Crash course on trademarks: Limitations on trademark rights

In this document

What is and is not "use" of a trademark
Non-commercial use of a trademark
Exhaustion of trademark rights

What is and is not "use" of a trademark

An important question always is what constitutes use of a trademark. Putting the trademark on the packaging of a product clearly is use of the trademark. This even applies if the products so labeled are strictly meant for export. Use of a trademark can also occur when offering the products for sale under the trademark name, having products available for sale, importing trademarked products and using the trademark in advertisements.

Some other cases are less clear. For example, refilling a container that features a trademark with a generic product is trademark infringement, even if the buyer knows that he is not getting the original product. The refilled product as such is not the same as the original product as sold by the trademark holder. Somebody else might see the refilled product in use, and if the refilled product did not work as well as the original product, the image of the trademark holder would be damaged in the eyes of that somebody else.

Removing a trademark from a product is not a use of the trademark, as one would expect. In some cases it might even be necessary to remove such a label, for example when the product has been adapted or modified by a third party. In particular with medicines it is often required by law to add labels or warnings in the local language. Adding or modifying the original label is not prohibited if such a requirement exists, as long as the modification was done solely to comply with these requirements. But adding your own label, or modifying the existing label without a valid reason can very well be.

When mentioning someone else's trademark, it is recommended to explicitly indicate that the sign in question is in fact a trademark. For example, the first time you mention a trademark you could append the ^TM or ® symbol. Alternatively, you could include a statement like "XYZZYX is a registrered trademark of The ABC Company" at some appropriate location. Such an acknowledgment does not automatically mean that you have permission to use the trademark. It does help against allegations that you are trying to dilute the value of the trademark by using it as a generic name.

Non-commercial use of a trademark

While non-commercial use of the trademark normally cannot be regarded as infringing, a trademark holder can still start a lawsuit of such a non-commercial use dilutes the value of his trademark. Dilution could result from use of the trademark as a generic name for a whole category of products, or by making fun of the trademarked product.

Using the trademark as a generic term

Especially when the trademarked product is the only one, or one of the few products on the market, it is common that people use the trademark as a generic name for a category of products. While this is understandable, it dilutes the distinctiveness of the trademark: the generic name by definition is not distinctive, and if a trademarked name becomes the generic name, the trademark becomes worthless. If a court decides a trademark has become a generic name, it will declare the trademark invalid. It should therefore come as no surprise that many trademark holders actively try to prevent people from using trademark names as generic names, even in "harmless" situations.

Two famous examples are Kleenex® and Xerox®. Although these two trademarks started out as very distinctive (because they were arbitrarily chosen and fanciful names), over the years many people would refer to just any paper tissue as a Kleenex or call every copying machine a Xeroxing machine (in English, many people still say "I'm gonna xerox this document" when they mean "I'm going to make a photocopy of this document"). To prevent the loss of their trademark rights, the respective trademark holders now actively approach people and ask them to use the generic names "paper tissue" and "copying"/"copying machine" instead.

Parodies using a trademark

Trademark law may become an issue when putting up a website that is a parody of a trademarked product. For example, in 1995 Michael Dougney registered peta.org in the name of an organization named "People Eating Tasty Animals". The animal rights society "People for the Ethical Treatment of Animals" (PETA®) was not amused and claimed this was trademark infringement, despite the fact that peta.org was not doing anything in commerce. It was intended as a parody of PETA's activities. A US District Court held that this use of PETA diluted the value of the trademark and ordered it shut down.

Dutch people sometimes refer to the Web browser Netscape® as "Netschaap" (lit. Net-sheep) whenever it shows lack of intelligence in handling web pages, or crashes for no apparent reason. A non-commercial humorous website called netschaap.nl received a complaint letter from a representative of Netscape, alleging that this use is diluting the value of their trademark, despite the fact that netschaap.nl does not parody Netscape the browser itself.

Exhaustion of trademark rights

When a trademarked product lawfully enters the market (e.g. because the trademark holder manufactured it and sold it in a store), the buyer may want to resell it, either on the same market, or at some entirely different market in a different country or region. As selling a trademarked product is use of the trademark in commerce, the trademark holder could block this resale by claiming trademark infringement. As this is not always fair, various countries have developed so-called "exhaustion" or "first sale" doctrines that regulate when a trademark holder can and cannot act against a reseller of 'his' products.

Development of the exhaustion doctrines

The simplest approach would be to simply say "if the trademarked product legally entered the market somewhere, reselling the product anywhere in the world is not infringement". This is known as the universality principle. Under this principle, grey markets and parallel imports are entirely legal. However, it does not recognize that different countries may have different legal systems, or that the trademarked product in one country may represent a completely different goodwill in one country than another. So, in practice the universality principle has little use today.

