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UPON HEARING Counsel for the Plaintiff and for the Defendant.

AND UPON READING the documents recorded on the Court file as having been read.

AND HAVING REGARD to the extent to which the outcome of this action depends upon the proper interpretation of Council Directive 89/104/EEC of 21 December 1988

AND UPON the Court considering it to be a proper exercise of its discretion pursuant to Article 234(2) of the Treaty Establishing the European Community to request a preliminary ruling from the Court of Justice of the European Communities on the questions of Community law which are likely to be determinative of this action or major issues therein

IT IS ORDERED pursuant to Order 114 of the Rules of the Supreme Court (as continued by Part 50 and Schedule 1 of the Civil Procedure Rules) that the materials set out in the Schedule hereto including the questions contained therein concerning the interpretation of Council Directive 89/104 EEC of 21 December 1988 be referred to the Court of Justice of the European Communities for a preliminary ruling in accordance with Article 234 of the Treaty Establishing the European Community.

AND IT IS ORDERED pursuant to Order 114 rule 5 of the Rules of the Supreme Court (as continued by Part 50 and Schedule 1 to the Civil Procedure Rules) that the Senior Master shall forthwith transmit to the Registrar of the Court of Justice of the European Communities a copy of this Order and the Schedule hereto without waiting for the time for appealing from this Order to expire.

AND IT IS ORDERED that as soon as reasonably practicable after they have lodged their written observations with the Registrar of the Court of Justice of the European Communities pursuant to Article 20 of the Protocol on the Statute of the Court of Justice of the European Communities the parties to this action shall exchange copies of the written observations they have lodged.

AND IT IS ORDERED that all further proceedings in this action be stayed until after the Court of Justice of the European Communities has given its preliminary ruling upon the questions set out in the Schedule hereto or further order in the meantime

AND the question of how and by whom the costs of the reference to the Court of Justice of the European Communities are to be borne and paid is reserved.

1. The Plaintiff, Zino Davidoff SA, is the proprietor of two trade marks, "COOL WATER" and "DAVIDOFF COOL WATER", registered in the United Kingdom in respect of and used on a broad class of toiletries and cosmetics. Products made by or on its behalf and, with its consent, bearing those marks are sold by the Plaintiff or on its behalf both within and outside the EEA.

2. The products, their packaging and marking are identical wherever in the world they are sold.

3. The Plaintiff's products also bear batch code numbers. Such marking is designed to comply with the provisions of the European Cosmetics Directive 76/768/EEC which is implemented in the UK by the Cosmetic Products (Safety) Regulations 1996, SI 2925/1996. It has not been determined whether the batch code numbers extend beyond what is necessary to meet the requirements of the Directive and Regulations.

4. The Defendant, A & G Imports Limited, has acquired stocks of the Plaintiff's products which were originally placed upon the market in Singapore by the Plaintiff or with its consent. The products in question were manufactured in the EEA.

5. The Defendant has imported that stock into England and has commenced selling it here. It is indistinguishable from the Plaintiff's products put on the market within England (or other members of the EEA) by or with the consent of the Plaintiff itself save that the Defendant or someone else within the chain of distribution of the goods has removed or obliterated, in whole or in part, the batch code numbers.

6. In 1998, the Plaintiff commenced proceedings before the High Court in England against the Defendant asserting, amongst other things, that the importation into England and sale here of the Singapore goods constituted an infringement of the Plaintiff's registered trade marks.

7. The Defendant argued that the importation and sale was, or should be treated as, consented to by the Plaintiff by reason of the manner in which the goods had been placed on the market by or with the consent of the Plaintiff in Singapore. It thereby purported to rely on the provisions relating to consent in Article 7(1) of Council Directive 89/104/EEC of 21 December 1988 and Article 5(1) thereof.

8. In addition to denying that it had or could be treated as having consented to the activities of the Defendant, the Plaintiff replied that it had legitimate reasons within the meaning of Article 7(2) of Council Directive 89/104/EEC of 21 December 1988 to oppose such importation and sale of its goods. Those reasons consisted of the removal or obliteration (in whole or in part) of the batch code numbers.

