competition
Article 101(1) prohibits joint not individual conduct. The reference to agreements between undertakins requires some element of collusion between independent undertakings, the many Article 101(1) cases the existence of an agreement is not in doubt. There may be doubt, however, as to the precise terms of the agreement or as to whether the terms can be said to restrict competition.
The term agreement has been given a liberal construction. Numerous cases have dealt with the meaning of an agreement
for the purposes of Article 101(1). The case law establishes that
an agreement does not have to be in writing; oral, informal and gentlemen’s agreements all fall within the scope of Article 101(1). The central requirement for there to be an agreement under Article 101(1) is the existence of some form of consensus between two or more undertakings.
In Bayer AG v. Commission, the GC set out what has now become the classic definition of the concept, holding that proof of an agreement must be founded upon the existence of the subjective element that characterizes the very concept of the agreement, that is to say rge concurrence of wills between economic operators on the implementation of a polic, the pursuit of an objective or the adoption of a given line of conduct on the market.
In Bayer AG, the parent of a major European pharmaceutical group, was a manufacturer and supplier of Adalat, the price of which was xed by health authorities in France and Spain at around 40 per cent less than the UK price. Wholesalers in France and Spain, exploiting the price di erence, began parallel importing to the UK.
In response, Bayer’s subsidiaries imposed a policy of refusing to supply French and Spanish wholesalers beyond certain levels. The Commission viewed this as a tacit agreement between Bayer and the wholesalers contrary to Article 101(1). Bayer, which contested the Commission decision before the GCEU, argued that the decision penalised unilateral conduct outside the scope of the Article and claimed that the Commission had given the concept of agreement a meaning beyond the precedents in the case law on Article 101(1). The GCEU annulled the Commission decision.
In Bayer AG v Commission, the GC set out what has now to become the classic definition of the concept, holding that proof of an agreement must be founded upon the existence of the subjective element that characterizes the very concept of the agreement, this is to say, the concurrence of wills between economic operators on the implementation of a policy, the pursuit of an objective, or the adoption of a given line of conduct on the market.
Note an important contextual point: arguably, the judgment is about the promotion of the single market objective and the fact that it has not (yet) been achieved in the pharmaceutical market. The judgment seems to be a rejection of the Commission’s attempt to bring about harmonisation of this sector by the back door.
Conceptually, the GCEU makes an important point about whether unilateral behaviour on the part of undertakings can be caught by Article 101(1) or whether this fall within the remit of Article 102 (abuse of dominance). In Industrial and Medical Cases, two of the undertakingsallegued to be members of a cartel. Air Liquide and Westfalen argued that they have not taken part in the agreements or implemented them. They stated that they acted as rogh competitor, and the Commission rejected these arguments:
The fact that Air Liquide and Westfalen participated in several meetings, and that the object of these meetings was to restrict competition, is confirmed by the documentary evidence in the Commission’s File. The finding that the behaviour described constitutes agreements within the meaning of Article 101(1) is not altered even if it is established that one or more participants had not intention implement the join intentions expressed by them. The notion of agreement is objective in nature. The actual motives and hidden intentions which underlay the behaviour adopted is irrelevant.
The GCEU makes an intelligent distinction between genuine and merely apparent unilateral behaviour. According to the GCEU, the latter falls within the scope of the concept of agreements caught by Article 101(1) while the former is outside. This analysis is correct and consistent with several other judgments, such as:
- Joined Cases 25, 26/84 Ford v Commission[1985] ECR 2725, [1985] 3 CMLR 528
- Case 107/82 AEG Telefunken v Commission[1983] ECR 3151, [1984] CMLR 325
- Case 277/87 Sandoz v Commission [1990] ECR I-45
- Case C-279/87 Tipp-ex GmbH v Commission[1990] ECR I-261.
An appeal against this decision was made to the ECJ. Like the GCEU’s judgment, the Commission’s appeal was set within the context of the promotion of the single market objective. The Commission argued that the GCEU ruling makes it harder for the Commission to establish the existence of an agreement for the purposes of Article 101(1) and to ght
It is clear from the case law that in order there to be an agreement, it is sufficient that the undertaking in question should have expressed their joint intention to conduct themselves on the market in a specific way.
