Change in case law on the burden of proof for exhaustion of trademark rights in parallel trade

Following the European Court of Justice, a supreme national court has now also facilitated and strengthened parallel trade in branded products: On October 22, 2024, the Austrian Supreme Court (OGH) ruled that, under certain conditions, the burden of proof for the place where a branded product was first placed on the market - which is relevant for the exhaustion of trademark rights in the EEA - lies with the trademark owner and not with the seller of the parallel traded goods. The Austrian Supreme Court is thus implementing in national case law what the ECJ previously decided on 18.01.2024 in the case Hewlett Packard Development Company LP ./. Senetic S.A. (click HERE for our article on the “Hewlett Packard” judgment of the ECJ). Due to the ECJ's ruling, it is to be expected that German courts will follow and decide similarly in the future - therefore the Austrian Supreme Court decision is also very relevant for Germany.

The decision was kindly provided by attorney-at-law Dr. Dyck from Salzburg, who represented the drugstore chain in court. SKW Schwarz was indirectly involved in the proceedings because SKW Schwarz advised a supplier of the drugstore chain and supported the litigation on his behalf.

1. What was the Austrian Supreme Court case about?

An Austrian drugstore chain had purchased large quantities of original branded perfumes from parallel trading companies. The latter had assured the drugstore chain that the branded perfumes originated from the EEA. This is important in parallel trade because the trademark right is only “exhausted” for branded goods that have been placed on the market in the EEA by the trademark owner or with its consent: the trademark owner then cannot prohibit retailers who trade in these goods in the internal market from using the trademark on the specific goods and in advertising for them (Art. 15 EUTMR for EU trademarks and Sec. 24 of the German Trademark Act for German trademarks). Retailers who are not part of the trademark owner's selective distribution system - such as the drugstore chain - can therefore also legally trade in branded goods that have been placed on the market in the EEA for the first time without infringing the trademark owner's trademark rights.

The decisive factor therefore often is: Who has to prove the place where the goods were first placed on the market?

The trademark owner had made test purchases in the drugstore chain and checked the distribution channel of the test purchase samples in its internal database using the tracking codes printed on each perfume sample. It claimed that the contents of the database showed that the specific products were first placed on the market in the United Arab Emirates (UAE) and thus outside the EEA.

The defendant, the drugstore chain, disputed this and claimed that the goods originated from the EEA. However, it was unable to prove this because its upstream suppliers naturally do not disclose from which sources in the EEA they had purchased the branded goods. This is actually always the case in parallel trade. Otherwise, the trademark owner would immediately close the source (typically authorized dealers who sell surplus goods in parallel trade). In addition, the drugstore chain could skip the supplier in the supply chain if it knew the source. Retailers of parallel traded branded goods therefore always find themselves in a dilemma because the exhaustion they rely on cannot usually be proven by them (for more on the burden of proof dilemma for parallel traded goods, see HERE, in my discussion of the “Hewlett Packard” judgment, under point 2).

The lower Austrian courts came to the conclusion that the trademark owner failed to prove the first placing on the market in the UAE because the company's internal database results could not be objectively verified and were not sufficiently supported by trade and freight documents. However, they argued that this was irrelevant because the burden of proof lay with the drugstore chain anyway - and the latter had not been able to prove that its goods originated from the EEA. Consequently, the drugstore chain was convicted of trademark infringement in the first and second instance.

2. And then came the ECJ decision “Hewlett Packard”...

In the “Hewlett Packard” decision of January 18, 2024, the ECJ recognized the burden of proof dilemma in parallel trade and its negative effects on trade and pricing in the internal market. The result was nothing less than a fundamental paradigm shift - because case law had previously always placed the burden of proof for exhaustion on the trader, even though the trader was regularly unable to prove exhaustion. The result was that retailers outside the selective distribution system were often convicted of trademark infringement based on the mere assertion of the trademark owner that the goods were of non-European origin.

The “Hewlett Packard” decision, to which the Supreme Court also makes extensive reference in its ruling, fundamentally changed this situation. Since then, the burden of proof has been reversed under certain conditions, i.e. the trademark owner must prove the place where the product was first put on the market - a mere assertion is no longer sufficient.

In general terms, the requirement is that the “traditional” allocation of the burden of proof could enable the trademark owner to seal off national markets and promote the continuation of existing price differences between the member states.

