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The European Court of Justice protects the “aura” of luxury brands

26 January 2010

In difficult economic times when some retailers may be celebrating the fact that consumers are ditching expensive designer stores for their discount designer outlets, the European Court of Justice may have dampened their good cheer by giving luxury brand owners another weapon in their armoury in controlling where and to whom their high-end goods are sold following its decision in Copad SA v Christian Dior SA (Case C-59).

Background

Dior entered into a trade mark licence with a French company, Societe Industrielle Lingerie (“SIL”) for the manufacture and distribution of luxury corsetry bearing the CHRISTIAN DIOR trade mark. The licence included a provision that sales by SIL must be within a selective distribution network which prevented them from selling the corsetry to discount retailers, mail order companies, door-to-door sales companies or companies selling within private houses without Dior’s written consent “in order to maintain the repute and prestige of the trade marks.” Desperate financial circumstances for SIL caused them to approach Dior for such consent which was refused. Nevertheless, SIL decided to proceed with selling the CHRISTIAN DIOR branded corsetry to Copad SA, a discount retailer, in breach of its licence.

One of the key questions for the ECJ was whether, in addition to its contractual rights against SIL, Dior could enforce its trade mark rights, not only against SIL, but also against Copad.

The Decision

Article 8(2) of E.U. Regulation 40/94 lists specific criteria which, if breached by a licensee under the terms of its licence agreement, entitle the licensor to invoke its trade mark rights against the licensee. One of the criteria includes a term relating to “the quality of the goods manufactured or the services provided by the licensee.” The ECJ held that this should be interpreted widely so that the term “quality” did not just mean the material characteristics of the goods but should specifically include “the allure and prestigious image which bestows on those goods an aura of luxury.”

Accordingly, SIL’s sale of CHRISTIAN DIOR branded goods to Copad was held to be not only a breach of its licence with Dior, but also a breach of a provision which specifically sought to protect the repute and prestige of the CHRISTIAN DIOR brand which would thus be caught by Article 8(2). This entitled Dior to a second cause of action against SIL for trade mark infringement.

The ECJ then had to determine whether Dior could also assert its trade marks against Copad. The ECJ considered the well-established principle that if branded articles are put on the market in the E.U. by a licensee, it is generally deemed to have been done with the trade mark owner’s consent. Such consent renders any trade mark rights in those goods exhausted. In other words, where branded goods are bought from a licensee who has marketed the goods within the E.U., it is generally safe to assume that the trade mark owner has no recourse under trade mark law against that purchaser. However, this principle does not apply if the licensee has marketed the branded goods in breach of one of the provisions listed in Article 8(2), which had been thought to be fairly limited in scope. For example, until this case, the sale of luxury branded goods in a discount store was thought unlikely to affect the physical quality of the goods in order to be caught by Article 8(2). By holding that damage to the aura of luxury of the goods could be sufficient to breach Article 8(2) in appropriate cases, the ECJ has effectively confirmed that brand owners like Dior may be able to assert its trade mark rights to oppose further re-sale by discount retailers like Copad if such re-sale damages the aura of luxury of a brand.

What does this mean for discount retailers and luxury brand owners?

The ECJ’s widening of Article 8(2) means that low-end retailers, discount stores and the like are exposed to trade mark infringement proceedings by selling goods which have an aura of luxury notwithstanding the fact that they have purchased those goods from an authorised licensee, if it transpires that the licensee is acting in breach by selling to them.

The ECJ’s decision means that further due diligence needs to be carried out by discount stores, mail order companies or other such entities selling high-end, branded goods as luxury brand owners tighten their grip on trying to maintain a certain image for their brands by implementing selective distribution networks. Comfort can be provided to such re-sellers by seeking written assurances and indemnities from vendors and licensees that they have the trade mark owner’s consent to sell to them in order to minimise the new increased risk of being sued by the brand owner for trade mark infringement.

On the flip side, luxury brand owners who operate selective distribution networks which preclude sales to discount stores or other low end retailers in order to protect their brand image, should consider including in any such restriction in their licences specific references to the protection of the “prestigious and luxurious image of the brand” and its “aura of luxury”. If a licensee were to then breach such a restriction, the brand owner may not only be able to invoke its trade mark rights against the licensee in breach (in addition to its contractual remedies), but also enforce its trade mark rights against those third party retailers outside of its selective distribution network.

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