Proof of an agreement must be founded upon the direct or indirect finding of a concurrence of wills between economic operators. The concept catches agreements they amount to a contract under national rules, whether or not they are intended to be legally binding, whether or not sanctions are provided for a breach, and whether theyare in writing or oral.
Further, an agreement which has been terminated may be caught by Article 101(1) in respect to of the period after termination if the effects of the agreement continue to be felt.
Agreements may be caught even if they are encouraged or approved by national law or entered into after consultation with the national authorities.
For an agreement etc. to fall within Article 101(1) it must have as its object or effect the restriction of competition. Article 101(1) contains a list of examples of the kinds of agreements that may be caught under the prohibition:
- price fixing
- market sharing agreements
- output limitation.
However, it is important to note that this list is not exhaustive and other examples have emerged under the case law, including practices such as bid rigging (collusive tendering).
The requirements of ‘object’ or ‘effect’ are alternatives and are not cumulative. This point was made by the ECJ in Case 56/65 Société Technique Minière v Maschinenbau Ulm (‘STM’) [1966] ECR 235, [1966] CMLR 357. This means that where the object of an agreement is restrictive of competition, you do not need to go further and prove its e ect.
For example, in Cases 56 and 58/64 Establissements Consten SARL and Grundig-Verkaufs-Gmbh v Commission [1966] ECR 299, [1966] CMLR 418, discussed further in Chapter 6 below, the agreement in question contained a clause granting a distributor absolute territorial protection, which was held to have the ‘object’ of restricting competition. The ECJ held that in this case the Commission did not need to establish the e ect of the agreement as well.
When considering the question of object, particular attention must be given to the wording of the agreement in question and to the objectives which are intended to be achieved under the agreement. Intention in this case refers to ‘objective’ and not ‘subjective’ intention n the part of the relevant undertakings. Thus, it is not relevant when assessing the object of an agreement to look at whether those undertakings had a subjective intention to restrict competition. Furthermore, an agreement may be considered to have an object restrictive of competition even if it does not have the restriction of competition as its sole goal but also includes other goals. This means that the assessment of the issue of object must be ‘contextual’ and should be guided where appropriate by the relevant facts of the case at hand, and at any rate the assessment must be conducted in an economic context.
However, when it is not clear that the aim of the agreement in question is to restrict competition, its e ect will also need to be considered. A good example here is Case C-306/96 Javico International vYves Saint Laurent Parfums SA [1998] ECR I-1983, [1998] 5 CMLR 172.
This case concerned a dispute in relation to a contract under which Javico International agreed to sell YSLP’s luxury cosmetic products in Ukraine, Russia and Slovenia (i.e. non-Member States) and undertook not to re-import them back into the EU.
The ECJ considered the applicability of Article 101(1) to this situation.
It held that the agreement in question did not have as its object the restriction of competition, and so it was necessary to consider its e ect. According to the ECJ it was possible that this e ect could be demonstrated provided that certain conditions were satis ed – looking at:
·the nature of the market in the EU (is it oligopolistic?)
·the price di erential between the EU and the non-Member States in question (see para. 28).
Establishing the e ect of an agreement is a much harder task than determining its object. An economic analysis is necessary to de ne the relevant market and establish the alleged anti-competitive e ects of the agreement. In Case 23/69 Brasserie de Haecht v Wilkin [1967] ECR 407, [1968] CMLR 26, the ECJ stated that considering the e ect of an agreement under Article 101(1) requires consideration of the economic and legal context of the agreement in order to evaluate the context in which such e ect occurs.
In April 2004 the Commission published, as part of its Modernisation Package (see Module D of this course), its Guidelines on the application of Article 81(3) of the Treaty.2 Although this is only a Notice and so
lacks the binding force of law, and its subject is not really relevant here, paras. 21–27 contain helpful information on the requirement of object or e ect under Article 101(1).
A nal key case to consider in relation to the issue of object and e ect, and also to the goals of EU competition law, especially Article 101,
is Case T-168/01 GlaxoSmithKline Services v Commission [2006] ECR II-2969. This concerned a complaint to the Commission that GSK’s ‘general sales conditions’ infringed Article 101(1). The Commission found that they did because GSK used one price for wholesalers when they resold its products domestically and a higher price in the case of exports. The Commission also concluded that no exemption was possible under Article 101(3).
