Advocate general delivers opinion on trademark rights exhaustion issues

The underlying dispute before the French Supreme Court involved the sale of Dior lingerie by a licensee to a discount distributor in violation of an express prohibition in the licensing agreement. The Supreme Court referred questions to the European Court of Justice (ECJ) for a preliminary ruling. The questions aimed to clarify whether Dior, the trademark owner, could invoke its trademark rights against the licensee and the discount distributor under Articles 7 and 8(2) of the First Trademarks Directive (89/104/EEC) (now the Trademarks Directive (2008/95/EC)).  

 

Article 8(2) provides for a list of circumstances in which a trademark owner may invoke its trademark rights against a licensee which has breached a provision of the licensing agreement. The list includes breaches with regard to:

The advocate general first stated that this list was exhaustive. She then considered whether Dior could rely on Articles 8(2)(d) and (e) in this case. 

 

With regard to Article 8(2)(d), the advocate general concluded that the provision was not applicable because the trademark had not been affixed outside of the territory described in the licensing agreement. The advocate general did not mention the fact that the term 'territory' refers to geographical restrictions, and not restrictions relating to the nature of the actors in the distribution chain. With regard to Article 8(2)(e), the advocate general concluded that the phrase “services provided by the licensee” referred to the provision of services under a licensing agreement, and not to the mere sale of goods. The word 'quality' refers to a central function of a trademark - namely, to indicate that the trademark owner controls, and is responsible for, the quality of the goods. Therefore, 'quality' refers to the manufacturing process, as opposed to the subsequent distribution of the goods.

 

However, the advocate general stated that, with regard to luxury goods, the reputation of the mark is usually relevant in assessing the quality of the goods within the meaning of Article 8(2). She also pointed out that, under Article 7, a trademark owner may oppose the distribution of goods if such distribution damages the reputation of its mark. On this basis, the advocate general concluded that Dior could rely on Article 8(2)(e) if the sale of the trademarked goods by the licensee to the discount distributor caused such damage to the reputation of the DIOR mark that it raised doubts as to the quality of the goods.

 

With regard to Article 7(1), the advocate general held that the fact that the parties had entered into a licensing agreement did not in itself lead to the exhaustion of Dior's trademark rights. A trademark owner's rights are exhausted only where the goods have been put on the market. The advocate general referred to the decision of the ECJ in Zino Davidoff/Levi Strauss (Joined Cases C-414/99 and 416/99) and Peak Holding (Case C-16/03), but refused to draw an analogy, as these cases involved other types of agreements.

 

The advocate general also emphasized that the right to invoke trademark rights against a licensee under Article 8(2) should not be more limited than the right to invoke trademark rights against third parties under Article 7. The advocate general concluded that, under Article 7(1), a licensee that puts goods on the market in violation of the licensing agreement will be deemed to have acted without the consent of the trademark owner only if, by distributing the goods, the licensee violates one of the rights listed in Article 8(2). Violations falling outside the scope of Article 8(2) are not governed by trademark law. The interpretation of Articles 7(1) and 8(2) is thus linked.

 

Finally, the advocate general stated that, under Article 7(2), the violation of the licensing agreement and the sale of the goods to a discount distributor would not constitute a legitimate reason to oppose the further commercialization of the goods. Referring to the case law of the ECJ, the advocate general emphasized that damage to the reputation of a trademark may, in principle, constitute a legitimate reason. However, the trademark owner must prove that serious damage has actually occurred - potential damage to the reputation of the trademark is insufficient.