Can Euro law come in from the East?

Date: 10/09/1998

By Ian S. Forrester QC

EVERY reader of this august journal knows the importance of free trade in Community law.

Indeed, most pupils at the European School could tell the difference between Article 85 (1), which prohibits contractual obstacles to trade between member states, and Articles 30 and 36, which restrict governmental obstacles to trade between member states. The summer has brought us clarification as to whether these principles apply outside the EU.

Forbidding export is a serious breach of the competition rules. American lawyers sniff at the European Commission's enthusiasm for using competition law to achieve market integration, but there is no prospect of an improvement.

Once a product has been put on the market in one member state, there is a risk that a trader may purchase it and resell it in another member state where prices are higher.

In the old days, a supplier might have been able to use patent or trade mark rights to challenge the resale in the second member state. However, the European Court virtually eliminated this possibility.

A group which held patent and trade mark rights in both the UK and the Netherlands could not use these rights to challenge the unwelcome export from the UK to the Netherlands of goods which had been first marketed by the rights holder or with the rights holder's consent in the UK.

European law distinguishes between using such rights for essential, core purposes (such as attacking counterfeit goods), which always remains acceptable, and using them for other purposes (like blocking the unwelcome resale of genuine goods from other member states), which is unacceptable.

The encroachment went further for pharmaceuticals, which are particularly attractive to parallel traders. The European Court held in a remarkable series of judgements that drugs could be repacked and relabelled with the brand name by the parallel trader, without the manufacturer's consent.

So it was clear that with respect to trade between member states, where parallel trade mark protection existed, trade mark rights could not be used to block the import and sale of genuine goods.

However, what if the goods had first been put on the market outside the Union? Could the European rights holder challenge the importation and sale of such grey market goods? If the supplier contractually prohibited the sale in the EU of goods sold for distribution in eastern Europe, was this legal?

Should the free trade principles be extended to eastern Europe? The European Court has given its answers in two recent judgements. Silhouette International/Hartlauer concerned genuine sunglasses bearing a famous name which were bought in Bulgaria and resold in Austria.

The legal question was whether the doctrine of trade mark exhaustion should prevent the Austrian rights holder from challenging the sale of goods bearing an Austrian trade mark.

Article 7 (1) of the EC Trademark Directive confirms the proprietor cannot prohibit the use in other member states of goods he has once marketed in the Community.

Can the French or German trade mark be invoked to prevent imports from Belarus or Hong Kong? The European Court held that member states were not free to choose to establish a wider principle of exhaustion, or there would be inconsistencies in the trade mark protection level in the EC.

That judgement represented a victory for rights holders selling physically identical goods bearing the same brand name in many countries world-wide.

The case aroused interest in the UK, where buying goods bearing famous brand names in South East Asia and eastern Europe for domestic resale is big business.

British press coverage was misleading; “Court outlaws price discounts on top brand imports”. The relevance of trade mark law was not mentioned, yet the judgement essentially interpreted the European law on trade marks and the limited discretion available to the member states to establish their own rules on the rights of trade mark holders. Europe's ministers could have decided upon a global principle of exhaustion, but did not do so.

The judgement in Javico/Yves Saint-Laurent, concerning the extra-territorial scope of the competition rules, was less clear-cut. A supplier of luxury perfumes sold them for distribution in several eastern European countries, doubtless at lower prices than would prevail in western Europe. The goods never left the EU, despite a contractual provision forbidding their resale there. Litigation ensued between the supplier and the would-be distributor.

The European Court was asked to advise on whether an export ban on a trader in, say, Russia was prohibited by Article 85 (1). The Court stated that in principle such export bans were prohibited if it could be shown there was an effect on trade and competition within the EC. So there is no automatic exception from competition rules simply because a contract involves trade with a third country. However, it is possible that the contract may have no chance of affecting trade and competition in the EC, in which case the prohibition of Article 85 (1) would not apply.

This article reflects the personal views of the author.