The issue of trade between EU member states and countries outside the EU has been in the public eye recently, partly because of high profile cases concerning retailers such as Tesco who are buying branded goods outside the EU and then selling them at low prices in their stores. Brand owners want to be able to prevent this for various reasons:

• they lose control over the way in which their goods are sold and risk having their brand image undermined if the goods are sold in 'shoddy' surroundings or with poor after-sales care.
• the loss of exclusivity that will result from 'designer' goods being sold in supermarkets will eventually undermine the brand and make it worthless.
• as a result of the loss of value of 'designer' brands, brand owners will be discouraged from investing in developing new products which will lead to a loss of choice for consumers.
• damage to brands and consequent loss of investment by brand owners, together with brand owners being unwilling to meet the higher costs of manufacture in Europe, will damage the European Economy. This is key in the pharmaceutical industry.

Parallel importers argue that consumers should have the right to buy the goods at the lowest possible price and not at artificially inflated prices.

The rights conferred on the proprietor of a trade mark are qualified by the principle of 'exhaustion'. Therefore, once trade mark holders have sold a product they cannot prohibit the subsequent re-sale of that product; their rights in respect of that market are 'exhausted' by the act of selling it. Consequently, they cannot prevent re-sale by prohibiting use of their trade mark.

However, recent judgements of the European court have made it clear that the principle of exhaustion of rights does not extend beyond the EEA, so there is no 'international exhaustion'. The first decision was Silhouette v Hartlauer in 1998¹.

This was followed with Sebago², which, although it affirmed the principle in Silhouette, did little to clarify whether express or implied consent was all that was required from a trade mark owner in order to import branded goods from outside the EEA into the EEA.

In 1999, Laddie J. heard the case of Davidoff³. Laddie J. acknowledged the law on international exhaustion had been settled by the previous cases before the ECJ. However, his judgement suggested that a proprietor of a trade mark whose goods were sold outside the EEA was not automatically entitled to stop parallel imports but could prevent goods being imported into the EEA if he imposed sufficient control on his distributors. The case concerned Davidoff, a producer of high quality perfumes which were sold under the mark COOL WATER. The Defendant, A&G, a parallel importer, was buying Davidoff perfumes outside the EEA, removing the source codes from the outer packaging and perfume bottles, and selling the perfume in the EEA.

Davidoff applied for summary judgement against A&G on the following grounds:

• Davidoff had not exhausted its rights by placing its perfume on sale outside the EEA, nor had it consented to re-sale of its product into the EEA, and so the importation of the perfume into the EEA was an infringement of its trade mark rights.
• Removal of the source codes by A&G made product recall more difficult and damaged the appearance of the goods, thus providing commercial grounds for opposing the importation of the goods by A&G from outside the EEA under Article 7(2) of the Trade Mark Directive.
• All of the perfume sold by A&G within the EEA was purchased outside of the EEA, thus permitting the Plaintiff to rely on its trade mark to oppose the importation and sale.

Mr Justice Laddie dismissed the application for summary judgement. In relation to argument 3, the Judge held that there was no real dispute and that substantially all of the Defendants' goods had come from outside the EEA, and he proceeded on that basis. In relation to the question of consent, it was held that the goods were placed on the market in circumstances where Davidoff could have imposed restrictions on the onward sale and distribution of the goods, but did not do so.

Mr Justice Laddie commented that the 'controversial' Silhouette decision should not be given a wider effect than absolutely necessary, and that "Silhouette has bestowed on a trade mark owner a parasitic right to interfere with the distribution of goods which bears little or no relationship to the proper function of the trade mark right". The proper function of a trade mark is to "guarantee the identity of the origin of the trade marked product to the consumer or ultimate user, by enabling him without any possibility of confusion to distinguish that product from products which have another origin." (Mr Justice Laddie was here quoting from the case of Hoffman-La Roche & Co. AG v Centrafarm (1978)).

Finally, although the removal of the source codes made it more difficult to recall the product, it would not be the removal of the codes which impaired the goods but Davidoff's own manufacturing process. The slight risk of such an event occurring did not constitute a sufficient commercial reason for opposing the importation of the goods into the EEA. Furthermore, there was no evidence to suggest that removal of the source codes would impair the appearance of the goods in the eyes of customers.

This case has now been referred to the ECJ. If Mr Justice Laddie's decision is upheld and the Davidoff contract is not sufficient to prevent goods being imported into the EEA, the question arises as to how a trade mark owner can make it clear that he has not consented to goods put on the market outside the EEA being imported within the EEA. It is likely that very stringent contractual arrangements will be required.

Also in 1999, the case of Levi Strauss⁴ was referred to the ECJ. This case concerned the importation of Levi branded goods by Tesco. Levi maintained strong controls on their retailers and distributors to prevent re-sale of their products in the markets. However, despite these restrictions Tesco managed to import quantities of Levi Strauss products which Levi objected to. The judge in that case also referred a series of questions to the ECJ seeking clarification on the Trade Marks Directive and its impact on the principle of exhaustion of rights.

