Exhaustion of trade mark rights and consumer loyalty programs

The Court of Appeal in The Hague (the 'Court') has recently ruled on the doctrine of exhaustion of trade mark rights. In a nutshell, the Court discussed several factors which are relevant (or not) when assessing whether the trade mark holder has the right to control further distribution of its branded products.

Facts

Societé Guy Laroche SAS ('Laroche') is the owner of EU trade mark for 'Guy Laroche' (word mark) and 'GL' (figurative mark) for, amongst others, goods in Classes 24 and 25. Laroche initiated proceedings against 4 Every Ware Socktlots B.V. ('4EW') for infringing its trade marks by selling branded products on the internet.

Laroche had granted a licence to Textiles Olivier Mercier SARL ('TOM') to produce and sell products under its trade marks in the context of a special offer for a limited period of time at Carrefour in France as part of a consumer loyalty program. TOM had in its turn granted a sublicence in the form of a Mutual Agreement of Understanding (MAU 1) to Promeco N.V. ('Promeco'). This sublicence permitted Promeco to sell branded products in different countries. Laroche was informed about the content of this agreement. In a customs declaration Laroche also referred to this sublicence. Laroche also received royalties for all branded products purchased by Promeco.

After the special offer ended in France, the parties decided to sell the remaining stock as a similar offer to Carrefour Belgium. Once the special offer in Belgium ended, Promeco sold the remaining branded products to Boxter of which sale Laroche was informed. Boxter subsequently sold the remaining branded products to 4EW. The products were then sold and offered on the internet.

At first instance, the District Court of The Hague held that Promeco had infringed Laroche’s trade marks. It dismissed the argument that the trade mark rights were exhausted on the ground that 4EW had not sufficiently substantiated its claim. Further, it could be not established that the branded products were put on the market with the permission of Laroche.

Reasoning

On appeal, 4EW argued that Laroche’s trade mark rights were exhausted as Laroche had sold the goods to Promeco. Laroche contested that the rights were exhausted as not all branded goods were sold to end consumers. Furthermore, Laroche argued that Promeco merely put the goods at the disposal of Carrefour.

The Court deduced from the customs declaration that Laroche had given consent to the sublicence and hence to the marketing of the branded goods in the context of Carrefour’s special offer in France.

When determining whether or not the trade mark rights were exhausted the Court took as a starting point that Laroche had received royalties from the sale of the goods. Although Laroche argued that economic value was higher than the received royalties, it did not contest that the received royalties covered all branded goods.

The Court relied in particular on three aspects in the sublicence between Promeco and Carrefour France: First, Carrefour had the possibility to return clothing which it did not sell to the end consumer. Second, Promeco was permitted to sell returned products to any third party. The Court interpreted this option as an indication that Laroche itself considered that it could not control the further distribution of the products as the trade mark rights had already been exhausted. Last, Promeco paid royalties for all products.

The fact of whether or not Carrefour had sold all branded products to end consumers was irrelevant. Laroche had, after all, received royalties from the use of its trade marks. In contrast to the District Court, the Court of Appeal found that the CJEU’s Peak Holding ruling (C-16/03) - where it was found that the goods were not put on the market because the transaction did not involve an independent third party - did not apply to the present case. The fact that Carrefour could dispose of the goods for only a limited time in the context of the special offer did not alter its conclusion on the exhaustion.

If, however, the licensee’s rights were limited in the licence agreement within the meaning of Art. 22 (2) EUTMR (European Trade Mark Regulation), there was no consent by the trade mark holder and the trade mark rights were not exhausted.

Once the trade mark rights are exhausted, they cannot be revived. Therefore, the fact that Carrefour had the right - not the obligation - to return unsold products after it had purchased the branded products did not change the conclusion that the trade mark rights were exhausted.

The Court remarked by obiter dictum that the trade mark rights were exhausted because the royalties were paid for all branded goods and a third party was able to dispose the goods. In this context, it is crucial that the parties assumed that the branded products were exclusively produced for Carrefour France. Therefore, Carrefour France could exclusively dispose of the goods during the special offer.

In addition, the Court considered by obiter dictum the question whether the rights were exhausted in the context of the sale of the remaining stock to Boxter. The Court held that exhaustion took place when Promeco sold the products to Boxter. The sale took place with the permission of TOM and Promeco. Therefore, it can in principle be assumed that Laroche had given permission to commercialize branded products via Promeco unless Laroche could have successfully invoked Art. 22(2) EUTMR which had been insufficiently substantiated. Moreover, there were no reasons for Promeco to believe that Laroche did not agree to a similar sale of the remaining stock as with the special offer in Belgium.

Laroche also invoked the so-called Copad exemption (Art. 13(2) EUTMR). This exemption refers to a situation where a licensee could violate a licensor's trade mark rights where the licensee permits the resale of licenced luxury products in a discount store. Although the Court dismissed Laroche’s attempt for procedural reasons, the Court concluded that the circumstances, in particular the prices for which the products were sold, could not establish a ‘luxury image’.

Conclusion

In this judgment, the Court gave an interesting assessment of the doctrine of exhaustion of trade mark rights. The crucial question is whether or not the branded goods where put on the market with consent of the trade mark holder. In addition, the Court emphasized the fact whether or not the licensor had received royalties from use of its trade mark and if a third party had the goods at its disposal. Once these conditions are met, the trade mark holder’s rights were exhausted and he cannot control further distribution of the branded products. In other words, the exhaustion takes place when the trade mark owner sells the branded goods to a third party, which is not necessarily the end consumer.

Interestingly, the Court of Appeal in Brussels came to a different conclusion in this matter. The Court considered the reason for this is that Court of Appeal in Brussels found that Laroche did not consent to the sublicence. This shows that the underlying question leaves room for different interpretations.

In order to retain control over the goods, a trade mark holder is advised to include the relevant provisions in the licence agreement.