German court rules no luxury goods in food retail outlets

On 6 April 2018, the Düsseldorf Higher Regional Court ruled that the food retailer real, whose parent company is Germany’s Metro AG, may not sell luxury cosmetics made by Japa-nese manufacturer Kanebo in its food retail stores, and that the manufacturer can protect the image of its brand with a trademark claim (case no. 20 U 113/17).

The ruling transposes an ECJ legal view, which states that the reputation of a luxury brand may be harmed by selling goods via discounters (ECJ, decision of 23 April 2009, case C-59/08 – Copad). In another decision (Coty, 6 December 2017), the ECJ reiterated that selective dis-tribution protects the legitimate interests of brand owners.

The reasoning behind the Düsseldorf and ECJ decisions are as follows: manufacturers of luxu-ry cosmetics sell their products within the framework of selective distribution. They authorise special dealers who promise high standards in the retail environment, particularly in terms of staff and the interior design of the outlets.

This standard is necessary to maintain a product’s luxury image and exclusivity. The same legal principle applies to other high-quality products, such as musical instruments, high-end consumer electronics, and motor vehicles. These products are sold by authorised dealers who are not entitled to sell to non-authorised resellers or "outsiders."

Selective distribution is undermined if outsiders are allowed to sell contract products without investing in a comparable high-quality retail environment.

Not only does this constitute “free riding” on investments made by the manufacturer and au-thorised dealers, selling by outsiders also harms the brand image. For example, if a food retail-er offers a high quality brand of perfume alongside food items such as cucumbers, apple purée or minced beef in a banal retail environment, the luxury image and exclusivity of the brand are harmed.

Selling luxury goods at a food retail outlet changes the quality of the goods from luxury to ordinary.

Taking effective action against outsiders, however, can be difficult for manufacturers. In order to detect grey market activity, manufacturers often code their goods and then make test purchases to identify the authorised dealer who sold the goods in question to the outsider.

An authorised dealer who knowingly sells contract products to an outsider is committing a serious breach of contract, which if repeated would justify termination. However, if the outsider purchased the goods under false pretence (i.e. the buyer actively misled the authorised dealer), the authorised dealer cannot be held responsible.

The manufacturer would then have a claim, including a right to injunctive relief, against the outsider under unfair competition law (section 4 of the Act against Unfair Competition). But the devil is in the details. Seeking claims can be difficult, particularly if the goods in question have passed through several hands.

The Düsseldorf Higher Regional Court also confirmed that manufacturers can make trademark claims against outsiders to protect a special brand image, which greatly reinforces manufactur-ers’ rights to selective distribution systems and high-class retail.