Germany – Distribution of original products and gray market

It is not only since the days of the Internet that brand manufacturers have had to contend with the fact that original products are offered outside of their authorized sales channels. The problem has since been significantly exacerbated, however. The relevant products are also referred to as gray market products.

The internal market of the European Economic Area makes it possible to exploit certain price advantages – that is, purchasing in one Member State at a price that is lower than in other Member States and selling to the end customer while passing on (or not passing on) the purchasing advantage. This is made possible by the “exhaustion regime”, according to which the sale of products, which at one time were made available in the European Economic Area with the copyright holder’s consent, cannot be prohibited.

Brand manufacturers’ attempts to counter this issue by means of distribution systems may be an effective instrument, but only if all distribution partners adhere to it. If a distribution partner pulls out, trademark owners (at least in Germany) are initially required to contact their distribution partner who is acting contrary to the contract. That is difficult when the distribution channel of the products in question cannot be traced by security systems (such as SKU numbers) beyond any doubt. A right to information against a third party generally does not exist. Thus, neither the distribution system itself nor the suspicion that the products are not of EU origin may be used easily to justify a right to information in selective or exclusive distribution. The Federal Court of Justice, for example, sees no reason to deviate from the exhaustion doctrine when implementing a selective distribution system (Federal Court of Justice, 1 ZR 63/04). In the case of a selective or exclusive distribution system (Federal Court of Justice, I AR 52/10), the burden of proof is reversed. Accordingly, it is initially the brand manufacturer itself that is responsible for providing evidence for its allegation of a non-EU product.

Exceptions are only made where, for example, the SKU numbers were modified, since this makes clarification difficult. In such cases, trademark infringement and at the same time breach of competition law are given by way of exception and it is not possible for the dealer to invoke exhaustion (Federal Court of Justice I ZR 1/98). The deliberate misleading of the authorized dealer by a third party to breach the contract is also recognized as an exception (Federal Court of Justice I ZR 96/04), which regularly is not verifiable, however.

By the way, the sensational December 2017 Coty decision of the Court of Justice of the European Union (CJEU C-230/16) (here you can find more: https://www.legalmondo.com/2017/12/eu-court-justice-allows-online-sales-restrictions-coty-case/) has not changed this basic presumption, either. In its Coty decision, the CJEU in the end confirms the exhaustion priority also and particularly for luxury products by referring to existing case law (specifically ECJ C-59/08).

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There are, however, more options available. As confirmed by the ECJ (ECJ, C-337/95), an exemption from the exhaustion principle already applies when the type of sale may be designed to damage the reputation of the trademark. In the Court’s opinion, this applies to the sale of products at discounters, if such a sale damages the reputation of the products to an extent that their luxurious image and quality is called into question (ECJ, C-59/08). This applies, on the one hand, if other products are sold in the immediate “neighborhood” to the branded product, without meeting the same quality requirements (ECJ, C-337/95) or if the advertising methods are unsuitable (ECJ, C-63/97). Hamburg Regional Court, for example, found that the use of photographs that are unsuitable and detrimental to the luxury image of a brand justifies a prohibition claim (at least with respect to use of the photos) (Hamburg Regional Court, 315 O 339/13). The Federal Court of Justice saw improper handling of the brand in an erroneous and negligent labeling of products (Federal Court of Justice, I ZR 72/11).

Düsseldorf Higher Regional Court has now also followed these CJEU guidelines by prohibiting the sale of high-priced cosmetic products, which are distributed in the framework of a strictly regulated selective distribution system, at a discounter (Düsseldorf Higher Regional Court, I-20 U 113/17). The Court explicitly referenced the CJEU, by repeating its principles and then applying them in the case of the discounter:

“The permanent and extensive sale of the cosmetic products at issue on the online platform www…de is suitable to significantly impair the image of the application brands. The way in which the products are presented there draws the application brands into the mundane and ordinary. As the relevant public is used to from the multitude of Respondent’s conventional self-service department stores, the offering on www…de of everyday products is frequently dominated in the form of particularly low priced own labels, such as Z.’s own label “O.” Respondent’s motto applies here as well. The assortment ranges from food to electronics, household goods, clothing to cosmetics. Since Respondent’s online presence was merged with that of the company “B” that it had acquired, it is moreover not only Respondent that offers its goods for sale on the platform, but also third parties may market goods via the online platform. The portal is designed to be functional and oriented toward products that are on sale. Customers are able to collect PAYBACK points with each purchase and may make use of financing. In some cases, goods are advertised at “instead of prices” and red letters indicate in attention-getting manner what percentage customers will save compared to the original prices. Product consultation does not take place.”

By offering luxury products at random alongside every-day and mass products without any kind of prominent presentation and becoming affordable through financing options, the products would be placed on a level with the other items offered, thereby significantly affecting the prestige value of the products. For this reason, Düsseldorf Higher Regional Court pronounced a complete ban on distribution for the online platform and the department stores.

Conclusion:

Even if the Düsseldorf Higher Regional Court’s decision is not to be considered revolutionary in light of existing CJEU case law, it certainly ensures some impetus in proceeding against gray market dealers, since national courts are now no longer facing the “uncomfortable” hurdle of applying CJEU case law, but rather in the customary fairway of national case law. In principle, Düsseldorf Higher Regional Court case law may not be understood as a blank check, however. Even Düsseldorf Higher Regional Court did not allow a general ban, but rather weighed individually whether the distribution in its concrete form could be prohibited. In the future, it will also be important to work out what in particular will determine the extent of the ban.

The author of this post is Ilja Czernik.