ECJ rules on PEAK time for exhaustion

European Union

In Peak Holding AB v Axolin-Elinor AB, the European Court of Justice (ECJ) has clarified the circumstances in which goods can be described as having been "put on the market" and thereby subject to exhaustion of trademark rights pursuant to Article 7(1) of the Community Trademark Directive.

The case concerned a batch of clothes bearing the PEAK PERFORMANCE mark manufactured by Swedish company Peak Holding AB (or its affiliates) outside the European Economic Area (EEA). The consignment was offered for sale in its retail shops in Sweden and Denmark. In late 1999 a French company bought the unsold consignment on the condition that the clothes would not be resold in the EEA (with a few minor exceptions). The consignment, however, found its way into a factory outlet in Sweden, owned by Axolin-Elinor AB, where the clothes were sold. Peak started trademark infringement proceedings against Axolin-Elinor in the Swedish courts.

The case came before the Court of Appeal (Hovrätten) and it asked the ECJ to give a preliminary ruling on exhaustion under the Community Trademark Directive. In short, the ECJ was asked whether (i) importing goods and paying the necessary customs duties with a view to selling them gave rise to exhaustion when the goods in fact remained unsold, and (ii) selling them to another company with a restriction prohibiting reselling of the goods in the EEA meant that exhaustion had not taken place?

The ECJ noted that to answer these questions it needed to examine the circumstances in which goods can be described as having been "put on the market" pursuant to Article 7(1) of the Community Trademark Directive. According to the court, the wording of Article 7(1) is inconclusive and thus the objectives behind the directive had to be considered. The purpose of the directive, said the court, was to ensure that trademark holders enjoy exclusive rights over their marks and Article 7(1) was merely an exception to that rule. It held that importation alone would not allow the proprietor to "realize the economic value of his trademark" and, accordingly, the goods had not been "put on the market" by virtue of importation and the payment of customs duties. The ECJ also noted that the act of importation itself would not transfer any property rights to third parties. By the same token, the fact that the goods had been offered for sale to consumers, but remained unsold, did not lead to exhaustion of trademark rights.

The second question concerned the effect of a contractual prohibition to resell the goods in the EEA, and whether this exclusion would mean that the goods had not been put on the market. Peak argued that the restriction meant that there had been no consent for putting the goods on the European market and therefore its rights could not have been exhausted. Axolin-Elinor, together with the Swedish government and the European Commission, stated that such a contractual restriction did not prevent exhaustion, which takes place by operation of law. According to the ECJ, "failure to comply with [the restriction] corresponds to a breach of contract, not an infringement of intellectual property rights. The legal effect of exhaustion as regards third parties is … not left at the disposal of the contracting parties". Therefore, a geographical prohibition to resell products on the European market does not protect trademark holders against exhaustion of their rights, even in cases where the products are put on the market in breach of contract. In such cases, the remedies remain purely contractual.

The decision seems to indicate that intra-group and ancillary transactions are protected against exhaustion, which takes place only when an independent third party acquires the goods. Merely offering the goods for sale in shops does not lead to exhaustion. However, trademark rights are exhausted when the goods are sold even if they have been put on the market in breach of contract.

Erkki Holmila, Berggren Oy Ab, Helsinki

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