9. Because the Plaintiff believed that its claim of registered trade mark infringement was very strong and that the Defendant's defence was unarguable, it applied to the High Court for summary judgment. Under English procedural law, summary judgment is only available to a plaintiff if the court is of the view that it is almost certain to succeed in the proceedings so that it is not necessary to have a full trial. If the court is of the view that the defendant has a credible or arguable defence, it must not give summary judgment. In such a case, the parties must take their dispute to a full trial.

10. On 18 May 1999 the High Court in England held that the Defendant had a credible and arguable defence. Accordingly it refused to grant summary judgment. A copy of the Court's decision is annexed hereto. It sets out in greater detail the relevant facts and the arguments advanced by the parties.

11. Although the High Court felt itself able to dismiss the application for summary judgment, it was of the view that the action raised fundamental questions, particularly as to the scope and effect of Article 7(1) and (2) of Council Directive 89/104/EEC of 21 December 1988, which would need to be resolved before it was possible to determine the issues between the parties at the full trial. Those questions concern the extent to which the proprietor can use his national registered trade mark rights to prevent the importation and sale of his own goods marked by him or with his consent into the EEA.

12. In the circumstances the High Court invites the Court of Justice of the European Communities to give its preliminary ruling upon the questions set out below.

  (b) The Questions:

(A) Insofar as the Directive refers to goods being put on the market in the Community with the consent of the proprietor of a mark, is it to be interpreted as including consent given expressly or implicitly and directly or indirectly.

(B) Where;

then, if restrictions effective according to that law to limit the third party's rights to market the goods have not been imposed, is the Directive to be interpreted so as to treat the proprietor as having consented to the right of the third party acquired thereby to market the goods in the Community.

(C) If the answer to question (B) is in the affirmative, is it for the national courts to determine whether, in all the circumstances, effective restrictions were imposed on the third party.

(D) Is Article 7(2) of the Directive to be interpreted in such a way that legitimate reasons for the proprietor to oppose further commercialisation of his goods include any actions by a third party which affect to a substantial extent the value, allure or image of the trade mark or the goods to which it is applied.

(E) Is Article 7(2) of the Directive to be interpreted in such a way that legitimate reasons for the proprietor to oppose further commercialisation of his goods include the removal or obliteration by third parties (in whole or in part) of any markings on the goods where such removal or obliteration is not likely to cause any serious or substantial damage to the reputation of the trade mark or the goods bearing the mark.

(F) Is Article 7(2) of the Directive to be interpreted in such a way that legitimate reasons for the proprietor to oppose further commercialisation of his goods include the removal or obliteration by third parties (in whole or in part) of batch code numbers on the goods where such removal or obliteration results in the goods in question

(Annexed hereto)

DATED: 18 May, 1999

Mr. Justice Laddie:

1. This is an application for summary judgment by the plaintiff, Zino Davidoff SA, in an action for infringement of registered trade mark and passing off. It is concerned with the legitimacy or otherwise of parallel importation, an issue which currently is of great commercial significance. Although the summons sought summary relief in respect of both causes of action, in the course of opening Mr. Silverleaf, who appears for the plaintiff, restricted the application to the claim for infringement. The plaintiff's interests would be secured by success in relation to that issue. On the other hand, Mr. Silverleaf conceded that if his client failed to obtain summary judgment in relation to registered trade marks it could not realistically hope to succeed in obtaining such relief in respect of passing off.

2. The plaintiff's original business was in the sale of high quality cigars. It decided to branch out into a wider field of high cost luxury products, including toiletries and cosmetics. It is the proprietor of two marks, "COOL WATER" and "DAVIDOFF COOL WATER", registered in respect of and used on a broad class of such products. In fact the toiletries and cosmetics bearing the registered marks are made and marketed by Lancaster Group GmbH ("Lancaster") under an exclusive licence from the plaintiff. The products are made in France and distributed from there throughout the world. For the purpose of this application neither party drew any distinction between the position of Zino Davidoff and Lancaster. They are treated as one for the purpose of this judgment.

