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The saga began when two English department store chains had the temerity to sell jeans. But these were not just any jeans — these were Levi’s 501s, and they were being sold without the approval of Levi Strauss & Co. Tesco Stores PLC and Costco Wholesale UK Ltd imported the jeans from various sources in North America, and these mass market stores sold them in the U.K. at prices that were far lower than were offered at authorized Levi’s dealers in Europe. So Levi Strauss made some threatening noises to Tesco and Costco. In October 1998 Tesco responded by suing for “unjustified threat.” Levi Strauss’ lawyers, Baker & McKenzie, sprang into action and filed a trademark infringement suit against Tesco later that month, and the cases were joined. Shortly thereafter, Levi Strauss brought a separate suit against Costco for trademark infringement. In both cases, the U.K. courts have refused to side with Levi Strauss, but the cases have now gone up to the European Court of Justice. Meanwhile, these lawsuits have fueled a larger political debate that threatens to strip all trademark owners in the European Union of the rights to control imports of their branded goods. LEVIS AND CONSENT Levi Strauss says it should be able to control the distribution and sale of its products. And European Union law supports this position, up to a point. The E.U.’s Trademark Directive mandates that a trademark owner’s rights in its goods are exhausted upon the first authorized sale of those particular goods within the E.U. At least, that’s how the European Court of Justice interpreted the directive in its landmark Silhouette case, Case C-355/96, (1998) ECR I-4799. So once Levi Strauss puts a pair of jeans on the market in any part of the E.U., the jeans maker can’t use its trademark rights to prevent those jeans from being resold throughout the E.U. But if Levi Strauss initially puts its jeans on the market outside the E.U., say in the United States or Thailand, the company can prevent those jeans from being imported into the E.U. Such parallel, or gray market, imports would violate Levi Strauss’ trademark rights. Levi Strauss could have the offending goods seized and destroyed. (Levi Strauss cannot, however, claim a trademark violation on jeans it sold to authorized dealers within Europe.) To date, the jeans maker has been unable to prevent Tesco and Costco from importing and selling 501s because these stores have mounted a clever argument. They claim that Levi Strauss has consented to the jeans being sold on the E.U. market. Specifically, the two stores acquired the 501s from manufacturers in North America, and Levi Strauss’ contracts with these manufacturers contained no explicit prohibition against the finished goods being exported to Europe. The contracts were silent on this point. And Tesco and Costco claim that silence equals consent.Both the Tesco and Costco cases were before Justice Nicholas Pumfrey of the English High Court of Justice, which is noted for hearing IP cases in the U.K. And Pumfrey declined to reject the retailer’s defense. Instead, he said this was a question that needed to be decided by the ECJ, so he sent up a series of questions, including the issue of consent, for that court to answer. Meanwhile, a similar case was on the burner before Justice Hugh Laddie, also of the English High Court. Zino Davidoff SA had sued A & G Imports Ltd. for importing bottles of “Davidoff Cool Water” perfumes into the E.U. Davidoff’s contract did not explicitly prohibit resales into Europe. Laddie ruled that Davidoff, by its silence, had consented to the sale. But Laddie, too, sent the ECJ a series of questions on consent. It was, notes Philip Atkinson, an IP partner at London’s Eversheds, “a broad view” of consent.The ECJ is hearing all three cases together in an attempt to clarify the standard for determining “consent” under the Trademark Directive. “Laddie publicly said that he expected his decision to be shredded,” says Barbara Cookson, an IP partner in London’s Nabarro Nathanson, which represented Costco in the suit. Laddie made that statement at an English legal function, according to firm lawyers. SOMETHING FOR EVERYONE On April 5 the ECJ handed down its interim ruling by the court’s advocate general. The court generally follows these advisory opinions. The AG did not shred Laddie’s and Pumfrey’s rulings, but didn’t support them either. The full implications of the ruling are unclear, but it may well give the trial courts enough wiggle room to find in favor of Tesco and Costco. And for now, Tesco and Costco are still selling 501s. The AG’s long and complex opinion, which examined such things as the “teleological construction” of consent, ruled that there should be a single, E.U.