Anne Mary HARRISON

‘Do Trademarks Operate to the Benefit or Detriment of the Consumer?’

Intellectual Property Law LW556

Supervisor: Alan Story

- 1 -

Contents

Abstract page 3

Introduction page 4

The Origin Function page 5

The Quality Function page 9

The Advertising Function page 11

Parallel Imports page 14

Conclusion: How Trade Marks Could Operate to the Benefit of the Consumer page 18

Bibliography

Books page 21

Articles page 22

Internet Resources page 24

Cases and Statutes page 25

Appendices:

Appendix 1: Relative Importance of IPR Driven Investment page 27

Appendix 2: Dollar price relatives (retail prices including tax) page 28

- 2 -

Abstract

Of the three functions that are said to pertain to the trade mark, only one has any relevance to the law of trade marks as currently conceived. The importance of the origin function has diminished as a result of the increasing use of assignment and licensing, which it is suggested may deceive the public as to the origin of goods, whilst the quality function has been superseded by consumer protection laws.

Formerly, the objective of trade mark law was the balancing of the protection of both the consumer and trade mark owners. However this balance has now tilted strongly in favour of the trade mark owner, which has resulted in detriment to the consumer.

This detriment can be seen most clearly within the area of parallel imports, which have, following the conjoined cases of Zino Davidoff SA v A & G Imports, Levi Strauss &Co v Tesco plc, Levi Strauss & Co v Costco Wholesale UK Ltd1, implicitly been prohibited by the European Court of Justice. Parallel imports, it is submitted, are in the interests of the consumer since they facilitate intra-brand competition, thereby reducing retail prices of trade marked goods.

Neither trade marks, nor the law protecting them, are inherently detrimental to the consumer. It is suggested that they could be beneficial to the consumer, if the emphasis were to shift from the advertising to the function of the mark, rendering parallel imports permissible and thereby benefiting the consumer.

1 Cases C-414/99, 415/99, 416/99; [2002] All ER (EC) 55

- 3 -

Introduction

It seems widely accepted that trademarks have three functions2: an origin function, a quality (or guarantee) function and an advertising (or investment) function. What is not clear however is the benefit that each of these respective functions has for the consumer. The concept of the consumer is in itself problematic, as the problems that consumers face in the market are not the same for all consumers.” For those on higher incomes, charging high prices for designer goods may be perceived positively, for those goods allude to a certain exclusivity, which would not be possible, were it not for such high prices. In contrast for those on lower incomes overpaying “…is a matter of vital importance” 3 as it has a far greater impact. As such, when considering the issue of whether trade marks operate to the benefit or detriment of the consumer, it will be the consumer who is on an average income that will be considered.

2 W.R. Cornish ‘Intellectual Property: Patents, Copyrights, Trade Marks and Allied Rights’, (London: Sweet &

Maxwell, 4th edition, 1999) 6123 Cranston ‘Cranston’s Consumers and the Law’, (London: Butterworths, 3rd edition, 2000) 4

- 4 -

Origin

The original function4 of the trade mark was to protect the consumer “from mistake, confusion and deception about the source … of products purchased in the market.”5 The trade mark’s importance to the consumer is its ability to operate as a distinctive sign that indicates where a product originates from thereby allowing the consumer to distinguish the products of a particular firm from those of its competitor. A trade mark may also provide information about the unobservable features of a product as it is “a symbol which the consumer identifies with a specific combination of features.”6

Such product differentiation allows the consumer to make rational choices about their purchases. However there is an argument to suggest that consumers are unable to make such rational choices about the products that they purchase as they do not know all the relevant differences7 between competing products. This is because their product differentiation choices are made, not through information about the product provided in an analytic form (which would provide objectively ‘useful’ information such as a list of ingredients) but on the basis of “noninformation, influential advertising”8. This would appear to be, not an argument about the usefulness of the origin function to the consumer, but about the advertising of trade marked products. The consumer’s inability to make rational choices about the products that they purchase is due to the mythical qualities that trade mark proprietors seek to attach to their trade marks9, and which form the basis of this “noninfomation, influential advertising.” In order that the possibility for the consumer to make a rational product selection can arise, the origin function is essential in allowing product differentiation.

It can thus be seen that the origin function is necessary for the consumer as it guarantees the identity of the origin of the product, enabling the consumer to distinguish the product of one manufacturer from others of a different provenance, however its importance in modern trade mark law is diminishing. This can be observed when considering the assignment and licensing of such marks. Prior to the Trade Mark Act (TMA) 1938 the theory concerning this area of law was that since “the public regarded a trade mark as indicating that the goods bearing the mark emanated from a particular business exclusively, …if the link between the mark and business was

4 Some have suggested that this function was the only basis under which the courts would intervene to protect a trade mark due to the judiciary’s reluctance to intervene in the marketplace - A Firth ‘The Prehistory and Development of Intellectual Property Systems’, (London: Sweet & Maxwell, 1997) 127-1285 Keith Aoki ‘Authors, Inventors and Trademark Owners: Private Intellectual Property and the Public Domain’ , 18Columbia VLA Journal of Law and the Arts 1994 191, 2366 Nicholas S Economides ‘The Economics of Trademarks’ Vol 78 TMR 523, 5267 n 2 above, 6138 Daniel M McClure ‘Trademarks and Unfair Competition: A Critical History of Legal Thought’ Vol 69, TMR 305, 3459 Discussed later when considering the advertising function of the trade mark

- 5 -

broken, it would be contrary to public policy to recognise the continuance of any exclusive right to the mark.”10

This theory has clearly been rejected, as s24(1) TMA 1994 permits the assignment of the whole trade mark or a partial assignment which may be limited to apply to only some of the goods or services for which the mark is registered or in a particular manner or a particular location.