The converse approach, known as the territoriality principle, beings by saying that trademarks are national affairs. Therefore, the trademark is legal only in the country where it is registered. Under this principle, grey markets can be blocked, as the trademark holder also controls the rights of its distribution in that market. The fact that he happens to have an identical trademark in another country, where the grey market product originated, is irrelevant - that's that other country's national affair. This principle can easily lead to unfair situations, in particular in regions where countries want to develop a common market (like the European Union).

The exhaustion principle is something of a compromise. There are two variations: exhaustion in commerce, and local goodwill. In the first case, the trademark holder loses his rights upon the first sale of the product. Since the product is a legally available authentic trademarked item, the parallel import is legal. In the second case, local goodwill is where the domestic holder of a foreign trademark has developed a substantial goodwill in the market separate from the goodwill associated with the trademarked goods themselves. It is not the same trademark either in law or in fact as the foreign trademark only maintains the goodwill of the manufacturer. Under this principle, it is possible to extinguish grey markets, since the exhaustion which occurred with the original release into commerce was exhaustion of a legally distinct and factually different mark.

First sale and exhaustion in the USA

In the USA, the trademark holder cannot act against domestic resellers of products he put on the market himself. The same applies if the product was manufactured by a third party with permission of the trademark holder (a licensee). This is called the "first sale" doctrine. The idea behind it is that the trademark holder has had a chance to ensure the quality of the product and to make money of the first sale, and then he no longer has a right to control further distribution of that product. Of course it only applies to the particular products he put on the market, making an exact copy of that product and selling that is trademark infringement.

If a US trademark holder sells trademarked products abroad, a third party may buy these products and import them into the USA. For example, Levi's® jeans could be bought cheaply in South America and then be shipped to the more expensive US market. Section 526 of the US Tariff Act prohibits unauthorized import of foreign-made goods bearing a registered US trademark held by a US corporation, except if the manufacturer of the goods is an affiliate of the US trademark holder. In other words, products manufactured abroad by the trademark owner or an affiliate can be imported if the foreign and US trademark owners are owned by the same person or business entity or if the foreign and domestic trademark owners are parent and subsidiary or subject to common ownership or control. In the Levi's example, if the Brazilian trademark "Levi's" were held by the same company as the US trademark, it would be legal to import jeans from Brazil to the USA.

The Lanham Act, which is the US trademark law, can sometimes be used to block imports even if they were manufactured abroad by the trademark holder or an affiliate. For example, when the foreign product would be considered different from the domestic product by the American consumer, the imported products are deemed not genuine. The Us trademark holder can then start an infringement lawsuit. It is not uncommon for a product to have different ingredients (for example, due to local health regulations) or to be of different quality in different countries.

Exhaustion in the European Community

One of the principles of the European Community is free flow of goods between the Member States. Trademarks, like patents and copyright, can be used to restrict this free flow of goods, and so various restrictions have been introduced on the assertion of trademark rights. The main restriction is represented by the exhaustion principle. Article 7(1) of the First Council Directive (89/104/EEC) dated December 21, 1988, to harmonize the laws of the Member States of the European Community relating to trademarks, as modified by Annex 17 of the European Econonic Area Agreement, provides that:

the trademark right shall not entitle the proprietor to prohibit its use in relation to goods which have been put on the market in a Contracting Party under that trademark by the proprietor or with his consent.

This means that when trademarked products are put on the market in a country of the European Economic Area with the trademark owner's consent, he cannot later oppose the import or re-import of these products into another country in the European Economic Area. The European Court of Justice has ruled that article 7(1) must be read as meaning that:

the rights conferred by the trademark are exhausted only if the products have been put on the market with the trademark owner's consent in the communitv and that provision does not leave it open to Member States to provide in their domestic law for exhaustion of the rights conferred by the trademark in respect of products put on the market in non member countries;

for there to be consent within the meaning of article 7(1) of the Directive, such consent must relate to each individual item of the products in respect of which exhaustion is pleaded (ECJ, 1st July, 1999, Case C-173/98, Sebago Inc and Ancienne Maison Dubois & fils SA V.G-Unic SA)

The exhaustion doctrine in the EC thus only applies to products that legally entered the European market. Member countries are not permitted to have more liberal exhaustion laws, for example by allowing worldwide exhaustion. So, even when a trademark holder put the product on the market in South America without any restrictions, he can later block parallel import of the product at the European borders. But if he put them on the market in Belgium, he can't block parallel import to the Netherlands, nor later re-import from the Netherlands back to Belgium.