In the judgment of the European Court of Justice dated April 23, 2009 (C-59/08), the following facts were at issue: Christian Dior couture SA concluded a trademark license agreement with Société industrielle lingerie (SIL) in respect of the manufacture and distribution of luxury corsetry goods bearing the Christian Dior trademark, which is owned by Dior.

According to the agreement, in order to maintain the repute and prestige of the trademark, SIL was obliged not to sell the goods outside the selective distribution network. In breach of its contractual obligations, SIL sold goods bearing the Christian Dior trademark to Copad, a company operating a discount store business. Therefore, Dior brought an action against SIL and Copad for trademark infringement. Within this action, the French Cour de cassation decided to refer three questions to the European Court of Justice for a preliminary ruling.

The court answered the question of whether a provision in the license agreement prohibiting sales to discount stores on grounds of the trademark’s prestige falls under Article 8(2) of the Directive 89/104/EEC (Trademarks Directive) in the affirmative, provided it has been established that contravention, by reason of the situation in the main proceedings, damages the allure and prestigious image that bestows on the respective products an aura of luxury.

Article 8(2) of the Trademarks Directive contains the following wording:

“The proprietor of a trademark may invoke the rights conferred by that trademark 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 trademark may be used, the scope of the goods or services for which the license is granted, the territory in which the trademark may be affixed, or the quality of the goods manufactured or of the services provided by the licensee.”

The court pointed out that it is precisely where the licensee contravenes provisions in the license agreement concerning, in particular, the quality of the goods manufactured, that Article 8(2) of the Directive enables the proprietor of the trademark to invoke the rights that the directive grants him. The quality of luxury goods is also based on the allure and prestigious image that bestows on them an aura of luxury. Therefore, an impairment to that aura of luxury is likely to affect the actual quality of those goods. It is not impossible that the sale by the licensee of luxury goods to discount stores that are not part of the selective distribution network set up under the license agreement may constitute such impairment. The court stated that it is for the national court to examine whether contravention by the licensee had damaged the aura of luxury of the goods. In this respect, the nature of the luxury goods bearing the trademark, as well as the volumes sold, had to be taken into account, along with the question of whether the licensee sells the goods to discount stores that are not part of the selective distribution network regularly or only occasionally, and what the nature of the goods normally marketed by those discount stores—and the marketing methods normally used in that sector of activity - are.  

The second question concerned the circumstances under which the trademark owner cannot claim his right to prohibit the use of a trademark because his rights are exhausted. According to Article 7(1) of the Directive, exhaustion occurs in relation to goods that have been put on the market in the Community under the trademark by the proprietor or with his consent. The European Court of Justice decided that in cases in which a licensee puts goods bearing a trademark on the market in disregard of a provision in a license agreement, he does so without the consent of the proprietor of the trademark if it is established that the provision in question is included in those exhaustively listed in Article 8(2) of the Directive.

With its third question, the Cour de cassation asked whether the proprietor of a trademark can nevertheless oppose further commercialization of the goods if the fact that a licensee puts luxury goods on the market in contravention of a clause in a license agreement is deemed to result in exhaustion of rights. According to Article 7(1) of the Directive, the proprietor can oppose further commercialization of the goods in specific cases, especially where the condition of the goods is changed or impaired after they have been put on the market. The question was whether the proprietor of a trademark could rely on a clause in a license agreement that the licensee had violated, in order to support this argument.

The court answered as follows: Where a licensee sells goods to a discount store in contravention of a provision in the license agreement, a balance must be struck. On the one hand, the legitimate interest of the proprietor of the trademark covered by the license agreement in being protected against a discount store that does not form part of the selective distribution network using that trademark for commercial purposes in a manner that could damage the reputation of that trademark needs to be considered. On the other hand, the discount store’s legitimate interest in being able to resell the goods in question by using methods that are customary in its sector of trade has to be taken into account. Therefore, should the national court find that sale by the licensee to a third party is unlikely to undermine the quality of the luxury goods bearing the trademark, so that it must be considered that they were put on the market with the consent of the proprietor of the trademark, it will be for that court to assess, whether further commercialization of the luxury goods damages the reputation of that trademark. In this respect, it is necessary to take into consideration, in particular, the parties to whom the goods are resold, and the specific circumstances in which the luxury goods are put on the market.