The existence of a selective distribution network may be included among the ‘legitimate reasons’ for not exhausting trademark rights, provided that it complies with antitrust law, the trademarked product is a luxury item and there is a real harm to the image of prestige the manufacturer seeks to maintain through the adoption of a selective distribution system as a result of product marketing by third parties not belonging to the network.
Selective distribution is defined in Article 1, letter e) of Regulation (EU) No. 330/2010 as “selective distribution system’ means a distribution system where the supplier undertakes to sell the contract goods or services, either directly or indirectly, only to distributors selected on the basis of specified criteria and where these distributors undertake not to sell such goods or services to unauthorised distributors within the territory reserved by the supplier to operate that system”.
Therefore, the prohibition of reselling products to resellers outside the network represents the distinctive feature of selective distribution, since by means of such system products are sold exclusively through resellers who meet specific standards of professional competence. This allows the manufacturer to ensure service consistency at the points of sale, coordinated management of logistics, training of specialists and monitoring of the disposal phase of unsold products.
Two recent orders of the IP Chamber of the Court of Milan sanctioned the interference with the selective distribution system legitimately implemented by the trademark holder, making findings of trademark infringement. These rulings have confirmed the situations in which there may be exceptions to the principle of trademark exhaustion once the products have been put on the market by the brand owner.
The first action was brought by L’Oréal and Helena Rubinstein against a retailer outside their selective distribution network and decided with an interim order issued on 19 November 2018. It also concerned the resale of products under the trademarks “Giorgio Armani”, “Lancôme”, “Cacharel”, “Yves Saint Laurent Beauté” and others of which the claimants in the action are licensees, in the outlets and on the e-commerce platform of an unauthorized reseller. The claimant argued, in particular, that (i) the principle of trademark exhaustion does not apply if packaging is altered by removing the Anti-Diversion Code; (ii) the lack of consent to the placing on the market of products parallelly imported from countries outside the European Economic Area; (iii) and that a deliberate interference with the selective distribution system had occurred.
The second decision was brought by Landoll as proprietor of the trademarks ‘Nashi’ and ‘Nashi Argan’, and decided with an interim order issued on 18 December 2018. It also concerned the resale of the claimant’s professional cosmetic products bearing its trademark by a reseller not belonging to its selective distribution network, who resold products online both on its own website and a third-party e-commerce platform.
Both decisions are in line with the established case-law which, in order to come within the exceptions to the principle of exhaustion, requires the following conditions to be satisfied:
(i) the selective distribution system implemented by the trademark owner complies with the antitrust rules;
(ii) the adoption of a selective distribution system is necessary to protect the trademarked products, which is particularly the case for luxury items;
(iii) the reselling methods put in place by third parties outside the network damage the image of luxury and prestige that the trademark owner seeks to maintain by means of a selective distribution system, or produce a confusing effect regarding the existence of an actual commercial link between the trademark holder and the unauthorized reseller.
(i) The legitimacy of the selective distribution system
The first requirement to be met is the legitimacy of the selective distribution system implemented by the trademark owner, i.e. its compliance with antitrust law is met.
According to established case law of the EU Court of Justice, a selective distribution system can be considered compliant with the rules set forth in Article 101 of the EEC Treaty, if selectivity is made necessary by particular technical requirements, linked to the peculiarities of the trademarketed products (e.g. they require special pre- and after-sales assistance services that not all dealers are able to provide), or it is necessary to protect the prestige and reputation of the brand, provided that the selection of distributors is based on “objective criteria relating to the qualifications of the seller, his staff and his facilities”, which are “laid down uniformly for all potential resellers” and “not applied in a discriminatory fashion” (CJEU, 11 December 1980, C-31/80; CJEU, 13 October 2011, C-439/09).
More recently, in a well-known case concerning the resale of luxury cosmetic products on a third-party e-commerce platform, it was confirmed that Article 101 TFEU should be interpreted as meaning that a selective distribution system for luxury items primarily aiming at preserving the luxury image of products complies with such provision on condition that the choice of retailers is made in accordance with the criteria developed by the EU case-law referred to above (CJEU, 6 December 2017, C-230/16, ‘Coty’).
It is up to the national court, which is called upon to determine whether there are ‘legitimate reasons’ for the trademark holder to be able to oppose the further marketing of its goods, to determine whether selective distribution contracts comply with antitrust law. In particular, it should verify that the distribution agreement does not contain any of the hard-core restrictions set out in Article 4 of Regulation (EU) No. 330/2010 (price, territory, consumer sales and cross-selling), or that it is exempted from market share threshold set forth in Article 3 (market share not exceeding 30%), and that the agreement complies with the three conditions for selective distribution, based on purely qualitative criteria, laid down in paragraph 175 of the Guidelines on Vertical Restraints of the European Commission – i.e. (i) the nature of the product in question must necessitate a selective distribution system, in the sense that such a system must constitute a legitimate requirement, having regard to the nature of the product concerned, to preserve its quality and ensure its proper use; (ii) resellers must be chosen on the basis of objective criteria of a qualitative nature which are laid down uniformly for all and made available to all potential resellers and are not applied in a discriminatory manner; (iii) and that the criteria laid down must not go beyond what is necessary.
In the above rulings, the Court of Milan examined the distribution contracts put in place by L’Oréal and Landoll and concluded that the quality criteria developed, implemented and used in selecting authorised dealers were fully consistent with the aim of safeguarding the luxury image of the products being distributed, that they had been applied in a non-discriminatory manner and were proportionate to the objective pursued.
