Nexus: exhaustion

Trade mark functions, repairs and collective marks: Dutch Supreme Court to refer questions to CJEU

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In its first IP ruling of the new decade, the Dutch Supreme Court raised interesting questions on the interface between exhaustion, repairs and collective marks [decision here]. It has stated its intention to refer these questions to the Court of Justice of the European Union (CJEU) and will do so after the parties to the dispute have expressed their views on their wording. With the reference coming up later this year, it is worth taking a closer look at the underlying case and the issues it raises.

The case

The European Pallet Association (EPAL) runs a pooling system for the well-known wooden pallets used in transportation. Every day, tens of thousands of deliveries are carried out world-wide using these pallets. Instead of making the delivery company wait until the pallets are unloaded to take them back, the pooling system allows the recipients to exchange previously unloaded pallets for the incoming ones, thus saving time and costs.

EPAL guarantees the quality of pallets in the pooling system by using the collective mark EPAL to license producers, repairers and sellers of pallets that meet its standards. Pallets that meet the requirement are branded with the EPAL trade mark.

PHZ is a Dutch trader in pallets that is not certified by EPAL. In 2014, it obtained a number of EPAL-certified pallets, then repaired and sold them. It was consequently sued by EPAL, which argued that this pallets constituted an infringement of its trade mark.

The district court prohibited PHZ to further sell the pallets [decision here]. The court of appeal partially upheld the injunction for procedural reasons, but otherwise found that the pallets were exhausted and that EPAL did not have a legitimate reason to oppose further commercialisation of the pallets by PHZ because it did not affect any of the functions of the EPAL trade mark [decision here].

Exhausted cats find good uses for pallets (Image credit: palletsdesigns.com)

The Supreme Court's proposed questions

According to the Supreme Court, the key question is whether a trade mark proprietor may oppose resale after repair by a non-licensee of goods carrying its mark. Put more technically, it must be decided what, in this context, would constitute "legitimate reasons" within the meaning of Article 13(2) of Regulation 207/2009 [the Community Trade Mark Regulation], which still governs this dispute, but is identical to its successor, ie Article 15(2) of Regulation 2017/1001 [the Union Trade Mark Regulation].

The Supreme Court identified four sub-questions that will be relevant to answering this main question and which can be paraphrased as follows:

How does the requirement of legitimate reasons relate to the requirement that the exercise of the exclusive rights of the trade mark holder "must be reserved to cases in which another party’s use of the sign adversely affects or is liable adversely to affect one of the functions of the trade mark" [CJEU C-661/11 Martin Y Paz, par. 58]?
In particular, can there be legitimate reasons if the functions of the trade mark are not adversely affected? Conversely, will an adverse impact on the functions of the trade mark always constitute legitimate reasons within the context of resale of exhausted goods?
Can a trade mark proprietor oppose resale of goods carrying the trade mark after they have been repaired by a third party not licensed to use the trade mark? If this depends on the existence of legitimate reasons, are the nature of the goods and the nature of the repair carried out relevant to this inquiry?
Is opposition against resale excluded if it is clear that the repair was carried out by a party not licensed to use the trade mark and there are no suggestions of economic ties to the trade mark proprietor?
What, if any, difference does it make if the trade mark at stake is a collective mark?

The Supreme Court has granted the parties a four-week term to respond to its formulation of the questions and it is to be expected that it will make a reference to the CJEU soon thereafter, i.e. in the Spring of 2020.

Comment

The case raises interesting questions and this Kat feels the answers can really go both ways. On the one hand, exhaustion exists precisely to facilitate third party aftermarket services and repair and resale seem typical examples thereof. On the other hand, EPAL's pooling system depends on quality control throughout the lifetime of the pallets. Compare the CJEU's decision in C-46/10 Viking Gas/Kosan Gas, where it held that it is allowable for an unlicensed third party to refill trade marked gas bottles and exchange them for empty ones, so long as there are no legitimate reasons to oppose it. That is where the CJEU left things; the Dutch Supreme Court, citing this decision, has now picked up the thread.

