Supreme Court rules on destruction and storage costs in customs cases

The Supreme Court of Slovenia has issued an important decision in a case involving the detention of a large shipment of counterfeit cosmetic products bearing the mark of a well-known multinational consumer goods company, in transit through Slovenia to another EU member state. The decision addressed the issue of whether it was possible to claim storage and destruction costs from infringers.

The Supreme Court’s decision partially reversed a controversial decision of the Higher Court in Ljubljana. In that decision, the Higher Court, despite finding that there had been infringement, had rejected the IP rights holder’s request that the court:

• order the infringer to destroy the infringing goods at its own expense; and
• order the infringer to pay the storage costs.

The Higher Court had based its decision on Articles 75 and 76 of the Slovenian act implementing the customs regulations of the European Union (the Customs Act). Under Article 75, infringing goods are 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 cover them within the deadline set by Customs.

The Higher Court, ignoring the provisions on the destruction of infringing goods in Article 121 of the Slovenian Industrial Property Act, had concluded that the above-mentioned provisions of the Customs Act clearly defined which party was to bear the costs of storage and destruction. As a consequence, the Higher Court had considered that the courts were not competent to rule on storage and destruction costs in infringement proceedings originating from customs cases.

A benign interpretation of the Higher Court’s decision could be that IP right holders always have to pay storage and destruction costs and then try to recover them through a separate claim for damages.

The Supreme Court clearly overruled the findings of the Higher Court, emphasising that the Customs Act cannot be lex specialis in relation to the Industrial Property Act, and that the Customs Act regulates only the procedures before Customs, whereas the Industrial Property Act governs the relations between IP right owners and infringers.

The Supreme Court also pointed out that, if the Industrial Property Act was not applied to border detention cases, IP rights holders in such cases would be at a disadvantage compared to IP rights holders in other infringement cases, as they would be deprived from the possibility of claiming destruction costs from the infringer, as provided by Article 121 of the Industrial Property Act.

With this decision, the Supreme Court made it very clear that the Industrial Property Act is the only substantive law applicable when ruling on destruction costs associated with IP rights infringement, and that this also applies to infringement cases arising as a result of customs detentions.

The Supreme Court, however, clarified that there was no provision in the Industrial Property Act that would allow the courts to order infringers to cover storage costs before such costs were actually settled by the IP rights owner upon Customs' request. The Supreme Court explained that, while a claim for the destruction of infringing goods is clearly mentioned in Article 121 of the Industrial Property Act, the same article does not mention storage costs at all, and such costs cannot be simply inferred from any of the claims under Article 121 of the Industrial Property Act.

The Supreme Court seemingly concluded that, if storage costs have not been paid by the time the infringement claim is filed, which is usually the case, such costs can be recovered only later on, once they are settled, through a separate damages claim.

Although the Supreme Court’s decision provides clear guidance as to when and how to claim storage costs, the practical implications of this decision could be important, as it may still enable IP rights holders to avoid paying storage costs in advance. Namely, it would be very difficult for infringers to execute a court order to destroy the goods at their expense without settling storage costs at the same time, and it is also unlikely that Customs will agree to hand out the goods for destruction if storage costs have not been previously settled.

The most important aspect of this ruling is that it clarifies that the legal basis for claiming storage costs lies in the civil legislation on damages, and not within the customs regulations.

In practice, if storage and destruction costs are expected to be high and the IP rights owners wish to avoid or recover them, an infringement claim should be lodged asking the court to order the destruction of the goods at the expense of the infringer. As for the storage costs, a good cooperation with Customs may compel infringers to pay these costs before the goods are released for destruction. Otherwise, IP right owners may need to claim storage costs through a separate damage action once Customs have received payment.

Lastly, such problems would be completely resolved if the Industrial Property Act was amended to clearly state that storage costs are included in the costs that IP rights holders can claim from infringers.

Andrej Bukovnik, PETOŠEVIĆ, Ljubljana