What happens when goods slip through the selective distribution net?

On April 23, 2009, the European Court of Justice (ECJ) held that if a licensee puts luxury goods on the market in contravention of a provision in a licensing agreement, even if it can be deemed to have done so with the trademark owner’s consent on the basis of Article 7^[1] of the EU Trademark Directive (89/104/EEC), the trademark owner can nonetheless oppose the resale of the goods by third parties on the basis of Article 7^[2] of the directive if it can be shown, on the specific facts of the case, that such resale damages the trademark’s reputation^[1].

Given this interpretation of Article 7^[2] by the ECJ, what approach are the Italian courts likely to adopt? Although no Italian decision has been published on this point since the ECJ’s ruling, a possible starting point is the decision of the specialist IP Chamber of the Court of Bari in Thun SpA v Lomuscio Distribuzione Srl. On July 11, 2008, the court concluded that a third party could not be held liable for breaching the provisions applicable to a selective distribution network, as the principle of trademark exhaustion2 could not be excluded in this case.

Facts

Thun is a leading producer of high-quality ceramic goods and the owner of the denominative and figurative trademark THUN. It has invested substantial capital in creating a specialized selective distribution network, setting high standards for its points of sale in terms of location, repair and appearance, personnel qualifications and other factors. Products bearing the THUN brand can be sold only through the selective distribution network.

When Thun discovered that its original branded products were being sold by Lomuscio Distribuzione Srl, a company which was not part of the selective distribution network, it sued Lomuscio for trademark infringement and unfair competition and sought damages resulting therefrom. It claimed that:

• Since Lomuscio was not part of Thun’s selective distribution network, it had purchased the branded products without the trademark owner’s consent;
• Since Thun had the right to prevent the sale of its branded products outside the network, Lomuscio was liable for trademark infringement; and s Lomuscio had unlawfully exploited the reputation and image of the THUN trademark and its sale of THUN products had damaged the trademark’s image, making Lomuscio liable for unfair competition.

• The defendant argued that it had purchased and sold genuine THUN goods and that, as it had not signed a selective distribution agreement with Thun, it could not be sued for breach of contract.

Decision

The court found that:

• The trademark owner’s rights had not been infringed because (i) Lomuscio had not modified or altered the branded products in selling them outside the selective distribution network, and (ii) a breach of the provisions applicable to such a network cannot be enforced against a third party;
• There was no question of unfair competition in this case, as there was no evidence that the defendant had been aware of the existence of the selective distribution network; and Comment and Analysis
• Thun had not shown that the location or quality of Lomuscio’s shop infringed the requirements of the selective distribution network, meaning that Lomuscio could not be held liable for damage to the trademark’s image or reputation.

Comment

The court’s view on the last point raises the possibility that:

(i) a trademark owner may be able to invoke an exception to the principle of trademark exhaustion where authentic products – regardless of whether the trademark owner originally authorized their sale – are sold at points of sale that do not meet the requirements of the selective distribution network; and

(ii) failure to meet such requirements may constitute a legitimate reasons for the trademark owner to oppose the further commercialization of the goods.

The ECJ has held^[3] that the characteristics and conditions of a selective distribution system can, in themselves, preserve the quality of the goods being sold. Particularly in the case of luxury goods, quality is not merely the sum of material characteristics, but also a product of an alluring and prestigious image, which bestows an aura of luxury on such goods.

Moreover, a selective distribution system serves as a quality-control measure by facilitating the detection of counterfeit products and making it easier for a proprietor to identify defective products, carry out a targeted recall and eliminate production defects.

Accordingly, a trademark’s value may be damaged not only by failure to meet store quality standards (as in the case of sales of luxury goods at a discount), but also by sales of products out of the selective distribution net, which fail to conform to quality-control standards.

Notes

[1] Copad SA v Christian Dior Couture SA and Socie´te´ Industrielle Lingerie, Case C-59/08.
[2] Under Article 5 of Legislative Decree 30/2005, which implements Article 7(2) of the directive.
[3] C-31/80, L’Ore´al [1980] ECR 3775, paragraph 16.

Published on BNA International