Specifically, the ECJ ruled that such a risk of market foreclosure can regularly be assumed under the following conditions:

• The trademark owner operates a selective distribution system.
• The branded products do not have any distinguishing marks that enable third parties to determine the market on which they are to be distributed. The trademark owner also does not provide any other means of verifying the marketability of the goods in the EEA.
• The trading company claiming exhaustion has acquired the branded goods in the EEA.
• The upstream supplier has confirmed the marketability of the branded goods in the EEA.

In such a case, according to the ECJ, it is so difficult or even impossible for the retailer of parallel traded goods to prove exhaustion that the burden of proof must be reversed for the protection of the fundamental freedoms of the internal market and placed on the trademark owner.

3. What was decisive for the Austrian Supreme Court in the specific case?

Unlike the lower courts, the Austrian Supreme Court placed the burden of proof for the place where the products were first placed on the market on the trademark owner. However, as the latter was unable to prove that the branded perfumes were placed on the market in the UAE and therefore outside the EEA - its tracking code system was unsuitable for this according to the findings of the lower courts - this led to the trademark owner’s complaint being dismissed. The drugstore chain won the case.

The Supreme Court graded the burden of proof in two steps as follows:

1. First, the defendant must - in addition to the requirements summarized above under 2 - prove the risk of foreclosure of the national markets in the European internal market.
2. If this is successful, the burden of proof with regard to the exhaustion of the trademark right shifts to the trademark owner: In the second step, the latter must then prove that the goods were actually placed on the market outside the EEA for the first time.

The Austrian Supreme Court considered the evidence for the first step - the risk of market foreclosure - to have been provided in the case on hand:

• It was undisputed that the trademark owner operated a selective distribution system.
• The tracking code on the packaging is not an indication of the market of destination because no one other than the trademark owner itself can determine the country of destination from it. In addition, the trademark owner had explicitly refused to provide any information in response to a letter from the drugstore chain asking whether certain products were marketable in the EEA.
• For their part, the drugstore chain's suppliers were based in the EU, i.e. the drugstore chain had purchased the goods in the EEA.
• The suppliers were not prepared to disclose their sources of supply. They merely offered that a court expert bound to secrecy could examine their business records regarding the procurement channels in order to confirm that the goods came from the EEA (without disclosing the source); however, this was rejected as insufficient by the trademark owner.

In conclusion, the Austrian Supreme Court stated that, according to the ECJ, the risk of market foreclosure is indicated if the conditions mentioned under 2. are met. However, the drugstore chain had even been able to demonstrate and prove in the proceedings that there were actually significant price differences between at least two authorized dealers in the EEA, which the Supreme Court considered to be a further indication of existing market foreclosure by the trademark owner.

4. What does this mean for the future?

At the end of the report on the “Hewlett-Packard” judgment, I wrote: “It will be interesting to see how the national courts will implement the ECJ's decision.” Now we have such an implementation in the form of the Austrian Supreme Court's ruling - and it impressively demonstrates the scope of the ECJ ruling that was already assumed in the “Hewlett Packard” judgment report:

If parallel traders and their retail customers are based in the EEA, purchase the branded goods from the EEA and the suppliers assure that the goods are marketable in the EEA, the reversal of the burden of proof is likely to apply in future. This is because the other requirements - a selective distribution system of the trademark owner, a lack of labelling of the market of destination and the refusal to provide information about the market of destination - are likely to be met on a regular basis.

Nevertheless, from the point of view of parallel trade - and the Austrian Supreme Court ruling also teaches us this - it is advisable to research and document further indications of market foreclosure, such as different price levels among authorized dealers in the EU member states or difficulties for consumers to order from authorized dealers in other member states. In the present case, this research work could have played a decisive role; at least this is indicated in the judgment.

Trademark owners can respond to the change in case law with an absolutely conclusive tracking code system in order to prove the non-European origin of the goods after the burden of proof has been reversed - but this is difficult in view of the purely internal nature of data collection and processing due to the lack of objective verifiability. Alternatively, EEA goods can be labelled as such or an external verification option of the country of destination can be provided via the tracking code - both of which, according to current case law, would eliminate the requirements for the reversal of the burden of proof. If a non-EEA product is actually found on a retailer's shelf, the “old” burden of proof rule would apply again.