EUROPE, MIDDLE EAST AND AFRICA: GERMANY
CONVERSE AND THE GERMAN FEDERAL COURT OF JUSTICE: A FIRST ASSESSMENT – CONSEQUENCES FOR BRAND OWNERS AND RETAILERS
Authors: Thorsten A. Wieland & Dr. Ivo Lewalter, Heuking Kühn Lüer Wojtek
High-quality branded goods are regularly provided only to selected retailers belonging to the selective distribution scheme of the brand owner. Lucky are those retailers who participate in the scheme. They may usually be subject to contractual restrictions, however, such as minimum purchase quantities or requirements in relation to the layout or equipment of their shops. But the brand conveys an image and prestige which attracts customers, who will then also turn to other products when visiting the retailer’s shop. Not least for that reason, such branded goods are also in high demand by wholesalers and retailers shunned by brand manufacturers. Amongst those so-called outsiders are cut-price supermarkets or consumer markets as well as so-called cash and carry stores which offer the whole range of food and non-food products.
The dilemma those outsiders face is obvious: since the brand manufacturers do not supply them, they have to rely on doubtful sources. They often purchase only small quantities which are then quickly sold, accompanied by extensive advertising campaigns, in short promotional periods over, for instance, one week. Quite often, however, the specific risks will materialise: the outsiders have been sold counterfeits.
In times of compliance programmes and good corporate governance, these situations cause a great stir. What has previously been dealt with in purely civil-law trademark disputes, will today often result in additional criminal proceedings against the outsider’s managing directors or heads of legal departments. Both brand owners and outsiders thus have the need for legal certainty. What measures need to be taken? What inspections are due when the retailer purchases branded goods? Is the brand owner obliged to protect its goods specifically from counterfeits? Does there need to be security features which are recognisable for everyone?
On 15 March 2012, the German Federal Court of Justice handed down decisions in two cases, both relating to the trademark “CONVERSE.” To date, only a press release is available. It contains few surprises.
In the first case, the trademark owner Converse, Inc. claimed that counterfeits of its well-known Converse Chuck Taylor All Stars sneakers, also referred to as “Chucks,” had been sold in consumer markets. In the second case, a European distribution company of the trademark owner objected to the sale of genuine “Chucks” sneakers by a retailing group, which claimed it had originally been put on the market in the US. In both cases a sale in Germany would infringe the trademark rights since a third party may only sell such goods bearing the trademark which have been put on the market within the European Economic Area (EEA) by the trademark owner or with its consent (so-called principle of exhaustion). This is never the case in relation to counterfeit goods. And goods imported from the US simply have not first been marketed in the EEA.
The Federal Court of Justice confirmed, to the satisfaction of trademark owners, that the burden of proving whether certain goods have been put on the market in the EEA by the trademark owner or with its consent lies in principle with the third party, i.e. the retailer, and not the trademark owner.
The burden of proof is reversed – and this is not a new finding either – if the trademark owner operates a distribution scheme for the purpose of preventing the cross-border resale of genuine products within the EU. If a claim is asserted against a retailer he will be obliged, if he is to defend his case, to disclose his supply chain, even if he sells original branded products which were first marketed in the EEA with the trademark owner’s consent. This would always enable the trademark owner to act on the weak link in his distribution scheme with the objective of preventing future sales to retailers that do not belong to the distribution scheme. Thus, it is essential to reverse the burden of proof if a distribution system may be used by the trademark owner to partition national markets to ensure the principle of free movement of goods within the common market. In practice, a variety of distribution schemes of well-known brand owners aim to achieve such a partitioning of national markets. De facto, the situation may arise time and again that the burden of proof is reversed in favour of the retailer.
However, as far as the sale of counterfeit goods is concerned, the press release regarding the Converse rulings suggests a modification of this rule of proof. According to the press release, the party contending that counterfeits have been sold would have to produce evidence or circumstances which support the contention that the products in question are indeed counterfeit. If this is confirmed later during the proceedings it will no longer be of relevance whether the brand owner’s distribution scheme may actually partition national markets. Such a risk cannot, in any event, materialise if counterfeit products are being sold.
Brand owners and retailers will draw their conclusions from the decisions at hand: it is in the interest of the brand owners to ensure that their products bear security features, such as holograms, in order to be able to identify them as genuine. The courts will reward them for doing this: the easier it is for everybody to check the authenticity of a product, the more difficult it will be to prove the contrary. The retailer, however, who is not supplied by the brand manufacturer, will be obliged to carry out extensive examinations when purchasing branded goods. He will have to be prepared, where a dispute arises, to provide proof that the goods in question are genuine and that they have first been put on the market in the EEA by or with the consent of the brand owner. Neither a simple confirmation letter issued by the supplier nor a mere visual inspection of the products will be sufficient. The retailer will be expected to make himself familiar with the security features used by the brand owner and to diligently record the measures carried out when examining the products. Failing this, multinational retail groups as well as online retailers trading from their living rooms may face criminal proceedings in addition to having to defend themselves against civil-law claims brought by brand owners.