3. For the purpose of this application, the plaintiff has served evidence from Mr. Guido Baumgartner, a director of Lancaster, which gives some indications of how the products are placed on the market. He says:

4. The defendant, A & G Imports Limited, is a company which engages in what is sometimes called "grey" or "parallel" importation. It makes profits by a process akin to arbitrage. It looks for goods in one country which it can sell at a higher price in another. As a general principle a trader who discovers a source of, say, unbranded shirts or screws in a foreign country can import them into this country and sell them here. If there is a sufficient price differential and he can sell the goods, he will make a profit. Particularly in relation to fashion items, there can exist a significant difference between the cost of manufacture and the final cost to the customer. This enables the proprietor a greater freedom to adjust the price of his goods to meet what individual markets can bear while still making a profit. This can result in large differences between the prices charged for the same goods in different markets. As the evidence from Mr. Baumgartner quoted above illustrates, such marked price differences exist in relation to the plaintiff's products. At the heart of this dispute is the question of whether, and in what circumstances, such parallel importation can be prohibited at the suit of the owner of registered trade marks applied to the goods.

6. In the alternative, the plaintiff relies on the fact that the defendant or its suppliers have removed certain batch code numbers marked on the products. These codes and the plaintiff's production and distribution records enable the plaintiff to identify precisely which of its distributors was supplied with which individual products. If the codes were left intact, the plaintiff could identify which foreign distributor was, directly or indirectly, the source of the goods being imported back into the EEA. It is because the defendant and its suppliers do not wish to help the plaintiff identify the weak links in its distribution network that the codes have been wholly or partially obliterated. The plaintiff argues that even if, contrary to its primary argument on exhaustion, it is to be treated as having consented in general terms to the importation of its own products into the EEA, it is still entitled to restrain the importation of the particular goods in issue here pursuant to Article 7(2) of the Trade Mark Directive. In particular the plaintiff pleads that the condition of its products has been changed or impaired by the removal or partial obliteration of the codes and that this represents a legitimate reason for it to oppose the importation of the goods into the EEA.

7. The defendant resists the application. Although it accepts that exhaustion of rights does not apply to goods imported into the EEA from outside, it says that that principle has no or little relevance here. It says that the plaintiff has, or should be taken as having, consented to such importation. Secondly, it says that it is not proved, sufficiently for an application for summary judgment, that the goods of which complaint is made came from outside the EEA. Thirdly, it says that the removal of part of the codes from the goods does not entitle the plaintiff to rely on its trade mark registrations under Article 7(2).

8. Before turning to the issues of substance on this application, I can deal with the second point raised by the defendant. Because the plaintiff's toiletries sold all over the world are identical, there are only two ways of telling from which country they come. The first is by reference to the code numbers stamped on them. All cosmetics sold in the EEA have to be marked so as to comply with the provisions of the European Cosmetics Directive 76/768/EEC ("the Cosmetics Directive") which is implemented in the UK by the Cosmetic Products (Safety) Regulations 1996, SI 2925/1996 ("the Cosmetics Regulations"). As I have said, they are also used by the plaintiff to enable it to keep track of which individual item comes from which batch and goes to which distributor. They therefore are a quick and easy way of tracing goods. The second way is for the vendor to identify his supplier and then to follow the consignment back up the chain of distribution by asking each link to identify its supplier. Neither of these courses will work here. As I have said, the code numbers have been wholly or partially removed so it is no longer possible to identify the goods' source this way. That was the purpose of the removal. Consistent with this, the defendant has said that it is impossible to use the second method of tracing. Although it is prepared to say from whom it obtained supplies, those suppliers have stated that they will not disclose their sources. The result is that the defendant and its suppliers have rendered it virtually impossible to prove precisely whence the goods came. However Mr. Baumgartner has given evidence on this application in which he concludes that the goods sold by the defendant must come from outside the EEA and that some, if not all, of them must come from Singapore. It is not necessary to go through the details of that evidence here.

9. It appears that there is no real dispute that some of the goods in issue have come from outside the EEA. Since the plaintiff is only claiming infringement in relation to such goods, any relief granted would have to be limited to them. Therefore it is not necessary to resolve how many of the goods, if not all of them, are from outside. That issue can be resolved at a later stage, if necessary. However I should say that whoever bears the legal burden of proving where the goods come from, it appears to me that the evidential burden is on the defendant. On the basis of the material served on this application, it is overwhelmingly likely that all or substantially all of the goods have come from outside the EEA and all or some of them come from Singapore. This judgment proceeds on that assumption.