�wide standard for determining consent. But the ruling failed to delineate what that standard should be. If the ECJ adopted the AG’s advice, says Atkinson, “no one would be any the wiser about what ‘consent’ means.” Actually, the AG’s opinion provides a little guidance about how consent should be interpreted — and that allowed each side to claim the ruling was a victory. Levi Strauss said they were the victors because the AG required some factual basis for finding consent; a court cannot presume that mere silence constitutes consent. Tesco and Costco said they won because the AG recognized that consent could be granted in a variety of ways; it need not be written, explicit consent. But on another, more profound issue, the AG seemed to side with parallel importers. “This is the first case to say there may be something more than just trademark law to be considered here,” says David Flint, an IP partner at London’s MacRoberts Solicitors. The AG states that consumer, safety, and public policy issues may also need to be taken into account. For instance, the fact that E.U. consumers are paying more for jeans than consumers elsewhere may be weighed in the balance, along with the rights of trademark owners. According to Flint, “The advocate general seems to be suggesting that the current law needs to be reconsidered at the political level” in order to decide whether the E.U. should adopt exhaustion of trademark rights. Under that standard, trademark rights are exhausted once a brand owner puts that item on the market anywhere in the world. THE WINNER IS … So how much weight should be given to the AG ruling? “I think the ECJ will follow the AG ruling,” Flint says. “There is something in it for everybody. Brand owners say, ‘We have the right to give consent or not’ [on imports into the E.U.]. Consumers point to court language that other factors should be taken into account.” Cookson expects the ECJ ruling “will be quite delayed” — possibly for months — because they need to develop the standards for determining consent. “Otherwise the court will get the question back again,” she says. “The court is already very busy; it doesn’t want to address the same issue again and again. So they’ve got to give it as final an answer as they can.” After the ECJ issues its ruling, the case will go back to the trial courts so they can apply the law to the facts. Atkinson says that Laddie, at least, is probably inclined to find that the facts are favorable to the parallel importers: “[Laddie] would perhaps either say there is consent, or other factors would come up and he would allow imports on those factors.” Things are thus looking pretty good for Tesco and Costco. Not only do they have a decent chance of winning their lawsuit, but the high-profile case has given the retailers lots of good PR, allowing them to stand as champions of low prices for consumers. Plus the companies are selling Levi 501 jeans like mad. How is Levi Strauss taking all this? The company and its counsel in this case have not responded to repeated inquiries by IP Worldwide. (Unlike Laddie, the careful reader should not infer anything from Levi’s silence.) POLITICS AND PARALLEL IMPORTS Europe’s courts have not been the only ones grappling with the issue of parallel imports. In late April the governments of Sweden and the United Kingdom released a five-country survey, which showed that the prices for many consumer items are significantly lower in the United States than in many E.U. countries. The report showed, for instance, that a pair of Levi’s jeans cost 70 percent more in England than in the United States. The report was issued shortly before a European conference of consumer ministers in May. At the conference, representatives from the U.K. and Sweden pointed to the report as evidence that E.U. law should be changed in order to allow more parallel imports. They called for the Trademark Directive to be altered to recognize the international exhaustion of trademark rights, instead of just E.U.�wide exhaustion. The British government began calling for this change during the run-up to a general election, and some, like London lawyer Flint, think this is no accident. He says, “There is a belief that consumers are being ripped off by big business. Whether that belief is correct or not is unimportant. It is a good political issue for the [U.K.] government to hang their hat on.” Perhaps that is part of the reason why the U.K. Secretary of trade and industry Stephen Byers wrote an article for the April 27 issue of the Guardian newspaper, stating that “companies were abusing European trademark legislation to keep prices artificially high in some countries.” Regardless of their political motives, the U.K. and Swedish governments appear keen to change the Trademark Directive. Belgium, Finland, Ireland, Denmark, and the Netherlands also support this proposal, according to Emma Ward, a spokesperson for the U.K. Department of Trade and Industry. France and Italy strongly oppose any change in existing E.U. rules — as does E.U. internal market commissioner Frits Bolkestein. They point to a 1999 study indicating that if the E.U. adopted international exhaustion of trademark rights, there would be no significant short-term change in overall European prices. The remaining E.U. countries are undecided. So what are the prospects for change? Flint says, “There are fairly strong trademark lobbies in both the U.S. and the U.K., and they’re not afraid to flex their muscles at the slightest opportunity. It is likely they will push hard for retention of the status quo. So the question is what the consumer lobby can do to bring about change.” He adds, “At the end of the day, [I think] the Trademark Directive will be revised.” Which would be good news for European consumers looking for a cheap pair of jeans. But it spells bad news for brand owners, who would find it harder to sell their goods at premium prices in Europe.

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