The judgment adopted by the European Court of Justice in the Consten and Grundig cases (Court judgment adopted in the joint cases No. 56/64 and C-58/64 of July 13, 1966, Établissements Consten S.à.R.L. and Grundig-Verkaufs-GmbH v Commission of the European Economic Community) was of critical im-portance. In the case under review, the German company Grundig entered into an exclusive distribution contract with the French company Consten for the ex-clusive distribution of the German company’s product of the brand GINT (Grundig International) in France. Grundig agreed not to transport any GINT brand products to France either directly or through third persons, what is more, to oblige their distributors active in third countries to refrain from doing so. On the other hand, Consten agreed not to ship the products forward to any third countries. The parties confirmed the exclusivity regarding the territory of France that was ensured in the contract by Grundig’s having authorized Consten to have the GINT trademark registered in its own name in France. Consten, already as the owner of a French trademark, could thus prevent the import of the goods with the GINT trademark to France (this is called parallel imports). By doing so, the parties wished to ensure that the goods with the brand GINT are exclusively distributed in France through Consten, which put the French company in a mo-nopoly position in the domestic market of the GINT brand.
However, another French company called UNEF purchased GINT products cheaper from German traders, which UNEF in turn put into the market in France below the prices applied by Consten. This violated the interests of Consten, this is why they launched a trademark infringement case against UNEF. UNEF turned to the Commission, which qualified the agreement on the registration of the trademark in favor of Consten an absolute territorial restriction that runs counter to the rule set out in the Treaty of Rome and this is why the Commission declared the distribution agreement null and void. Then Consten and Grundig consulted the European Court of Justice for the review of this Commission deci-sion, which was unfavorable for them. The Court upheld the decision of the
Commission with regard to the parts of the distribution contract that ran counter to Community law, including the instructions regarding trademark registration in France, and it confirmed that the contract was null and void in this respect.
The European Court of Justice declared that the single market cannot be di-vided along the national borders even by national trademarks, i.e. the exercising of rights arising from trademark protection shall not lead to the prohibition of the imports of the goods parallel to the domestic distribution of the goods sup-plied with the same trademark. The restriction of competition is prohibited both in the forms of horizontal and vertical cartels. Accordingly, the restriction of competition is prohibited not only in the case of goods supplied with different trademarks (inter-brand competition) but also, in the case of goods with the same trademark (intra-brand competition). By this, the Court basically created the principle of the exhaustion of Community rights and it allowed parallel imports within the Community. It did not question the existence of member state trademark rights, however, it restricted their exercise in order to allow the free movement of goods.
In 1974, in the Centrafarm vs. Winthrop case (Court judgment No. C-16/74 of October 31, 1974, Centrafarm BV and Adriaan de Peijper v Winthrop BV), the European Court of Justice declared that trademark rights concern the permission of the first release of the trademark into the market within the Community. What it means in practice is that the free trade in the products supplied with the trademark became possible within the Community without regard to the national (member state) trademark rights, i.e. if a merchant is able to procure the goods in question in a certain member state cheaper, they can sell them freely in an-other member state. This will, in turn, greatly contribute to the reduction of price differences between the individual member states and to the increased trade in branded goods within the Community.
Later the principle of the exhaustion of Community rights also appeared in normative Community regulation. According to Article 7 of the first directive of the Council (December 21, 1988) (No. 89/104/EEC) on the approximation of the trade mark laws of the Member States:
‘Exhaustion of the rights conferred by a trade mark
1. The trade mark shall not entitle the proprietor to prohibit its use in relation to goods which have been put on the market in the Community under that trade mark by the propri-etor or with his consent.
2. Paragraph 1 shall not apply where there exist legitimate reasons for the proprietor to op-pose further commercialization of the goods, especially where the condition of the goods is changed or impaired after they have been put on the market.’
After the declaration of the principle of the exhaustion of Community rights, several cases were brought to the Court in which the manufacturers, perhaps
partly in order to prevent parallel imports, put their products (generally medi-cines) on the market in a different packaging (sometimes under a different name) and at a different price in each member state, which were bought cheaply by some smart traders in one member state, repackaged according to the appearance that was common to the consumers of the target country, then put on the market in this member state at a lower rate than the local price. The question that arose in these cases was whether the trademark owner’s approval of putting the pro-ducts to the market extended to the permission of repackaging. On the one hand, such repackaging allowed the parallel imports of the same products which originally had a different packaging and name but on the other hand, it violated the interests of trademark owners.
In the first case of this kind (this is the Hoffmann–La Roche case) (Court judgment on case No. C-102/77 of May 23, 1978, Hoffmann-La Roche & Co.
