Enforcing trademark rights against free riders on selective distribution networks: Two recent decisions of the District Court of Milan in the luxury cosmetics sector
Introduction
The interim orders recently handed down by the District
Court of Milan in the Landoll v MECS case[1]
and in the L’Oréal v IDS case[2]
well illustrates the interaction between competition law and IP law where
branded goods are marketed through selective distribution networks. Consistently
with the settled EU case law, these orders indicate that violation from a third
party of competition compliant selective distribution system may trigger the
exemption from the exhaustion principle, allowing the supplier to enforce his
trademark rights against the infringer.
This note reviews the approach taken by the Court of
Milan to determine when the supplier can successfully invoke trademark
protection.
The legal background
The exhaustion principle lays down that the exclusive
rights conferred on the trademark proprietor are exhausted in relation to the
trademarked that have been place in the market in the EEA by the proprietor or
hid consent[3]. Article
5(2) of the Italian Intellectual Property Code (thereafter IPC) provides an
exemption from the exhaustion principle[4].
This provision states that the principle of exhaustion of trademark rights does
not apply where there exist legitimate reasons for the proprietor to oppose
further commercialization of the trademarked products, especially in case of
change and impairment of the condition of the goods.
As ruled by the Court of Justice of the EU
(thereinafter CJEU) in Copad v Dior[5], the presence of a selective
distribution system may constitute a legitimate reason for exempting the
supplier from the exhaustion principle. More specifically, for this exemption
to apply, the contract products are luxurious or prestigious goods that justify
the adoption of a selective distribution network; and the resale of the
products outside the selective distribution network damages the reputation of
the trademark. Because the exhaustion principle does not apply if the above
conditions are met, the trademark proprietor can still oppose the acts of
resale of the products made by third parties even where the resellers have
purchased the goods from dealers admitted to the selective distribution
network. It is upon national judges to determines whether these conditions are fulfilled.
In that regard, the factors that may be of relevance are
- The nature of the trademarked luxury goods;
-The volumes and frequency of sales outside the
selective distribution networks (Do the sales occur occasionally or on a
regular basis?);
-The nature of the goods normally sold by the
infringer and the marketing methods normally used in that sector.
A further condition for the exemption from the
exhaustion principle to apply is that the allegedly infringed selective distribution
network must be compliant with competition law. Under EU competition law, a selective
distribution network is defined as a system where the supplier commits to sell
the contract products only to distributors selected on the basis of specified
criteria and where these distributors undertake not to sell such products to
unauthorized distributors within the territory reserved by the supplier to
operate that system[6]. Since
the seminal Metro I[7],
the CJEU has developed a three-limb test to assess whether a selective
distribution network is in line with Article 101 TFEU. In
practice, under this test, which is now codified in the Commission’s Guidelines
on Vertical Restraints[8],
a selective distribution network is lawful provided that:
i)
The product is of
a nature that necessitates a selective distribution system;
ii)
Resellers are
chosen on the basis of qualitative criteria, laid down uniformly for all
retailers and are not applied in a discriminatory manner;
iii)
The above criteria
must not go beyond what is necessary.
The CJEU accepted selective distribution networks for
the marketing of products that have a strong brand image such as perfumes and
luxury cosmetics[9].
More recently, it confirmed this approach in Pierre Fabre[10]
concerning a selective distribution system for cosmetics and personal care
products. In this case the CJEU held that the preservation of the prestige and
reputation of the trademarked products justified the recourse to a selective
distribution network. Crucially, this network does not constitute an
anti-competitive practice where the admitted dealers have been selected on the
basis of objective criteria pertaining to the qualifications of the seller, his
staff and his facilities and such criteria are not applied discriminatorily.