Whilst the assignment of a whole trade mark severs the link between the mark and the business from which the product emanated which earlier public policy considered so vital, there would remain one ultimate producer of the goods, unlike in the case of a partial assignment of a trade mark. Such an assignment is extremely likely to be deceptive, for example as regards the fragmentation of a trade mark between different owners for different parts of the United Kingdom (a partial assignment limited to a particular location), “Customers, after all, are highly mobile and are likely to assume that goods or services bought in one part of the country come from the same source as those bought in another part.”11

Similar issues arise with regards to licences, which may be exclusive, non-exclusive, whole or partial. Most of the problems that arise concerning deceptiveness, do so because “…there is no express guidance in the Act as to what a proprietor can and cannot do by means of a licence.”12 As such the general intention of the Act would appear to be to leave trade mark proprietors to take care of their marks, since it is in their interests to do so, rather than providing for the law or registrar to do it for them.13

As with the partial assignment of trade marks, the partial licensing of them may also be deceptive, for example, as regards the partial licensing by manner of use which “goes against the fundamental nature of a trade mark…[and] would be likely to confuse consumers.”14

Since both licensing and assignment “…contain the potential for public confusion, especially as to trade origin…if it is not consistent”15 section 46(1)(d) TMA 1994 allows the registration of trade mark to be revoked if it is liable to mislead the public. As observed in Scandecor Development AB v Scandecor Marketing AB16 there is no jurisprudence (and in particular no Community17 jurisprudence) on the issue of s46(1)

10 D Kitchin et al ‘Kerly’s Law of Trade Marks and Trade Names’, (London: Sweet & Maxwell, 13th edition, 2001) 12-0411 R Annand et al ‘Blackstone’s Guide to TMA 1994’, (London: Blackstone, 1994) 19212 n 10 above, 12-8213 C Morcom et al ‘The Modern Law of Trade Marks’, (London: Butterworths, 1998) 19514 n 11 above, 19215 ibid, 13316 [2001] UKHL 2,1 [2001] 2 C.M.L.R. 3017 The TMA 1994 implemented the Trade Mark Directive (Directive 89/104).

- 6 -

(d)18, i.e. what would be considered misleading to the public, therefore this question has been referred to the European Court of Justice (ECJ) and awaits resolution. Due to this lack of case law on this section of the Act it is difficult to assess its impact, although one might speculate that the lack itself demonstrates its ineffectiveness.Some of the comments made in this case would appear to suggest however that partial licences are inherently deceptive, since the purpose of the trade mark is to convey “that goods bearing the mark come from one business source…[and are] the goods of one undertaking.”19 However in the case of a partial licence this is clearly untrue as the goods may be manufactured by two different and unconnected producers.

The possibility of mergers would appear less likely to deceive the consumer since the product purchased would seem to remain connected to the original purchaser who has merely become connected with another corporate entity. However there may be many repercussions of such a merger. Production, for example, may shift from one country to another or the ethics of the company may change. The latter may be of importance for ‘ethical’ consumers who wish to avoid purchasing goods from a particular company due to concerns about its conduct.20 Yet if two companies have merged in order to continue their protest at the conduct of the organisation, such consumers will wish to boycott the goods of both companies.21

In addition to the possibility of assignment and licensing, another phenomenon that has arisen is that of manufacturers transferring production from the United Kingdom to developing countries. This is due to the low wages that are paid to the workforce in such countries. The latest company22 to relocate is Dyson23 whose current wage costs in the are £9 per hour. In transferring production to Malaysia the company will save, per worker, £6 per hour.24

These companies evoke an image of British-made goods because their trade marks were established when the manufacturers were based in Britain. However this image is now misleading as the goods no longer originate from this location, thus rendering the trade mark deceptive to the consumer, who may be unaware of the transfer.

18 The corresponding provision of the TM Directive is Article 12(2)(b)19 n 4 above, 66220 For example, the National Union of Students (NUS) decided to boycott Nestle products over concerns about the company’s conduct in the developing world21 In the above example, the merger of Nestle and Rowntree resulted in NUS also boycotting Rowntree products.22 Marks and Spencer and Hornby have also (relatively) recently transferred the majority of their production to North Africa and Eastern Europe, and China respectively. (BBC News – UK Manufacturers Lured Overseas, 08 February 2002)23 Announced on Dyson’s website (http://www.dyson.com/news/article.asp?mode=Back&id=105) on 05/02/200224 Wage costs for an equivalent worker in Malaysia are just £3 per hour. (BBC News – Dyson to Move to Far East, 05 February 2002)

- 7 -

Some consumers may, for example, have ethical reasons for wishing not to purchase goods from certain countries25 and may choose those goods which have established the label of ‘made in Britain’. In doing so, they are relying on the trade mark to enlighten them of the country of origin of the product, and this may be deceptive.