Predicting the future is probably best reserved for soothsayers and more senior [or overconfident..?] lawyers. But the start of the new year is always an occasion to look ahead – often with ancient traditions such as Bleigiessen – so in keeping with the season's spirit, here's a tentative analysis of what might happen in this case.

My feeling is that, generally, the burden on a trade mark proprietor seeking to prevent resale after repair of their goods will be a heavy one. It is quite a stretch to argue, as EPAL does in this case, that any repair will alter the state of a trade marked good in a way that gives rise to legitimate reasons for preventing resale.

That remains the case where the trade mark is also used to license repair services: if there is no suggestion that the repair is carried out by an economically linked operator, then the trade mark as it pertains to services is not affected. It seems incorrect to read into a trade mark affixed to a physical good that is exhausted the expectation, on the part of the purchasing public, that it will (also) have been repaired by a licensee of the trade mark proprietor. Rather, the quality guarantee of the trade mark pertains to the product, and the trade mark proprietor will only be able to act against resale if the repair has altered the quality of the good itself, for instance where the repair was performed inadequately.

Furthermore, affection of a trade mark function seems required, but not sufficient to argue there are legitimate reasons to stop resale after repair. It's hard to imagine a case where the function of the trade mark is not affected, yet legitimate reasons to prevent resale still arise. And if affection of trade mark functions were all that is needed for successful reliance on Article 13(2)/15(2) of the Trade Mark Regulations, that would either deprive the legitimate reasons requirement of meaning or, if this requirement is subsumed in the function test, would result in affection of trade mark functions meaning different things depending on whether the goods at issue are exhausted. That does not seem desirable.

Having said that, I would argue that in this case the quality function of EPAL's trade mark is affected. The nature of pallets is such that they are used a large number of times by (potentially) a large number of different entities. Under these circumstances, the EPAL trade mark functions as an indicator of quality not just at the time of first sale, but throughout the lifetime of the product [in this respect I part ways with the Court of Appeal, which held that it is not a function of the trade mark's function to guarantee a certain quality after the moment of first delivery, par. 4.9]. This function is clearly affected if unauthorized parties repair and put back into circulation pallets bearing the EPAL trade mark.

If the above analysis appears, to this Kat, sound for ordinary trade marks, it may play out differently for certification marks as per Article 83 of the Union Trade Mark Regulation. The purpose of a certification mark is to certify certain goods' material, mode of manufacture or quality, and if the nature of the goods is such that they are used and re-used by a large number of entities, it seems reasonable that a certification mark must be able to perform its function even after first sale. The certification mark did not exist under the Community Trade Mark Regulation, but under that regulation, collective marks (such as the EPAL mark) were also used for certification. So there may be hope for EPAL still.

The nice thing about writing down new year's resolutions is that you can check what came of them. In the same vein, we'll see if curiosity will kill this Kat when a decision is rendered. This and other decisions give us plenty to look forward to in the new decade, and the author (belatedly) wishes to all readers that their upcoming decade may be fruitful and engaging, both inside and outside our realm of IP.

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No economic links, no exhaustion of the "Schweppes" mark in Spain

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AG Szpunar advises CJEU to rule that internet downloads of ebooks are covered by right of communication to the public, not distribution (so, no, there is no digital exhaustion under InfoSoc Directive)

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Is it possible or not to create second-hand digital marketplaces for, say, audio and ebooks, digital music, games, etc?

This is the question at the heart of the referral to the Court of Justice of the European Union (CJEU) in Tom Kabinet, C-263/18 [here].

As readers know, the CJEU has already found - in UsedSoft - that there is such thing as 'digital exhaustion' in relation to software under the Software Directive. However, that piece of legislation is both lex specialis and has a rather narrow field of application (for instance, it does not cover videogames, as the CJEU clarified in Nintendo).

Hence, in the aftermath of the UsedSoft ruling, it has remained unclear whether the same consequences envisaged in relation to the first lawful sale of the copy of a computer program could extend to subject matter protected under the InfoSoc Directive.

Certain national courts have attempted to tackle all this, though have done so with diverging outcomes.

For instance, in 2014, the Court of Appeal of Hamm in Germany excluded that the right of distribution under the InfoSoc Directive, as transposed into German law, could be exhausted in the case of audiobooks (OLG Hamm, 22 U 60/13).

