In Copad v Dior the Advocate General (AG) has advised the European Court of Justice (ECJ) on whether a licensee's failure to comply with provisions in a trade mark licence may prevent the exhaustion of the owner's rights in the mark. The AG has advised that only breaches of the provisions listed in article 8(2) of the Trade Mark Directive will prevent such exhaustion. Article 8(2) refers, among other things, to provisions regarding the quality of the goods. The AG has advised that this includes the public's perception of the quality of the goods.
Dior licensed SIL to produce lingerie under the Christian Dior mark. The licence prohibited the sale of goods produced under it to discount stores. SIL became insolvent, and the goods it had made under licence were sold to Copad, a discount store. Dior sued Copad for trade mark infringement, asserting that its rights were not exhausted because it had not consented to the sale from SIL to Copad.
Article 7(1) of the Trade Mark Directive provides that a trade mark "shall not entitle the proprietor to prohibit its use in relation to goods which have been put on the market in the Community under that trade mark by the proprietor or with his consent". If a proprietor has so consented, its rights are said to be exhausted.
Article 7(2) states that article 7(1) "shall not apply where there exist legitimate reasons for the proprietor to oppose further commercialisation of the goods, especially where the condition of the goods is changed or impaired after they have been put on the market". The effect of this article is that if the trade mark rights would otherwise have been exhausted, the proprietor can nonetheless prevent further commercialisation if it can show "legitimate reasons" to oppose it. In case C-337/95 Dior v Evora the ECJ held that, for luxury goods, such reasons could include the fact that the method of commercialisation would result in "grave damage to the reputation of the mark".
Article 8(2) provides that "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".
The Advocate General has advised the ECJ to rule that:
- "Article 8(2) should be interpreted as meaning that a trade mark owner can enforce the rights conferred by that trade mark against a licensee who breaches a clause in the trade mark licence agreement that prohibits sales of the licensed goods to discount retailers, if such a sale would undermine the reputation of the product so far as to call into question the quality of the marked goods.
- Article 7(1) should be interpreted as meaning that the marketing of goods marked with a trade mark by the licensee in breach of a clause in the licence agreement, is to be considered as without the consent of the trade mark owner only when the licensee, in marketing these goods, contravenes one of the licence restrictions specified in article 8(2).
- Article 7(2) does not allow the owner of a trade mark to oppose the further commercialization of goods bearing its trade mark by discount retailers solely because a clause in the licence agreement prohibits the sale of such products to such retailers."
The AG stated (at paragraph 21) that article 8(2) "does not allow a trade mark owner to enforce his trade mark rights against any violation of the licence agreement, but only those expressly indicated in the article". He also stated (at paragraph 30) that "'quality of a product' refers exclusively to the characteristics which they acquire during production".
However, the AG also concluded (at paragraph 31) that: "In the case of luxury or prestige goods, their reputation for quality is also a relevant factor in assessing whether article 8(2) applies. Regardless of any other requirement of such products, damage to the reputation of the brand may have the effect that the marked product in question would no longer be recognized as a luxury or prestige product. Therefore, for this type of product, the use of certain distribution channels which are damaging to a mark's reputation may put into question the quality of the goods to which it is affixed."
If this opinion were to be followed by the ECJ, it could in effect create two different classes of marked goods for the purpose of determining whether trade mark rights have been exhausted. Where a trade mark owner could establish a relevant licence provision and that the circumstances of sale would "undermine the reputation of the product so far as to call into question the quality of the marked goods" then its rights would not be exhausted. However where harm to the reputation of the product could not be established, the reference to quality control provisions in article 8(2) would not be of any assistance unless the licensee was in breach of terms relating to the intrinsic quality of the goods made under licence.
If article 8(2) is a closed list, as the AG concludes, providing a measure of certainty to those dealing with licensees, then the question remains why the AG chose to interpret "any provision…with regard to…the quality of the goods manufactured" to include provisions relating to consumers' "perception of quality" of such goods? The AG's reason is found in paragraph 34 of the opinion, where the AG states that "as is apparent from the consideration below of article 7(2), only such a wide definition of the concept of the quality of a product results in the owner of a trade mark not having greater rights against a third party than it has against a licensee". The AG is in effect saying that, if a trade mark owner can rely on article 7(2), against a third party, to prevent "grave damage to the reputation of the mark" by shoddy advertising, it must be able to rely on article 8(2) against a licensee in similar circumstances, so "quality" in article 8(2) must include "perception of quality".
However, it is not clear why there should be this link between article 7(2) and article 8(2). Article 7(2) applies to prevent further commercialisation of marked goods after the rights in the mark would otherwise have been exhausted due to consent to first marketing. To rely upon this article the trade mark owner must establish "legitimate reasons" for opposing such further commercialisation. Article 8(2) lists the circumstances in which non-compliance with a licence term will negate the trade mark owner's consent altogether and therefore prevent exhaustion from ever occurring in relation to those goods. The first is therefore ex-post protection, the second defines when exhaustion does not occur due to an absence of consent in the first place. Since article 7(2) already allows additional protection for owners of luxury brands, following Evora, it is not necessary to rely on article 8(2) for this purpose, unless the AG is correct in assuming that a trade mark owner cannot rely on article 7(2) against its own licensee.
The AG may have assumed that a trade mark owner cannot rely on article 7(2) in respect of the acts of its own licensees, possibly because 7(2) refers to "further commercialisation". If that is correct, then his findings about article 8(2) may be necessary. If it is not, then a licensor may be able to act against its licensee on the basis of harm to reputation being a "legitimate reason" within article 7(2), as in Evora.
It may be that, when the ECJ gives its judgment, article 8(2) falls by the wayside as the court relies on previous case law under article 7(2) relating to "legitimate reasons". Certainly the AG's interpretation of article 8(2) appears stretched.