This article was originally published in World IP Review.
The French fashion power-house Chanel is not only notorious for its brand, but also for its efforts in defending it against misuse and infringement.
While Chanel’s legal battles with retailers who sell allegedly counterfeit Chanel goods are ongoing, in a recent development, Chanel has also started a law-suit in England against an online retailer (Kensulate Corporation Limited – owner of the Crepslocker online store) that sells authentic Chanel goods.
Ambit of the dispute
Chanel mainly accuses Crepslocker’s owner (‘Crepslocker’) of infringing Chanel’s trademark by tarnishing its positioning as a luxury fashion brand. Chanel’s main arguments consist in Crepslocker:
Crepslocker defends itself by invoking the exhaustion of Chanel’s rights to the sold products. The trademark exhaustion rule means that after the first sale of a trademarked product by the trademark holder or with the consent of the trademark holder, such holder can no longer control the subsequent sale(s) of the product. The exception is that the trademark owner can oppose subsequent sales for legitimate reasons, especially when the condition of the products has been materially changed or impaired.
Crepslocker adds that the division that Chanel makes between the goods it sells online and the ones it does not is artificial. Also, according to Crepslocker, mixing the Chanel products with sportswear is not tarnishing Chanel’s reputation, who has itself collaborated with sports apparel manufacturers for its products.
Until Brexit, courts in the UK have been bound on guidance from the Court of Justice of the European Union (‘CJEU’) in cases regarding tensions between luxury brands and online resellers.
Considering that the UK is no longer part of the EU, the dispute will be subject to national British legislation. Post-Brexit, the Supreme Court of England and Wales is no longer bound by decisions of the CJEU as of 1 January, 2021. However, courts in the UK are free to have regard to such decisions in their own rulings.
From the perspective of the applicable legal texts regarding trademark rights exhaustion, the UK’s Trade Marks Act of 1994 is harmonised with EU legislation. Both the Trade Marks Act and the Directive (EU) 2015/2436 to approximate the laws of the Member States relating to trade marks stipulate the principle of trade mark exhaustion in the same manner, providing the same exception.
The CJEU precedents so far seem to indicate that at least the EU main judicial body is protective of trademark owners. Analysing the matter from a competition law perspective, in the famous Case C 230/16 Coty Germany GmbH versus Parfümerie Akzente GmbH, the CJEU ruled that a luxury brand owners were entitled to implement selective distribution systems, i.e., sale systems where they controlled the distribution chain, in order to preserve the luxury image of their respective goods, on condition that the selection of the resellers was done based on ‘objective criteria of a qualitative nature that are laid down uniformly for all potential resellers and applied in a non-discriminatory fashion and that the criteria laid down do not go beyond what is necessary’. Moreover, the ruling allowed brand owners to exclude Internet sale of their goods through contractual clauses.
In Case C 59/08 Copad SA versus Christian Dior couture SA, the CJEU held that when a licensee of the trademark owner sells goods in a discount store in spite of the contractual provisions of the license which do not allow such licensee to sell the goods to discount stores on grounds of the trademark’s prestige, the proprietor of a trademark can invoke the rights conferred by that trademark against the licensee, provided it has been established that that contravention damages the allure and prestigious image which bestows on those goods an aura of luxury.
With regard to packaging, the CJEU held, in Case C 324/09 L’Oréal versus eBay, that selling a product after removing its original packaging may be opposed by the trademark holder, ‘where the consequence of that removal is that essential information, such as information relating to the identity of the manufacturer or the person responsible for marketing the cosmetic product, is missing. Where the removal of the packaging has not resulted in the absence of that information, the trademark proprietor may nevertheless oppose the resale of an unboxed perfume or cosmetic product bearing his trademark, if he establishes that the removal of the packaging has damaged the image of the product and, hence, the reputation of the trademark.’
The above-mentioned decisions show that controlling the sale channels and respect for the integrity of the original packaging are acceptable exceptions to the trademark exhaustion rule.
Even though the higher courts in the UK are no longer obliged to follow the rulings of the CJEU, it is unlikely that they will depart from established trademark principles without well-grounded reasons.
Crepslocker used to sell both new and second-hand Chanel products. In the case of new goods, it may be possible that the UK courts will deem the situation similar to the ones in the CJEU cases mentioned above.
However, an element of novelty rests in the used products which Crepslocker kept in consignment from its customers, where the courts would probably consider balancing not only Chanel’s rights against Creplocker’s, but also the (natural persons) owner’s rights of the used products to have a platform to sell these goods on the aftermarket.
In the event the dispute ends in settlement or a win for Chanel, this may have a chilling effect on online resellers of other luxury brands in the UK and elsewhere in Europe.
One can argue that maintaining the prestige and value of luxury brands by setting and keeping sales standards and specific outlets protects both the brands and the consumers of luxury goods, due to the fact that the large investment they make in purchasing them is not easily diminished.
However, part of Crepslocker’s business responds to a real need of consumers owning luxury products for a resale outlet, and the corresponding demand for such products. Careful consideration should then be made with reference to whether the second-hand luxury goods market is different from the new luxury goods market and whether the exception to the trademark exhaustion principle still applies.