In its judgment, the GCEU found that there was an agreement within the meaning of Article 101(1) because of a manifestation of a joint intention on the part of GSK and its wholesalers. There was no ‘object’ to restrict competition because although clause 4 of the conditions prevented imports, there was no guarantee that parallel imports would reduce prices: Member States are involved in the sector and regulations exist. However, the GCEU concluded that competition might still be restricted even if no price reduction was being prevented, as intra- brand competition was a ected.
The GCEU’s ndings were appealed to the ECJ, which delivered its judgment on 6 October 2009. Crucially, it overturned the GCEU’s conclusion that the fundamental purpose of EU competition rules is
to protect nal consumers.
According to the ECJ, the purpose of EU competition rules is to protect ‘not only the interests of competitors
or of consumers, but also the structure of the market and, in so
doing, competition as such’. The ECJ also noted in its judgment that restrictions on export sales within the EU (and also within the European Economic Area more widely) should be treated as having an ‘object’, regardless of their impact on nal consumers. And the ECJ also held that, in relation to the sector at issue, pharmaceuticals, the Commission had not su ciently assessed whether the positive impact of GSK’s distribution agreement on investment in innovation might justify exemption under Article 101(3).
In this sense, the first point made in the statement is correct. After all, Article 101(1) TFEU itself talks about ‘object’ and ‘effect’ as being separate headings dealing with competition harm. Usually, one would expect the distinction would be maintained in the case law and indeed there are many cases in which this has been done starting with the original cases such as Consten and Grundig and STM both dealing with vertical agreements which should be highlighted and discussed in the answer. In more recent case law however one can say that the distinction between object and effect has become blurred and an overlap in their scope has been caused. This is especially when it comes to decisions rendered by the EU courts dealing with economic analysis in relation to the question of object. It would be important to refer to various recent cases in order to highlight this point or possibly to explain it (for example if the candidate believes that this case law has not really blurred the differences between object and effect). Cases that can be discussed here including Allianz Hungaria etc.
1.‘Vertical agreements play an important role in the EU economy. It is already established that these agreements have little adverse effect on competition and so they should benefit from very lenient treatment under EU competition law.’
See page 784 and summaries.
EU competition law regards restraints in vertical agreements as less harmful than those found in horizontal agreements (agreements between rms operating at the same level of the market). The Commission’s approach to vertical agreements under Regulation 330/2010 is economics-based, as opposed to the formalistic approach that it adopted until the end of the 1990s. In other words, it focuses on the market impact of the agreement as opposed to its form.
The new regime on vertical restraints – based on Regulation 330/2010 and the 2010 Guidelines on vertical restraints – entered into force on 1 June 2010. As noted above, this new Regulation and the new Guidelines have replaced Regulation 2790/99 and the 2000 Guidelines on vertical restraints.
Unlike the Regulation, the Guidelines lack legal force. Nonetheless, they are very helpful in explaining many of the important points in the Regulation. Indeed, they are necessary in order to understand the entire operation of the regime on vertical restraints.
Regulation 330/2010 comprises recitals and Articles. The recitals explain many of the Articles and the Commission’s policy on vertical agreements. Unlike the Articles, they lack binding legal force.
There is a presumption of legality under the Regulation; it depends
on the market share of the supplier and buyer (and the absence of hardcore restrictions within the meaning of Article 4 of the Regulation).
The market share must not be more than 30 per cent for the exemption to apply. This is the threshold set out in Article 3 of the Regulation.
·Application of the Regulation
The Guidelines explain important points relating to the substance and application of the Regulation. Below we deal with the key ones.
1.Safe harbour under the Regulation
There is a presumption of legality under the Regulation; it depends
on the market share of the supplier and buyer (and the absence of hardcore restrictions within the meaning of Article 4 of the Regulation).
The market share must not be more than 30 per cent for the exemption to apply. This is the threshold set out in Article 3 of the Regulation.