25 For example, the anti-apartheid movement relied heavily on this tactic.

- 8 -

Quality

Trade marks also indicate the quality of a product; this function becomes apparent when considering the purchase of goods infrequently bought. The consumer may have little or no experience of a particular product, e.g. a washing machine, but may have purchased many other electronic products and thus is “likely to have previous experience in the consumption of goods with the same trade name.26

If his experience of a particular brand (or trade) name has been favourable then he will trust this and may purchase the item on this basis alone. It is argued by some that such customer loyalty to a name “create[s] incentives for firms to produce products of desirable qualities even when these are not observable before purchase.”27 The problem with the quality function of the trademark however is that “although trademarks help consumers identify higher quality brands, trademarks also permit brands of equivalent quality to be differentiated based purely on superior advertising techniques.”28 This may result in new brands of equal or higher quality being unable to compete in the market due to the strength of an established brand with a recognised trademark, thus consumers may end up paying more for a well known but lower quality product.

It is often also suggested that trade marks indicate the quality of a product, however this is also a falsehood, a trade mark does not indicate whether an item is of higher quality than another but ensures consistency – that the goods will always be of the same quality and have the same attributes.29 There are also other and more effective methods of disclosing quality information than through the use of trade marks, such as compositional labelling30 or though quality marks, such as the Kitemark symbol, which certify that the product complies with a certain standard, in this case the BSI standard, and which are probably better indications of quality of a product than a trade mark.

In addition to there being other (and arguably better) methods of providing quality information to the consumer, it may be argued that this function is redundant as consumer protection law protects the consumer against a variety of matters from unsafe products to qualitatively deficient goods and services31 thereby guaranteeing certain minimum standards for products to attain.

26 Nicholas S Economides ‘The Economics of Trademarks’ Vol 78 TMR 523, 53127 ibid, 52628 Daniel M McClure ‘Trademarks and Unfair Competition: A Critical History of Legal Thought’ Vol 69 TMR 305, 35129 P Groves, ‘Intellectual Property with Competition Law and Practice’ (London: Cavendish, 1994) 6030 Cranston, ‘Cranston’s Consumers and the Law’, (London: Butterworths, 3rd edition, 2000) 34631 The range of laws in this area can be seen in many textbooks, for example, Brian Harvey, ‘The Law of Consumer Protection and Fair Trading’ (London: Butterworths, 6th edition, 2000)

- 9 -

The quality function of the trade mark is further compromised when one considers that it would be “possible for the public to be taught that a box bearing a particular mark and get-up contains 500 grams of chocolates and then, by discreet expansion of the packaging to reduce that amount to 475 grams.”32 In order to counteract such deception, if a manufacturer were proved to have misled the public then they may be penalised through criminal laws, such as the Trade Descriptions Act 1968. This Act, some have suggested, may cover markings on anything in which goods are supplied, e.g. packaging, however the only case cited as evidence of this concerned beauty products supplied in jars 30 percent larger in volume that their contents (which were correctly described).33 This case would seem quite exceptional due to the substantial difference between packaging and product, and it would appear that this was the decisive factor in reaching this verdict; such a substantial difference is unlikely to occur where a manufacturer surreptitiously alters the quantity of the product as a marked difference would be noticeable by the consumer, therefore this legislation is unlikely to be of much help where the consumer is misled by a trade mark. As noted by one commentator, if it were considered sufficiently important that the consumer was not deceived by a trade mark’s use powers included in consumer protection laws concerning this could be included in trade mark statutes.34

32 n4 above, 61433 R Lowe et al ‘Consumer Law and Practice’ , (London: Sweet & Maxwell, 5th edition, 1999) 22934 n 4 above, 614

- 10 -

Advertising

The high investment relative to other areas of IPR driven investment35 shows that producers view the advertising function of trademarks as fundamental. This level of investment occurs because advertising is capable of changing the perceived image of the product being sold. The process under which these symbolic attributes from the advertising of a mark become fused with the objective attributes of the product may explain why consumers will frequently purchase one product over another notwithstanding the fact that this may be indistinguishable from a less expensive rival36.

Some commentators have noted that increasingly it seems that either those mythical qualities attached to the trademark or “the trademark itself is the product [that is] being sold”37. In particular this seems to be true of ‘designer goods’ where the market value is not inherent in the goods themselves, “but resides precariously in the public's perception of the goods as expressing a degree of desirability”38. Here it is in the interest of manufacturers of these items to limit their availability in order to ensure their exclusivity. Invariably this is achieved through charging unjustifiably high prices, thereby limiting the number of people who can afford the product, and through the use of a selective distribution system, which ensures the price remains inflated as there is little or no intra-brand competition. It is this selective distribution system that is challenged by parallel imports - “goods that having been sold on one market by a manufacturer, are then shipped to another by a distributor.” 39 Such goods are not counterfeit, but genuine products made by an authentic manufacturer.

