Higher Court issues surprising decision regarding storage and destruction costs

In a recent case involving the seizure of infringing goods by Customs, the Higher Court in Ljubljana (Appellate Court) has issued a decision that was contrary to the established practice of ordering the defendant to pay the costs of the storage and destruction of the infringing goods. This unexpected decision could have an impact on all future similar cases in Slovenia.

The court case followed the seizure of a large shipment of counterfeit cosmetic products bearing the mark of a well-known multinational consumer goods company. The goods were in transit in Slovenia and were intended for another EU member state.

The Higher Court upheld the decision of the first instance court in which the latter had:

• found that the goods were counterfeit;
• prohibited the defendant from infringing the trademarks in the future; and
• awarded the plaintiff all litigation costs.

However, the Higher Court reversed certain parts of the lower court's decision, namely:

• the order that the defendant destroy the infringing goods at its own expense and under Customs supervision; and
• the order that the defendant cover the storage costs.

The Higher Court based its decision on Articles 75 and 76 of the act implementing the customs regulations of the European Union (the Customs Act). Under Article 75, infringing goods must be destroyed under Customs supervision and in accordance with Customs regulations. Under Article 76(1), the defendant must cover the costs of storage and destruction. However, under Article 76(2), the trademark holder must cover the costs if the infringer fails to pay within the deadline set by Customs.

The Higher Court concluded that the issue of the destruction and storage costs is clearly regulated by the above provisions and is the subject matter of Customs proceedings. Therefore, there is no basis in the legislation for these costs to be awarded in infringement proceedings before the courts - in other words, the Higher Court considered that the courts are not competent to rule on the issue of storage and destruction costs in Customs cases.

The court did not give any further guidance, so the decision might be interpreted in two ways:

1. The court considered that the provisions of the Customs Act are the substantive law applicable when deciding who should bear the costs of storage and destruction.
2. The court implied that the storage and destruction costs, if not covered by the infringer within the deadline, should be the subject of a separate action.

As the Higher Court considered that Articles 75 and 76 of the Customs Act are the substantive law applicable to decide the issue of storage and destruction costs, it failed to take into account the provisions of the Industrial Property Act, which stipulate (Article 121) that the rights holder may file a lawsuit against the infringer and request, among other things, the destruction of the infringing goods. The courts have always construed this provision as meaning that the infringer must cover the costs of destruction. If the new interpretation of the Higher Court were to be applied, IP rights holders in cases involving seizures by Customs will be at a clear disadvantage compared to IP rights holders in cases where the infringing goods are found within the country, for which Article 121 would apply.

Furthermore, this decision could be contrary to Article 17 of Regulation 1383/2003 concerning customs action against goods suspected of infringing certain IP rights, which stipulates that EU members must adopt the measures necessary to allow the competent authorities to destroy the infringing goods or dispose of them outside commercial channels in such a way as to preclude injury to the rights holder.

If the Higher Court believes that Articles 75 and 76 of the Customs Act are not merely intended to protect the state budget by ensuring that the IP rights holders cover the costs in cases where the infringers fail to do so, but that they are the applicable substantive law, it can be expected that, in all cases where the infringer fails to cover the storage and destruction costs, Customs will ask the rights holder to cover these costs. Whether such costs would then be recoverable in separate civil proceedings is questionable, because the obligation to cover the costs could be interpreted as a direct obligation imposed on IP rights holders. The Higher Court was not clear on this issue, but if this was the case, it would send the wrong signal to infringers.

If, however, the Higher Court considers that the costs should be claimed as damages in separate proceedings, it would imply that two separate proceedings would always be required to deal with the same infringement - first, an action to obtain a court declaration of infringement following the Customs detention and, second, a civil action to recover damages (ie, the storage and destruction costs). This would be contrary to the principle of procedural economy and would not resolve all issues between the infringer and the IP rights holder within a concentrated procedure. Considering the high cost of litigation, the fact that court actions in Slovenia suffer from serious delays and the fact that many Customs suspensions involve foreign and/or evasive parties, this solution would very likely discourage or even prevent IP rights holders from recovering storage and destruction costs.

The case is currently being reviewed by the Supreme Court of Slovenia - the latter will hopefully annul this controversial ruling of the Higher Court or, at least, clarify the issue.

Andrej Bukovnik, PETOŠEVIĆ, Ljubljana