2.Scope of the Regulation
There are several important points to note about the scope of the Regulation.
·Definition of vertical agreement
The Regulation applies to vertical agreements. The de nition of a vertical agreement can be found in Article 1(1)(a) of the Regulation:
a)It is an agreement between two or more undertakings.
b)Each of the undertakings operates, for the purposes of the agreement, at a di erent level of the market.
c)The agreement relates to the conditions under which the parties may buy, sell or resell certain products (goods or services).
The Guidelines contain a detailed explanation of these three elements.
·Vertical agreements between competitors
Importantly, the Regulation does not apply to agreements between competing rms (see Article 2(4)). However, where such agreements have vertical aspects (such as a non-reciprocal vertical agreement entered into between competing rms), then the Regulation will apply, provided that the conditions in Article 2(4)(a) and (b) are met.
·Vertical agreements containing provisions on intellectual property rights (IPRs)
The relationship between EU competition law and intellectual property rights will be examined in Chapter 8 of this Study Guide. For now, we will consider the situation where a vertical agreement contains provisions of intellectual property rights. According to Article 2(3) of the Regulation, the Regulation applies to vertical agreements containing certain clauses relating to the assignment of IPRs to or use of IPRs by the buyer. All other vertical agreements containing IPR clauses are excluded. The Regulation applies to vertical agreements containing IPR clauses when the conditions set out in Article 2(3) are satisfied.
·Relationship between the Regulation and other block exemption Regulations
Article 2(5) of the Regulation states that the Regulation does not
apply to a vertical agreement covered under another block exemption Regulation (such as Regulation 772/2004 on the transfer of technology).
·Hardcore restrictions under the Regulation
Under Article 4 of the Regulation you will nd a list of hardcore restrictions. If any of these restrictions are included in a vertical agreement, the Regulation will not apply to the agreement as a whole. This means that the bene t of the block exemption will be lost for the whole agreement.
To use the language of the Guidelines: there is no severability in relation to hardcore restrictions; in other words, hardcore restrictions cannot be severed from the rest of the agreement, which means that the rest of the argument cannot stand on its own. However, severability is possible where the conditions set out in Article 5 (discussed below) are satis ed. The Guidelines provide a helpful explanation of the hardcore restrictions in Article 4.
A notable issue in relation to the new vertical restraints in the EU and the application of the Regulation is online selling, i.e. sale via the internet.
The Guidelines pay particular attention to internet/online distribution. This has become an important topic due to the rapid growth of the internet in recent years. It is expected that under the new regime, some interesting and di cult questions will arise concerning this form of distribution. In particular, important questions may arise on the issue of active and passive sales and also resale price maintenance.
Certain restrictions applied by suppliers in particular in relation to sale via the internet are deemed to be hardcore restrictions. Note paras. 51–54 of the Guidelines in this respect.
Moreover, it is worth noting the line that the ECJ in particular has taken on the issue of online distribution, as can be seen from a number of judgments, most recently the judgment of the Court which was delivered in the form of a preliminary ruling on 13 October 2011 in Case C-439/09 Pierre Fabre v Président de l’Autorité de la concurrence and Ministre de l’Economie, de l’Industrie et de l’Emploi (not yet reported). Although the case arose in relation to the old Regulation 2790/99,
the predecessor of Regulation 330/2010, it is certainly relevant in relation to the latter Regulation and its application. The judgment o ers important guidance, especially on the limits that producers may impose on internet sales. Speci cally, the Court o ered support to the hardline stance the Commission has taken in relation to restrictions imposed on online sales. The Court con rmed the importance of the internet as a sales channel and rejected the claim that producers can impose an outright ban on online sales by distributors based on the need to provide individual advice to the customer, the importance
of ensuring that customers are protected against incorrect use of products, or the producer’s strategy to protect the brand image of his products.
·Excluded restrictions under Article 5
Article 5 provides for exclusions of certain restrictions from the coverage of the Regulation. Where these restrictions are included in the agreement, the Regulation continues to apply to the remainder of the agreement in question – if it is possible to sever the infringing clauses. The Guidelines deal with the exclusions under Article 5.