The advertising function, may in this way be seen to be to the detriment of the consumer. The trade mark proprietor’s objective is to increase the value of their trade mark, thus inflating the price of the goods to the consumer. The manner in which they achieve this increase in value is not by improving the product or service, which would also benefit the consumer, but by attaching mythical qualities to their product. Consequently this results in difficulties for new or smaller brands, who are unable to compete with such advertising, and whose products therefore do not possess these mythical qualities. The goods produced may be of equivalent or higher quality,

35 NERA Study: The Economic Consequences of the Choice of Regime of Exhaustion in the Area of Trade Marks, 8 February 1999, Table 6.4: Relative Importance of IPR Driven Investment – See Appendix 136 Thomas D Drescher ‘The Transformation and Evolution of Trademarks – from Signals to Symbols to Myth’ Vol 82 TMR 301, 32937 Keith Aoki ‘Authors, Inventors and Trademark Owners: Private Intellectual Property and the Public Domain’ 18 Columbia VLA Journal of Law and the Arts 1994 191, 24038 Thomas Hays ‘Anticompetitive Agreements and Extra-Market Parallel Importation’ E.L. Rev 2001, 26(5) 468, 47239 BEUC’s (The European Consumer’s Organisation) Statement on the Exhaustion Principle in the Field of Trade Marks Submitted for the Study of the EC, DGXV Undertaken by the IFF and NERA, London. 11/1/1999 (BEUC/X/009/2000)

- 11 -

however because they cannot compete with such advertising they are likely to be ignored by consumers. A repercussion of this is that there is little competition, which ensures prices remain artificially high, thereby having a detrimental effect on the consumer.

Yet it appears to be this function upon which there has been the most emphasis in the case law of recent years. For example, the Advocate General40 has expressed the opinion that the trade mark represents an image and reputation for its business in the marketplace and it has been suggested that therefore the law protects the proprietor's right to exploit its expenditure on the trade mark.41 Further she also considered that damage to the essential function of the trade mark would be damage to the value, allure or image of the trade mark”42 which might suggest that she considered the advertising function to be the essential function, as damage to the mark’s value, allure or image would not have any adverse impact upon its origin nor quality functions.

The importance of the advertising function may be seen to have arisen concurrently with the emerging view of the courts that the essential purpose of a trade mark is no longer to protect the consumer from confusion but the “protection of property rights in divers economically valuable sales devices.”43

The emergence of assignment and licensing of trade marks in the TMA 1994 is also indicative of a shift from trade marks being perceived as consumer protection devices to property rights which are capable of wealth generation for the trade mark proprietors. Their value as such is apparent when one considers that in 1986 the Coca-Cola trade mark was valued at around $7 billion.44

As can be seen from the preceding discussion, it is apparent that whilst previously the courts 45 and even the European Commission have expressed the opinion that the origin function is the essential function of the trade mark46, protection of the mark granted by modern law of trademarks has very little to do with origin and far more to do with advertising.

40 In Cases C-414/99, 415/99, 416/99 Zino Davidoff SA v A & G Imports, Levi Strauss & Co v Tesco plc, Levi Strauss & Co v Costco Wholesale UK Ltd [2002] All ER (EC) 5541 Praveen Jeetun ‘Parallel Victories’ Ent L.R. 2001, 12(7) 210, 21342 Sahira Khwaja ‘United Kingdom: Advocate General Gives Opinion of Exhaustion of Rights’ Mondaq 6/6/2001(http://www.mondaq.com)43 F Cohen, ‘Transcendental Nonsense and the Functional Approach’ (1935) Columbia Law Review, 809 at 83144 Thomas D Drescher ‘The Transformation and Evolution of Trademarks – from Signals to Symbols to Myth’, Vol 82 TMR 301, 30145 Bristol Meyers Squibb v Paranova [1996] ECR-I 345746 Memorandum on the Creation of an EEC Trade Mark – Bulletin of the European Communities, Supplement 8/76 in stating that “both economically and legally the function of the trade mark as an indication of origin is paramount,” cited in C Morcom et al ‘The Modern Law of Trade Marks’, (London: Butterworths, 1998) 7

- 12 -

It is suggested that if the purpose of the function of the trade mark was to designate the origin of a product, this “would have emphatically introduced the international exhaustion principle once more into EEA law.”47 This will be considered further when examining the area of parallel imports, however it is pertinent to note that the importance of the advertising function would be limited by recognition of parallel importers’ interests since it would provide a basis for estopping the trade mark proprietors for exercising their right to control distribution. As present, as will be subsequently demonstrated, the trade mark proprietor can effectively control the distribution of trade marked goods because some distribution (i.e. parallel imports) would, they argue, damage the value of their trade mark: thus this is an instance of the courts protecting the mark’s advertising function. If parallel importers’ interests were recognised, the trade mark proprietor’s ability to effect the distribution rights would be restricted, thereby reducing the importance of the trade mark’s advertising function. Implicit in this would be a reassertion of the value of the origin function, a move that would benefit the consumer.

47 Praveen Jeetun ‘Parallel Victories’ Ent L.R. 2001,12(7) 210, 216

- 13 -

Parallel Imports

The area of parallel imports48 is of importance in this discussion of trademarks since it illustrates how the emphasis upon protection of the advertising function of the trademark operates to the detriment of the consumer.