AG v Centrafarm Vertriebsgesellschaft Pharmazeutischer Erzeugnisse mbH), the German company Hoffmann-La Roche released the tranquillizer called Valium to the German market at a higher price and in a different packaging than in Eng-land. The company Centrafarm, which was also German, purchased the medicine in England, repackaged them into a package that was common in Ger-many, and then distributed them in Germany supplied with the trademark of Hoffmann-La Roche. The owner of the German trademark stood up against Cen-trafarm and said that the original condition of the goods cannot be guaranteed as a result of the repackaging, with regard to which the use of the original trade-mark is unlawful. In making its decision, the European Court of Justice started out from the function of the trademark that it considered the most important, i.e.
guaranteeing the origin of the product supplied with a trademark, and came to the conclusion that the consumer should be certain that no one during distribu-tion could have influenced the original condidistribu-tion of the goods purchased by them. However, the Court also made it clear that on the basis of the reference to repackaging, the action against parallel imports would qualify as a concealed re-striction of trade between the member states if
• the distribution system of the owner of the trademark involves the artifi-cial division of the market;
• repackaging is not such that would damage the original condition of the product;
• the right owner has received preliminary notice on the distribution of the repackaged product, and
• the fact of repackaging is indicated on the new packaging.
Striving to draw a general conclusion, the Court defined in this judgment the conditions of repackaging for the future as well. Due to the ever newer solutions of the traders, which were pushing the earlier defined limits, the judicial body of
course further clarified the rules of repackaging in some further judgments (Pfizer vs. Eurim case [judgment No. C-1/81 of December 3, 1981 adopted by the Court (First Chamber), Pfizer Inc. v Eurim-Pharm GmbH]; Centrafarm vs.
American Home Products case [Court judgment on case No. C-3/78 of October 10, 1978, Centrafarm BV vs. American Home Products Corporation]), which in-cluded some cases in the area of alcoholic beverages as well – see the Loender-sloot vs. Ballantines case (Court judgment on case No. C-349/95 of November 11, 1977, Frits Loendersloot, trading as F. Loendersloot Internationale Expedi-tie vs. George Ballantine & Son Ltd and Others).
In European trademark law, the Silhouette case (the Court’s judgment on case No. 1998 C-355/96 of July 16, 1998, Silhouette International Schmied GmbH &
Co. KG v Hartlauer Handelsgesellschaft mbH), which established the geo-graphical limits of the exhaustion of Community rights, counts as a milestone. In this case, the Austrian company Silhouette that manufactures premium eye-glasses frames shipped suneye-glasses supplied with a Silhouette trademark, which had come from earlier collections and which were out of fashion, to the Bulgar-ian company Union Trading on condition that it was only authorized to distrib-ute them in Bulgaria, which was not a member of the European Union at that time, and in the ex-Soviet member states.
Another Austrian company called Hartlauer, however, bought these eyeglasses frames, took them back to, and put them on the market in Austria. Hartlauer said that the owner of the trademark had earlier agreed to putting the product on the market, this is why the right owner is not in the position to prohibit them from importing the products and putting them on the market, irrespective of in which country the owner of the trademark had originally permitted the release of the eyeglasses frames to the market. Based on the inquiry of the Austrian court, the European Court of Justice declared that the importing of products that are put on the market outside the territory of the Community can be prevented on the basis of the trademark registered under the law of the member state in question. Ac-cording to the principle of the exhaustion of Community rights (and the respec-tive direcrespec-tive norm), the right of the owner of the trademark will only be exhausted, i.e. they will not be in the position to prevent the further distribution of the goods only if the goods were put on the market within the Community (in this case, more accurately, in the territory of the EEA) with the approval of this right owner. In this very case, the approval granted by Silhouette concerned the territory of Bulgaria, so no permission was given for distribution in the territory of the Community.
This interpretation of the limitation of the exhaustion of Community rights was later confirmed by the European Court of Justice in the Davidoff cases (Court judgment adopted in the joint cases No. C-414/99–C-416/99 of Novem-ber 20, 2001, Zino Davidoff SA v A & G Imports Ltd and Levi Strauss & Co.
and Others v Tesco Stores Ltd and Others). In this case, the trademark owner en-tered into an agreement on the distribution of perfume products outside the EEA with a company from a non-EEA country. A certain A & G Imports Ltd, how-ever, purchased the perfumes which were meant to be distributed outside the EEA and imported them to the United Kingdom. In this case again, the Euro-pean Court of Justice declared that the right of the owner was not exhausted, de-spite the fact that it was not indicated on the goods that they were meant to be distributed outside the EEA.