10. It is convenient to start with a consideration of Community law. As the parties agree, it is well established that the principle of exhaustion applies to all intellectual property rights. So if an article made in accordance with a patent is put upon the market in one Member State by or with the consent of the owner of the patent rights, that owner cannot use those rights to prevent or hinder the importation of the goods into a second Member State or to prevent their sale there. The expression "exhaustion of rights" accurately encapsulates the principle involved. The proprietary rights have been used up. The owner of them has nothing left to deploy against further exploitation of the goods. This principle applies not only to patents and copyright, but to trade marks as well. So, once the rights holder has put protected products on the market or has consented to such marketing, he loses all rights to object to further exploitation. This effect is indefeasible. The rights owner cannot override it by contract. The Member States cannot override it by national legislation.

11. Although this principle applies equally to all intellectual property rights, that does not mean that all intellectual property rights are the same. A major function of patents is to assist the proprietor to obtain a reward for his effort and expenditure in making inventions. Similarly copyright and registered designs exist to assist the proprietor to obtain a reward for creating new artistic, literary, musical and similar works. Considering the case of patents by way of example, it is understandable that a patentee might wish to market his product at different prices in different countries, receiving from each what he regards as the best reward which that market can bear for the introduction of a new and meritorious product. It is possible to argue that maintaining barriers to inter-state trade helps the patentee in that endeavour and is not inconsistent with one of the purposes or objectives of the patent protection, namely to assist inventors to recover higher profits to compensate for the cost of research and as a reward for having introduced novel products to the market. Nevertheless the provisions relating to exhaustion within the Community override his wishes and, to some extent, fetter the achievement of this objective. Once marketed by him or with his consent in one Member State the goods are free to flow into any other Member State.

13. These views are consistent with the Trade Mark Directive, which, in one of its recitals, confirms that "the protection afforded by the registered trade mark is in particular to guarantee the trade mark as an indication of origin". So it may be said that a trade mark is designed to identify properly the trade origin of goods. It says nothing about the design, novelty, nature or quality of the goods save that the reputation acquired by them is attributable to and claimed by the proprietor of the mark.

15. In the light of this, the application of the principles of exhaustion of rights to intra-Community trade in goods bearing a registered trade mark can be regarded as consistent with and supportive of the purpose (or, to use Community terminology, 'specific subject matter') of the right. After the exhaustion principle has been applied, marks continue to perform their function of identifying origin. If the imported products are different or have been changed in a way which materially affects their condition, then the consumer may be confused or the mark may be adversely affected but, as we shall see, this is catered for in Article 7(2) of the Trade Mark Directive.

16. It is against this background that the Trade Mark Directive should be considered. Article 7(1) provides:

19. The ECJ followed the same course as the Advocate-General. It said:

22. As noted above, the principle of exhaustion of rights is accurately so called. By placing the goods on the market or consenting to them being so placed, the proprietor loses any further ability to deploy any intellectual property rights which have been used on or in the goods. This deprivation of rights is not based on a fiction that the proprietor has consented to further exploitation. The proprietor's consent only relates to the original placement of the goods on the market. Exhaustion of rights is therefore not consensual but is a consequence which flows automatically and inevitably as a matter of Community law from the act of marketing. Even if the proprietor makes it clear that he did not, does not and will not consent to intra-Community trade in his goods, the provisions of Articles 30 and 36 of the Treaty and 7(1) of the Trade Mark Directive override his wishes and impose the legal consequence. His ability to consent or object to intra-Community trade in his goods is removed.

25. The other argument advanced by GB-Unic was that in order to show that the proprietor had consented to importation of the goods into the EEA, it was sufficient to show that similar goods bearing the same trade mark had been lawfully marketed in the EEA with the consent of the proprietor. This might be categorised as an "all or none" argument; if the proprietor consented to one consignment of goods being sold in the EEA under the marks, then he must be deemed to have consented to all consignments (including ones actually marketed outside the EEA) being so sold, even if this was contrary to his express intentions. This was dismissed by the Advocate-General:

28. The retained ability to object or consent to further dissemination of the plaintiff's goods is inconsistent with exhaustion. The present case is concerned only with the question of whether such consent exists in relation to the plaintiff's goods. This is primarily an issue of fact. Mr. Hobbs argues that the proprietor is not only free to impose whatever terms he likes when he sells his goods but he can also choose the proper law of the contract. Here he says that the proper law of the contract is either English law or must be assumed to be the same as English law, a proposition which Mr. Silverleaf does not dispute. Based on this Mr. Hobbs argues that both by reason of the law of the contract and the specific terms of the relevant contracts and circumstances of sale, it is, at the least, arguable that the plaintiff has consented to free onward sale and distribution of its goods, including onward sale and distribution into the EEA.