There is some discrepancy within the current law on this subject. Some within the English judiciary, for example Laddie J in his decision in Glaxo Group Ltd v. Dowelhurst Ltd49, have suggested that English trade mark law only recognises (and ought only to recognise) the origin and quality functions. According to this judgement, where national law allows the trade mark proprietor to prevent the trade mark's message being passed on, the law goes beyond the function of the mark50. However this has not been the approach by the ECJ.The decision in the conjoined cases of Zino Davidoff SA v A & G Imports, Levi Strauss &Co v Tesco plc, Levi Strauss & Co v Costco Wholesale UK Ltd51 (herein cited as Zino Davidoff) appears to have restricted the possibility of (legal) parallel imports. This case concerned the interpretation of the word “consent” following the judgement in the earlier case of Silhouette International Schmied GmbH & Co v Hartlauer Handelsgesellschaft mbH52. There the court had ruled that a trade mark owner could prevent the importation of goods into the European Economic Area (EEA) if he had not consented to the imports. The parallel importers in Zino Davidoff (and in general in the UK) had relied upon the English law doctrine of “implied consent” to demonstrate that the trade mark owner had consented to the imports and would therefore not be able to use trade mark rights to prevent retailers from importing such goods.

The ECJ however rejected this argument, and whilst not expressly excluding the possibility of implied consent “…it is very difficult to envisage circumstances which demonstrate unequivocally that the brand owner has impliedly consented to the parallel importation.”53 Therefore in order for parallel imports to be legally imported it would appear likely that the express consent of the trade mark owner will be required.

48 There is some objection to the alternative name given to such imports – that of grey imports – this term will not be used in the preceding discussion, due to the connotations that may be attached to it (i.e. that the goods are somehow not of the same quality, or that their origin is somewhat dubious). “These expressions are often invoked by those who seek to secure monopoly rights to corporations which are engaged in the commercial exploitation of information and knowledge, notably the large publishers and information providers.”[33]

49 [2000] 2 CMLR 57150 Naomi Gross. ‘Trade Mark Exhaustion: The U.K. Perspective’ E.I.P.R 2001, 23(5) 224, 23051 Cases C-414/99, 415/99, 416/99; [2002] All ER (EC) 5552 [1999] 3 CMLR 26753 Herbert Smith ‘ECJ Decision in Zino Davidoff/Levi Strauss: The Final Chapter in

the Parallel Importation Saga?’ Mondaq 20/11/2001 (http://www.mondaq.com)

- 14 -

Whilst this may appear reasonable in theory, in practice It is unlikely that they will consent as they believe parallel imports to be harmful to their business.

Arguments that parallel imports are of detriment to consumers, unsurprisingly, emanate from the brand owners and international producers, who argue that “a regime of international exhaustion could lead to a reduction in quality and after-sale service, difficulty in enforcing common technical or safety standards within the EU and, of course, lower returns for trade mark owners which would, they argue, ultimately lead to reduced quality and choice for the consumer.54

Whilst it is true that if parallel imports were widely permissible the manufacturers would have less control over the surroundings in which their products were sold. This, for Levi’s, superficially seems to have been the motivation for their action against Tesco with President of Levi Strauss Europe, Middle East and Africa, Joe Middleton proclaiming triumphantly “We have always maintain that we have the right to decide the way in which we distribute our products to best serve our customers, and the court has confirmed that right.”55

The manufacturers may argue that the consumer does not receive the same ‘shopping experience’ from purchasing, for example Levi jeans from a Tesco supermarket. If this ‘experience’ had inherent value for the consumer (and was in their best interests), then in allowing them the choice between official authorised retailers and those which are unauthorised, such as the supermarkets, the consumer would choose the former. Parallel imports would not have any effect on the ‘authorised’ stockist, other than possibly reducing the volume of sales; one does not have to operate to the exclusion of the other. However, if for most consumers, as it is suggested is the case, the central issue is one of cost and not the ‘shopping experience’, then they will continue to purchase the goods from the ‘unauthorised’ suppliers and the consumer would suffer no detriment whatsoever from the (re)introduction of legal parallel imports.

If parallel imports were permitted, it would be unlikely that there would be any reduction in the quality of the products, as by definition parallel imports are genuine, not counterfeit goods, which originate from an authentic manufacturer. The only way in which quality of the products could be affected is if the items produced differed in quality according to the country in which they were supposed to be sold. It is possible

54 Naomi Gross. ‘Trade Mark Exhaustion: The U.K. Perspective’ E.I.P.R 2001, 23(5) 224, 22455Levi Strauss website: News http://www.levistrauss.com/news/pressrelease.asp?r=3&c=0&cat=0&pr=507&area=Europe%2C+Middle+East%2C+Africa

- 15 -

though to introduce a concept of international exhaustion56 which would permit only parallel imports of the same quality as products available in the domestic market57.

The concerns expressed regarding the difficulty in enforcing common technical or safety standards can be dismissed in a similar manner to those regarding quality. In addition, within the European Community, there are stringent laws governing product safety, which these imports would have to adhere to.