Lastly, also in Coty
Germany[11] the
CJEU considered the legitimacy of a selective distribution network for luxury
cosmetics that imposed a ban on resale of these products on independent
e-commerce platforms. Consistently with its past case law, the CJEU said was
that a selective distribution system that is primarily aimed at preserving the
luxury image of the contract products complies with Article 101 TFEU if the
authorized dealers are selected on the basis of the Metro I three-limb test.
Facts
The Landoll v MECS
case
The applicant, Landoll, is the proprietor of several
Italian and EU word and figurative trademarks (the NASHI and NASHI ARGAN marks)
for professional cosmetic products. These products are sold by Landoll via its flagship
stores and a selective distributive network. The members of this network are hairdressers
and beauty salons chosen on the basis of qualitative criteria with the view to
preserve the luxury image and reputation of the products. a dealer which is
admitted to its selective distribution network.
The respondent, MECS, is a retailer of cosmetic
products that does not belong to the Landoll selective distribution network.
Nevertheless, MECS offered online cosmetics bearing the NASHI and NASHI ARGAN
marks via an e-commerce platform and its own e-shop.
The L’Oréal v IDS
case
L’Oréal Italia and Helena Rubinstein belonging are
part of the L’Oréal group (thereinafter L’Oréal). They are the exclusive
licensees for Italy for several famous national and EU trademarks covering upmarket
cosmetics and perfumes. The distribution channel chose by L’Oréal for these
products is a selective distribution network whose members are allowed to sell the
contract products only to end-consumers and other admitted dealers. To preserve
the integrity of its selective distribution network, L’Oréal has developed a system
tracking each product place in the market. In particular, an Anti-diversion
code (AD code) is affixed on every luxury product. This code enables the
supplier to determine the distributor that put the products in the market as
well as to track that product.
The respondent is IDS International Drugstore Italia
(IDS) is a retailer, not admitted to the selective distribution network of
L’Oréal, that, under the Lillapois brand, runs a chain of drugstores offering household
cleaner and personal care products. IDS sold in its brick-and-mortar and online
shops several cosmetics bearing the trademarks licensed to L’Oréal, and namely
‘Giorgio Armani’, ‘Lancôme’, ‘Diesel’, ‘Cacharel’, ‘Ralph Lauren’ and ‘Yves
Saint Laurent Beauté’. Moreover, the AD Code affixed on the external film of
the original packaging of these products was removed and replaced with the labels
of IDS. over the AD code. In addition, some of batches of the products resold by
IDS, and in namely particular ‘Acqua di Gioia’ di Giorgio Armani, ‘Opium’ di
YSL and ‘Trésor’ of Lancôme, were placed in the market for the first time in non-EEA
countries.
The proceedings
before the District Court of Milan
Landoll and L’Oréal started a trademark infringement
action before the District Court of Milan against MECS and IDS, respectively. In
particular, L’Oréal claimed that the selling methods employed by IDs infringed its
rights on the Giorgio Armani’, ‘Lancôme’, ‘Diesel’, ‘Cacharel’, ‘Ralph Lauren’
and ‘Yves Saint Laurent Beauté’ marks. IDS replied that it did not harm the
brand image of the products as consumers perceived its outlet shops as being of
high qualitative standards and that its own labels did not alter the original
packages. It also argued that the L’Oréal action had a vexatious nature,
targeting the drugstore retailers with the view to lessening the intra-band competition.
To defend the infringement claim, MECS submitted that it had purchased in good
faith the products in question from a third party in April 2017 and,
accordingly, the exhaustion principle applied.
Together with the infringement action, L’Oréal and
Landoll also filed with the Court of Milan an application for interim relief.
They asked for an interlocutory injunction to order the respondents to deliver
up the infringing goods and stop the continuation of infringing activities. To
determine the claims for the interlocutory injunctions submitted by L’Oréal and
Landoll, the Court of Milan had to consider whether the trademark rights were
already exhausted or instead they fell within the exception to the exhaustion
principle in Article 5(2) of IPC.
