Publications > Licence terms and trade mark infringement

Licence terms and trade mark infringement
Recent ECJ case law on the effect of selective distribution networks and quality control
Roman Cholij, Cam Trade Marks & IP Services
Brands Committee Co-chair
Readers of the LES NewsXChange may have missed the commentary in les Nouvelles earlier this year (March 2010) by two Spanish authors, María González-Gordon and Mónica Esteve Sanz, on the Dior vs. Copad preliminary ruling case of the ECJ (C 59/08 of 29 April 2009).  This case was discussed at the LES Pan-European conference in Budapest in June 2010, and the following is a write-up of one of the presentations on the subject which was given by the author.
General legal principles concerning licence terms and trade mark infringement
In considering the interaction of licence terms, or their breach, and whether the trade mark that is being licensed might thereby be infringed, certain core principles from law need to be kept in mind. 
Article 5 of the Council Directive 89/104 harmonising trade mark laws establishes the rights conferred by a trade mark: an owner can prevent a third party, unless with authorisation, from using a similar or identical mark on similar or identical goods/services (and in some cases on dissimilar goods/services) including:
       affixing the sign to the goods or to the packaging thereof;
       offering the goods, or putting them on the market or stocking them for these purposes under that sign, or offering or supplying services thereunder;
       importing or exporting the goods under the sign;
       using the sign on business papers and in advertising
Article 8(1) of the same Directive 89/104, which deals with licensing, states:
“A trade mark may be licensed for some or all of the goods or services for which it is registered and for the whole or part of the Member State concerned. A licence may be exclusive or non-exclusive.”
What if the licence terms are breached? Established case law provides that breaking the terms of a licence – which is an agreement between private parties - does not always lead to breaking trade mark law with its statutory penalties (cf. the ECJ Peak Holding case: C-16/03), even if there is a breach in contract law, which has its own appropriate remedies.Nonetheless, the Directive does provide for exceptions to this principle. These are found in Article 8(2) as follows:
“The proprietor of a trade mark may invoke the rights conferred by that trade mark against a licensee who contravenes any provision in his licensing contract with regard to:
       its duration,
       the form covered by the registration in which the trade mark may be used,
       the scope of the goods or services for which the licence is granted,
       the territory in which the trade mark may be affixed, or
       the quality of the goods manufactured or of the services provided by the licensee.”
The following discussion will focus on the last of these exceptions, and in particular the meaning that the ECJ has now given to the concept of ‘quality’.
Quality control
Quality control is a fundamental requirement of a trade mark licence arrangement since it affects the essential function of a trade mark, namely indicating the source or origin of a product or service so that a customer is not confused about its identity. It is so important that in some jurisdictions lack of quality control can even lead to invalidation of the mark that is being licensed, as the mark might be considered to have become deceptive because of the discrepancies in quality. Hence it is for this reason that the legislator insists that breaking a licence agreement regarding ‘quality of goods manufactured or services provided’ may constitute trade mark infringement.
But in addition, lack of quality control to ensure a ‘psychological environment of prestige’ for luxury goods can also constitute infringement. This is one of the main points made in the ECJ ruling of Copad v Dior, which has unequivocally equated the brand image of a product with actual quality.
Facts of Copad v Dior in brief
        On 17 May 2000, Christian Dior couture SA (‘Dior’) concluded a trade mark licence agreement with Société industrielle de lingerie (‘SIL’) in respect of the manufacture and distribution of luxury corsetry goods bearing the Dior trade mark.
        SIL went into insolvency on 14 November 2001 and wished to offload Dior branded goods outside the agreed selective distribution network, which it did contrary to the express prohibition of Dior. It sold goods to Copad International (‘Copad’) which in turn sold to various discount stores.
        Dior brought actions against SIL and Copad for infringement of trade mark rights.
The French Court of Cassation referred three questions to the ECJ. The first was, can Art 8(2) be interpreted to include a licensee who ‘contravenes a provision in the licence agreement prohibiting, on grounds of the trade mark’s prestige, sale to discount stores? Put another way, does infringement occur (not just breach of contract) if there are sales outside a selective distribution network which has been approved because the distributors guarantee in their marketing and sales methods protection of the reputation and high profile of the brand?
The actual restrictive clause in the contract that was claimed to have been breached reads as follows:
“In order to maintain the repute and prestige of the trade mark the licensee agrees not to sell to wholesalers, buyers’ collectives, discount stores, mail order companies, door-to-door sales companies or companies selling within private houses without prior written agreement from the licensor, and must make all necessary provision to ensure that that rule is complied with by its distributors or retailers.”
