The American label Michael Kors took the German discount supermarket LIDL to court over the sale of handbags– without success. The loss hinged on MK’s status as a “prestigious” brand, which the Landgericht Hamburg suprisingly denied. LIDL’s offers showed three trademarks belonging to Michael Kors, the word mark “Michael Kors” and these two figurative marks:

Considering the fact that, LIDL was and is not part of MK’s selective distribution system, the latter was not too happy with the distribution of their purses via a discounter. The ads challenged by the US-American label show handbag models of the applicant in which the RRP (Recommended Retail Price) is crossed out in red, with a much reduced price stated in black next to it. Lidl also advertised the bags in connection to jewellery not produced by MK. Therefore, Michael Kors decided to assert claims against LIDL to stop this practice.

The principle of exhaustion

According to the principle of so-called “exhaustion” in Article 15 (1) of the EU Trademark Regulation (EUTMR), the proprietor of a trademark is not entitled to prohibit third parties the use of his trademark in relation to goods that have been put on the market with his consent in the European Economic Area. However, Article 15 (2) EU Trademark Regulation allows an exception when there are legitimate reasons for the proprietor to oppose the further commercialisation of the goods, especially where the condition of the goods is changed or impaired after they have been put on the market.

Since the purses sold by LIDL were originally put on the market with the consent of Michael Kors, the label tried to argue for an exception to the principle of exhaustion with reference to Article 15 (2), claiming there was a high risk for damage of reputation by being associated with a discounter.

According to European case law, damage to reputation constitutes a legitimate interest to justify an exception to the principle of exhaustion (ECJ – Dior/Evora). This is beacuse, according to the ECJ ruling L’Oreal/Bellure, one of the funcitons of a trademark is to give the consumer a sign which indicates consistent and especially consistently high quality. Therefore, particularly in the luxury sector, many trademark owners have a pronounced interest in ensuring that their acquired image of offering first-class quality goods and services is not damaged.

Are you prestigious? Or just popular?

The mere “risk” of a damage of reputation suffices in these cases (ECJ – Copad/Dior). But in accordance with case law, the Court stated that any such risked damage to the trademarks proprietor’s image needs to be of substantial nature. A certain treshold of “prestige” needs to be overcome, meaning the goods need to have a particular character of luxury and glamour. Because of the freedom of movement of goods in the European Union (Art. 34 and 36 TFEU), the principle of exhaustion under trademark law enjoys a high level of protection. Exceptions may only be allowed in singular cases and cannot be claimed for just any well-known, famous or popular mark. Otherwise, there is a risk of undermining the free flow of goods in the single market. This leads to barriers to trade and legal uncertainty for third parties.

The judges supported their argument with the following reasoning: Michael Kors shops are to be found in the best locations in European city centres. It can also be argued that the plaintiff’s trademark is probably perceived as upmarket by certain parts of society. However, momentary public opinion alone is not enough. Certain objective criteria must be met, on which consumers base their opinion. Reports and advertisements in magazines, which claim to have a prestige character are not sufficient to achieve a luxurious reputation with the consumer in the long term.

Luxury and the European Single Market: old foes

In examining these objective criteria, the Court also drew a parallel with the conditions under which selective distribution systems are permissible under antitrust law. Michael Kors had instituted such a system half a decade ago in order to sharpen the brand’s image and improve sales.

The ECJ ruled in Coty Germany that luxury brands have a legitimate interest in protecting their image and such measures are not harmful to competition in principle. Nevertheless, any brand setting up such a system has to select their distributors strictly based on objective criteria related to quality. These have to be applied in a uniform manner and mustn’t exceed what is absolutely necessary. Failing to satisfy this test means a violation of European antitrust law. Invalidity of the relevant contract clause and prosecution by the local cartel authority might follow.

Here, the ECJ also defined what luxury means to it: “the opposite of the ordinary due to exclusivity”. Such a status could be caused for example by

– a high price

– limited supply possibilities

– long waiting times and

– a recognisably high presentation effort.

In principle, the “prestige barrier” of Art. 15 (2) EUTMR does not require the institution of a selective distribution system. Admittedly, the absence of such a system, or its patchy enforcement, could quite clearly indicate a lack of prestige due to lack of exclusivity. Here this did indeed harm Michael Kors’ case, that the label only instituted a system of selective distribution a few years ago, which the judges interpreted as the brand not having achieved a sufficient level of prestige yet.

A word of advice

Trademark proprietors should therefore pay particular attention to demonstrating the prestige status of their trademark for the targeted public on the basis of objective criteria which are independent of the actual sales situation. Without a selective distribution system, this is unlikely to succeed. In addition, the trademark proprietors must state, why the reseller’s objectionable conduct threatens to damage the specific reputation of the mark.

Resellers should try to raise doubts about the prestige character of a trademark, for example by presenting offers made by the trademark owner or third parties, which are damaging to the mark’s image.

Image: Ella Christenson on Unsplash