Brand names bite back

The Silhouette case has provided limited protection for trade mark owners. But caution must still be exercised to control the grey market within Europe, warns Brian March. Brian March is senior partner at Wildbore & Gibbons and president of the Institute of Trade Mark Attorneys.

We have all witnessed the extraordinary growth in the power of the brand name over the last decade. Some brands have become highly fashionable and sought after, with purchasers prepared to pay a premium for a product simply to be able to own and display it. Brands have become valuable and powerful assets.

In recent months there have been numerous examples of supermarkets selling trade-marked designer goods cheaply – or at least at a cheaper price than the brand owners would like.

Calvin Klein boxer shorts at £10 in supermarkets as opposed to £19 in the High Street, Adidas trainers at £25 as opposed to £49.99 and Rive Gauche Eau de Toilette at £16.25 instead of £32.50 are just a few examples.

The ruling made by the European Court of Justice (ECJ) in Silhouette moved the issue of the legality of the grey market (selling authentic goods at low prices), out of the courtroom and into public consciousness because of its subsequent impact on supermarkets' sale of designer goods.

The case before the ECJ focused on Austrian company Silhouette, which sells high quality spectacles direct to opticians in Austria and through subsidiary companies or distributors in the European Economic Area (EEA) and EU member states, and an Austrian retail outlet called Hartlauer, whose chief selling point is its low prices.

Silhouette decided not to supply Hartlauer, believing it would be harmful to its high-quality fashion image. But Hartlauer obtained 21,000 outmoded frames that Silhouette had put on the market in Bulgaria and put them up for sale in its Austrian stores.

Silhouette brought an action to prevent Hartlauer marketing those spectacles under the Silhouette trade mark, as they had not been put on the market in the EEA by Silhouette or with its consent.

The question the ECJ was asked to determine was whether national rules regarding exhaustion of trade mark rights in respect of products put on the market outside the EEA under the mark of a proprietor or with their consent (international exhaustion) are contrary to EC legislation relating to trade marks.

The ECJ's ruling was that they are contrary to legislation. The proprietor of a trade mark can therefore restrain parallel imports from non-member countries. Further, the proprietor does not lose trade mark rights after the goods have been marketed outside the EEA.

The EC legislation relating to trade marks is contained in the First Council Directive 89/104/EEC of 21 December 1998.

The court ruled that articles 5 to 7 of the directive had to be construed as embodying a complete harmonisation of the rules relating to the right conferred by a trade mark. In respect of products put on the market in non-member countries, the directive cannot be interpreted as leaving it open to member states to provide exhaustion of the rights conferred by a trade mark in their domestic law.

Moreover, the court ruled that this is the only interpretation which can ensure that the purpose of the directive is achieved; namely to safeguard the functioning of the internal market.

A situation whereby some member states could provide for international exhaustion while others provide for EC exhaustion only would result in barriers to the free movement of goods and the freedom to provide services. In effect, the ruling adds further value to trade mark registrations obtained within the EEA.

While it is understandable that the media highlight the populist consumer angle, the ruling is an important landmark for trade mark owners and gives added strength to the argument for registering trade marks.

Let us examine what a trade mark is. Essentially it is a mark that distinguishes the goods or services of one manufacturer or provider from another. It identifies the origin of the goods or services so that the purchaser can be assured of the quality of the product and can be certain he or she is getting exactly what they expect.

Providing the branded goods are genuine and of exactly the same quality, it is hard to argue against international exhaustion of trade mark rights so that once such a product is put on the market anywhere in the world, it can be free to circulate throughout the world, subject, of course, to third party rights.

But a degree of caution is still required when talking about parallel imports from the grey market. Although it is clear that in Silhouette the spectacles purchased in Bulgaria had been manufactured by Silhouette (albeit a discontinued line), in some cases there are reasons why a brand owner might place slightly different products in different markets under the same brand name.

For example, diesel fuels in arctic climates need a different octane level to those required in hot climes, yet the same brand name is used to sell the two different products.

The grey market holds no protection for the consumer if the arctic brands are bought cheaply and sold in countries with warmer climates. Indeed, the consumer is badly and dangerously served.

The populist media's call for more grey marketing therefore needs to be treated with some caution.

Of course there is nothing to stop a grey market operating within the EEA, but that was not what this case was about. Trade mark owners and brand managers only have themselves to blame if they allow a grey market to flourish by allowing cheap goods to appear on markets within the EEA.

It was noticeable that the big brand owners were conspicuous by their absence from all the media coverage of the Silhouette case – they know when to keep their heads down. And yet, they have a good story to tell, but perhaps not at a time when the media are baying for their blood.

While the Institute Trade Mark Attorneys (ITMA) would not endorse the enforcement of trade mark rights to artificially inflate prices, it recognises that companies often put a lot of resources into promoting and marketing their trade marks and they are, therefore, entitled to get a fair return on their investment.

Once the businessperson has finished reading the media coverage with their consumer hat on, they should quickly realise that the ruling is very much an endorsement of the ITMA's arguments for encouraging all businesses to consider, at an early stage in their product/service development, the registration of their trade mark, thus providing the protection deserving of their investment.

Naturally, the ITMA would argue that the only sensible way of achieving a successful registration and long-term protection of trade mark rights is to register trade marks.