·Instances where the Regulation does not apply
Article 6 of the Regulation gives the Commission the power to declare the Regulation inapplicable to vertical agreements in any given market where parallel networks of similar vertical restraints cover more than 50 per cent of that market. In this case, the bene t of the Regulation will be removed in relation to the relevant market.
·The pro- and anti-competitive effects of vertical restraints
Now that we have considered the application and scope of the Regulation, let us consider the Commission’s views in relation to the pro- and anti-competitive e ects of restraints contained in vertical agreements (vertical restraints).
On the whole, vertical restraints are considered to be pro-competitive, but they may also generate certain anti-competitive e ects. The Guidelines show that the Commission believes that such e ects include:
a)foreclosure of other suppliers or other buyers by raising barriers to entry
b)reduction of inter-brand competition3 between the rms operating on a market, including facilitation of both explicit and tacit collusion amongst suppliers or buyers
c)reduction of intra-brand competition4 between distributors of the same brand
d)the creation of obstacles to single market integration, including, above all, limitations on the freedom of consumers to purchase goods or services in any Member State they choose.
With regard to the pro-competitive or positive e ects of vertical restraints, the Guidelines list several possible e ects, ranging from protecting the distributor (buyer) in a vertical agreement, to opening up and developing new markets, to achieving economic e ciency.
·The Commission’s analytical methodology
The Commission deals in the Guidelines with its methodology of analysis when assessing vertical restraints. In general, this involves four steps:
a)First, the relevant market needs to be de ned in order to establish the market share of the supplier or the buyer, depending on the vertical restraint involved (see above).
b)If the relevant market share does not exceed the 30 per cent threshold, the vertical agreement is covered by the Regulation, subject to the hardcore restrictions and conditions set out in the other provisions of the Regulation.
3 That is, competition in relation to products made by di erent producers.
4 That is, competition
in relation to the same product, for example competition between distributors who handle the same product.
a)If the relevant market share is above the 30 per cent threshold, it is necessary to assess whether the vertical agreement falls within Article 101(1).
b)If the vertical agreement falls within Article 101(1), it is necessary to examine whether it ful ls the conditions for exemption under Article 101(3).
Note several important points about the Commission’s methodology and approach:
a)A very clear and important emphasis is placed on market shares.
b)The Commission adopts a pragmatic approach.
A vertical agreement which exceeds the safe harbour threshold in the Regulation is not necessarily caught by the prohibition in Article 101(1).
·Article101(1)
The Guidelines contain a helpful explanation of the Commission’s assessment of Article 101(1) in cases where the market share threshold of 30 per cent is exceeded. They explain that in such cases a full competition analysis will be made. This will take into account a number of factors which are important for establishing whether a vertical agreement is within the scope of the prohibition in the Article, including:
a)the market position of the supplier and competitors
b)the market position of the buyer
c)barriers to entry
d)the maturity of the market
e)the nature of the product.
The Guidelines state that other factors may have to be considered
in the assessment of particular vertical restraints. These include the cumulative e ect resulting from the existence of similar agreements on the market.
·Article101(3)
As we saw in the previous Chapter of this Guide, the Guidelines also deal with the application of Article 101(3).
Art. 101(1) is aimed at explicit collusion whatever forms it takes. The term ‘concerted practice’ is thus designed to provide a safety net, catching looser forms of collusion. Classic descriptions of a concerted practice were set out in ICI v. Commission (Dyestuffs) and Suiker Unie. In Dyestuffs, the Court held that the purpose of the term was to preclude coordination between undertakings which, without having reached the stage where an agreement, properly so called, has been concluded, knowingly substitutes practical cooperation between them for the risks of competition. InSuiker Unie, the Court confirmed that the concept in no way required the working out of an actual plan. However, concerted practice does not deprive economic operators of a right to adopt intelligently to the existing and anticipated conduct of their competitors. It does preclude any direct or indirect contact between such operators, the object or effect whereof is either to influence the conduct on the market of an actual or potential competitor or to disclose to such a competitor the course of conduct which they themselves have decided to adopt or contemplate adopting on the market. Thus, the concept does not require an actual plan or a meeting of the minds. However, it does seem to require reciprocal cooperation or a joint intention to conduct themselves in a specific way, disclosed through direct or indirect contact, designed to influence the conduct of an actual or potential competitor or to reveal to them the course of conduct that will or may be adopted on the market. The criteria of coordinationand cooperation necessary for determining the existence of concerted practice are understood in the light of the notion inherent in the Treaty provisions on competition, according to which an economic operator must determine independently the policy which he intends to adopt on the common market. One important difference between the concept of an agreement and the concept of a concerted practice is that the latter term implies a requirement that the concertation should be practised or implemented on the market.