Taking a different view, in that same year the District Court of Amsterdam concluded that the right of distribution would be exhausted following the first lawful sale of copies of ebooks (Rechtbank Amsterdam, C/13/567567 / KG ZA 14-795 SP/MV, NL:RBAMS:2014:4360). The decision of the Amsterdam court was appealed to the Court of The Hague. This court held that the provider of second-hand e-books, Tom Kabinet, would not be liable for unauthorized acts of communication to the public under the Dutch equivalent of Article 3(1) of the InfoSoc Directive. However, it is unclear whether it could invoke the digital exhaustion of the right of distribution in relation to its e-book trade. Hence, the court in The Hague decided to seek guidance from the CJEU.

This morning, Advocate General Szpunar issued his much-awaited Opinion in this case, in which he advised the CJEU to rule that, despite the presence of arguments - of both a legal and teleological nature - that support the availability of digital exhaustion under the InfoSoc Directive, "as EU law now stands, the arguments to the contrary should prevail." As such,

the supply of e-books by downloading online for permanent use is not covered by the distribution right within the meaning of Article 4 of that directive but is covered by the right of communication to the public within the meaning of Article 3(1) of that directive.

The conclusion of the AG, as it will be discussed further in what follows, appears correct. He divided his analysis into two parts: first, he considered the objective, wording and context of relevant legislative provisions; second, he reviewed earlier CJEU case law.

The law

Distribution or, rather, communication to the public? A teleological interpretation

The AG noted nearly at the outset that this referral goes beyond the right of distribution, as it requires consideration of whether the supply of ebooks by online downloads is something else in the first place, ie an act of communication to the public, which - under Article 3(3) - shall not be subject to exhaustion.

After recalling the differences in the public's possible enjoyment of protected subject matter, the AG turned to the WIPO Copyright Treaty to recall how its drafters were well aware of the "mixed nature of downloading". As a result, an umbrella solution was adopted, "which, while giving priority to the right of communication to the public, does not preclude the application of the distribution right." The AG also noted the wording of the agreed statement to Article 6 and 7 therein, which limits the application of those provisions to ‘fixed copies that can be put into circulation as tangible objects’.

In all this, the InfoSoc Directive is the implementation into the EU legal order of, inter alia, the WIPO Copyright Treaty. According to the AG,

In adopting that directive, the EU legislature seems to have clearly taken a position in favour of the right of communication to the public being applicable to the supply of works by downloading online and also of the right of distribution, and therefore of the exhaustion of that right, being limited solely to tangible copies. More specifically, downloading is covered by the right to make works available to the public, provided for in Article 3(2) of that directive.

In support of all this, the AG recalled the wording (as well the ambiguities thereof) of recitals 24, 25, 28 and 29 in the preamble to the directive. From them it would appear "clearly" "the demarcation line which the EU legislature intended to draw between the right of public communication (in the form of making available to the public) and the right of distribution. Thus the right of communication to the public applies to all forms of online exploitation of the works, as much to those not linked to a copy as to those based on the creation of such a copy."

This said, would there be a communication 'to the public' if only a single copy could be purchased? AG Szpunar noted that "[w]hat matters is not the number of persons to whom the communication is made but the fact that the person at the origin of that communication addresses his offer to persons not belonging to his private circle. In that case, a single acquirer may therefore constitute a public."

Will Luciano be able to sell
the content of his Kindle after all?

Concepts in Article 4 of the InfoSoc Directive: a literal interpretation

According to the AG, not only would a teleological interpretation like the one above prevent the application of Article 4 to the scenario at issue, but also a literal interpretation thereof would lead in the same direction.

In fact, authors have the right to authorize the distribution of their work 'by sale or otherwise', ie by a transfer of ownership. However:

It is difficult to speak of ownership in the context of a digital file;
The making available of works by downloading online requires a multitude of conventions specifying the parties’ rights and obligations: "Those conventions come within the scope of freedom of contract and I do not think that any recognition of the rule of the exhaustion of the distribution rule could limit that freedom. Thus, unlike the situation that prevails for tangible objects, in the case of dematerialised works supplied online it would never be easy to state with certainty whether or not there has been a transfer of ownership and therefore exhaustion of the right of distribution, as the parties to the contract are able to define in different ways the modes of use of the copy of the work."

