As is well known, the registration of a trademark grants the owner the exclusive right to prohibit third parties from using that trademark in commerce for identical or similar products or services.
Pursuant to Article 34 of the Trademark Law (LM), the trademark owner may exercise their right to prevent the offering, importation, exportation, and use of the trademark for advertising purposes by any individual or entity. For additional information on this topic, please refer to our frequently asked questions about trademarks. here.
However, it is striking that there is a thriving secondary market in which a wide variety of branded products are sold, ranging from clothing to smartphones and even vehicles. But, How is it possible to resell branded products? Why don't trademark owners take action to prevent this, based on their trademark rights?
Legality of reselling branded products. How is this trade in products permitted?
Firstly, in order to understand the scope of trademark protection, the Court of Justice of the European Union (CJEU) states that “The exclusive rights conferred by trademarks can, in principle, only be invoked against economic operators.” (Judgment of the Court of Justice of the European Union of July 12, 2011, Case C-324/09, L'Oreal). Therefore, the owner of a trademark cannot invoke their right against an individual who, in a non-professional manner, resells a product bearing that trademark.
However, as specified in the aforementioned ruling, in the event that sales exceed “due to their volume, frequency, or other characteristics, the scope of a private activity, the seller acts within the «economic traffic» for the purposes of the aforementioned articles.”.
That is, even if one acts theoretically in a private capacity, if the resale activity exceeds certain limits in terms of volume and recurrence, it will be considered a commercial activity, and not merely private. Therefore, the trademark owner may exercise their trademark rights against the reseller.
In other words, if an ordinary individual decides to resell a branded product on an isolated and non-professional basis, the trademark owner will generally not be able to exercise their exclusive rights against that person. This is because trademark protection was primarily designed to regulate commercial activities between companies or economic operators in the market.
However, when sales made by non-professional individuals exceed certain limits in terms of volume, frequency, or other characteristics that indicate significant commercial activity, such resale of products could then be considered an economic activity rather than a private transaction. In this case, the trademark owner has the power to assert their exclusive rights and take legal action against the reseller, unless the exhaustion of their rights applies, which we will discuss below.
This distinction is based on CJEU case law and is fundamental to understanding how trademark law applies in situations involving the resale of branded products.
What is trademark exhaustion?
Despite all this, many companies and professionals are engaged in the trade of products and the resale of branded goods. The reason they are able to do so lies in the Article 36 LM, which in its first section states:
“The right conferred by the trademark registration shall not entitle the proprietor to prohibit third parties from using the trademark for goods marketed in the European Economic Area under that trademark by the proprietor or with his consent.”.
This article, as well as the analogous one Article 15 of the Regulation on the European Union Trademark (RMUE), enshrine the principle of exhaustion of trademark rights, according to which The exclusive right that the trademark grants to its owner is limited to the first sale of the product within the European Economic Area.
Once the branded product has been sold on this first occasion, the trademark right is exhausted, and it can be freely resold. without the need to obtain the consent of the owner again.
Requirements for the exhaustion of trademark rights in the resale of products. Understanding the limits.
In the complex world of trademark law, exhaustion of rights plays a crucial role. For exhaustion to occur and allow the resale of trademarked products, certain essential requirements must be met.
The requirements and limitations to be taken into consideration for the exhaustion of trademark rights are:
I. Distribution for sale
For trademark rights to be exhausted, the first distribution of the trademarked products must be for sale. Any other type of arrangement of the products will not exhaust the trademark right.
This means that products distributed free of charge for promotional or advertising purposes will not exhaust trademark rights, as established in the CJEU judgment of July 12, 2011, C-324/09, cited above.
In this regard, the indications of “sample article, sale prohibited” or “test“which is usually included in these promotional branded products has been considered by the CJEU as sufficient proof of the non-existence of their sale and, therefore, of the non-exhaustion of the trademark right (Judgment of the Court of Justice of the European Union of June 3, 2010, Case C-127/09, Lancaster).
II. Territory of the European Economic Area
Exhaustion only occurs when the first sale takes place in the territory of the European Economic Area (EEE). Sales outside the EEA do not exhaust trademark rights.
This means that the trademark owner may oppose the importation and resale of products bearing their trademark that were legally purchased outside the EEA.
The burden of proof that the products were marketed in the EEA lies with the party claiming exhaustion of the trademark right, as established in the Judgment of the Court of Justice of the European Union of November 20, 2001, Case C-414/99, Levi’s case.
III. Sale by the trademark owner or by a third party with their consent
For exhaustion to occur, the first sale must be made by the trademark owner or by a third party with their consent.