To this end, the Court of Milan followed a three-step
approach. Preliminarily, it assessed whether the selective distribution systems
implemented by the applicants abode by competition rules. Then, it focused on
the conditions set out by the CJEU in Copad
v Dior. First, it dealt with the question whether the supplied products
were luxury goods requiring a selective distribution system. Second, it
ascertained whether the business practices of the respondents caused a real
damage to the luxury image and prestige of the trademarks relied on by L’Oréal
and Landoll.
The lawfulness of
the selective distribution systems
The Court of Milan carefully reviewed the general
sales conditions in the selective distribution agreements concluded by the
applicants. It found that L’Oréal chose the resellers to be admitted to its
distribution network on the basis of very detailed criteria concerning the
quality, location of sales points; the characteristics of points of sales and
store signs; and the minimum professional training expected from authorized
resellers. All these were objective criteria of qualitative and not
discriminatory nature and were also proportionate to the objective of
preservation of the luxury aura of trademarks.
The goal of the selective distribution system put in
place by Landoll is to ensure a correct use of the products, thereby preserving
their image and prestige. To achieve this aim, the distribution agreements require
authorized resellers to possess appropriate professional skills to achieve by
suitable training programmes. The Court of Milan found also the criteria
devised by Landoll to select the distributors to be consistent with the objective
of preserving the luxurious image and of the products and that criteria were laid
down and applied uniformly.
In light of the above, the Court of Milan reached the
conclusion that the selective distribution systems crafted by Landoll and L’Oréal
met the conditions set out in the Metro I
test. Therefore, these were lawful arrangements consistent with Article 101
TFEU.
The luxury nature
of the supplied products
This was the least controversial condition and the Court
of Milan hastily discussed it. The evidence furnished by Landoll clearly
indicated that the NASHI and NASHI ARGAN marks and the cosmetics bearing them
were famous and well-reputed. Moreover, these marks also conveyed an aura of
prestige and luxury. It was alike indisputable that the products marketed by
L’Oréal had a luxurious or prestigious nature.
The damage to
trademarks repute
After having established the selective distribution
networks put in place the applicants were not anti-competitive and were needed
by the luxury nature of the supplied products, the last step for the Court of
Milan was to determine whether the condition of damage to trademark repute was
satisfied.
In L’Oréal v IDS
the Court of Milan reminded that, pursuant to the privity doctrine enshrined in
Article 1372 of the Civil Code, the selling arrangements laid down in the
selective distribution agreements do not bind on third parties. Therefore, the
legitimacy of the business practices of IDS cannot be ascertained against the
selling modalities determined by L’Oréal. The Court of Milan also added that
the cash & carry resale model is not necessarily incompatible with the
prestige and luxury aura of trademarks.
Then, the Court of Milan pointed out that for this condition
to be met, a real damage must be proved. In other words, it is not sufficient to
allege the likelihood of a serious harm because a dealer outside the selective distribution
network employs a particular selling modality. Instead, it is necessary to produce
specific factual circumstances proving that the selling method of a third party
causes an effective damage to the luxury aura of the mark. This evidentiary
burden was correctly discharged by L’Oréal. The photographs submitted by the
applicant are visual evidence that the Lillapois stores are unsuitable to
preserve the image and luxury aura of the branded products in question. The stores
look like discount stores with sloppy dressing, dim-light premises and
close-range shelving showing a wide range of products of different nature.
These selling modalities are clearly incompatible with the quality standards
that L’Oréal expects from its authorized dealers. And, in any event, they
seriously harmed the prestige of the marks in question.
In Landoll v
MECS the Court also found that the selling modalities implemented by the
respondent effectively harmed the image of luxury and prestige associated with
the NASHI and NASHI ARGAN marks. The ways in which MECS offered the trademarked
products on e-commerce platforms and its e-shop were similar to the selling modalities
employed for generic cosmetics of lower qualities.