The right of reproduction: contextual interpretation

Finally, also the right of reproduction would prevent application of exhaustion in a case like the one at issue:

Any downloading of a digital file consists in the creation of a copy of that file on the receiving computer. The creation of that copy constitutes an act of reproduction subject to the exclusive right of the copyright holder over the work contained in the file in question.

More specifically:

In the case of the supply of works by downloading online, the copy of the work by its original purchaser is made with the consent of the copyright holder, as an essential element of that form of making available to the public. However, that consent does not cover the reproductions that would be necessary for the subsequent transmission when the copy of the work is resold.
Nor can those reproductions be considered to be covered by the rule of the exhaustion of the right of distribution. Such a conclusion would be tantamount to recognising the exhaustion of the right of reproduction. But that right cannot be exhausted. Thus, any reproduction that accompanies the resale of a work in digital form must either be authorised by the holder of the exclusive right of reproduction or come under an exception to that exclusive right.

In all this, Article 5 does not contain any exception that would apply in a case like the one at issue, not even Article 5(1).

Case law

The AG reviewed earlier case law, notably the UsedSoft decision and noted how, not only the legislative instruments at issue (Software and InfoSoc directives), but also the peculiarities of relevant subject matter would be different.

First, unlike for computer programs, for subject matter like literary or musical works the medium in which they are made available is not irrelevant. Second, while a computer program is a tool, InfoSoc-type works are not. Third, while for literary, musical or cinematographic works the usefulness is often exhausted, so to speak, after a single reading, hearing or viewing, the same is not true for computer programs. Finally, computer programs are subject to rapid obsolescence, which is not the case of InfoSoc-type works.

In all this, the Software Directive - unlike the InfoSoc Directive - does not contemplate a right of communication/making available to the public, nor does it mention that the rule of exhaustion should be limited to copies incorporated in a tangible medium. Finally, Article 5(1) of the Software Directive contains an exception to the right of reproduction which the InfoSoc Directive does not envisage.

The AG also considered Vereniging Openbare Bibliotheken and case law on linking.

He rejected the idea that CJEU case law is inconsistent, noting that:

in the absence of full regulation by means of legislation as regards that rule, the diversity of judicial solutions is justified, and even inevitable, in the case of different factual situations, governed by different legislative acts and pursuing specific objectives. To my mind, the desire for consistency cannot on its own serve as a basis for judicial recognition of the rule of exhaustion.

Even if there are "many arguments" that can be advanced in favour of digital exhaustion, EU law is not there, and likely there is no need for it go there either:

By recognising the rule of exhaustion of the right of distribution in the internet environment, the Court would thus resolve a problem that does not really need to be resolved and that to a large extent belongs to the past.

The CJEU should thus rule in the sense that the activities of an undertaking like Tom Kabinet are not covered by Article 4(2) of the InfoSoc Directive.

Sadly stuck with all these games to play ...
Comment

As mentioned, the Opinion of AG Szpunar appears absolutely correct, and the CJEU should follow it unless it opts for a policy-driven response to a problem which, as the AG himself acknowledged, "to a large extent belongs to the past". In fact, with streaming on the rise, the role of internet downloads might be progressively fading in the (technological) past.

In all this, there are two main points worth noting.

The first is that, similarly to what AG Szpunar had done in his Opinion in VCAST (a case concerning - formally - private copying) [here and here], the referral has now somewhat mutated from being all about to distribution to being about communication to the public.