Despite the concerns of the manufacturers that quality and safety would be affected by rendering parallel imports permissible, for the consumer “the popularity of grey marketing has never been greater”58. This is unsurprising when comparing the costs of goods in the EU with those of the US, where, for example, men’s clothing costs just 65% of that in the EU59. Consumers would seem to benefit from lower prices and greater accessibility to brand name goods through parallel imports, since this “increases competition, ensures good product choices and results in competitive prices.”60

The Association of European Consumers supports the introduction of a concept of international exhaustion, as it believes that parallel imports are “an important way to ensure that companies do not charge too much for products in certain countries.”61

Some have suggested that “cheap parallel imports damage the brand in which manufacturers substantially invested.”62 This investment, as revealed by the NERA Study, is unlikely to be in the research and development of a product, but more likely to be in the advertising of the product.

Consumers benefit from lower prices and greater accessibility to brand name goods through parallel imports as manufacturers are forced to become more efficient and competitive. It seems perverse that the trade mark proprietor or manufacturer who on the one hand may actively pursue and benefit from the sale of their goods offshore may on the other later try to prevent those same goods from being sold on the domestic market by shielding behind the protectionist rhetoric of trade marks, in particular the European Court’s fondness for their protection. This seems to be contrary to the spirit of global trading, open competition, free market forces which

56 Exhaustion occurs when a trade mark owner places a product on a defined market. The manufacturer then loses the ability to restrict the movement of any trade in that product within a defined area. International (or global) exhaustion – manufacturer loses control over resale anywhere in the world once the product has been placed on a market anywhere in the world.57 This will be examined when considering how trade marks could exist to benefit the consumer.58 Gavin Murphy ‘Who’s Wearing the Sunglasses Now?’ ECLR 2000, 21(1) 1, 259 NERA Study: The Economic Consequences of the Choice of Regime of Exhaustion in the Area of Trademarks, 8 February 1999, page 117. Full table in Appendix 260 n 58 above, 161 Association of European Consumers’ website: http://www.consumer-aec.org62 Silvia Zarpellon ‘The Scope of the Exhaustion Regime for Trade Mark Rights’ ECLR 2001, 22(9) 382, 384

- 16 -

underlie the objective of the Single Market. As such Mario Monti, the new DG IV Commissioner for competition, is on record supporting a change in the current E.C. law on grey marketing. 63

Moreover, the argument concerning a reduction in prices if parallel imports were permitted is not mere theory. The BEUC64 (The European Consumer’s Organisation) has categorically stated that it has factual evidence that proves that in those countries where there was previously a principle of international exhaustion, of which the UK was one, since the Trade Mark Directive was adopted, and this principle abandoned, the prices of trade marked goods have increased considerably.65 Thus it is clear that the demise of parallel importation, which has occurred as a direct result of the shifting emphasis of trade mark law from a mark’s origin function to its advertising function, has had a detrimental effect upon the Consumer.

63 Gavin Murphy ‘Who’s Wearing the Sunglasses Now?’ ECLR 2000, 21(1), 564 Bureau Europeén des Unions de Consommateurs65 Trade Marks – The Principle of Exhaustion – A BEUC Position – 23/02/2001 (BEUC/X/142/2000)

- 17 -

Conclusion: How Trade Marks Could Operate to the Benefit of the Consumer

The trade mark is not inherently detrimental for consumers, this depends upon the emphasis placed upon its respective functions; it is the current emphasis upon its advertising function that is however causing detriment to the consumer. Therefore some66 have argued that, were the emphasis placed upon the proper function of the trade mark: its origin function67, under which the consumer’s interests are said to be inherently recognised68, trade mark law could actually benefit the consumer.

This benefit is apparent when one considers that if the origin function supplanted the advertising function as that which the courts sought to protect, then parallel imports, which are goods which legitimately bear the mark of the trade mark proprietor and as such do not deceive the consumer as to their origin, would, in certain circumstances, be permitted. The trade mark proprietor's monopoly would not therefore be justified to the extent that it allows him to prevent further dealings in such goods as it currently does following the Silhouette and Zino Davidoff judgements in the ECJ.

Some have expressed concern that the price reductions obtained through parallel imports “are often possible because the goods are sold at difference prices outside the EEA, perhaps because of currency fluctuations, to get rid of out of date stock or because they are of a different (perhaps inferior) quality.”69

This latter suggestion, that goods may be of lesser quality, would also deceive the consumer as to the quality of the goods thus providing an argument against permitting parallel imports. However, it would be possible to permit parallel imports only where there is no difference in the quality of the imported goods with those marketed by the trade mark proprietor within the EEA, a position which was adopted by the English courts under the TMA 1938.

Two contrasting cases illustrate best how this principle worked in practice. In Revlon v Cripps & Lee70 imports of ‘Flex’ shampoo from the US into the UK were found not to infringe the trade mark, as the goods were of the same quality. In Colgate v Markwell Finance71 the product, Colgate toothpaste, was imported from Brazil and was, in comparison to that sold in the UK, inferior. It was held that the importers had infringed the trade mark, the judgement thereby effectively prohibiting the imports. In

66 For example Professor Cornish, Laddie J67 Christopher Stothers ‘International Exhaustion of Trade Marks and Consent in the EEA’ EIPR 2001, 23(7) 344, 34768 Praveen Jeetun ‘Parallel Victories’ Ent L.R. 2001, 12(7) 210, 21369 J Davis ‘Intellectual Property Law’, (London: Butterworths, 2001) 26270 [1980] FSR 85, CA 71 [1989] RPC 497, CA

- 18 -

both cases the UK courts seem to have adopted a concept of international exhaustion, so long as the consumer was not misled

There is a persuasive argument that where parallel imported goods have all of the characteristics and features that the consumer expects (such the trade mark is performing its "badge of origin" function), it is not only illogical but contrary to the very nature of the trade mark right to allow the brand owner to use that right to prevent importation of those good.

