In brief
- The recent trade mark infringement case brought by luxury skincare brand Maria Galland in Germany illustrates the tension between beauty brands' commercial aspirations and the legal reality of trade mark exhaustion and parallel imports in the European Economic Area (EEA).
- Carefully crafted selective distribution systems can preserve brand prestige and control product flow, particularly outside the EEA.
- Once trade marked goods are put on the market in the EEA by or with the rights holder's consent, a rights holder's ability to prevent further dealings in those goods in the EEA and UK is difficult and only possible where legitimate reasons exist.
What are parallel imports?
Parallel imports are goods manufactured by or under licence from a rights holder which are lawfully placed on the market by or with the consent of the rights holder and then moved across territorial borders. Often, this is done to benefit from price differentials between markets. Depending on the exhaustion regimes in different countries, such parallel trade may or may not be legal.
What is exhaustion?
Exhaustion is the principle that prevents rights holders from using their trade mark rights to control the onward sale of their goods once those goods have been placed on the relevant market by the rights holder or with their consent, except in limited circumstances. In that situation, their IP rights are said to be 'exhausted'.
EEA exhaustion
The EEA operates EEA-wide exhaustion which means that once goods are placed on the market anywhere in the EEA by the rights holder or with their consent, the rights holder cannot prevent their resale anywhere within the EEA.
UK position post-Brexit
The UK has adopted the "UK+ regime" (covered in our previous article). Goods placed on the EEA market can be imported into the UK without requiring the rights owner's consent. However, the same does not apply the other way around: goods first placed on the UK market may be prevented from being exported to the EEA, as a rights holder's trade mark rights will not have been exhausted there.
Non-EEA goods
Goods first placed on the market outside the EEA cannot be imported into the EEA or UK without the rights holder's consent because their trade mark rights will not have been exhausted there (i.e., neither the EEA nor the UK apply a concept of international exhaustion).
Are there any exceptions to exhaustion?
Rights holders can object to further dealings in their goods in the EEA or UK where 'legitimate reasons' exist, such as where the condition of the goods has been changed or impaired after the rights holder has put them on the market.
One such reason could be that a reseller has removed cosmetics packaging so that it no longer complies with Article 6(1) of the Cosmetics Directive, which requires certain information to be on the packaging, including a list of ingredients, the manufacturer's name and a 'best before' date.
Another potential reason is where the further dealings in the goods might damage the reputation of the trade mark, an argument that tends to arise only in respect of luxury goods. In Copad v Christian Dior, for example, the European Court of Justice (CJEU) held that Dior could, in principle, oppose the further commercialisation of its luxury goods by the resale of those goods by its licensee (in contravention of terms of the licence agreement) through a discount store if that resale caused damage to the reputation (allure and prestige) of Dior's trade marks.
The High Court applied the Copad decision in Nomination v JSC Jewellery, finding that repackaging by a UK reseller would damage the reputation of Nomination's trade marks. Nomination's bracelet packaging conveyed an image of luxury to consumers whereas JSC repackaging and selling Nomination's products in small blister packs or polythene bags did not.
Do selective distribution criteria alter the position on exhaustion in the EEA and UK?
Prestige beauty retailers exemplify the carefully curated experience that selective distribution criteria creates: knowledgeable staff, elegant merchandising, premium pricing and exclusivity. Supporting this is a complex infrastructure of contractual obligations governing every aspect of the retail experience.
Beauty brands invest enormous resources in constructing and policing these systems. Criteria may specify that products may only be sold to 'end consumers in normal household quantities', prohibit sales to 'unauthorised distribution agents', and reserve the right to terminate arrangements with dealers who breach these obligations. However, these restrictions cannot prevent trade mark exhaustion once products have been lawfully placed on the EEA market.
When confronted with the reality that contractual restrictions often cannot prevent exhaustion, beauty brands often respond: "But surely we can enforce our contracts against breaching dealers?". Yes, of course. Contractual remedies (e.g., termination, damages) remain available against dealers who breach these distribution restrictions. But this may not give comfort to brands whose primary concern is to prevent parallel imports, as opposed to disciplining individual dealers. Brands must also balance enforcement against the need to maintain dealer relationships and distribution coverage.
