The European Court of Justice (ECJ) has ruled that luxury brand owners can use their trade mark rights to prevent licensees selling goods to discount stores in breach of licence.

Facts

In 2000, Dior entered into a trade mark licence with Societe Industrielle Lingerie (SIL) for the manufacture and distribution of corseted clothing bearing the 'Christian Dior' trade mark. The licence specifically stated that Dior's permission was required before selling to any discount stores.

SIL, finding itself in financial hardship, sold goods bearing the Dior trademark to Copad, a discount retail business, despite Dior expressly refusing consent. Dior sued for - among other things - trade mark infringement.

The ECJ ruled that Dior was not limited to contractual remedies, but could also sue SIL for trade mark infringement, but only if the breach damaged the 'allure and prestigious image which bestows on those goods an aura of luxury'.

The Court also ruled that even if SIL had obtained Dior's consent to sell goods to Copad, Dior could still oppose the resale if it would 'damage the reputation of the trade mark'.

What this means: Brand owners
This ruling will be welcome news to luxury brand owners, as it gives an extra level of protection when licensing their brand.

However, the Court failed to define an 'aura of luxury', and has also left open when a brand has an 'allure and prestigious image' to be able to gain protection.

Where both reputation and damage is serious and obvious, there is no doubt that luxury brands will be able to use this ruling to their advantage. We are therefore likely to see a host of brands pushing to prove their prestigious image in the future. Unfortunately, it is not clear where the Court will draw the line.

And the ruling it is not seriously bad news for the non-luxury sector, either - brands that are licensing their trade mark are still likely to be able to sue for breach of contract to recover any damage suffered should unauthorised sales be made.

What is imperative, though, is that licences - and selective distribution agreements - are clearly drafted, and that the trade mark owner chooses the right licensee; if the brand owner gets this wrong, it can do more harm to the brand than good.

What this means: Licensees
Licensees of luxury brands will have to be careful who they sell goods to in future, and ensure they have explicit consent from the brand owner before going ahead.

If not, they could well face a claim for damages for trade mark infringement, as well as contractual damages, in addition to termination of what could have been a very profitable licence.

In these tough times, licensees really do need to maintain a good relationship with the brand owner and not overstep the mark, otherwise it is more than likely to cause significant problems, the most serious of which is the potential loss of a lucrative licensing deal.

What should you do?