These cases were all concerned with the importation of goods into the EEA from outside the EEA. However, in February, the case of Glaxo Group Limited & Others v. Dowelhurst Limited & Another⁵, also heard by Laddie J., was concerned with goods originally placed on the market within the EEA.

Background Facts

This case was an amalgamation of seven actions brought by four well-known pharmaceutical companies against, in all but one action, a company called Dowelhurst Limited. The seventh action was brought by Glaxo against Swingward Limited. Both Defendants were engaged in the business of selling pharmaceutical goods, which they did not manufacture themselves.

The case concerned the importation of several brands of pharmaceutical products into England from different Member States within the EEA. The products were originally placed on the market in the EEA by the Claimants bearing their trade marks. Due to pricing irregularities, namely the products being cheaper on the continent, the Defendants imported these products from other Members States into the UK. The products were then repackaged to comply with the importation licence issued by the Medicines Control Agency and the Defendants then re-affixed the Claimants' trade marks and in some cases the Claimants' name to the new packaging.

The Claimants alleged that the sale and marketing of these repackaged/relabelled goods by the Defendants was an unauthorised use of their trade marks and constituted trade mark infringement. The Claimants also claimed that the Defendants' use of a particular box design which the Claimants' themselves used, without applying the Claimants' trade mark amounted to an actionable passing off. Rather than answering these allegations directly, the Defendants relied on the provisions of the Treaty of Rome. In particular, the Defendants asked the judge to consider the provisions of the Treaty designed to prevent a trade mark proprietor from exploiting its national trade mark rights to stop a parallel import from within the EEA.

In essence, the Claimants argued that the interpretation of the Treaty in case law meant that parallel importers were only permitted to repackage goods bearing a proprietor's trade mark to the extent that the repackaging was "necessary". Furthermore, they argued that case law had imposed a prerequisite that the importer was required to notify the proprietor of the proposed importation.

The Judgement

Laddie J's judgement was very detailed and was just short of 40,000 words! However, despite such a detailed consideration, Laddie J. has referred this case to the ECJ for a preliminary ruling.

A substantial portion of his judgement focused on what a trade mark is, the nature of the right, its purpose and the objective of free movement of goods and exhaustion of rights.

Trade Marks & Passing Off

He commented that the function of a trade mark is primarily to indicate the source of the goods, not the quality. Although a trade mark is usually associated with quality, it is the identification of the source of the goods which indicates quality because quality is set at a standard which the trade mark proprietor is content to meet.

Laddie J. found on the facts that the use by the Defendants of the Claimant's trade marks was, prima facie, an infringement within the scope of British trade mark legislation. However, as will be discussed later, because no substantial damage was caused to the Claimant's trade marks, their proprietary rights could not be used to impede free movement of goods within the EEA.

In respect of the Claimant's allegation of passing off, Laddie J. held that this was not made out. In evidence, the Claimant's Counsel conceded that no pharmacist had been misled by the packaging and there was no evidence of confusion amongst the public. Furthermore, Laddie J. held that the use of the design did not result in substantial damage to the Claimants' reputation and therefore the claim failed.

Free Movement of Goods & Exhaustion

Laddie J. summarised the principle of free movement of goods "as being fundamental for the creation, operation and development" of the Common Market. He commented that the rules of free movement were supreme over other legal principles and could only be avoided where they were justified, for example, the undermining of an intellectual property right. Interpreting the Paranova⁶ case, Laddie J. stated that justification could only be found where:

• the specific subject matter or function of that right (i.e. the exclusivity of use in relation to trade marks) was harmed and
• the use of intellectual property rights by the proprietor was not objectively designed to interfere with free movement.
• In his judgement Laddie J. commented that the Claimants' attempt to enforce their trade mark rights to prevent the importation of its own goods, which although repackaged by the Defendants had not damaged their trade marks, was designed to restrict trade. Therefore, if the ECJ affirm this interpretation, the Claimants' reliance on trade mark infringement will fail.

Necessity

In considering the question of necessity, Laddie J. reviewed the decisions in Paranova, Loendersloot⁷ and Pharmacia⁸, which were put forward by the Claimants. All three cases concerned the repackaging of products. Paranova and Pharmacia concerned the repackaging of pharmaceuticals and Loendersloot concerned the repackaging of alcoholic drinks. In Loendersloot, the Advocate General ruled that a trade mark proprietor cannot prevent the re-labelling of a product whether it is necessary or not, if there is no significant impairment of the reputation in the trade mark. Pharmacia was concerned with the parallel importation of a drug from France by Paranova under the mark DALACINE and its re-sale in Denmark with the French mark removed and the mark DALACIN affixed in its place.

From reviewing the three cases and finding similar interpretations throughout them, Laddie J. came to the conclusion that a trade mark proprietor cannot use national trade mark law to interfere with a parallel importer's use of a mark on the proprietor's goods unless such use inflicts substantial damage to the specific subject matter of the mark i.e. the identification of origin. Furthermore, on reviewing the ECJ decisions, he found that, if there was no damage caused to the subject matter, the proprietor cannot object to the repackaging even if it was unnecessary.

