Some companies create valuable brands with great ambition and perseverance, brands that are surrounded by an aura of luxury or have an image of absolute coolness.
In times of constantly increasing competition, it is a remarkable achievement to be the owner of a brand that stands out from other brands. Once acquired, companies try to defend this prestige by all means. This is quite understandable, especially considering the fact that many customers are only willing to pay a considerable premium because of the brand's reputation.
One way to deteriorate or damage a brand's reputation is if the products are presented in a context that does not correspond to its actual image. This is why brand manufacturers want to prevent their products from being sold online as well as offline in supposedly inappropriate environments. Within the official and authorised distribution channels of the brand manufacturers, they naturally have the necessary influence to ensure an appropriate presentation of the goods.
However, it has been a major problem for brand manufacturers long before the times of the internet that original products are offered through grey market dealers outside the authorised distribution channels.
A categorical prohibition of such sales would be the solution which, however, is contrary to the principle of trade mark exhaustion that is enshrined in both, EU trade mark law and in the national trade mark law systems. Accordingly, the trade mark manufacturer cannot prohibit the use of its trade mark if the goods have previously been placed on the market in the European Economic Area (EEA) by the manufacturer itself or with its consent.
Under very restrictive conditions, the principle of exhaustion does not apply, namely where there are legitimate reasons for the proprietor of the trade mark to oppose the continued marketing of the goods covered by the trade mark. This is the case, for example, if the condition of the goods is changed or impaired after they have been placed on the market.
There are other situations in which the trade mark owner can oppose distribution. For example, damage to the trade mark's reputation may in principle constitute a legitimate reason for a trade mark owner to oppose the resale of the prestigious goods. The Higher Regional Court of Düsseldorf, Germany, has recently dealt with a case of reputational damage in its judgment of 6 April 2018 (20 U 113/17):
Düsseldorf court's decision
The Japanese luxury cosmetics manufacturer Kanebo, whose products are marketed under a strictly regulated selective distribution system, was able to stop the sale of grey market goods by a retail chain which was not part of this system. The court has prohibited the retail chain throughout the EU from offering Kanebo luxury cosmetics in its stores and online shop.
The court considered that there was an exception to the principle of trade mark rights exhaustion in this case. It held that since Kanebo's luxury cosmetics were offered by the retail chain, reputational damage was caused. The sales environment, both online and offline, was not comparable to the luxurious environment in which the goods were offered by the manufacturer itself.
The court assessed the concrete circumstances in great detail and on a case-by-case basis. Among other things, it criticised the fact that the luxury articles were randomly located next to everyday and mass-produced products and also how they were offered, without any kind of prominent presentation of the goods. The possibility of financing also made them seem affordable for everyone and put them on the same level as the other items on offer, which significantly affected the prestige value of the goods.
Outlook for other branded goods
It is important to understand that the court did not under any circumstances establish a general prohibition regarding the sale of parallel imported products, but considered individually whether the distribution was unlawful in the specific sales set-up.
The question of how this decision will affect the development of future case law is an interesting one. So far, the clear emphasis of the decision is on so-called luxury goods. Recently, the European Court of Justice (CJEU), in its decision in Coty Germany GmbH v Parfümerie Akzente GmbH in December 2017, considered a restriction of free trade by restricting internet distribution via third-party platforms to be in conformity with antitrust law if this was necessary to safeguard the luxury image of goods from a selective distribution system. (See our blog here on this CJEU decision.)
But what makes goods luxury goods?
The CJEU says it is "not just the result of their material characteristics, but also of the allure and prestigious image which bestow on them an aura of luxury". This definition allows for many possible interpretations, particularly because the CJEU considers that the goods are also purchased because of their prestige character, not alone or above all because of it.
The Düsseldorf Court's decision certainly offers potential for brand manufacturers of other very high-quality products, such as technical devices with a certain prestigious image, to test in court if the sale, both online and offline, of goods re-imported via the grey market can be successfully prohibited, if these goods were sold in an inferior sales environment.