This includes licensees, but compliance with the terms of the license agreement is crucial for the sale made by the licensee to exhaust the trademark right.
What about the resale of products online, through e-commerce?
If, for exhaustion to take place, it is a requirement that the first sale of the branded product be within the EEA, what happens when that sale has been made through e-commerce?
In relation to this issue, the aforementioned judgment of the Court of Justice of the European Union of July 12, 2011 (C-324/09) states that the sale shall be deemed to have been made in the EEA “when it is clear that the offer for sale of the branded product located in a third country is intended for consumers located in the territory covered by the trademark”.
However, the mere accessibility of a website from the EEA does not automatically guarantee that the offer for sale is directed at European consumers.
To determine whether or not they are recipients of the offer, other possible indications must be considered, most notably the “information about the geographical areas to which the seller is willing to ship the product”.
Restrictions on the resale of products
Although exhaustion allows for the resale of branded products, there are limitations. Not just any resale of products is valid, even when the first sale took place in the EEA by the owner or with their consent.
Article 36.2 LM and Article 15.2 RMUE establish that the exhaustion of trademark rights shall not apply “where there are legitimate reasons justifying the owner's opposition to the subsequent marketing of the products, especially when their condition has been modified o agitated after its commercialization.
What are the legitimate reasons that allow the trademark owner to oppose the resale of their products?
I. Damage to the brand's reputation
One of these reasons is the damage to the brand's reputation. The way in which the product is resold can affect the brand image, which is particularly important when it comes to high-end products.
In this regard, the CJEU has stated that “since prestige products are high-end items, the sense of luxury they convey is an essential element in enabling consumers to distinguish them from other similar products,” so that “any damage to that sense of luxury may affect the very quality of those products” and therefore considers that “the damage caused to the reputation of the trademark may, in principle, be a legitimate reason [...] justifying the trademark owner's opposition to the further marketing of the prestigious products."” (Judgment of the Court of Justice of the European Union of April 23, 2009, C‑59/08).
Similarly, the Supreme Court states that “among the functions performed by the trademark is also that of condensing prestige” and, as a result, “damage to the reputation of the trademark constitutes a legitimate reason justifying the exception to the exhaustion of the trademark” (STS 1669/2016 of April 22).
In this ruling, the Supreme Court indicates certain circumstances that allow a detrimental effect on the brand to be inferred: limitation of the product range, limitation of stock, lack of new products, refusal to accept product returns, presentation of products alongside others of inferior quality, etc. And, in the case of online sales, The name of the website and the presentation of products on it, essentially in alphabetical order, may affect the brand image..
However, certain types of sale, such as resale via the Internet or sale to discount retailers, cannot be considered systematically detrimental to the reputation of the brand, but rather the reality of such damage must be assessed in each case based on the specific circumstances of the resale of the products.
II. Removal of external packaging
The removal of the outer packaging may be a reason for the trademark owner to overcome the exhaustion of their rights and prohibit the resale of their products, but not always.
In order for the trademark owner to oppose the resale of their products, they must prove that, as a result of the removal of the packaging, information that consumers should be aware of is no longer included on the product, such as the manufacturer's identification.
According to the CJEU, outside of this case, the trademark owner may only oppose the resale of its products if it can prove that the removal of the packaging damages the reputation of the trademark (CJEU judgment of July 12, 2011, C-324/09).
III. Repackaging
Repackaging of products prior to resale is also not permitted, unless it is necessary to comply with the legal requirements of the importing country.
In addition, the new packaging must indicate who is responsible for repackaging the product, which must be communicated to the trademark owner before repackaging takes place.
And, even if all these requirements are met, the trademark owner may oppose the resale of the product if the new repackaging damages its image and, therefore, the prestige of the brand (Judgment of the Court of Justice of the European Union of July 11, 1996, C-427/93, C-429/93, and C-436/93).
Conclusion: Consult a professional before reselling branded products.
We have seen how The general rule in the resale of branded products is that of exhaustion of rights. brand after the first sale of the product in the EEA by the owner or with their consent. But also that when the resale activity is undertaken on a professional basis, there are multiple exceptions to that rule.
Therefore, in these circumstances, it is highly advisable for the company to seek the advice of a trademark attorney that allows you to act with a certain degree of confidence.
In addition, it will also be necessary to check that the name of the new branded product resale project is not already taken (as explained in this post), as well as registering the trademark with the Spanish Patent and Trademark Office or in the EUIPO.
At Bamboo.legal We specialize in trademark law and can provide you with the advice your project needs.
[Article written by Luis Mª Benito and Javier Serrano Irurzun]
