proprietors’ position with regard to resale.
- Conversely of course, licensees and companies buying products from them for resale will now need to be more careful in the future with regard to the potential for breaching licensing agreements and the trade mark infringements which would result.