CJEU on the burden of proof for exhaustion of trade mark rights

Some jurisdictions have a doctrine of international exhaustion while in others, like the EU, the exclusive trade mark rights are only exhausted if the goods are placed on the market in the EEA (including the EU, Iceland, Liechtenstein and Norway). In (supra-)national exhaustion regimes, an important question is who bears the burden of proof that the goods are exhausted. The Court of Justice of the European Union (‘CJEU’) recently addressed this question in its judgment Hewlett Packard Development Company (C-367/21).

Background

Hewlett Packard Development Company LP (‘Hewlett Packard’) owns EU trade marks for the sign ‘HP’, which are registered for various types of computer hardware.

Hewlett Packard operates a selective distribution system to sell ‘HP’-branded computer hardware. The authorised agents of the distribution network may purchase the goods only from Hewlett Packard or other authorised agents and may sell them only to end-consumers and other authorised agents.

Each ‘HP’ computer hardware products has a serial number, which allows Hewlett Packard to identify the geographical market on which the good is meant to be sold. Third parties do not have access to this information and Hewlett Packard does not provide a tool for third parties to ascertain whether a particular product is intended for the EEA market.

Sentic S.A. (‘Sentic’) sells computer hardware and imported original ‘HP’-branded computer hardware into Poland. Sentic purchased these goods from vendors in the EEA, who were not part of Hewlett Packard’s distribution network. The vendors declared in statements that the sale of the hardware would not infringe Hewlett Packard’s trade mark rights. Sentic also asked authorised agents of Hewlett Packard to confirm that the purchased goods may be marketed in the EEA without infringing relevant trade mark rights but such confirmation was refused.

Hewlett Packard sued Sentic for trade mark infringement before a Polish court. Sentic argued that the doctrine of exhaustion would apply (Art. 15 EUTMR).

The Polish court wondered whether Artt. 34, 35 and 36 TFEU would prevent Hewlett Packard from enforcing its trade mark rights given the circumstances of the case.

The CJEU’s decision

The CJEU recalled that only Art. 15 EUTMR governs the doctrine of exhaustion. The provision states:

An EU trade mark shall not entitle the proprietor to prohibit its use in relation to goods which have been put on the market in the European Economic Area under that trade mark by the proprietor or with his consent.

Art. 15 EUTMR strives to reconcile the interest in protecting trade mark rights with the interest in the free movement of goods within the internal market.

There are no provisions in EU law dealing with the burden of proof regarding exhaustion. The CJEU held in Van Doren + Q (case C‑244/00, IPKat here) that a national rule, according to which the defendant bears the burden of proof of exhaustion, does not violate EU law, provided that it is modified if the fundamental principle of the free movement of goods (Artt. 34 et seqq. TFEU) so requires. The burden must be reversed where it is liable to allow the trade mark owner to partition national markets and thus help to maintain price differences between Member States. The CJEU concluded that the trade mark owner bears the burden of proof of non-exhaustion if the defendant can show that there is a real risk of market partitioning.

In the present case, the CJEU considered that:

(1) The trade mark owner operates a selective distribution system,

(2) The goods sold through this system are not marked in a way that would allow third parties to ascertain the market on which the goods are to be sold,

(3) The trade mark owner refused to give this information to third parties, and

(4) The suppliers of the defendant are inclined not to disclose their supply sources in order not to lose sales.

Under these circumstances, the burden of proof of exhaustion must rest with the trade mark owner because they could otherwise prevent legitimate sales. The defendant would have difficulties to establish exhaustion and, even if it could, the trade mark owner could prevent the authorised agent (who violated the distribution agreement with Hewlett Packard by selling to outsiders) from selling exhausted goods to the defendant in the future.

As a consequence, Hewlett Packard has to prove that the goods have been put on the market outside the EEA. If this is established, Sentic has to prove that the goods were imported into the EEA by or with the consent of Hewlett Packard.

Therefore, the CJEU responded to the Polish court’s question that Art. 15 EUTMR in conjunction with Artt. 34 and 36 TFEU must be interpreted as precluding that the burden of proof for the exhaustion of the right conferred by an EU trade mark rests exclusively on the defendant in infringement proceedings when the goods bearing that trade mark:

(a) Do not have any marking, which would enable third parties to determine the market on which they are meant to be sold,

(b) Which are distributed through a selective distribution system, the members of which may only resell the goods to other members of that network or to final consumers,

(c) Were purchased by the defendant in the EEA after receiving assurances from the sellers that the goods may be sold there in accordance with the legal regulations and

(d) The trade mark owner refuses to carry out a verification at the buyer's request that the goods are exhausted.

Comment

The judgment appears to be in line with the CJEU’s previous case law on the burden of proof for the conditions of exhaustion:

1. The Court summarized it in Harman International Industries (C-175/21 at para. 50) as follows:

[…] the trader alleging exhaustion of trade mark rights bears, in principle, the burden of proving that the applicable conditions are satisfied. However, that burden must be reversed where it is liable to allow the proprietor to partition national markets and thus help to maintain price differences between Member States […].

Mere difficulties of the defendant in obtaining information about the original supplier are not sufficient to reverse the burden of proof (Harman International Industries, C-175/21 at para. 54).

2. A risk of market partitioning can exist in exclusive distribution systems (Harman International Industries, C-175/21 at para. 51) and selective distribution systems such as those implemented by Hewlett Packard. However, this depends on how the system is set up. For instance, the German Supreme Court held that the risk of market partitioning does not exist if passive sales of the authorised agents are allowed, i.e. they may not actively solicit sales to retailers outside the distribution network but may sell to outsiders if they are approached by the latter (Converse I, I ZR 52/10, at para. 31).

Therefore, the question whether the burden of proof is reversed does not depend on the existence of a selective distribution system per se but how it operates. A selective distribution system is neither a necessary nor a sufficient condition for finding a risk of market partitioning.

3. Considering the CJEU’s previous case law, it seems to be a peculiarity of the case that Sentic obtained ‘assurances’ (whatever their legal qualification: mere declarations of knowledge, separate warranty agreements or something in between?) from its vendors and that it tried to verify that the goods are exhausted with the help of Hewlett Packard’s authorised agents. In light of the Harman International Industries judgment and earlier CJEU decisions, the assurances and Sentic’s attempt to obtain reliable information on the origin of the goods do not appear to be requirements for relying on the reversal of the burden of proof.

Consequently, the inconsistency one might find to exist between the reasoning of the decision (in paras. 61 and 66, summarised in the list numbered (1) to (4) above) and the official answer (in para. 67, summarised in the list numbered (a) to (d) above), namely that the CJEU mentioned Sentic’s vendors’ assurances as a relevant factor only in the official answer but not in the reasoning, seems irrelevant.

4. The CJEU held that the trade mark owner is not required to adopt a marking system that allows verification by third-parties whether a particular product was destined for the EEA market (Harman International Industries, C-175/21 at para. 53). Therefore, the mentioning of the lack of a marking system as a relevant factor for finding a reversal of the burden of proof appears to be just another peculiarity of the case. It should not be interpreted as a deviation from the Harman International Industries judgment and requiring a marking system to prevent a reversal of the burden of proof in all cases.

5. Another question to consider: Who bears the burden of proof that there is a risk of market partitioning? According to the German Supreme Court, it is the defendant (Converse I, I ZR 52/10, at para. 30). The problem is that the defendant usually does not know how the distribution system is set up and it may be difficult to prove a risk of market partitioning. Time for another reference for a preliminary ruling to the CJEU?

Picture is by Katya Guseva and used under the licensing terms of Pixabay.com.