Selective distribution helps you protect the luxury aura of your brand, but it does not rewrite the EU rule on trademark exhaustion rights – once genuine goods are lawfully placed on the EEA market by you or with your consent, trade‑mark rights are usually spent for further EEA resales.
EU competition law allows the supplier, in certain restrictive conditions, to implement selective distribution systems. Why do suppliers make use of selective distribution systems? Well, selective distribution is an effective weapon for suppliers to protect the luxury aura and brand position of their products, which is why it is not uncommon for luxury items, hi‑tech items—basically for all shiny goods where controlled presentation and service matter.
Under selective distribution systems, provided the conditions in Regulation 2022/720 (VBER) are fulfilled, the supplier is allowed to limit active and passive sales to unauthorised distributors. The supplier undertakes to sell the products only to distributors selected on the basis of specified and objective criteria and the selective distributors undertake not to sell the products to unauthorised distributors within the territory where the selective distribution system is operated[1]. However, this competition‑law tool does not alter how trade‑mark exhaustion works once the first lawful EEA placement has occurred.
Under Article 15(1) of Regulation 2017/1001 (EUTMR), after the first lawful EEA placement by you or with your consent, you generally cannot use trade‑mark rights to block further EEA commerce, save from some specific exceptions (mainly the condition of the goods has changed or been impaired).
But what happens if the authorised distributor breaches the contractual terms and sells the branded products to a non‑authorised distributor which, in its turn, resells the concerned products—can the supplier invoke infringement of the trade mark, or are its trade‑mark rights already exhausted even if the authorised distributor proceeded to an unauthorised sale?
Short answer: selective distribution systems do not shield your brand from trade‑mark infringements. Once your branded products are lawfully put on the EEA market, trade‑mark rights are usually exhausted, and contractual breaches remain contractual‑liability issues.
In a recent case decided by the Higher Regional Court of Munich[2], this supremacy of the exhaustion principle was once again underlined. The owner of Maria Gallard cosmetic brand alleged trade‑mark infringement by a UK online shop outside the selective network that operated an online shop for beauty products for the German market, and which sourced genuine cosmetics from an authorised German dealer and resold them in Germany. The court held there was no infringement, because exhaustion applied once the proprietor had already put the goods on the EEA market by supplying the authorised dealer and thus breach of the distribution contract could not “un‑exhaust” right. This an outcome lines up with CJEU case‑law, notably Peak Holding[3] case, which clearly stated that a prohibition of resale in EEA, in a contract of sale concluded with an operator established in the EEA, does not mean that there is no putting on the market in the EEA.
However, there is a narrow path for luxury brands. In Copad v Dior (2009)[4], the CJEU held that a proprietor could rely on trademark rights against a licensee who sells to discount outlets in breach of licence terms if that breach damages the “allure and prestigious image” of the goods. For luxury products, loss of aura can be treated as a deterioration of quality, which brings the case within the “legitimate reasons” exception to trademark exhaustion.
Nonetheless, the Higher Regional Court of Munich refused to stretch Copad jurisprudence to leakage by an independent authorised distributor as the resale made by the unauthorized dealer did not impair the quality of the goods nor the brand’s prestige as the brand owner itself and its authorised distributors also sold the products online and occasionally offered price reductions.
Thus, keep your expectations realistic when it comes to the strength of the selective distribution systems shield: the “legitimate reasons” exception under Article 15(2) EUTMR covers classic scenarios like changes to condition, certain types of repackaging or relabelling that affect guarantees or presentation, and only exceptional, provable reputation damage for luxury goods. In ordinary leakage cases, where an authorised distributor breaches the selective agreement, the exhaustion rule will still apply, and your primary recourse will be contractual.
What can you do?
- Use the VBER toolkit via selective distribution systems and robust contractual provisions to prevent, not cure unauthorized sales and lean primarily on contracts, not trademarks, for enforcing sanctions against unauthorized sales.
- Once an unauthorized sale has occurred, if you intend to pursue trademark infringement claims, you must properly document how the unauthorized sales harm the brand’s image and reputation. Additionally, keep in mind that if the unauthorized sales align with your own/authorized distributors’ commercial policies (e.g., occasional price discounts), such claims are unlikely to succeed.
[1] Point 143, EC Guidelines on vertical restraints
[2] Case 6 U 2795/23, Higher Regional Court of Munich