Another aspect of the exhaustion of Community rights has recently been ana-lyzed by the European Court of Justice in the case entitled Coty Prestige Lan-caster Group vs. Simex Trading (Court [Fourth Chamber] judgment on case No.
C-127/09 of June 3, 2010, Coty Prestige Lancaster Group GmbH v Simex Trad-ing AG). The company Coty Prestige manufactures and distributes various per-fumes under its own name (e.g. Joop!, Lancaster) and the brand names of third parties (e.g. Davidoff, Calvin Klein). Coty Prestige supplies its contractual part-ners with so-called testers, i.e. product samples not meant for sale, in a packag-ing different from the original, whose ownership rights remain with Coty Pres-tige. Simex Trading distributed such product samples, i.e. ones supplied with la-bels ‘sample’ or ‘not to be commercially distributed’ in Germany. Simex Trading referred to the exhaustion of rights but the European Court of Justice declared that in this case, the trademark owner did not give its consent to commercial dis-tribution, this is why they trademark right is not exhausted and they are entitled to prevent the distribution of the testers.
By introducing the principle of the exhaustion of Community rights, it was first the European Court of Justice, then EU legislation that broke the territorial-ity of national trademark rights and their dependence on the state territories.
Similarly, the issue of transit goods comes up as one related to the limits of trademark rights tied to geographical areas, i.e. whether the legal measures based on national or EU trademarks are applicable against goods which are only in transit in the territory of the EU. A local customs authority in the United Kingdom found and then seized some undoubtedly fake Nokia mobile phones when they searched a cargo heading from Hong Kong to Columbia. Later, how-ever, with regard to the fact that the goods were only in transit, it was ordered that the seizure of the goods be released. Nokia lodged an appeal, finally the case was brought to the European Court of Justice (case No. C-495/09 called the Nokia case, Nokia Corporation v Her Majesty's Commissioners of Revenue and Customs). The Belgian customs authorities seized fake Philips products in transit in a similar case, then decided to release the seizure (case No. C-446/09 called the Philips case, Koninklijke Philips Electronics N.V. v Lucheng Meijing Indus-trial Company Ltd, Far East Sourcing Ltd, Röhlig Hong Kong Ltd and Rohlig Belgium N.V.). This case was also brought to the European Court, which joined
the cases. Thus, the European Court of Justice had to answer the question what should be done about goods originating from third countries and only staying in the territory of the EU temporarily, whether any legal measures can be applied against any goods which are only in transit in the territory of the EU. In its judg-ment of December 1, 2011, the Court declared that the goods ‘in transit’ can only be held up by the customs authorities if they hold some evidence on that the goods concerned may eventually be put on the market of the EU.
During all this time, the European Court of Justice dealt with the contradic-tions between the free movement of goods and services, and the territorial mo-nopolies provided by intellectual property in the fields of patent rights, the pro-tection of plant varieties, related rights and copyrights. Besides the trademarks, the principle of the exhaustion of rights was developed by the Court for the other forms of intellectual property rights as well, and it was also defined in which cases it is possible to enter into valid exclusive licence agreements.
Thus, the exhaustion of Community rights means, in summary, that the owner of the exclusive right that exists on the various forms of intellectual property shall not restrict the distribution, through alienation, of the samples of the tangi-ble products that were produced by using the intellectual property and were put on the market, in the territory of the EEA after their first release into the market with the permission given by the right owner itself or by another person with the right owner’s permission in one of the EEA member states.347 This right is known in the law of the United States as the right of first sale. Thus, the right owner may not prevent the further movement of the product that was put on the market with their permission in the territory of the EEA, this is why the traders can procure the goods in the member state that offers them at the lowest rate and distribute them arbitrarily in any member state.
There are also some material exceptions from the principle of the exhaustion of Community rights, so the right owner may prevent the distribution of the goods if the condition of the goods was changed or impaired after their having been put on the market (e.g. they were repackaged, damaged, or their warranty has expired). Furthermore, the exhaustion of Community rights only extends to tangible products, so the right owner e.g. is not in the position to prevent the dis-tribution in another member state of the sound records that it put on the market in an EEA member state but this does not extend to e.g. the rent of the audio disk or the public presentation of the piece of music on the disk (Court judgment of April 9, 1987 on case No. C-402/85, G. Basset v Société des auteurs, compositeurs et éditeurs de musique (SACEM), as well as Court judgment of May 17, 1988 on case No. C-158/06, Warner Brothers Inc. and Metronome Video ApS v Erik Viuff Christiansen).
347 Boytha 2003, p. 357.