31. It is against this background that the particular circumstances of sale of the plaintiff's goods outside the EEA should be looked at. The plaintiff's relevant distribution agreement has been exhibited to the first affidavit of Mr. Baumgartner. It grants the distributor (Luxasia Singapore) exclusive rights to import, promote, sell and distribute the products throughout Singapore, Malaysia, Indonesia, Philippines, Hong Kong, Cambodia, Sri Lanka and Myanmar. At Article 3 it stipulates that Luxasia shall buy and sell, under its own name and for its own account, as an independent trader. Article 4.3 requires Luxasia to sell the products directly to local retailers, or appoint sub-distributors or sub-agents within each market within the distribution territory. Article 7.2 contains the following undertaking:

32. Mr. Hobbs submits that this undertaking leaves Luxasia, sub-distributors, sub-agents and retailers free to sell the products in the distribution territory without (a) restricting the freedom of their purchasers to sell and supply the same to whomsoever they might think fit; or (b) reserving to the plaintiff or anyone else any rights under any trade mark registrations subsisting anywhere in the world in respect of any of the relevant trademarks. Further it leaves them free to sell the products without (c) notifying their purchasers of any such restrictions or reservations; or (d) imposing any legally binding obligation upon their purchasers to observe any such restrictions or reservations. It does not require them to incorporate self-perpetuating contractual terms on everyone further down the chain of distribution limiting where the goods may be sold. Consistent with this, none of the products sold by the plaintiff and in issue in this case carry any marking or notice that there is any restriction on where they may be sold. Nor is it suggested that the defendant or its immediate suppliers were bound by any terms in the contracts under which they purchased the goods which purported to restrict their freedom to sell the goods where they liked.

33. Mr. Hobbs says that all these factors together point to an arguable, indeed strong, case that the plaintiff should be taken to have consented to the importation of the goods into any country, including the countries of the EEA.

38. It seems to me that the following propositions should be drawn from the European case law or are consistent with it and the specific subject matter of trade mark rights:

39. On the basis of the matters brought to my attention on this application and referred to above, it appears that the goods in issue here were placed on the market in circumstances where the plaintiff could have placed, but did not place, an effective restraint on their further sale and movement. As a consequence it is readily arguable that, pursuant to the proper law of the relevant contracts, purchasers within the chain of distribution of the plaintiff's goods were free to market the goods where they liked including within the EEA and that the plaintiff is to be treated as having consented to such marketing. It follows that I agree with Mr. Hobbs that his client has substantial grounds on which to defend this part of the action.

41. Mr. Silverleaf says that even if his client is to be treated as having consented to the use of its trade marks on the goods imported into the EEA, there are still legitimate reasons for it to object to such importation pursuant to the provisions of Article 7(2) of the Directive. He says that those reasons are so strong that his client should obtain summary judgment on this ground also. Article 7(2) of the Directive provides:

42. It seems to me that there are two issues which need to be addressed in considering the effect of this Article. First, it is necessary to identify what kind of reasons for opposing further commercialisation are considered legitimate. Secondly, it is necessary to determine whether the proprietor needs to show that his grounds for opposing further commercialisation are substantial and, if so, how substantial.

43. Not every reason will do, only legitimate ones will. A commercially plausible and sensible reason is not necessarily a legitimate reason. As Mr. Silverleaf puts it, this Article is the statutory enactment of the long-established case law of the ECJ that exhaustion of trade mark rights does not apply where the manner in which the goods are remarketed by a subsequent trader damages the specific subject matter of the trade mark applied to them.