Because the conditions for the application of
exception in Article 5(2) of ICP were fulfilled Landoll and L’Oréal were still
able to enforce their trademark rights against the infringers of their
selective distribution networks. In that regard, the Court of Milan made the
provisional finding that IDS and MECS infringed the trademark rights of the
applicants, which, however, will have to be confirmed at the ensuing full
trail. However, the applications of Landoll and L’Oréal for interim relied were
partially rejected by the Court of Milan. It only granted a cease and desist
injunction, though it refused to make a delivery up order.
Conclusive remarks
Enforcing trademark rights can
be an effective strategy to protect selective distribution networks from free
riders provided that certain conditions are met. The rulings recently made by
the Court of Milan in Landoll v MECS and Oréal v IDS well
illustrates how Italian judges interpret these conditions. Incidentally, these
conditions strike a balance between the legitimate interests of suppliers in
protecting the reputation of their trademarks against unsuitable selling
arrangements of third parties and the interests of distributors in reselling
the trademarked goods to the benefit of intra-brand competition.
To
enjoy the exemption from the exhaustion principle, suppliers have to make sure
to meet these conditions. First, the selective distribution agreements are not
anti-competitive because the criteria for admission of distributors to the
network are consistent with the so-called Metro I criteria. Secondly,
the selective distribution network concern luxury products, whose nature
justify the recourse to this channel. Third, and more importantly, a real
damage to the repute of trademarks must be established.
It
can be argued that the Court of Milan slightly departed from the EU case law in
interpreting the third condition. In Coty Germany, the CJEU seemed to
imply a harm to the luxury image of the trademarked products from the absence
of a contractual relationship between the supplier and third-party e-commerce
platforms. Because these retailers do not belong to the selective distribution
system, the supplier cannot check
whether they respect its selling arrangements. The ensuing risk is that
the way in which these unauthorized distributors sell the contract products is
to tarnish the reputation of the brands of the supplier. On the other hand, the
Court of Milan seems to have taken a less favourable position for suppliers
requiring to them to prove that the selling arrangements of the third parties
effectively cause a serious and actual damage to the repute of marks.
[1] District Court of Milan, Commercial Law Chamber,
Judgment of 12 December 2018, Case No 44211/2018, Landoll v MECS.
[2] id., Judgment of 19 November 2018, Case No 38739/2018,
L’Oréal Italia and Helena Rubinstein
Italia v IDS International Drugstore Italia.
[3] See Article 5(1) of the Italian Intellectual Property
Code (IPC), which is equivalent to Article 15(1) of Regulation (EU) 2017/1001 and Article 15(1)
of Directive (EU) 2015/243.
[4] The exemption is similarly worded to the exemption in Article 15(2) of Regulation EC 2017/1001 and Article
15(2) of Directive (EU) 2015/243.
[7] Judgment of 25
October 1977, Metro v Commission (Metro I), ECLI:EU:C:1977:167; Judgment of 11 December 1980, Case 31/80, L’Oréal v PVBA,
ECLI:EU:1980:289, [1980] ECR 775; judgment of 25 October 1983, Case 107/82, AEG, ECLI:EU:C:1983:293; European
Commission Guidelines on Vertical Restraints, para. 175. On the competition
assessment of selective distribution networks, see also Giorgio Monti,
‘Restraints on Selective Distribution Agreements’ (2013) World Competition 489.
[9] Selective distribution netwoks for this category of
products have been approved in judgment of 10 July 1980, Case 99/79 Lancôme v Etos, EU:C:1980:193; Case
T-19/92 Groupement d’Achat Eduoard
Leclerc v Commission; judgment of 12 December 1996, Case T-88/92 Groupement d’Achat Edourd Leclerc;
EU:T:1996:192.
[10] Judgment of 13 October 2011, C-439/09; Pierre Fabre, EU:C:2011:649.
[11] Judgment of 6 December 2017, Coty Germany, C-230/16, EU:C:2017:941.
Comments