Case example – Maria Galland skincare
Luxury skincare brand Maria Galland (MG) distributed its products in the EEA member states through general authorised importers, including some group-owned companies. In Germany, MG's products were distributed through a network of bricks and mortar retail outlets (their 'distributors'), which were predominantly beauty salons as well as some pharmacies and drugstores who had entered into authorised distribution agreements with MG. MG also sells its products through its own website to consumers, and the distributors were free to do so through their own websites as well.
MG brought trade mark infringement proceedings against a UK-based online retailer, who did not have an agreement with MG. The defendant operated an online beauty product store for the German market, advertising over 10,000 products, including MG's products, at low prices and with fast delivery. The defendant purchased MG's products from one of MG's authorised distributors.
MG argued that the products had not been placed on the market in the EEA with its consent (and therefore its trade mark rights were not exhausted) because the authorised distributor sold those products to the defendant in breach of the terms of the distribution agreement.
However, the Higher Regional Court of Munich held that exhaustion had occurred because MG had realised the economic value of its trade mark in the EEA by supplying its German distributor (relying on the CJEU decision in Peak Holding). MG had therefore lost the ability to control further distribution of the products in the EEA. The distribution agreement with its selective distribution criteria did not alter this as it only applied as between MG and its distributor (albeit MG would potentially have a breach of contract claim against the distributor).
The court also held that MG's supply to the distributor did not constitute internal movements of goods within a corporate group that would preclude the assumption of placing the goods on the market. There was no corporate relationship between MG and the distributor, which was an independent third-party company, and not a licensee or otherwise economically linked. This position might have differed however if the distributor was a (manufacturing) licensee and had breached a provision of its licence agreement by its supply e.g., by supplying to a discount store and this damaged the prestige nature of the goods, but this was not relevant in this case.
The court held that the defendant's distribution method blended seamlessly (in principle) into MG's distribution system because its distributors offered the products via the internet and advertised discounts in a similar manner to the defendant. As such, it did not damage the reputation of MG's trade marks and could not amount to 'legitimate grounds' to oppose the defendant dealing in the products.
This decision suggests that brands must demonstrate that a parallel importer's specific resale practices damage the reputation of its marks in ways that the brands' own authorised distribution does not. For beauty brands that have embraced online sales, marketplace presence, promotional pricing and digital marketing, this may prove a significant challenge.
Customs enforcement
One area where trade mark law provides meaningful protection stopping goods entering at the EEA and UK borders. The rights in goods that were first placed on the market outside the EEA/UK are not exhausted, and customs authorities can detain them based on Applications for Action (see our article on AFAs ) submitted by trade mark owners.
This then is an area where beauty brands should focus key enforcement resources: preventing entry of products from lower-priced markets outside the EEA/UK, particularly where such products may be intended for different markets, labelled in different languages, or subject to different regulatory requirements. Brands should consider investing in customs cooperation, providing detailed product information to border authorities, and responding rapidly when suspicious shipments are detained.
Takeaways: what should beauty brands do?
To protect their brands effectively, beauty companies should implement the following strategic and operational measures.
Use selective distribution criteria strategically to achieve commercial objectives:
- Market focus: Create different distribution channels for different product tiers and consumer segments.
- Dealer motivation and relationship: Provide authorised dealers with benefits and (limited) protection from intra-brand competition to justify their investment in staff, premises and stock.
- Brand experience: Ensure that consumers encounter products in environments that reinforce brand positioning.
- Quality control: Maintain standards for product storage, handling and customer advice.
- Competitive advantage/market positioning: Differentiate from mass-market brands and competitors.
Invest in supply chain security:
- Implement rigorous dealer verification processes.
- Monitor purchasing patterns to identify potential diversion.
- Use serialisation and authentication technologies to track products.
- Make it difficult for goods to leak into unauthorised channels in the first place, rather than trying to control them after they have escaped.
Maximise customs cooperation
- File Applications for Action in the UK and EEA.
- Take steps to educate customs officers on your brand and provide timely assistance.
Legitimate reasons to prevent further dealings in your products:
- Identify how unauthorised dealings might damage your trade mark's reputation, whether that be through the condition of the goods being changed or impaired, the way in which they are being resold, or otherwise.
- Gather evidence to support any such claims.