51. Mr. Silverleaf relies on these passages and argues that any type of activity of a reseller which damages the prestige of luxury goods confers back on the proprietor of the trade mark the power to prevent further commercialisation of those goods, whether by way or importation or sale. The consequences of this submission, if right, are surprising. Perhaps the three factors which most contribute to the prestige of luxury goods are (i) restricted supply, (ii) very high price compared with equivalent products and (iii) sale through selected, high quality outlets. If Mr. Silverleaf's argument is right, it would appear to follow that any reseller who obtained stocks of authentic goods and was able to sell them in high volume, at low price or through down-market retail premises could be sued for trade mark infringement. Mr. Silverleaf does not shirk from this. He says that to give a cheap and tatty image to luxury goods would be to damage their prestige and that cheap to some extent equals tatty. He says that high-priced luxury products could be regarded as "toys for rich people" and that if they are sold at knock-down prices that undermines the very nature or prestige of the product. A perfume which sells normally at £50 per bottle through high class outlets would very quickly lose its cachet if it could be bought for £5 in a cost-cutting and less august supermarket chain. If these arguments are correct it would appear to follow, for example, that the proprietor of a prestigious trade mark could use his mark to prevent bankrupt stock from re-entering the market save at a price and through outlets satisfactory to him.

55. It appears, therefore, that the following propositions flow from these cases:

56. Although, as noted above, for the purpose of illustrating the width of his argument Mr. Silverleaf argues that price-cutting can be a legitimate ground within Article 7(2) entitling the proprietor to use his trade mark registration to oppose sales by a reseller, in fact that is not one of the grounds relied upon by the plaintiff here. The plaintiff relies only on the removal or partial obliteration of the code numbers on the products which it claims materially changes or impairs the condition of the goods. This is advanced in two ways. In the statement of claim it is said that the removal or obliteration prevents the plaintiff or its licensees or distributors from identifying or recalling any of the goods passing through the defendant's hands which may be faulty. Secondly, it is said that it results in damage to the packaging which lowers the image of the products. It should be noted that neither of these amounts to an assertion that the defendant or its suppliers have changed or impaired the nature or quality of the products themselves. The quality of the perfumes and toiletries is exactly the same as it was when the goods were originally supplied to the market by the plaintiff. The plaintiff is only relying on alleged changes to the "mental condition" of the goods handled by the defendant.

57. Before considering these points, it is necessary to say something about why the codes get onto the plaintiff's products. The Cosmetics Directive specifies certain marking requirements for cosmetics being placed on the market within the Community. That Directive has been implemented in the United Kingdom by means of the Cosmetics Products (Safety) Regulations 1996 - SI 1996 No. 2925. A breach of those Regulations constitutes a criminal offence pursuant to s.12 of the Consumer Protection Act 1987, punishable by a term of imprisonment not exceeding 6 months or a fine not exceeding standard level 5 or both (s.12(5)). In its evidence served on this application the plaintiff says that it placed the codes on its goods so as to comply with the Directive and the Regulations. However it is not said, nor is it pleaded, that the removal or partial removal of the codes is a breach of the Regulations, whether by the defendant or its suppliers; nor is it suggested that, if it were, the plaintiff has any cause of action enabling it to enforce these provisions in a civil court. In fact the requirement for marking has been used by the plaintiff as a convenient method tracking its goods. It is the precision of the codes used on the goods (which may go further than required by the Directive and Regulations) taken together with the detailed production records maintained by the plaintiff which enables it to know which individual item was made where, when, on which machine and went to which customer.

58. Because the codes enable the plaintiff to identify the production history of each item produced by it, it is said that their removal or partial obliteration hinders product recall in the case of faults in manufacture. Based on this, Mr. Baumgartner says that the decoded goods;

60. Furthermore, even if removal of codes can be regarded as contributing to an impairment of the mental condition of the goods, it would still be necessary to show that the adverse effect is substantial. That is an issue of fact and in my view the plaintiff gets nowhere near being able to demonstrate that at a level sufficient for an application for summary judgment. On the contrary, according to its own evidence, faults in production are described as infrequent. Mr. Dashwood says;

62. This issue was raised by the following passage in Mr. Baumgartner's first affidavit;

63. It is not clear to me whether Mr. Silverleaf continues to rely on this for the purpose of summary judgment. In any event it can be disposed of quickly. Mr. Silverleaf handed to me some of the products which the defendant is reselling. I assume that they are representative. I had to look hard to find where the codes were which had been removed or partly obliterated. The marking to the products was slight and, from a practical point of view, virtually invisible. There is no evidence that any customer has ever noticed the marking, let alone thought that it impaired the appearance of the goods. In my view the plaintiff's prospects of succeeding on this issue are remote.

64. For these reasons, the plaintiff has not demonstrated that it will succeed under Article 7(2) either. Accordingly this application fails.