ECJ clarifies the exhaustion of rights

The Court of Justice of the European Union (ECJ) recently issued a new decision on the exhaustion of rights, providing clarification as to how Article 7 of the EU First Trademark Directive should be interpreted and applied in practice (Case C-46/10 Kosan Gas v Viking Gas). 

Facts
Kosan Gas holds an exclusive licence to commercialise gas bottles made of composite material (which are lighter than normal bottles) and to refill them with gas. Its gas bottles were specifically built to be refilled.

The shape of the gas bottles is registered with the Office for Harmonisation in the Internal Market (OHIM) and the Danish Patent and Trademark Office as a three-dimensional (3D) trademark to distinguish not only gas bottles, but also the gas itself. Together with the 3D trademark, the gas bottles also bear Kosan’s denominative and figurative trademarks.

Kosan’s services consist of selling and refilling bottles. Customers who purchase a bottle for the first time pay for both the bottle and the gas it contains. Afterwards, they can replace empty bottles for full bottles at Kosan’s distributors’ establishments. 

Viking Gas is a distributor that refills gas bottles, including Kosan’s. Viking refills the empty bottles brought in by Kosan’s clients and includes the corresponding label on the bottles, which, according to domestic consumer legislation, should provide the details of the gas provider. These labels do not cover Kosan’s trademarks and signs.

Kosan brought an action for infringement of its 3D trademark based on Article 7.2 of the directive. The Danish court ruled in favour of Kosan and prohibited Viking from refilling Kosan’s bottles with its own gas. This decision was confirmed on appeal, and Viking appealed to the Supreme Contentious Administrative Court of Denmark. That court suspended proceedings pending submission of the following prejudical question to the ECJ: whether, and under what circumstances, the owner of the exclusive licence for the exploitation of gas bottles that are built to be refilled in a shape that is protected under a 3D trademark registration, and bearing the trademark registrations of the licensee, can prevent (under Articles 5 and 7 of the directive) those bottles from being exchanged for bottles refilled with a third party’s gas.

Arguments
Viking’s main arguments in defending the exhaustion of rights were as follows:

• The trademark rights were exhausted when consumers bought the bottle from Kosan for the first time. Viking alleged that trademark rights cannot be extended in such a way that would prevent consumers from using the bottles freely for refills (ie, the purposes for which they were built).
• Consumers were not confused about the origin of the refilled gas on the basis that Viking included adhesive labels on the bottles every time consumers proceeded with a refill.
• A trademark right cannot be used to ringfence markets in order to obtain an unfair advantage or apply an unjustified price difference (which Viking claimed to be 20% higher than gas in normal, non-light bottles).

Kosan argued as follows:

• Viking's actions resulted in the double identity of signs and products, which was a clear infringement of the trademark. 
• There was a high likelihood of confusion due to the fact that the labelling used by Viking when refilling was unobtrusive. 
• Exhaustion did not authorise Viking to refill a third party’s bottles protected by a trademark registration with its own gas. Exhaustion cannot affect the bottles, as they were created with the essential aim of being refilled and therefore reusable. The bottles on their own were not a product and, in this particular case, the subject at hand was the gas and not the bottles.
• The substitution of a product covered by a trademark may constitute a modification of the product under Article 7.2 of the directive, and this modification constituted an exemption to the exhaustion of trademark rights.

ECJ considerations
The ECJ considered the following factual issues:

• The bottles covered by the trademark were marketed in the European Economic Area by Kosan, and therefore with the authorisation of the trademark owner. The bottles also bore Kosan’s trademarks. 
• The fact that Viking refilled the bottles with its own gas constituted a risk of alteration or modification of the product (ie, the bottle). 
• Kosan had a vested interest in having the bottles refilled by its own authorised distributor in order to maintain strict control of the quality of the gas sold, as any defect could have a clear impact on the trademark’s reputation.
• Kosan, Italy and the European Commission considered that exhaustion jeopardises trademark owners only in pursuing further sales of the bottles, but does not allow a third party to refill those specific gas bottles with its own gas for commercial purposes. 
• Considering that on the first occasion, consumers must pay not only for the gas, but also for the bottle itself (the price of which is higher than that of traditional gas bottles), and considering that the bottles were created for the purposes of being refilled on various occasions, the ECJ held that the bottles did not constitute a mere packaging of the gas, but a product in themselves.

The ECJ noted that two main interests were in conflict. On the one hand, there was Kosan’s interest in obtaining and exercising its trademark and other related exclusive rights. On this issue the ECJ declared that a sale that allows the owner to obtain the economic value of its trademark exhausts the exclusive rights. 

On the other hand were the consumers’ interests in fully enjoying their ownership rights in the bottles for which they have paid. However, the ECJ considered that through the purchase, consumers become dependent on a sole gas provider for future refills. In addition, the public had a general interest in not reducing competition in the market. The ECJ considered that there was a risk of closing off the market if Kosan was allowed to regain a free choice of gas supplier on the basis of its rights in the 3D trademark – that is,  “because of its specific technical characteristics”. 

Conclusions
In light of the above considerations, the ECJ held that on the one hand, the sale of the bottle exhausts the trademark rights related to the shape of that bottle (and the rights in the trademarks included on the labels affixed to the bottle), and on the other it entitles the consumer to decide on the bottle freely, including the decision to change or refill it using third-company gas and refilling services. That is to say, competitors can proceed with refilling and changing empty bottles unless the trademark owner has a legitimate reason to oppose.

The ECJ has previously declared that there is a legitimate reason when: 

• There is a modification of the product. In this regard, the ECJ considered that the facts that Kosan’s and Viking’s labels coexisted on the bottles, and that Kosan’s labels are kept intact, should be enough to demonstrate that there have been no modifications that justify and support the lack of exhaustion. 
• Use by a third party of an equal or similar trademark has seriously diminished trademark reputation or when that use is made in such a way that consumers might believe that there is a commercial link between the trademark owner and the third party.

The ECJ held that in order to decide whether Kosan has a legitimate reason in this specific case, the national court should take into account the labels placed on the bottles and the terms and conditions under which the bottles are replaced by Viking. These two elements should not lead average consumers to assume that there is a link between the two companies, or otherwise to consider that the gas used for the refilling is Kosan’s. Furthermore, the ECJ held that it was necessary to take into account the practices of the sector to determine whether there is confusion – that is, whether the consumers are used to gas bottles being refilled by other distributors. In addition, the ECJ noted that as a general rule, it should be easier to believe that consumers may not be aware of the link between the two companies.

In conclusion, Kosan was not entitled to invoke trademark rights in order to oppose the replacement of its bottles by Viking with other bottles, unless it was able to provide a legitimate reason.