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German Court Rules on Selective Distribution Systems Concerning Luxury Cosmetics

In the recent publication of a ruling dated 6 March 2018, the Higher Regional Court of Düsseldorf held that Japanese luxury cosmetics manufacturer Kanebo has a valid intellectual property (IP)-based claim against German retail chain Real, to stop selling goods under its brands Kanebo and Sensai both online and in stores EU-wide. In consequence, the Court prohibited online and offline sales by Real of Kanebo’s luxury cosmetics.

Kanebo’s skin and hair care products, makeup and perfumes are marketed under a strictly regulated qualitative selective distribution system. Kanebo holds the respective EU word mark and figurative mark which is registered with the European Union Intellectual Property Office (EUIPO).

Hong Kong sellers may already know of the retailer Real, which mainly sells groceries, but also, among others, household products, electrical appliances, textiles and cosmetics. It also operates an online sales platform. Real placed Kanebo’s products on the market in stores as well as online without being a member of Kanebo’s selective distribution network.

As a general rule, an EU trademark shall not entitle the proprietor to prohibit its use in relation to goods which have been put on the market in the EEA under that trademark by the proprietor or with his consent. This so-called principle of exhaustion prevents the trademark holder from prohibiting subsequent re-sales of such goods.

Kanebo based its claim on Regulation 2017/1001 (the European Union Trademark Regulation – “TMR”) which was implemented by the German Trademark Act (“MarkenG”). The relevant provision lays down an exception to the above rule, according to which a proprietor is entitled to prohibit the use of his trademark where there are legitimate reasons to oppose the further selling of the goods, especially where the condition of the goods is changed or impaired after they have been put on the market.

The Court considered that the exception to the principle of trademark rights exhaustion shall generally be interpreted restrictively, but shall apply where, like in the present case, there was a threat of reputational damage.

In this respect, the Court referred to the case law of the EU’s Court of Justice (the ECJ) which has repeatedly recognised and reinforced the interests of owners of prestigious brands to secure the luxury image of their goods. In this context, it based its reasoning on the judgment of the ECJ in case C-59/08 (decision of 23 April 2009) – Copad, which states that the reputation of a luxury trademark may be harmed by the sale of products via discounters. A selective distribution network for luxury goods that primarily aims at securing the luxury image of the goods was considered compatible with EU law, since it secures the quality of the luxury goods and its proper use. The Court further referred to the judgment of the ECJ in case C-230/16 (decision of 6 December 2017) – Coty, in which the ECJ held that producers of luxury articles may prohibit the distribution of their goods via third party online platforms, as long as online sales are not per se prohibited.

The Court held that the concrete circumstances of the sale of Kanebo's luxury cosmetics by Real were likely to damage the reputation of the trademark. The sales environment, both online and offline, was not comparable with the luxurious environment in which the products were usually sold by the manufacturer and through its selective distribution system.

The Court considered of particular relevance that Real sold the luxury cosmetics alongside mass-produced discounts and everyday products of all kinds, that no product consultation took place, that the platform (on which also third parties could sell) was focused on the price, with highlighted special offers, crossed-out prices, and the indication of the percentage saved compared to the original price. Further, that the products counted towards a payback system which included all products and that it was possible to finance the purchase, which made the products appear affordable for everyone and put them on the same level as common items.

The Court concluded that all these factors seriously undermined the prestigious image of the product, since this form of distribution ultimately negated Kanebo’s claim to ensure the exclusivity and luxurious appeal of the branded goods and its qualitative distribution criteria.

The case presents a potential scenario for Hong Kong exporters of cosmetics or Hong Kong trademark owners and brand manufacturers of other high-quality products, such as technical devices with a prestigious image. If relevant, they may be able to make a claim that the online and offline sales of products offered outside a qualitative selective distribution network should not only be prohibited where there is the danger of the product being impaired after being placed on the market, but also where there is a danger for the reputation of the products. An example of this, as shown in the case, is if these goods are being sold in what appears to be an inferior sales environment.

Content provided by Picture: HKTDC Research
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