The second is that, as the AG correctly discussed, the analysis under the InfoSoc and Software directives cannot be the same, for a number of reasons:

Recital 28 in the preamble to the InfoSoc Directive appears to link the right within Article 4 of the InfoSoc Directive to the ‘right to control distribution of the work incorporated in a tangible article’.
Recital 29 clarifies that ‘[t]he question of exhaustion does not arise in the case of services and on-line services in particular’.
In relation to the right of communication/making available to the public, Article 3(3) of the InfoSoc Directive rules out that this right be subject to exhaustion.
It should be recalled once again that, by adopting the InfoSoc Directive, EU legislature transposed into the EU legal order the WIPO Internet Treaties. The agreed statements to Article 6 of the WIPO Copyright Treaty provide that the expressions ‘copies’ and ‘original and copies’ in the context of the right of distribution exclusively refer to fixed copies that may be put into circulation as tangible objects.
Since its early case law, the CJEU has been careful in drawing a distinction between the right of distribution, which would be subject to exhaustion, and other rights for which no exhaustion would occur. For instance, as early as 1982, in Coditel, the Court did not find that requiring payment of a fee for each public performance of a film would be contrary to EU law. A similar distinction between the consequences of the first sale of a copyright work or a copy thereof for the exhaustion of the right of distribution and other economic rights was also made in Metronome and Tournier.

Let's now see what the CJEU decides.

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Honda goes for Silver

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Sometimes IP litigants just effortless breeze into court and, hey presto, whatever problem they have instantly vanishes. Japanese motor vehicle manufacturer is not such a litigant. Indeed,

Honda Motor Co Ltd and another v David Silver Spares Ltd [2010] EWHC 1973 (Ch), a 28 July 2010 ruling by George Leggatt QC, sitting as a deputy judge of the Chancery Division (England and Wales), is the latest chapter in the long and often frustrating journey taken by Honda into the highways and byways of the English legal system in its attempt to stop the importation and sale in the United Kingdom of genuine Honda bikes that were first sold in all sorts of distant lands (see earlier IPKat posts here, here and here).

Right: unable to purchase grey goods spare parts for his Honda, the IPKat decided to resort to pedal power as an economy measure ...

In this action Honda was flexing the muscles of its Community and UK registered trade marks for the word HONDA in respect of motorcycles and parts for them. These muscles were being flexed in the direction of Silver, the biggest British supplier of Honda spare parts. Honda sued for trade mark infringing, saying that Silver was trading in spares that had not been first marketed in the European Economic Area (EEA) by Honda or with its consent. In these proceedings Silver demanded that this claim be struck out or at least that summary judgement should be granted in its favour on the ground that the claim was entirely speculative and lacking in particularity.

The Deputy Judge dismissed Silver's application.

The effect of harmonised domestic European trade mark law was that, even where a trade mark proprietor puts goods on the market himself outside the EEA, he can still assert his trade mark right to prevent importation of those goods into the EEA without his consent.
Such consent has to relate to each individual item of the trade mark-protected product in respect of which a defendant pleads exhaustion of rights. This consent must be expressed positively [it can also be implied if the evidence of the implication is uniquivocal, the IPKat reminds readers], it being for the trader alleging consent to prove it -- not for the trade mark owner to demonstrate its absence. Only if the defendant can establish that a real risk of partitioning of national markets exists will that burden of proof be reversed.
In this case, Silver did not even begin to show that Honda's claim lacked any reasonable basis or had no real prospect of succeeding. There was therefore no need for Honda to show that the motorcycle parts which Silver was selling were first placed on the market by Honda or with its blessing outside the EEA. Honda only needed to assert on reasonable grounds that Silver had used its trade marks within the EEA for the goods for which they were registered and that it (Honda) had not consented to such use.

Says the IPKat, Honda's bike might go like a rocket but there was no rocket science in this case, just the straightforward recitation and application of principles enunciated by the Court of Justice of the European Union. With nothing more than a LexisNexis alert to go on, the Kat feels sure that there must have been some further significant factors that induced Silver to go for a strike-out or summary judgment: he wonders if any readers can oblige.

Why the market for motorbike spare parts is so valuable here and here

Silver the pirate here

Motion sickness: are motorbikes better or worse than cars?

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Nexus

Trade mark functions, repairs and collective marks: Dutch Supreme Court to refer questions to CJEU

No economic links, no exhaustion of the "Schweppes" mark in Spain

AG Szpunar advises CJEU to rule that internet downloads of ebooks are covered by right of communication to the public, not distribution (so, no, there is no digital exhaustion under InfoSoc Directive)

Honda goes for Silver

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