Hüls AG v. Commission the CJ accepted that the concept of a concerted practice does require both concertation between the undertakings and subsequent conduct on the market, and a relationship of cause and effect between the two. However, once evidence had been adduced of concertation it is presumed that undertakings taking part in the concerted action and remaining active on the market take account of the information exchanged with competitors in determining their conduct on the market. Although a concerted practice requires concertation and also subsequent conduct, there is a presumption that concertation has been followed by conduct and has been taken into account where the undertakings concerned remained active on the market. This presumption of a causal connection stems from art. 101 and so forms an integral part of EU law.
Moreover, the most important question appears to be whether or not there was collusion. In Polypropylene,the importance of the concept of a concerted practice does not thus result so much from the distinction between it and an agreement as from the distinction between forms of collusion falling under art. 101(1) and mere parallel behaviour with no element of concertation.
In PVC, the Commission considered that the term concerted practice was particularly apt to cover the involvement of some undertakings. In T-Mobile Netherlands, the CJ confirmed that a concerted practice could result not only from meetings which occurred on a regular basis over a long period but from an isolated exchange of information. Art. 101 precluded contact between firms which might influence the conduct on the market of competitors or disclose to them its decisions or intentions concerning its own conduct on the market. The presumption that a concerted practice would influence the conduct of the undertakings participating in the practice where they remain active on that market was an integral part of EU law which had to be applied by a national court.
In Dyestuffs, it has been said that the parties to the concerted practice should knowingly substitute practical cooperation for the risks of competition and the requirement of reciprocal contact in concerted practices.
Conclusion:
Obviously, not every situation of parallel behaviour by competitors is illegal and so should be caught under a provision like Article 101(1) TFEU. This means that the concept of concerted practice cannot and should not be used in every single situation of parallel behaviour. At the same time, it is important to recognise that the concept has been used successfully in illegal parallel behaviour situations. Nonetheless, what one should add is that the concept is not easy to apply in all such situations and its application can lead to the wrong outcome being reached. This means there should be a clear distinction attempted between those situations in which the concept should be used and those in which the concept should not be used.
It is clear from Articles 36 and 345 that the TFEU recognises IPRs, and so there is respect for them within the framework of the EU Treaty. However, EU law does not necessarily give the IPR holder absolute power by virtue of their rights; rather, the protection given to such rights is limited in certain circumstances. One important example that has emerged is contained in the doctrine of exhaustion.
To understand the doctrine of exhaustion and its application, you should first understand two concepts mentioned above: the issue of ‘existence’ and ‘exercise’ and that of the specific subject of an IPR.
The distinction between existence and exercise was first made by the ECJ in Consten and Grundig (discussed in Chapter 6 above), where it stated that Community law (as it then was) did not undermine the existence of an IPR, though it could limit the exercise of that right.
The concept of a specific subject of an IPR was referred to in Case C-78/70 Deutsche Grammophon GmbH v Metro-SB-Grossmarkte GmBH & Co KG [1971] ECR 487, [1971] CMLR 631. This was decided under Article 36. The ECJ stated at para. 11 that:
Amongst the prohibitions or restrictions on the free movement of goods which it concedes Article [36] refers to industrial and commercial property. On the assumption that those provisions may be relevant to a right related to copyright, it is nevertheless clear from that Article that, although the Treaty does not affect the existence of rights recognised by the legislation of a Member State with regard to industrial and commercial property, the exercise of such rights may nevertheless fall within the prohibitions laid down by the Treaty. Although it permits prohibitions or restrictions on the free movement of products, which are justified for the purpose of protecting industrial and commercial property, Article [36] only admits derogations from that freedom to the extent to which they are justified for the purpose of safeguarding rights which constitute the specific subject-matter of such property.
