In the case of Copad SA v Christian Dior SA, the European Court of Justice (ECJ) has confirmed that, in certain circumstances, a brand owner may prohibit the sale of its luxury goods in discount stores.
Article 7(1) of the Trade Marks Directive, which harmonised trade mark law throughout Europe, states that a trade mark owner cannot prohibit the use of his trade mark on goods which have been put on the market in the EEA by the trade mark owner or with his consent. This is known as the doctrine of ‘exhaustion of rights’. There is an exception to this doctrine in Article 7(2) where there exist “legitimate reasons” for the trade mark owner to oppose further sale of the goods.
Article 8(1) of the Directive provides that a trade mark owner may licence his trade mark for some or all of the goods or services for which it is registered. Article 8(2) states that the trade mark owner may sue for trade mark infringement where a licensee breaches any provision in the trade mark licence “with regards 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”.
Dior licensed its CHRISTIAN DIOR trade mark to SIL for the manufacture and sale of luxury lingerie. Clause 8.2 of the licence said:
“ ...in order to maintain the repute and prestige of the trade mark the licensee agrees not to sell to wholesalers, buyers’ collectives, discount stores, mail order companies, door-to- door companies or companies selling within private houses without prior written agreement from the licensor...”
Faced with economic problems, SIL asked Dior for permission to sell the lingerie outside its selective distribution network. Dior refused. Despite that refusal, and in breach of clause 8.2 of the licence, SIL sold the lingerie to Copad, a discount store. Dior commenced proceedings against Copad and SIL for trade mark infringement. The French courts found that the sale to Copad by SIL merely gave rise to contractual liability on SIL’s part but that it did not constitute trade mark infringement. Dior appealed to the Cour d’appel de Paris and Copad subsequently appealed to the Cour de cassation. In the context of those appeals, a reference was made to the ECJ for a ruling on the interpretation of Articles 7 and 8(2) of the Directive.
The ECJ held:
- That Article 8(2) of the Directive allows a trade mark owner to sue a licensee for trade mark infringement where that licensee breaches a clause of the trade mark licence, provided that clause falls within one of the categories of clauses listed in Article 8(2). A clause prohibiting the sale of goods to discount stores would fall within the “quality of goods” category in Article 8(2). Quality of goods refers not merely to the material characteristics of goods but also to their “allure and prestigious image which bestows on the goods an aura of luxury”. An impairment of that aura of luxury is likely to affect the actual quality of the goods.
To able to sue for trade mark infringement under Article 8(2) for breach of a clause prohibiting sales to discount stores, a trade mark owner would need to satisfy the national court that breach by the licensee of the clause would in fact damage the aura of luxury of the goods and therefore their quality. In assessing this, the court must take into account the nature of the goods, the volumes sold, whether the licensee sells to discount stores regularly or occasionally, the nature of the goods normally sold by the discount stores and the marketing methods used by those stores.
- In the circumstances, the trade mark owner’s rights were not exhausted by Article 7. Usually, the fact that a licensee had put goods on the market would be sufficient to demonstrate the trade mark owner’s “consent”. However, there would be no exhaustion of rights where a licensee had breached the licence and the breach was of one of the clauses listed in Article 8(2).
- A trade mark owner would also be able to prohibit the sale of its luxury goods to a discount store using Article 7(2) of the Directive. Provided the trade mark owner could show that the sale to the discount store would damage the reputation of its trade mark, this would amount to a “legitimate reason” under Article 7(2). To assess the likelihood of damage to the trade mark, the court should take into account the parties to whom the goods are resold and the specific circumstances in which the luxury goods are put on the market.
This decision will be welcomed by businesses that own luxury brands. Where a licensee sells the goods to a discount store, in breach of a prohibition in the licence, the brand owner will be able to sue for breach of contract and trade mark infringement under Article 8(2). This will allow them to manage their distribution networks more effectively and therefore control the quality of the goods and the image and reputation of their brand. One sticking point might be that a brand owner will need to demonstrate that the sale to the discount store will actually damage the “allure and prestigious image which bestows on the goods an aura of luxury”. It remains to be seen how the courts will assess the “allure” and “prestigious image” of branded goods.