Judgment of the Court
The Court followed the Opinion of the Advocate General – Juliane Kokott (the first female to be an Advocate General):
Par 24-26: “The quality of luxury goods not just the result of their material characteristics, but also of the allure and prestigious image which bestows on them an aura of luxury.”... “Since luxury goods are high-class goods, the aura of luxury emanating from them is essential in that it enables consumers to distinguish them from similar goods. Therefore, an impairment to that aura of luxury is likely to affect the actual quality of those goods.”
The Court then went on to note that a selective distribution network seeks to ensure that the goods are displayed in sales outlets in a manner that enhances their value, “especially as regards the positioning, advertising, packaging as well as business policy; it contributes to the reputation of the goods at issue and therefore to sustaining the aura of luxury surrounding them.” Selling outside the network (e.g. to discount stores) may lead to harm – depending on volumes sold, whether sales outside the network are done only occasionally or regularly, and depending on the nature of the goods normally marketed by those other sales outlets and their marketing methods. For trade mark infringement to occur (according to Article 8(2)) there must be evidence of damage to the image of the brand, which is to be decided on the facts (cf. par. 28-34).
Concluding comments
This is the first time that the psychological or mental condition of a consumer, when faced with a brand (its ‘image’), has been equated in trade mark law with the essential quality of a product, as according to Article 8(2) of the Directive. Such an equation leads to tricky questions concerning when an image is deemed to have been actually harmed through going outside a selective distribution network. If damage can be established, according to this ruling, that is when it is deemed that no consent has been given to use the owner’s trade mark (hence infringement) despite the licensing agreement. However, even if consent cannot be deemed to have been withheld, another part of the judgment – not commented upon here – rules that the rights of the owner may not have been exhausted by the product having been put on the market if the condition of damage to reputation through resale can be established as according to Article 7(2) (and previous case law). In other words, further sales can still be stopped even if there is no technical infringement.
Although this court judgment is an evident victory for brand owners of luxury goods, one might legitimately question whether this is in fact going one step (or at least half a step) too far in protecting luxury brands, in the disfavour of consumers who are forced to pay artificially high prices for branded goods. Another recent European judgment (L'Oréal SA v Bellure) likewise marked a different sort of victory for luxury brand owners with regard to comparative advertising, prompting Lord Justice Jacob (honorary president of LES Britain and Ireland), who had to implement the ruling in the Court of Appeal, to make a rare and public statement criticising the European court for being, effectively, anti-competitive vis-a-vis legitimate traders who were not luxury brand owners. Be that as it may, the Copad vs Dior case itself is an immensely interesting case for licensing practitioners and for anyone involved in any way with trade marks and brands. It will no doubt in time generate more commentary than it hitherto has done.
Judgment of the Court in Case C‑59/08 [23 April 2009] Copad SA v Christian Dior couture SA
1.      Article 8(2) of First Council Directive 89/104/EEC of 21 December 1988 to approximate the laws of the Member States relating to trade marks, as amended by the Agreement on the European Economic Area of 2 May 1992, is to be interpreted as meaning that the proprietor of a trade mark can invoke the rights conferred by that trade mark against a licensee who contravenes a provision in a licence agreement prohibiting, on grounds of the trade mark’s prestige, sales to discount stores of goods such as the ones at issue in the main proceedings, provided it has been established that that contravention, by reason of the situation prevailing in the case in the main proceedings, damages the allure and prestigious image which bestows on those goods an aura of luxury.
2.      Article 7(1) of Directive 89/104, as amended by the Agreement on the European Economic Area, is to be interpreted as meaning that a licensee who puts goods bearing a trade mark on the market in disregard of a provision in a licence agreement does so without the consent of the proprietor of the trade mark where it is established that the provision in question is included in those listed in Article 8(2) of that Directive.
3.      Where a licensee puts luxury goods on the market in contravention of a provision in a licence agreement but must nevertheless be considered to have done so with the consent of the proprietor of the trade mark, the proprietor of the trade mark can rely on such a provision to oppose a resale of those goods on the basis of Article 7(2) of Directive 89/104, as amended by the Agreement on the European Economic Area, only if it can be established that, taking into account the particular circumstances of the case, such resale damages the reputation of the trade mark.

Published in LES NewsXChange, September 2010