2017/11 > The application of the rule of exhaustion in cases of assignment of IP rights

The Court of Justice of the European Union in Centrafarm / Sterlit and Centrafarm Wintrop decisions n°15/74 and 16/74 of 31 October 1974, ruled that Articles 30 to 36 of the Treaty on the Functioning of the European Union (TFEU) prohibits an IP right owner from using his exclusive rights to prevent the free movement of goods within the European Economic Area, when they were put on the market for the first time in a Member State with his consent.

Therefore, the IP right owner cannot oppose importation of the same product into any of the member countries of the European Union.

This rule is applicable to all IP rights.

Regarding trademarks, this principle also applies where the trademark belongs to different holders, located in different Member States, when they are economically linked. The decisive element of this economic link is defined as the possibility of exercising control over the quality of the marked products. However, such an economic link is not considered to exist in the event that the trademark has been voluntarily assigned to a third party (Case C-9/93 of 22 June 1994 – Ideal Standard).

The Court of Justice of the European Union (EUCJ) will have to consider this issue again in relation to the world-renowned trademark “Schweppes” for beverages, in case n° C-291/16 for which Advocate General Paolo Mengozzi has issued his opinion on 12 September 2017.

Two different companies hold the rights on the ‘SCHWEPPES’ trademark  in different territories within Europe: since 1999, the Coca-Cola Company owns it for 13 European Union Member states including the United Kingdom, while the Orangina group remains the rights-holder for the other countries.

Rights in the Spanish trademark Schweppes are held by Schweppes International Ltd, which is an English company, affiliate of the Orangina Group, and are licensed to Schweppes’s Spanish subsidiary.

The Spanish subsidiary discovered the importation and commercialization in Spain of beverages marked “Schweppes”, by an importer who was sourcing the product from the United Kingdom from the English subsidiary of Coca-Cola. The Spanish company sued the importer for infringement before the Barcelona commercial court No. 8 claiming that these products had not been manufactured and marketed under his control and that the consumer was not in a position to distinguish their commercial origin from his own Products.

The importer could not deny that the signs and products in issue were identical. However he argued that, because of the existence of tacit consent between the two holder companies, and the existence of legal and economic links between them for the joint exploitation of the trademark (point 9), the trademark rights were exhausted. He also cited a number of company behaviors which, in his opinion, were contributing to maintaining a global image of the trademark (point 10)

The Spanish court then asked four questions to the EUCJ (point 11), summarized at point 51 of the General Advocate’s opinion, among them whether or not the Spanish company, licensed for “Schweppes”, could legitimately object that a third party imports into Spain products bearing the same trademark and put for the first time on the market in the United Kingdom by a different company (paragraph 51).

The General Advocate recalls in his opinion that, in principle, the rule of exhaustion of rights does not apply when the unity of control on the trademark has been interrupted following a voluntary trademark assignment.

However, he thereafter supports the position developed by the Commission in their opinion on the case, according to which the exhaustion may apply when the manufacture and marketing of products bearing identical parallel trademarks are subject to a single commercial policy and strategy conducted by the holders of those trademarks (Paragraph 70).

According to the General Advocate, the notion of ‘economic ties’ is capable of covering a wide spectrum of commercial relationships in the course of business (paragraph 76) with, as a consequence, the exhaustion of IP rights when the first launch on the market by one of the parallel trademark holders cannot be considered to be made without the consent of the other. Thus, he considers when trademark owners coordinate their commercial policies in order to exercise joint control over the use of their respective trademarks, they can be economically linked (paragraph 82).

He states that this conclusion is consistent with the balance to be sought between the conflicting objectives of the free movement of goods and the protection of trademarks rights. It cannot be denied because the owners’ agreement for a joint management of their trademarks is similar to agreements concluded between licensor and licensee, manufacturer and resellers or between companies belonging to the same group.

He emphasizes that “it is the unity of control over the brand resulting from all these relationships, and not their formal aspects, which triggers exhaustion“.

A discussion is nevertheless open on the second trademark owner’s lack of remuneration when the first launch on the market is operated by the other trademark holder. However, according to the General counsel, the specific purpose of the trademark right is the right to use the mark for the first launch on the market and, as a result, the principle of exhaustion of IP rights is unrelated to the trademark owner’s right to get a fair reward from the sale. The collection of a fee is not the specific object of that right and what must be determined is whether the right holder gave his consent to the launch on the market, or not (paragraph 87). However, the General Advocate rules out such reasoning in relation with patents.

The General Counsel also states that a trademark assignment contract can provide for a reciprocal prohibition on selling in some territories (paragraph 90). It is therefore at the time of the negotiation of that contract that trademark holders will have to settle this issue, subject to the rules of antitrust law.

With regard to the question of the burden of proof as to the existence of a single control on the trademark, the General Advocate agrees with the opinion of the Commission according to which the existing rule which puts the burden of the proof on the parallel importer who claims exhaustion, should be adapted. This had already been accepted in the case of selective distribution in the Van Doren case (C-244/00 of 8 April 2003). It was indeed decided that the trade mark owner had to provide evidence that, although he had consented to marketing outside the Union, he had indeed prohibited re-importation into the same territory. Thus, in the present case, it would be up to the holder who intends to oppose the importation to prove that no agreement or coordination for a single control of the trademark exists in cooperation with the imported goods trademark’s holder (paragraph 95).