Trademark licences, sell-off periods and the exhaustion doctrine (Milan IP Court, order of 30/04/2015, docket no. 13254/2015)

In the matter of trademark infringements, conflicts between a licensee’s buyer or assignee and the trademark owner are usually more complex than the archetypal litigation between the trademark holder and any alleged infringer. There is, in fact, a complicating factor, represented by the contractual relations of both parties with the licensee. The decision discussed here epitomises this situation.

An Italian clothing company had licensed the use of its brand on watches and jewellery to a French company, which sold the licensed items on the Italian market through its local subsidiary. Once expired, the licence agreement had not been renewed.

A few months later, the licensor realised that a third company based in the Lombardy region was selling watches bearing its trademark, apparently taken from the remaining stock of its former licensee, kept at the premises of the Italian distributor. The licence agreement granted the licensee the right to dispose of any remaining stock within six months from the termination of the licence (sell-off period), requiring the destruction of goods still unsold at the end of said period. The watches in question were being sold on the market past the 6-month term.

The trademark holder applied before the IP Court of Milan for a preliminary injunction against the new seller, claiming prima facie infringement of its trademark rights and unfair competition.

The defendant argued that it had acquired the goods in question under a regular sale contract with the applicant’s former licensee and a lease of business agreement with its distributor: contractual obligations between third parties (i.e. the trademark owner and the licensee) should not affect its rights. Predictably, the defendant invoked the so-called exhaustion doctrine, pointing out that its sale agreement with the licensee had been executed before the end of the 6-month sell-off period granted to the latter, hence with the consent of the trademark owner.

The appointed judge noted that the case was strictly one of non-contractual liability, since the applicant had claimed trademark infringement and unfair competition: “upstream” contractual relationships were mere factual antecedents, to be considered only in order to confirm or rule out the trademark owner’s consent and accordingly the exhaustion of its rights. At the end of the day, the solution to the dispute rested on the answer to a single question: whether the 6-month sell-off period in the licence agreement referred to the sale of the remaining stock by the licensee to a third party or to the sale of the products on the end-user market by anyone, including any licensee’s assignee.

The judge found that the correct answer, according to statutory rules on contract interpretation, was the latter. She considered that, based on a good faith interpretation of the sell-off clause, the brand owner had wanted to ensure that no branded products from the previous season were offered to the public whichever the dealer, because the sale of last season stock would be prejudicial to the prestige of the brand, “regardless of the identity of the distributor”. Reading the licence agreement as a whole led, in the judge’s opinion, to the same conclusions: the fact that the licence required the licensee to destroy any unsold goods at the end of the sell-off period indicated the trademark owner’s lack of interest in any remuneration from the remaining stock and, conversely, its positive will not to offer out-of-date products for sale to the public.

It followed, according to the judge, that the sale of the stock by the former licensee near the end of the 6-month sell-off period did not allow the new owner to continue marketing the products beyond the term. The re-sale by the defendant was therefore not covered by the exhaustion of the applicant’s trademark rights, but, on the contrary, infringed on those rights, and constituted at the same time an act of unfair competition.

It is possible that this construction of the sell-off clause so unfavourable to the assignee – and, in the opinion of this writer, not so obvious – was influenced by the fact, noted by the judge, that the latter was very contiguous to the licensee, sharing the headquarters with the Italian distributor of the latter and having as sole shareholder an employee of the same; in other words, by the judge’s belief that the licensee had tried to artificially lengthen the sell-off period granted to it to dispose of the stock.

With regard to the danger of irreparable harm, which is a prerequisite of any interim remedy in the Italian legal system, the judge accepted the argument that the continued distribution of large quantities of infringing products would lead to damages, especially in terms of brand reputation, that would be difficult to restore.

In light of the above, the judge granted the preliminary injunction requested and ordered the defendant to pay legal expenses and court fees.

The advice that can be drawn from this case is that both licensors and licensees should pay particular attention to the terms governing the disposal of stock upon expiration of the licence agreement. If the choice falls on the sell-off mechanism, it would be better to specify whether sales during the sell-off period can be made to resellers. It is equally important to carefully regulate side obligations regarding inventory statements, price dumping, destruction of unsold goods and any licensor’s right to purchase the stock itself. Licensees’, or former licensees’, assignees should also check the terms of the licence agreement as a matter of precaution: purchasing from a licensee does not necessarily shield from attacks from the trademark holder, as this case shows.