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Silhouette bad for Europe

Written by on 08 January 2003

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There are reasonable grounds for believing that Article 7 was not intended by itself to represent a complete harmonisation of the principle of the free movement of goods. First, an international doctrine had yet to begin to develop at community level at the time the Directive was adopted.

However it was developed at national level in a number of member states and but for EMI Records v. CBS UK, it might of developed at a community level along similar line to European exhaustion.   Commissioner Monti was quoted as saying "if I am provided with satisfactory evidence that such a move [to international exhaustion] would have the ultimate of effect of reducing consumer prices without detrimental effect on employment, I would tend to look at it not only with an open, but a favourable mind."   It may be possible to answer commissioners Monti's statement by looking at three leading reports which were produced, which looked at the economic effect of excluding international exhaustion,  which shall now be analysed.   Swedish Competition Authorities Report   The Swedish Competition Authority analysed the impact of the Silhouette judgement ruling on parallel imports.The authority sought to ascertain parallel imports into Sweden and the effects that the Silhouette ruling may have on prices and competition.   Table 1: Parallel Imports in Sweden (1997)

SEK Million Clothing 4000 44.44% Motor Car Components and spare parts 3000 33.33% Pharmaceuticals 1000 11.11% Footwear 400 4.44% Motorcycles 350 3.89% Foodstuffs 100 1.11% Snowmobiles 60 0.67% Golf Equipment 50 0.56% Tyres 40 0.44% Total 9000   One can see from the table above that imports into Sweden are generally products like clothing, car components, and pharmaceuticals. Its remarked in the report that, as in the UK, the contribution to motorcycles has fallen dramatically as the price of motorcycles in Sweden had fallen in response to parallel imports. It was felt that a great amount of parallel imports had been affected by the Silhouette judgement in Sweden alone. This demonstrates that the Silhouette judgement has started to affect the economy so suddenly and dramatically!    The NERA Report: An Answer to Monti's scepticisms   Member states asked the commission to investigate the economic consequences of the regime of trade mark exhaustion in the light of the Silhouette case. The commission subsequently appointed the National Economic Research Associates (NERA) to undertake such a study. In their report, NERA identified ten sectors in which trade marks were important; footwear and leather goods, musical recordings, cars, consumers electronics, domestic appliances, cosmetics and perfumes, clothing, soft drinks, confectionery and alcoholic drinks.   It was noted in the NERA report that most of the world's production of such goods was localised in south East Asia, and this choice of location of production was unlikely to be influenced by changes in trade mark exhaustion regimes. This seems to be a crucial finding in that it can be used when predictions of job losses in the EU are mooted in any movement to a system of international exhaustion.   The report examined a number of sectors affected to a greater or lesser extent by trade mark exhaustion, and summarised the arguments for and against the introduction of international exhaustion in the EEA, whether unilaterally or BI-/multi-laterally by agreement with other states.

They listed the advantages and disadvantages of international Exhaustion the bulk of these  arguments can apply to most sectors, with some exceptions. The NERA report identified many of these arguments, which were clearly summarised in evidence by the Licensing Executives Society (LES). It is possible to identify these findings as follows:   * Arguments against Extending Exhaustion: The arguments against extending exhaustion and retaining the status quo emphasise the following negative effects of international exhaustion.   · Lower returns for trademark owners which would inhibit investment in new brands, encourage firms to retire certain products from the market and lead to reduced quality and choice;

 · Higher prices in markets outside the EEA and the possible withdrawal of products from those countries;  · Possibility of higher prices in the EEA if firms exit from lower margin markets so that fixed  costs can no longer be spread over a wide volume of sales;  · Reduce effectiveness of trademarks in assuring quality and identifying origin;  · Possible reduction in quality and after-sale service;  · Difficulty in enforcing common technical or safety standards within the EU;  · Adverse impact on the future economic development of advanced economies which rely heavily on products with substantial IP content; and  · Reduced ability to detect and prevent counterfeits.   * Arguments for Extending Exhaustion:  The dominant argument in favour of international exhaustion was, unsurprisingly, lower prices.  · Parallel imports provide additional competition, reduce the ability of the trademark owner to exploit its position by setting higher prices in some markets than others and increase competition in the distribution of products;  · The fundamental function of a trademark is to protect consumers, not to create elements of monopoly in the market;  · International exhaustion is consistent with the trend towards liberalisation of international  trade;  · New trends such as purchasing over the internet will make it increasingly difficult to sustain the existing regime;  · Parallel importers would have the same incentives to offer good services as authorised  distributors;  · Consumers would be prepared to forgo certain benefits in return for lower prices;  · Technical and safety standards will restrain parallel imports in many sectors; and  · Counterfeit problems should be attacked directly by effective detection and deterrence and not by inhibiting legitimate competitive activity.   The report concludes that extending the principle of trademark exhaustion would lead to an  increase in parallel imports in the short term. Through this analysis, they felt that it would  lead to a fall in prices and an increase in volume, which would then turn to an increase in  employment. The report concluded that long term effects are likely to be more dynamic and more difficult to predict, but may impact on the location of production plants, which would lead to a change in pricing, product and distribution strategies.   The study went on to say that the issue of exhaustion is complex which, they predict, may have an effect not only on prices, but also on product quality, product availability, after sales services (guarantees), employment, distribution agreements, and market segmentation amongst others. On the other hand, the study suggests that the impact of a change in the existing community exhaustion regime will be minimal in certain sectors like alcoholic drinks and confectionery, whereas it may have severe consequences in other sectors such as electronics, domestic appliances and footwear.

