The brand and the second hand – the Chanel affair

In 2012, Chanel accused a company of reselling second-hand cosmetics (lipstick, eyeshadow, perfume). Samples, unpackaged products and new products were involved.

For Chanel, its products (new or second-hand) are part of a selective distribution network, i.e. one in which only selected retailers can offer its products for sale (because they have been trained to recommend them). In other words, according to the company, second-hand quality does not dispense with this selection of retailers, and the sale of its brand outside the network is an illicit and parasitic use.

The case before the Rennes Court of Appeal and then the French Supreme Court (Cour de cassation) raised a number of issues in trademark law and common law tort law:

• Can a trademark owner prohibit the resale of cosmetics samples distributed free of charge to customers?
• Can a trademark owner oppose the resale of unpackaged cosmetics?
• Can the reseller be held liable for parasitism when selling new products second-hand?

To return, if only for a moment, to the principles.

Trademarks are private intellectual property rights. It is proprietary, because it must enable consumers to identify the origin of the product on which it is affixed: this is its “essential function”. Consequently, the trademark owner can in principle prohibit any other economic operator from using his trademark for identical or similar products.

But such a right necessarily has the effect of restricting competition and the free movement of goods, a fundamental principle within the internal market.

The search for a balance between these two imperatives of guaranteeing the origin of products on the one hand, and free competition and circulation of goods on the other, led to the creation of the theory of exhaustion of rights: the trademark owner can prohibit the use of his trademark for products identical or similar to those he markets only when they are first put into circulation in the internal market.

Once the products have been marketed in Europe by an authorized operator or the brand owner, the latter can no longer oppose the resale of its branded products, unless there are legitimate grounds.

The action launched by Chanel therefore raised at least three questions.

(1) Does the free distribution of samples by Chanel’s authorized distributors to their customers constitute a first entry into circulation that exhausts the rights conferred by the Chanel trademark?

The Court of Appeal, upheld by the Court of Cassation, held that the distribution of free samples to consumers by authorized distributors for demonstration purposes only does not constitute putting a product into circulation.

The resale of samples distributed free of charge to consumers does not exhaust the owner’s trademark rights. Such resale cannot therefore take place without the owner’s agreement, at the risk of undermining the essential function of guaranteeing the origin of the brand’s products.

Chanel was therefore perfectly entitled to prohibit the resale of samples distributed to its customers.

(2) Can Chanel object to the resale of second-hand cosmetics from which the packaging has been removed?

In this case, the question of exhaustion of rights due to initial circulation did not arise, since the products in question were classic cosmetics sold by authorized Chanel distributors and bought back by the retailer from private individuals.

As a result, Chanel had in principle exhausted its rights, since the products had been marketed for the first time in Europe.

However, there is an exception to the exhaustion of rights: the owner of a trademark retains the possibility of opposing the marketing of products already in circulation in the internal market if the owner can justify legitimate reasons, in particular the modification or alteration of the condition of the products after the first marketing.

To oppose the second-hand resale of its products, Chanel argues that :

• As cosmetic products have an expiry date from the date of opening, purchasers of second-hand cosmetic products cannot know this date;
• Cosmetic products are also subject to special health regulations that prohibit them from being put back on the market after opening.

The Court of Appeal, once again confirmed by the Court of Cassation, validated Chanel’s reasoning and considered that the marketing of cosmetic products without their packaging constitutes a subsequent alteration of the product which justifies the trademark owner’s right to oppose their resale.

Is a retailer who sells new branded products (day cream in its packaging) in the same shopping mall as an authorized distributor guilty of parasitism?

Finally, the Court was asked to rule on the resale of new products purchased from private individuals. In this respect, there was no question of trademark law, since the products in question had already been marketed once and had not undergone any alteration or modification, so that the rights conferred on Chanel by the ownership of its trademark were exhausted.

On the other hand, the judges considered that the resale of new products in their original packaging, bearing comparative new/resale price labels, showed the retailer’s intention to appropriate Chanel’s clientele in search of bargains. In addition, customers were informed of the possibility of testing products sold by authorized distributors located in the same shopping mall before purchasing them.

The retailer was therefore guilty of parasitism, in seeking to appropriate the clientele of a selective distributor.

To remember:

• The distribution of samples does not exhaust the trademark owner’s rights in these products. Their marketing is subject to authorization by the owner.
• Despite a first release, the trademark owner can still oppose the resale of his cosmetic products. In this respect, the fact that they have been opened constitutes an alteration of the product, which justifies the trademark owner retaining his rights to the product.
• Beware of the resale of new products second-hand, which may constitute an act of parasitism if it can be shown that there is a desire to appropriate the clientele of authorized resellers in a selective distribution network.