Where there is no difference in the quality of the imported goods with those marketed by the trade mark proprietor within the Community, there is no justifiable reason according to these functions of a trade mark to allow the proprietor to interfere with distribution within the Community72.

In addition to rendering the trade mark beneficial for the consumer, reasserting the primary function of such a mark as that of the origin function would seem to be more in accordance with the fundamental principles of European law concerning the free movement of goods and competition law. As Annette Kur suggests if the origin and quality functions were considered to be the primary functions of trade mark law, then once a court has enquired as to whether these functions are kept intact and found the affirmative to be the case and “there should be no legal basis for granting an exemption from the principle of free movement of goods.” 73

It is suggested that with regards to the debate concerning the parallel importation of goods, the decision of the Commission to maintain Community-wide exhaustion implies the political choice of ensuring that trade mark owners get a return on their investments in development, quality and brand image of their products and protecting the industry against competition from other countries where prices are or may be lower. The debate has become a question of economics and politics, and, as was pointed out during the European parliamentary process, there is strong lobbying in particular from the manufacturers and trade mark proprietors who have far greater resources than consumer organisations such as the BEUC or the AEC.74

In conclusion it may be seen that trade marks are not inherently detrimental to the consumer; they may be of great utility. However the legislature (both within the United Kingdom and Europe) have bowed to the pressure from trade mark proprietors 72 Praveen Jeetun ‘Parallel Victories’ Ent L.R. 2001, 12(7) 210 , 21373 Annette Kur ‘Glaxo et al v Dowelhurst – Time for the ECJ to Change its Attitude Towards Repackaging’ IPQ 2000, 3 301, 30274 Christopher Stothers ‘International Exhaustion of Trade Marks and Consent in the EEA’ EIPR 2001, 23(7) 344, 347

- 19 -

to continue to emphasis only one function of such a mark: the advertising function. It is this that harms the consumer.

Whilst it may be right that some protection is granted to manufacturers due to their investment in research and development of products, thereby justifying the need for trade marks and the laws protecting them, the question that must be addressed by the legislature is why this should be at the expense of the consumer’s interests.

- 20 -

Bibliography

Books:

R Annand, H Norman ‘Blackstone’s Guide to the Trade Marks Act 1994’ (London: Blackstone, 1994)

W.R. Cornish ‘Intellectual Property: Patents, Copyrights, Trade Marks and AlliedRights’ (London: Sweet & Maxwell, 4th edition, 1999)

Ross Cranston‘Cranston’s Consumers and the Law’ (London: Butterworths, 3rd edition, 2000)

J Davies ‘Intellectual Property Law’ (London: Butterworths, 2000)

A Firth ‘The Prehistory and Development of Intellectual Property Systems’(London: Sweet and Maxwell, 1997)

P Groves ‘Intellectual Property with Competition Law and Practice’(London: Cavendish, 1994)

T Hart, L Fazzani ‘Intellectual Property Law’ (Basingstoke: Palgrave Law Masters, 2nd edition, 2000)

Brian Harvey ‘The Law of Consumer Protection and Fair Trading’ (London:Butterworths, 6thedition, 2000)

D Kitchin, D Llewelyn, J Mellor, R Meade, T Moody-Stuart ‘Kerly’s Law of Trade Marks and Trade Names’ (London: Sweet & Maxwell, 13th edition, 2001)

Robert Lowe, Geoffrey Woodroffe ‘Consumer Law and Practice’ (London: Sweet &Maxwell, 5th edition, 1999)

C Morcom, A Roughton, J Graham ‘The Modern Law of Trade Marks’ (London: Butterworths, 1997)

D Vaver ‘Intellectual Property Law: Copyright, Patents, Trade Marks’(Concord: Irvin Law, 1997)

Articles:

- 21 -

Keith Aoki ‘Authors, Inventors and Trademark Owners: Private Intellectual Property and the Public Domain’ 18 Columbia VLA Journal of Law and the Arts 1994

191

F Cohen ‘Transcendental Nonsense and the Functional Approach’ (1935)Columbia Law Review 809

Thomas D Drescher ‘The Transformation and Evolution of Trademarks – from Signals to Symbols to Myth’ Vol 82 TMR, 301

Nicholas Economides ‘The Economics of Trademarks’ Vol 78 TMR, 523

Naomi Gross ‘Trade Mark Exhaustion: The U.K. Perspective’ EIPR 2001 23(5), 224

Thomas Hays ‘Anticompetitive Agreements and Extra-Market Parallel Importation’EL Rev 2001, 26(5), 468

Herbert Smith ‘ECJ Decision in Zino Davidoff/Levi Strauss: The Final Chapter in theParallel Importation Saga?’ Mondaq, 20 November 2001 (http://www.mondaq.com)