On the facts of the case, Laddie J. found that none of the actions of the Defendants caused or was likely to cause any damage to the specific subject matter of the Claimants' trade marks. It seems from his judgement that he preferred the view that a reseller of imported goods is permitted to use the proprietor's trade mark for the purpose of further commercialising the product provided that the use does not damage the specific subject matter.

Finally, in the case where the importer's use of the proprietor's mark causes harm, Laddie J. said that the proprietor can object to that use unless (i) such use is necessary or (ii) the purpose of the objection is to discriminate against the importer or to restrict trade between Member States. Laddie J. defined necessity to mean "reasonably required to overcome actual or potential hindrance to further commercialisation of the products" such as the repackaging of products to comply with national laws of a Member State.

Notice

After considering the various case law, Laddie J. confirmed the view that it was a prerequisite to importation that a proprietor of a trade mark should be given notice of the parallel importer's proposed use of the mark on repackaged goods. Failure to give this notice meant that the proprietor had a justifiable complaint against the parallel importer without the need to prove that use resulted in any damage to the mark.

Referring to the decision of Loendersloot, Laddie J. explained that the rule regarding notice applies to all goods and not just pharmaceutical goods. He also suggested that the rule should apply to any use of a proprietor's trade mark and not just in the case of repackaging, for example re-labelling or putting stickers on the products. Finally, he commented that 2 days notice should, unless evidence proved otherwise, be sufficient to comply with this rule.

References to the ECJ

Although Laddie J. made findings of fact in his judgement, the outcome is dependant on some substantial questions of law he has referred to the ECJ for ruling. In general the questions seek clarification on the interpretation of Articles 28 and 30 of the Treaty of Rome (free movement of goods), Article 7 of the Trade Marks Directive (exhaustion of rights), the effect of national trade mark rights on free movement of goods and the question of necessity and notice in relation to repackaging.

However, whilst we are awaiting the decision from the ECJ on these questions, the Scottish courts are continuing to decide cases on the law as it stands at present.

The latest were the cases of Davidoff SA v M&S Toiletries⁹ and Joop! GMBH v M&S Toiletries Limited¹⁰. Both these cases concerned the marketing and distribution of Davidoff and Joop! perfumes respectively, which had been imported into the UK from Singapore. In both cases there was a licence to sell the products in Singapore. Davidoff ('D') and Joop! ('J') argued that they could prevent M&S Toiletries ('M') from selling the goods in the UK as the goods had not been placed in the EC market by D and J or with their consent. M asserted that it was entitled to market the goods in the UK as D and J had placed the perfumes on the market without any restrictions as to where they may be sold. The key question was whether D and J could have been said to have consented to the sale of its perfume in the EEA. The Judge held that the consent to the import and sale by D and J could not be implied. The Judge was able to distinguish this from Justice Laddie's judgement in Davidoff v A&G imports by relying on the application of German law, where the original contract was made, and Scottish law.

Comment

There are now several sets of questions before the ECJ on the question of parallel imports and exhaustion of rights. The cases of Davidoff and Levi Strauss, both of which deal with the question of consent were referred to the ECJ in 1999, and in November of that year a reference was made to the ECJ by the Vienna Regional Court of Appeals for further guidance on the Paranova case. However, it is likely to take in excess of 18 months for these answers to be decided.

Once again the parallel importer and brand owner is in a difficult position with respect to exhaustion of rights. Quite rightly national courts are referring this issue to the ECJ in order to obtain a consistent interpretation of the Trade Marks Directive which will be binding on each Member State. However, until such time as the ECJ make their ruling, this will remain a grey area and even following their ruling the decision will be open to interpretation by national courts. This is a complex and emotive area of law and in the short term future neither the parallel importer nor the brand owner are likely to have a clear set of guidelines.

This article first appeared in IPeye, the intellectual property newsletter published by Eversheds Solicitors. For more information about, or to receive copies of IPeye, please contact Janet Knowles on +44 (0) 161 837 6107 or +44 (0) 113 243 0391 or at janetknowles@eversheds.com.

1. SILHOUETTE INTERNATIONAL SCIMIED -V- HARTLAUER HANDELGESELLSCHAFT, CASE C-355/ 96 [1998] E.T.M.R. 539
2. SEBAGO INC. AND ANCIENNE MAISON DUBOIS ET FILS S.A. -V- GB UNIC SA CASE C-173/98 [1999] E.T.M.R. 467
3. ZINO DAVIDOFF S.A. -V- A & G IMPORTS LTD [1999] 2 C.M.L.R. 1056 (CH.D)
4. UNREPORTED, JULY 22, 1999 (PATENTS COURT)
5. [2000] 2 CMLR 571
6. BRISTOL-MYERS SQUIBB -V- PARANOVA A/S [1996] E.T.M.R.1
7. LOENDERSLOOT -V- BALLANTINE [1998] E.T.M.R. 10
8. PHARMACIA AND UPJOHN -V- PARANOVA CASE C-379/97 [1999] E.T.M.R. 937
9. 2000 LST 683
10. Times, June 14, 2000

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