 The study calculates that the lowering effect on prices would range from "negligible" (soft  drinks) to "small" (around 1% for footwear, musical recordings, motorcars) or "moderate" (around 2% for consumer electronics).   Despite the NERA study into the consequence of trade exhaustion and the Swedish research, there is actually little empirical research measuring the impact of international exhaustion in both the long and short term.    UK Commons Select Committee   In July 1999, the Commons Select Committee on trade and industry published its eighth report on the issue of trademark exhaustion, with particular reference to the implications of such a principle on parallel imports. In its report, it concluded that in sectors of clothing and shoes, perfumes and toiletries and motor vehicles, the benefits of international exhaustion of trade mark rights outweigh the disadvantages, whereas the music and pharmaceutical industries benefited from EEA wide exhaustion.   The report continued that the EU should move towards the application of international exhaustion in some but not all sectors. The government seemed to be very pessimistic as to whether the change would be effective, given that a number of member states have signalled their intention to resist change.   Whether these reports will change the views of the EU commission or Commissioner Monti when it undertakes further analysis into trademark exhaustion is unanswerable. However, the indications from the European case law are that the ECJ will stay with community exhaustion although reports demonstrate that international exhaustion is more economically sound. Furthermore, the ECJ feel that Article 7 (1) of the Trade Marks Directive was never intended into the EEA. Such countries as the UK who disagree with the EU must remember that supremacy lies with the EU who would be willing to implement fines or take action against those who fail to adhere to the Directive.   From the analysis of these reports, some salient results are clear, the EU is an importer of grey goods, the Silhouette ruling raises the prices and lowers the consumption of such goods, they are also an exporter of grey market goods, the ruling will have the consumption of these goods too. In this respect, the ruling will have the impact of raising the prices of a wide range of trade mark goods in the EU. Given the reluctance to come to a view on a common approach to trade mark exhaustion at the WTO, it is clear that to unilaterally move to a system of regional exhaustion is very likely to lower consumer welfare. This result is copper fastened by the fact that a large amount of trade mark goods of EU countries are already produced outside Europe.   It is freely admitted that international exhaustion would discourage manufacturers from selling to countries where prices are currently low. These countries are often those where the goods are currently produced (or they would be suitable destinations for production plants if the low prices were due to low income levels).

Furthermore, the movement to international would lead to an increase in counterfeit. This argument has been found spurious by the commons select committee as the closing off of the grey market goods has lead some scrupulous firms to turn to counterfeits.

In any case, there is a generally accepted principle that the stopping of counterfeits is to the  benefit of society. There should be no diminution in the incentive of IPR holders and the state to pursue counterfeits if the Silhouette ruling was to be overturned.   It could also be argued that manufacturers would re-locate to countries that do not follow  international exhaustion regimes and where production costs are lower than in Europe. Currently, as pointed out in the Swedish Competition Policy and NERA reports, the vast majority of grey market goods are produced in SE Asia (presumably purely on the basis of production costs) where, overall, a system of global exhaustion is implemented. The exhaustion regime and the location of production are, in any case, independent of each other.

It is clear that producers will produce goods in the lowest location. However, the location, for the purposes of trade mark exhaustion, is the country where the goods were first sold by the manufacturer, opponents of international exhaustion have made much of this point.

It is worth reiterating that most of the same manufacturers of trade mark goods choose not to locate their production plant within the EU in any case. In the light of this fact, it is misleading for manufacturers of trade mark goods to use scare tactics over the employment consequences of overturning Silhouette.

 

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