Praveen Jeetun ‘Parallel Victories’ Ent LR 2001 12(7), 210

Sahira Khwaja ‘United Kingdom: Advocate General Gives Opinion on Exhaustion ofRights’ Mondaq, 6 June 2001 (http://www.mondaq.com)

Annette Kur ‘Glaxo et al. v Dowelhurst – Time for the ECJ to Change its AttitudeTowards Repackaging?’ IPQ 2000,3, 301

Daniel M McClure ‘Trademarks and Unfair Competition: A Critical History of LegalThought’ Vol 69, TMR, 305

Gavin Murphy ‘Who’s Wearing the Sunglasses Now’ ECLR 2000 21(1), 1

Christopher Stothers ‘International Exhaustion of Trade Marks and Consent in the EEA’EIPR 2001, 23(7), 344

Silvia Zarpellon ‘The Scope of the Exhaustion Regime for Trade Mark Rights’ ECLR 2001,

22(9), 382

- 22 -

- 23 -

Internet Resources:

NERA Study: The Economic Consequences of the Choice of Regime of Exhaustion in the Area of Trade Marks, 8 February 1999(Available online at: http://www.nera.com/_template.cfm?c=6167&o=3846)

BEUC: Trade Marks – The Principle of Exhaustion – A BEUC Position, 23/02/2001 (BEUC/X/142/2000)BEUC’s Statement on the Exhaustion Principle in the Field of Trade Marks Submitted for the Study of the EC, DGXV, Undertaken by the IFF and NERA, London, 11/01/1999(BEUC/X/009/2000)(Both available from the BEUC – online address: http://www.beuc.org/public/xfiles2000/x2000/contentxfiles2002.htm )

BBC News – ‘Dyson to Move to Far East’ 05/02/2002http://news.bbc.co.uk/hi/english/business/newsid_1801000/1801909.stm(Accessed: 20 February 2002)

BBC News – ‘UK Manufacturers Lured Overseas’ 08/02/2002http://news.bbc.co.uk/hi/english/business/newsid_1806000/1806463.stm(Accessed: 20 February 2002)

Dyson – News:Dyson Announcementhttp://www.dyson.com/news/article.asp?mode=Back&id=los(Accessed: 19 February 2002)

Levi Strausshttp://www.levistrauss.com/news/article.asp?r=3&c=0&cat=0&pr=507&area=Europe%2C+Middle+East%2C+Africa(Accessed: 5 February 2002)

Association of European Consumers (AEC)http://www.consumer-aec.org(Accessed: 31January 2002)

- 24 -

Cases:

C-414/99, 415/99, 416/99 Zino Davidoff SA v A & G Imports, Levi Strauss & Co v Tesco plc, Levi Strauss & Co v Costco Wholesale UK Ltd [2002] All ER (EC) 55

Scandecor Development AB v Scandecor Marketing AB [2001] UKHL 2

Bristol Meyers Squibb v Paranova [1996] ECR-I 3457

Glaxo Group Ltd v Dowelhurst Ltd [2000] 2 CMLR 571

Silhouette International Schmied GmbH & Co v Hartlauer Handelsgesellschaft mbH [1999] 3 CMLR 267

Revlon v Cripps & Lee [1980] FSR 85, CA

Colgate v Markwell Finance [1989] RPC 497, CA

Statutes:

Trade Mark Act 1938

Trade Mark Directive (Directive 89/104)

Trade Descriptions Act 1968

- 25 -

APPENDICES

- 26 -

Appendix 1

Relative Importance of IPR Driven Investment

Sector Branding / Advertising

Product development and design

Research and development

Footwear and Leather goods

High Intermediate/high Low

Musical Recordings Intermediate High LowMotorcars High High IntermediateConsumer Electronics

High High Intermediate/high

Domestic Appliances High Intermediate/high LowCosmetics and perfumes

Very high High Intermediate/high

Clothing High Intermediate LowSoft drinks High Low LowConfectionery High Intermediate LowAlcoholic drinks High Low/intermediate Low

Table 6.4 National Economic Research Associates (NERA) Study: The Economic Consequences of the Choice of Regime of Exhaustion in the Area of Trademarks 8th February 1999, page

112

- 27 -

Appendix 2

Dollar price relatives (retail prices including tax)

Ratio US:EUMen’s footwear 0.57Ladies’ footwear 0.59Children’s footwear 0.64Records, tapes, cassettes 0.74Motor cars 0.72Tyres, tubes, parts 0.67Radio sets 0.82TVs, VCRs 0.52Record players, etc 0.59Refrigerators 0.80Washing machines 1.02Cookers 0.48Heaters and air cond 0.37Vacuum cleaners 0.55Toiletries 1.05Men’s clothing 0.65Ladies’ clothing 0.59Children’s clothing 0.55Mineral water 0.59Other soft drinks 0.61Chocolate preparations 0.73 Confectionery 0.61Spirits and liqueurs 0.62Wine 1.25Beer 1.04Other 0.82

Table 6.8 NERA Study: The Economic Consequences of the Choice of Regime of Exhaustion in the Area of Trademarks 8th February 1999, page 117

- 28 -