Exceptions to Trade Mark Exhaustion: Inalienability Rules for the Protection of Reputational Economic Value

[2021] 43 European Intellectual Property Review 352-365

Queen Mary Law Research Paper No. Forthcoming

Posted: 30 Jun 2021 Last revised: 7 Sep 2021

See all articles by Apostolos Chronopoulos

Apostolos Chronopoulos

Centre for Commercial Law Studies, Queen Mary University of London; Queen Mary Intellectual Property Research Institute (QMIPRI)

Date Written: June 28, 2021

Abstract

There is no doubt that the doctrine of exhaustion of trade mark rights is of grave economic importance. It allows consumers to enjoy the benefits of free trade on goods already placed on the market with the trade mark proprietor’s consent and promotes competition in the collateral markets for specific dealings with those goods, including repair and maintenance services. As a counterbalance, trade mark law recognises some exceptions to trade mark exhaustion in order to protect legitimate interests of trade mark owners. Understandably, the emphasis has been placed on the aspect of the doctrine that prevents the trade mark proprietor from distorting the downstream commercialisation of goods she has already put into circulation by virtue of her exclusive right. Scholars have meticulously explored the economic dimension of the doctrine and European courts have been vigilant in rejecting interpretations of the law that would undermine the trade mark proprietor’s authority to place the goods bearing her mark on the market for the first time or circumvent the principle of regional exhaustion.

On the other hand, the only exception to the exhaustion of the rights conferred by a trade mark that is explicitly mentioned in the text of all European trade mark law instruments issued so far relates to the ageless problem of adulterated goods. Of course, neither art.15(2) of the Trade Marks Directive nor its counterpart in the EUTMR contain an exhaustive list of grounds upon which the trade mark proprietor would be able to assert her rights to oppose the further commercialisation of trade-marked goods. In accordance with the broader policy goals of trade mark law, the European Court of Justice (ECJ) has indeed recognised economically significant exceptions to the exhaustion rule for the purpose of protecting the advertising value encapsulated in a trade mark, especially when it is featured on goods characterised by an aura of luxury and exclusivity. Compared with the policy justifications underpinning the exhaustion of trade mark rights as a legal concept, the exceptions to that doctrine remain somewhat under-theorised.

Several legal principles operate cumulatively to pull strings within the interpretation of the law so that any departures from the rule of trade mark exhaustion remain confined to a narrow field of application. At the European level, the absence of trade barriers within the internal market is an overriding principle of primary EU law that is sturdily anchored in the provisions establishing the free movement of goods and a system of undistorted competition. Similar background principles concerned with the freedom of trade and competition can be found in the private law traditions of national jurisdictions. Trade mark exhaustion has been perceived as operating in a fashion that is analogous to the function of civil law rules on good-faith acquisition, for instance. Within a very few years, the US Supreme Court has explained the exhaustion doctrine as a manifestation of the traditional common law hostility towards the imposition of restrictions to the alienation of chattels. Ruling that the patentee may not invoke her exclusive rights to enforce contractually imposed post-sale restrictions with regard to the patented product, the court referred to the “first sale doctrine” as marking “the point where patent rights yield to the common law principle against restraints on alienation”. A few years earlier, when the court ruled that the sale of a copyrighted article in a foreign market triggers the exhaustion of the copyright owner’s rights regardless of whether the product had been manufactured outside the US, it portrayed exhaustion as “a common-law doctrine with an impeccable historic pedigree” reflecting “the common law’s refusal to permit restraints on the alienation of chattels”. Notably, both cases have cited Lord Coke’s reiteration of the common law rule back in the early 17th century to support their propositions.

Appreciating the link between the exhaustion doctrine and private law concepts favouring the unconstrained trade on goods already placed on the market with the consent of the trade mark proprietor induces us into further syllogistic steps. Despite its apparent hostility towards trade restraints, the law quite often employs inalienability rules to promote efficiency considerations or some other policy goal. Hence, the exceptions to trade mark exhaustion may be studied and, at least partially, explained as rules restricting the alienability of trade-marked goods to implement trade mark law policies.

The second part of this article seeks to emphasise the point that the exhaustion rule does not constitute a sort of “natural” trade mark law principle depriving the trade mark proprietor of every possibility to interfere with the downstream commercialisation of the trade-marked good. It is a rule established by the legislator, which occasionally confers upon the proprietor a significant degree of control over the distribution channels for her products. This article examines that aspect of the doctrine by looking at its historical development and application in various trade mark systems.

The third part examines the exceptions to the principle of exhaustion recognised by the European system of trade mark protection, and as formulated in the relevant judgments of the ECJ. The justification for recognising these exceptions offered by the ECJ focuses on the need to secure incentives to create and maintain reputational value and not on the need to avoid an impairment of a trade mark function. On the other hand, it is widely accepted that the authority of the trade mark proprietor to oppose the further commercialisation of a trade-marked good after its first sale can be justified through recourse to the legal concept of the trade mark functions, and, in particular, the advertising function. This article elaborates upon those arguments to illustrate how the quality function of trade marks, understood broadly enough to mirror the concept of quality perception established by marketing science, could corroborate such justifications of the exceptions to the exhaustion principle despite its accessory nature. Given, however, the controversy about the functions theory and the need to explain the rationale behind the legal recognition of the advertising function especially when it is bound to interfere with the free flow of trade, a more solid justification is necessary.

The fourth part draws upon the observation that both the exhaustion doctrine and its exceptions are intertwined with the broader policy question pertaining to the circumstances under which the legislator or the courts tend to opt for inalienability rules to protect entitlements. This article examines the nature and the function of inalienability rules as instruments for achieving particular efficiencies without excluding other considerations such as distributional goals. It then shows how the exceptions to the exhaustion rule operate as inalienability rules. In that regard, trade mark law does nothing different than other areas of law when they seek to achieve the conservation of some resource. The fifth part summarises and concludes.

Keywords: economic analysis of trade mark law, inalienability rules, exhaustion, trade mark exhaustion, trade mark funtctions, selective distribution, luxury goods

Suggested Citation

Chronopoulos, Apostolos, Exceptions to Trade Mark Exhaustion: Inalienability Rules for the Protection of Reputational Economic Value (June 28, 2021). [2021] 43 European Intellectual Property Review 352-365, Queen Mary Law Research Paper No. Forthcoming, Available at SSRN: https://ssrn.com/abstract=3875291

Apostolos Chronopoulos (Contact Author)

Centre for Commercial Law Studies, Queen Mary University of London ( email )

United Kingdom

Queen Mary Intellectual Property Research Institute (QMIPRI) ( email )

Northgate House
67-69 LINCOLNS INN FIELDS
LONDON, WC2A 3JB
United Kingdom

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