EUROPEAN PERSPECTIVES

Bell Tolls for Contract Prohibitions on Re-Sale
ECJ Rules Them Ineffective at Preventing Exhaustion of Rights

For a trade mark owner’s rights to be exhausted, are goods “put on the market within the EEA” where they have been offered for sale here, but no sale has actually taken place? What happens if the only sale in the internal market includes a restriction preventing the buyer from reselling the goods in the common market? These were the questions posed to the ECJ in Peak Holding AB v. Axolin-Elinor AB (C-16/03), a judgment handed down in November.

 

The Questions

Peak Holding was the proprietor of the trade mark PEAK PERFORMANCE in inter alia Sweden. The right to use the mark was granted to a licensee, Peak Performance Production AB. In late 1999, Peak Performance Production gathered up certain articles of clothing bearing the PEAK PERFORMANCE mark which it had offered for sale in its shops within the E.U., but which remained unsold. Peak Performance Production sold the unsold clothing to a French company, the sales agreement stipulating that the French company was not to re-sell the products in European countries other than Russia and Slovenia, except for 5% of the total quantity which could be sold in France.

Despite this restriction, the clothing did not leave the EEA and within a year 25,000 articles of it turned up in Swedish shops operated by Factory Outlet. Peak Performance sued for trade mark infringement, but Factory Outlet claimed that Peak Performance’s rights had been exhausted by the sale to the French company, regardless of the condition prohibiting onward sale within Europe. The case turned on whether Peak Performance Production had ever put the goods on the market in the EEA within the meaning of the relevant provision, Article 7 (1) of the Directive, and the court asked the ECJ to consider inter alia:

(1) whether Peak Performance Production had put the goods on the market by importing them into the E.U., or by virtue of their initial (albeit unconsummated) offer of the goods for sale in their shops;

(2) if not, whether the goods had been put on the market, and the rights thus exhausted, when they were sold to the French company, and what impact if any the restriction on re-sale in Europe had.

 

The Answers

The ECJ began its deliberations by noting that the purpose of the Directive was to ensure that the proprietor of a trade mark has the exclusive right to use the trade mark for the purpose of putting goods bearing it on the market in the E.U. for the first time. The Directive was thus concerned with the realisation of the economic value of trade marks. Consequently, an actual sale of goods to a third party within the EEA clearly resulted in putting the goods on the market in the EEA.

In contrast, where a proprietor merely imports goods into the EEA or offers them for sale here, without making any actual sales, his rights in the mark in respect of those goods are not exhausted. He has not yet put the goods on the market in the EEA because he has not transferred the right to dispose of the goods to third parties, and thus has not realised the economic value of the mark in respect of those goods.

By the same token, the Court held that any transaction between parties in the EEA that transfers the right to dispose of the goods amounts to putting the goods on the market in the EEA, regardless of any contractual stipulations prohibiting re-sale within the EEA. The sale itself is enough to realise the economic value of the mark, after which the right to dispose of the goods has been transferred, and the trade mark proprietor’s rights in them have been exhausted. Any terms in the contract restricting the onward sale of the goods concerned only the relations between the parties to the contract, and did not affect the ability of those acquiring the goods later to market them without fear of an infringement action.

 

Comment

This lucid ruling leaves the Swedish court with a clear obligation. It must find that although rights in the unsold goods had not been exhausted when Peak Performance Production gathered them up from its shops, nevertheless rights were exhausted once the sale to the French company took place. The prohibition in the sale agreement that restricted further sales in the EEA was irrelevant. Enforcement of that contract, or damages for breach, were matters for the parties to the contract only.

This ruling will have an impact far beyond this action. In the U.K., it signals the way forward in Glaxo Group Ltd. v. Dowelhurst Ltd., in which the claimant had sold pharmaceuticals within the EEA at discounted rates on the understanding that they would only be used for humanitarian purposes in Africa (see “Parallel Imports Update,” MYM, Autumn 2004). In fact, the drugs were sold to a Swiss company who sold them on to a parallel importer. The drugs then found their way onto the U.K. market, where the claimant sued the importer for trade mark infringement.

In that case, the Court of Appeal sensed real problems with deciding that the seller’s intention should be determinative of whether goods had been put on the market. The decision in Peak Holdings affirms the Court’s intuition, and when the hearing of that case is resumed it seems likely that rights will be deemed to have been exhausted when the goods were sold, regardless of the “understanding” that the goods would only be re-sold outside the EEA.

It now seems clear that if a sale takes place within the EEA, no contractual prohibition on re-sale will prevent the transaction from effectively putting the goods on the market in the EEA and thus exhausting the right owner’s ability to act against unapproved sales by third parties. All contemplated transactions of goods where a prohibition on re-sale in the EEA is key should be considered very carefully in the light of this judgment. All cases should be considered on their own special facts, and we will be pleased to advise any clients who have issues of this nature to address.