Trademark Act, Art. 8(2); Act on the Enforcement of Industrial Property Rights and the Protection of Trade Secrets, Art. 3; Treaty on the Functioning of the European Union, Arts. 101(1), 101 (3); Commission Regulation (EU) No 330/2010 of 20 April 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices, Arts. 1(1)(a), 1(1)(e), 2(1), 4(b)(iii), 4(c)
The plaintiff is a world-renowned manufacturer of luxury goods (primarily perfumes and cosmetics) and is the owner of the international word trademark CHANEL for Class 3 (cosmetics, perfumes, toiletries, and toilet waters). In the European Union, all of its products are distributed through a selective distribution system (hereinafter also referred to as “SDS”), in which the plaintiff approves a group of distributors for a specific territory who meet the criteria set by the plaintiff; the defendant is not part of this system. These criteria include that an applicant for admission to the system must not have infringed the plaintiff’s intellectual property rights in the past three years, must have operated three brick-and-mortar stores for at least one year, and, in the case of online sales, must do so through websites that meet specific quality criteria.
According to the plaintiff, the defendant, in the course of its business activities, offered and sold products bearing the trademark in question through its brick-and-mortar stores and website. However, the defendant has never been authorized as a distributor of the plaintiff’s products; its stores and online shops are not part of the plaintiff’s SDS, nor did the plaintiff grant the defendant a license to market products bearing this trademark. The defendant thus infringed the plaintiff’s trademark rights. The plaintiff sought an order requiring the defendant to provide information about the previous owners of the infringing goods, as well as their quantity and price.
In its defence, the defendant argued, in particular, that the SDS in question is incompatible with EU competition rules and that, by refusing to admit the defendant into this system, the plaintiff abused its market position and is therefore not entitled to enforce its trademark rights.
The Supreme Court therefore considered whether the plaintiff operates its SDS in a manner compatible with competition rules in the European Union market.
Following the findings in the judgments of the Court of Justice (especially in the cases Pierre Fabre Dermo-Cosmétique, C‑439/09; Copad, C‑59/08; Coty Germany, C-230/16), the Supreme Court held that vertical agreements constituting a SDS necessarily affect competition. However, there may be legitimate reasons justifying a restriction on price competition in favour of competition based on factors other than price. SDS, therefore, as they are aimed at achieving a legitimate goal that may promote competition in an area not solely based on price, may comply with Article 101(1) of the Treaty on the Functioning of the European Union (hereinafter also referred to as “TFEU”). However, members of such a system must be selected by following objective criteria of a qualitative nature, which are established equally for all potential distributors and are not applied in a discriminatory manner. In addition, the existence of such a distribution system must be justified by the need to protect the quality of the products offered and ensure their proper use, and the criteria required must not go beyond what is necessary.
The quality of products that justifies their sale through a SDS need not result solely from their material characteristics, but also from the prestigious nature and image that give them an impression of luxury. This constitutes an essential element of such products, which, in the eyes of consumers, distinguishes them from other similar products. Consequently, any distortion of that impression of luxury may also affect the very quality of these products. Therefore, the features and conditions of the SDS may ensure the protection of the quality of such products and their proper use.
Furthermore, even if an agreement on a SDS were to be considered a practice restricting competition within the meaning of Article 101(1) of the TFEU, it may be covered by the block exemption under Article 2 of the Block Exemption Regulation, unless it involves a hardcore restriction affecting customers within the meaning of Article 4(b) or a restriction on passive sales to end users within the meaning of Article 4(c) of that regulation.
The Supreme Court therefore concluded that the relatively closed SDS used by the plaintiff to sell its products bearing the trademark in question does not violate competition rules, as it is justified by protection the luxury image of its goods. In addition, the requirement to operate both an online store and a brick-and-mortar store and not to have infringed the plaintiff’s trademark rights in the past three years is not discriminatory, as it is applied equally to all applicants seeking entry into the system. It also serves the legitimate purpose of ensuring the proper use of products bearing the plaintiff’s trademark, as well as protecting the reputation and prestige of luxury products.
Thus, the Supreme Court affirmed the lower court’s decision granting the plaintiff’s claim.