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

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: 

1. 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?
2. 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? 
3. 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?
4. 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.