Protecting the aura of luxury: ECJ guidance on trade marks

Owners of luxury good brands will welcome the ECJ’s decision in Copad SA v Christian Dior couture SA and others, Case C-59/08, ruling in favour of the Dior mark in a dispute relating to the sale of Christian Dior branded goods outside a selective distribution network in breach of a trade mark licence. The court determined three questions on the interpretation of the Trade Marks Directive (89/104/EEC) (the “Directive”) following a reference from the French courts. Among other things, it acknowledged the ability of trade mark owners to invoke their rights under the Directive if breach of a trade mark licence damages the allure and prestige of goods sold under the mark.

The Facts

In May 2000, Christian Dior couture SA (Dior) entered into a trade mark licence with Société industrielle lingerie (SIL) for the manufacture and distribution of luxury corsetry goods bearing Dior’s “CHRISTIAN DIOR” trade mark. Among other things, the licence provided that SIL would not 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 Dior. The licence also provided that SIL would make all necessary provision to ensure that its distributors or retailers complied with so as to maintain the repute and prestige of the trade mark

Faced with economic difficulties, SIL requested Dior’s consent to market goods outside its selective distribution network. Despite Dior’s refusal to grant SIL the necessary permission, and in breach of its contractual obligations, SIL sold goods bearing Dior’s trade mark to Copad SA, a chain of discount stores in France. Dior brought proceedings against SIL and Copad for trade mark infringement in the regional court. The court rejected Dior’s claim and held that SIL’s actions created contractual liability only.

Dior appealed and the appeal court ruled that sales by SIL did not constitute infringement because compliance with the provision in the licence agreement relating to conditions governing distribution did not fall within the scope of the national provisions on trade mark law that relate to Article 8(2) of the Directive. In spite of this, SIL’s sales did not imply exhaustion of Dior’s trade mark rights, for the purposes of the national legislation relating to Article 7(1) of the Directive.

Copad appealed to the Court of Cassation and claimed that Dior’s rights were exhausted by SIL’s sales. Dior cross-appealed and argued that the appeal court should not have ruled out infringement by SIL and Copad.

The Court of Cassation stayed proceedings and referred three questions to the ECJ.

The ECJ ruled as follows:

Question 1: Should Article 8(2) of the Directive be interpreted to mean that a trade mark owner could invoke the rights conferred by his trade mark against a licensee who contravened a provision in the licence agreement prohibiting, on grounds of the trade mark’s prestige, sale to discount stores?

The court found in favour of Dior, ruling that Article 8(2) 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.

However, the ECJ added that the trade mark owner must establish that the contravention damages the “allure and prestigious image which bestows on those goods an aura of luxury”. Specifically, the court reasoned that the quality of luxury goods was not only the result of their material characteristics, but also of their high-class image which bestowed on them an aura of luxury. On the basis that this sense of luxury allowed consumers to distinguish Dior’s goods from other similar items, an impairment to that “aura” was likely to affect the perception of the quality of those goods.

Whether the licensee’s actions in fact damaged the luxurious aura of the goods, and therefore affected the perception of their quality, was for the national court to decide, although the ECJ noted that the objective of the selective distribution agreement in question was to ensure that Dior’s goods were displayed in a manner befitting their luxurious reputation. On this basis it was possible that the sale of luxury goods by the licensee to third parties outside the selective distribution network could affect the quality of those goods. In these circumstances, a contractual provision prohibiting such sale must be considered to be falling within the scope of Article 8(2) of the Directive.

The court suggested that the national court should consider the following factors when assessing the impact of the licensee’s breach of contract:

The nature of the branded luxury goods;

The volumes sold and whether the licensee sells the goods to discount stores that are not part of the selective distribution network (and, if so, how often).

The nature of the goods normally marketed by the discount stores and the marketing methods normally used in that sector.

The ECJ also interpreted the word “territory” in Article 8(2) for the purpose of these provisions, concluding that the term referred to geographic scope only and did not extend to a group of authorised outlets belonging to a selective distribution network.

Question 2: Should Article 7(1) of the Directive be interpreted to mean that a licensee who puts goods bearing a trade mark on the market in the EEA in disregard of a provision of the licence agreement prohibiting, on grounds of the trade mark’s prestige, sale to discount stores, did so without the consent of the trade mark proprietor?

The ECJ held that Article 7(1) is to be interpreted as meaning that a licensee who puts goods bearing a trade mark on the market without taking into account a provision in a licence agreement does so without the consent of the trade mark owner if it can be established that the provision in question is included in those listed in Article 8(2).

Question 3: If the answer to the second question is “no”, could the proprietor invoke such a provision to oppose further commercialisation of the goods, on the basis of Article 7(2) of the Directive?

The ECJ concluded that where a licensee puts luxury goods on the market in contravention of a provision in a licence agreement and must be considered to have done so with the consent of the proprietor of the trade mark (i.e. it cannot be established that the provision in question is included in those listed in Article 8(2) of the Directive), 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) provided that it can be established on the facts that such resale damages the reputation of the trade mark.

Where there is a licensee selling goods to a discount store, the court will need to strike a balance between the legitimate interest of the trade mark owner and that of the discount store. If the national court does not find that the sale by the licensee to a third party is likely to undermine the quality of the luxury goods (meaning that they are put on the market with the trade mark owner’s consent), the national court will need to assess whether further commercialisation of the goods by the third party, using methods customary in its sector of trade, damages the trade mark’s reputation. In reaching its decision, the national court should take into account the parties to whom the goods are resold and the circumstances in which the goods are put on the market.

Comment

We are yet to see how the ECJ’s reference to “the allure and prestigious image which bestows on those goods an aura of luxury” will be interpreted by the national courts, and in particular the words “allure”, “prestigious”, “aura” and “luxury” within this context. It will also be interesting to see whether this will apply only to luxury consumer goods or whether it will affect other brands in niche areas, such as the technology or automotive sectors. Either way, in the current economic climate, we may well see more cases of this nature and can expect owners of luxury brand trade marks and licensors of selective distribution agreements to rely more heavily on the provisions of a licence agreement.

This decision also creates the curious position that the way in which the goods are displayed and used by a third party, post-sale, can determine infringement. This may be a difficult line to draw as a practical matter.

For a copy of the judgement, please click here.