Dior decision represents victory for luxury brand owners

European Union
In Copad SA v Christian Dior couture SA (Case C-59/08, April 23 2009), the European Court of Justice (ECJ) has provided important guidance to luxury brand owners with regard to their ability to control the resale of their goods.
Christian Dior couture SA brought an action for trademark infringement before the Bobigny Regional Court (France) against Société industrielle lingerie (SIL), its licensee, and Copad SA, a company operating discount stores. Dior alleged that the sale by SIL to Copad of goods bearing the DIOR mark violated a licensing agreement between SIL and Dior which specifically prohibited any sales to discount stores without Dior’s prior consent. SIL had asked Dior for permission to sell goods bearing the DIOR mark outside of its selective distribution network, but Dior had refused.
The action was based primarily on Articles 7(1) and (2) and 8(2) of the First Trademarks Directive (89/104/EEC) (now the EU Trademarks Directive (2008/95/EC)). Article 7(1) provides for the exhaustion of the trademark owner’s rights if the goods have been put on the market by the owner or with its consent. Under Article 7(2), the owner may oppose further commercialization of the goods if it has a legitimate reason. Article 8(2) provides as follows:

"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:

(a) its duration;
(b)  the form covered by the registration in which the trademark may be used;
(c) the scope of the goods or services for which the licence is granted;
(d) the territory in which the trademark may be affixed; or
(e) the quality of the goods manufactured or of the services provided by the licensee."

The court held that SIL’s contravention of the licensing agreement did not constitute infringement, but merely gave rise to contractual liability on the part of SIL. Dior appealed.
The Paris Court of Appeal dismissed the appeal, holding that sales by SIL did not constitute infringement since the relevant provision in the licensing agreement relating to the conditions governing distribution did not fall within the scope of the national provisions transposing Article 8(2) of the directive. However, the court considered that those sales did not imply the exhaustion of Dior’s trademark rights for the purposes of the national legislation transposing Article 7(1).
Copad appealed and Dior cross-appealed. The Cour de Cassation decided to stay the proceedings and referred three questions to the ECJ on the interpretation of Articles 7(1) and (2) and 8(2).
The ECJ first considered Article 8(2). It held that since the list of provisions set forth in Article 8(2) was exhaustive, a trademark owner could assert its trademark rights against a licensee only if the latter had violated a provision expressly referenced therein. With regard to the phrase “the quality of the goods manufactured by the licensee” (Article 8(2)(e)), the court interpreted the term 'quality' broadly to encompass not only the material characteristics of the goods, but also the “allure and prestigious image which bestow on them an aura of luxury".    
Consequently, the ECJ concluded that:

"the proprietor of a trademark can invoke the rights conferred by that trademark against a licensee who contravenes a provision in a licence agreement prohibiting, on grounds of the trademark’s prestige, sales to discount stores [...], provided it has been established that that contravention [...] damages the allure and prestigious image which bestow on them an aura of luxury."
The ECJ pointed out that such determination must be made by the national courts based on the specific circumstances of each case. The ECJ instructed the courts to take into consideration:
firstly, the nature of the luxury goods bearing the trademark, the volumes sold and whether the licensee sells the goods to discount stores that are not part of the selective distribution network regularly or only occasionally and, secondly, the nature of the goods normally marketed by those discount stores, and the marketing methods normally used in that sector of activity.”
The ECJ then turned to Article 7(1) of the directive. It held that where a licensee puts goods on the market in contravention of a clause in a licensing agreement, the trademark owner will not be deemed to have given consent resulting in the exhaustion of its rights pursuant to Article 7(1) if the clause in question is expressly listed in Article 8(2). Therefore, if the trademark owner can demonstrate that such sale damages the “allure and prestigious image” of its goods, its trademark rights will not be exhausted.

The third question was whether, if the trademark owner was deemed to have given consent, it could nevertheless rely on Article 7(2) of the directive to oppose the further commercialization of the goods.
The ECJ referred to one of its earlier decisions in which it had held that damage to the reputation of a trademark may constitute a “legitimate reason” to oppose the further commercialization of the goods. Therefore, the ECJ held that a trademark owner could rely on Article 7(2) if it could demonstrate that such resale would damage the reputation of its mark. In this respect, the ECJ pointed out that it was necessary to take into consideration the parties to whom the goods had been resold and the specific circumstances in which they had been resold.
The decision reinforces the rights of luxury brand owners. However, brand owners should ensure that the quality control provisions in their licensing agreements include the broad definition of the term 'quality' given by the ECJ (ie, “the aura of luxury”). This will make it easier for brand owners to assert their trademark rights against licensees that violate the distribution clauses in their licensing agreements.
Further, even if trademark owners cannot demonstrate that the violation of the distribution clause affected the quality of the goods by damaging their “aura of luxury”, they may still be able to prohibit the resale of the goods on the basis of Article 7(2).
Karina Dimidjian-Lecomte, Casalonga Avocats, Paris and Cristina Bercial-Chaumier, Bureau DA Casalonga-Josse, Alicante

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