How to prohibit sales of grey market goods by unauthorized dealers

Brand-name manufacturers and trademark licensees often have an interest in prohibiting the use of their trademark by unauthorized dealers selling grey market goods. Now, a German court allowed a trademark licensee to prohibit an unauthorized dealer to distribute such grey market goods online and offline – because such distribution threatened to damage the trademark’s reputation.

Luxury goods manufacturer prohibits resale online and offline by unauthorised dealer

The parties dispute whether the licensee can prohibit the sale of luxury goods through unauthorised dealers on the basis of his trademark rights. The licensee is the German affiliate and trademark licensee of a Japanese manufacturer of luxury cosmetics. It distributes the high-quality and high-priced goods via a selective distribution system. The unauthorised dealer is a retail chain which acts outside the licensee’s selective distribution system. It sells food, household goods, electrical appliances, textiles, shoes and – amongst besides that – also cosmetics on its online platform and in its shops. The licensee requests that the unauthorised dealer be prohibited from distributing the cosmetics bearing its trademark both online and offline.

Preconditions and Reasons for prohibiting the sale of grey market goods

The Higher Regional Court of Düsseldorf confirms the injunction originally granted by the Regional Court, arguing that a claim for injunctive relief existed under the EU Trade Mark Regulation (Art. 9 (2) lit. a). The unauthorised dealer could not invoke exhaustion (Art. 15 Trade Mark Regulation), even though the products had been placed on the market by or with the licensee’s consent (decision of 6 March 2018, case no. I-20 U 113/17).

Instead, there was a legitimate reason for a right of prohibition under EU Trade Mark Regulation (Art. 15 II) – with the consequence that the licensee`s trademark rights were not exhausted. Such right of prohibition exists beyond the statutory examples of "change" or "impairment" of the goods if the use of the trademark threatens to damage their reputation (cf. Court of Justice of the EU, case C-337/95, "Dior/Evora"). In particular, retailers should not damage the luxury image of brands of a luxury and prestige character through their advertising. However, the trademark proprietor might only prohibit it if the use of the trademark by the reseller "substantially damages" the trademark reputation or, as the Higher Regional Court apparently puts into perspective, if "there is a risk of damage to the reputation" (para. 29 et seq.). Such reputational damage could be caused, for example, by the use of a distribution channel that does not comply with the distribution system. This would also be confirmed by Court of Justice of the EU’s case law on distribution and antitrust in the cases L'Oréal (case

C-31/80), Copad/Dior (case C-59/08), Pierre Fabre (case C-439/09) and – most recently – Coty Germany (case C-230/16; see also the article on online sales restrictions here): According to these decisions, luxury manufacturers can prohibit their dealers from selling on third-party platforms in order to ensure the luxury image of the goods in question. The criterion "damage to the luxury image" should, according to the Higher Regional Court, be interpreted uniformly under trademark and distribution / antitrust law.

In the present case of the distribution of luxury cosmetics, the court saw a risk of damage to the image of luxury through the sale of the goods both on the online platform (para. 32 et seq.) and in the brick and mortar stores (para. 38 et seq.): the product presentation there would drag the luxury trademarks into the usual – thus strongly differing from the restrictive sales criteria imposed on the authorised dealers – because the unauthorised dealer also and mainly offered goods of the daily need, including low-priced private labels, presented the goods in a simple, special offer-oriented, non-exalted, but indiscriminate way, without offering any consultation services.

Practical Tips

1. Luxury manufacturers can prohibit unauthorised dealers from selling their branded goods through channels contrary to the distribution system if there is a risk of damage to their reputation. To argue that such risk exists, it is helpful to have in place – or set up – clear and elaborate sales guidelines and distribution criteria vis-à-vis the authorised dealers which clearly underline the brands’ and goods’ luxury image and prestige character.
2. It remains to be seen if the decision will result in a uniform EU-wide decision practice (the free movement of goods must be taken into account, German Federal Court, case "Klacid Pro", para. 24). In any case, the decision is in line with the decision practice on selective distribution agreements and understandably pleads for a uniform interpretation in trademark and distribution antitrust law – as also does the Advocate General in the Coty case on third party platform bans (para. 71 et seq. of his Opinion).
3. It further remains to be seen if brand manufacturers below the luxury segment will be awarded injunctive relief against unauthorised dealers. Regarding authorized dealers, it can at least be argued that not only luxury manufacturers, but brand manufacturers in general can prohibit sales via third-party platforms (see the previous article on online sales restrictions). In any case, the decision practice on Internet sales is becoming increasingly clear, see for example on price search engines the previous article here.
4. Trademark protection within Europe: When selling products within the European Economic Area (= EU plus Liechtenstein, Iceland and Norway), brand-name manufacturers and trademark licensees can protect their trademarks through a dual system: (i) an EEA-wide trademark and (ii) national trademarks covering only single EU Member States. Registering an EU trademark confers on the proprietor the exclusive rights therein, and especially allows to prohibit:

• affixing the sign to the goods or to the packaging of those goods;
• offering the goods, putting them on the market, or stocking them for those purposes under the sign, or offering or supplying services thereunder
• importing or exporting the goods under the sign;
• using the sign as a trade or company name or part of a trade or company name;
• using the sign on business papers and in advertising,
• using the sign in comparative advertising contrary to Directive 2006/114/EC (art. 9 (3) EU Trade Mark Regulation).

Such rights, however, are, however exhausted (cannot be claimed any more) as regards goods which have been put on the EEA market under that trademark with the proprietor’s consent (so-called principle of exhaustion). Exception: a proprietor may yet prohibit further commercialisation of the goods for legitimate reasons. Such reasons exist especially where the condition of the goods is changed or impaired after they have been put on the market – or where selling the goods marked with their trademark threatens to damage the reputation, as in this new German case.

For the Italian version of this article, click here. For explanations in German, please see the article by Rohrßen/Tenkhoff, Unterlassungsanspruch gegen Vertrieb durch nicht-autorisierte Händler („Injunctive relief against distribution by unauthorized dealers“), in the German law journal: GRUR-Prax 2018, 235.