What amounts to the specific subject matter depends, of course, on the right at hand. The ECJ in Deutsche Grammophon described the subject matter of a patent as ‘the exclusive right to use an invention with a view to manufacturing industrial products and putting them into circulation for the first time, either directly or by the grant of licences to third- parties, as well as the right to oppose infringements’.
In relation to trade marks, the ECJ stated in Case 16/74 Centrafarm v Winthrop BV [1974] ECR 1183, [1974] 2 CMLR 480 that the subject was ‘the guarantee that that owner of the trade mark has the exclusive right to use that trade mark for the purposes of putting products protected by the mark into circulation for the first time’.
It was from these seeds that the doctrine of exhaustion grew into a widely recognised and well-established doctrine in EC competition law, not only in the case law of the ECJ but also in legislative instruments. An example of this is the Trade Mark Directive, Directive 89/104, which provides in Article 7(1) that:
The trade mark shall not entitle the proprietor to prohibit its use in relation to goods which have been put on the market in the Community under that trade mark by the proprietor or with his consent.
However, an exception is given under Article 7(2): prohibition is possible ‘where there exist legitimate reasons for the proprietor to oppose further commercialisation of the goods, especially where the condition of the goods is changed or impaired after they have been put on the market’.
Thus, it is clear that the doctrine is based essentially on whether the owner of an IPR gave their consent to the ‘further commercialisation’ in the EU of the products that incorporate that right. This usually takes the form of sale of the product in the EU with the consent of the owner of the IPR. If such consent was given, the right will be taken to have been exhausted.
The doctrine of exhaustion has been applied in several cases.
8.4.5 International exhaustion: relevant case law
The cases and points made above deal with the application of the doctrine of exhaustion within the EU. However, it was inevitable that the question would arise at some point whether the doctrine applies in a situation where the owner of the IPR consented to the sale of the products which incorporate that right outside the EU (i.e. whether the right could be said to have been exhausted in this case).
This question came before the ECJ in two interesting preliminary ruling references, Silhouette and Zino Davidoff.
Case C-355/96 Silhouette International Schmied GmbH v Hartlauer Handelgesellschaft mbH [1998] ECR I-4799
The Austrian claimant (SIS) produced fashion spectacles under the trademark ‘Silhouette’ and refused to supply the defendant (Hartlauer), believing that its marketing techniques (low-cost pricing) would be harmful to the high-quality image of its products. Some outdated models sold to a third party for sale only in Bulgaria or the former Soviet Union were subsequently acquired by the defendant, who sold them in Austria.
Silhouette applied for an interim injunction on the basis of the trademark violation. When its application was refused Silhouette appealed to the Supreme Court (Oberster Gerichtshof), arguing that under Article 7(1) of Directive 89/104 a trademark owner was entitled to prohibit the parallel re-importing of branded goods put on the market outside the European Economic Area (EEA). A preliminary reference was made to the ECJ. The clear answer given by the ECJ was that there was no international exhaustion under EU competition law.
Cases C-414–416/99 Zino Davidoff SA v A&G Imports Ltd [2001] ECR I-8691 (aka Levi Strauss & Co v Tesco plc) [2001] ECR I-8691, [2002] 1 CMLR 1)
Zino Davidoff had an exclusive distribution contract with a third party based in Singapore, which restricted the sale of its products to a specified territory outside the EEA and prohibited further resale outside the specified territory.
The defendant, A&G, acquired a stock of products originally placed on the Singapore market and began to sell them in the UK. Proceedings were brought in the UK alleging breach of trademark rights. Similar infringements in the joined case were alleged by other claimants against Tesco and Costco.
The national court sought guidance on the interpretation to be given to consent in the context of Article 7 of the Trade Marks Directive (Directive 89/104) and asked:
–whether the consent of a trade mark proprietor to marketing in the EEA could be implied
–whether implied consent could be inferred from the mere silence of a trade mark proprietor
–as to the consequence of ignorance, on the part of the trader importing the marked goods into the EEA, of the proprietor’s expressed opposition to such imports.