In particular, the Court noted that “the general sales conditions applied by L’Oréal, in accordance with the Guidelines on Vertical Restraints of the European Commission, expressly specify that the trademarked products were intended to be sold throughout the European Economic Area through a network of authorised selective distributors on the basis of quality criteria which are described in detail …. establish in detail the quality and location of the sales outlets, the characteristics of the brand and the sales outlet, and the minimum professional skills of authorised retailers’ (L’Oréal Order, p. 11). In the same way, the Landoll ruling also noted that the adoption of a selective distribution system ‘appears to be aimed at ensuring, by means of the proven professional training of authorised persons – or by means of training and specialisation – the appropriate use of the products in relation to the needs of the final customer, thereby also contributing in this respect to the need to safeguard the image and prestige of the products’ (Landoll Order, p. 3).
(ii) Luxury products
Having established the existence and lawfulness of the selective distribution system, there is a requirement to assess whether there is a need to protect the trademarked products which is particularly the case for luxury items.
In this respect, EU case-law affirmed that the quality of luxury goods is not only the result of their material characteristics, but also of the style and prestigious image which bestow on them an aura of luxury, which is essential for them in order to be distinguished by consumers from other similar products. Damage to said luxury aura may therefore affect the quality of the products themselves (see CJEU, 6 December 2017, C-230/16; CJEU, 23 April 2009, C-59/08).
Therefore, according to EU case law, due to their characteristics and nature, luxury products may require the implementation of a selective distribution system to preserve their quality and ensure their proper use. However, no criteria were established to determine when a product can be considered as ‘luxury’.
In the two cases examined by the Court of Milan, the products in question were clearly considered luxury items, so that no in-depth examination of the applicability of the judgement of EU case-law was necessary in this case.
The reasoning in Coty specifically concerned luxury goods, since this was the reference subject for the preliminary ruling. However, one might ask whether it can also be applied to products of a different nature. It seems reasonable to presume that the reasons justifying the legitimacy of the provisions for the distribution of luxury products can also be applied in other contexts where the same sort of protection that legitimize the adoption of a selective distribution system is necessary, or where the access of dealers to third-party e-commerce platforms is likely to undermine the legitimate objectives pursued by choosing this form of distribution, such as, for instance, ensuring pre-sales consultancy for a proper use of the product.
(iii) The Existence of Prejudice
The trademark owner must then prove that the resale methods put in place by the third party outside the network is such as to damage the reputation of the products bearing the mark and the image of luxury and prestige that the trademark owner seeks to maintain precisely by means of the adoption of a selective distribution system.
The existence of a prejudice is undoubtedly the most controversial requirement, as it implies an assessment by the Court of both the third party’s specific selling methods and the conditions applied by the owner to his authorised dealers.
In this regard, both decisions examined here are in line with the quite restrictive approach already adopted in many cases by the Court of Milan, according to which the existence of a selective distribution network, even if lawful and concerning luxury goods, does not in itself exclude the exhaustion of the exclusive rights. Based on this restrictive approach, it is also necessary to prove the existence of significant harm to the trademark (or to the products bearing the trademark) caused by the third party and resulting from the factual circumstances of the case (see Court of Milan 13 March, 2016).
On this point, the L’Oréal order clarified that it would not be sufficient to demonstrate that the method adopted by the retailer outside the network does not comply with the quality standards required of authorised distributors (and therefore with the conditions laid down in the selective distribution contracts). It is still necessary to ascertain the concrete existence of a prejudice. In this respect, the order states that “the sales methods provided for by the L’Oréal selective distribution system do not constitute a parameter for the lawfulness of the defendant’s conduct. As already clarified by this Court, the conditions of sale stipulated by the holder of the right with the resellers, as clauses having inter partes effect, are not enforceable against third parties pursuant to Article 1372, second paragraph of the Italian Civil Code. The methods of selling cash & carry are not incompatible in their essence with the prestige and aura of luxury of the brand … the danger or the possibility of a serious harm would not be sufficient to justify an exception to the principle of exhaustion, but its actual existence is required. It follows thus that the harm in question must result from specific factual circumstances of the case”.
In the Court’s view, it is therefore not sufficient to show that the arrangements adopted by the third party do not comply with those imposed on authorised dealers. The trademark owner needs to prove that they are in fact detrimental to the aura of prestige of the mark.
It could be argued that in this respect the EU case-law highlights the mere lack of control by the trademark owner in the context of a sale by dealers not belonging to the network, which, according to the CJEU, leads to the existence of harm. Specifically, the CJEU in Coty stated that: “The absence of a contractual relationship between the supplier and third-party platforms is, however, an obstacle which prevents the supplier from being able to require, from those third-party platforms, compliance with the quality conditions that it has imposed on its authorised distributors. The internet sale of luxury goods via platforms which do not belong to the selective distribution system for those goods, in the context of which the supplier is unable to check the conditions in which those goods are sold, involves a risk of deterioration of the online presentation of those goods which is liable to harm their luxury image and thus their very character” (cf. “Coty”, pt. 48-49).
It would be reasonable to acknowledge that any sale outside the selective distribution system legitimately established by the trademark holder is liable to cause harm, both to the holder and to its network of authorised distributors, who undertake to comply with the conditions specifically laid down in the contract in order to protect the reputation and renown of the trademarked products. In other words, there is no need to prove a serious and significant harm to the trademark caused by the third party resulting from the factual circumstances of the case.