Copyright law trumps free movement of unlawfully distributed goods

Author: Thorsten Lauterbach (Robert Gordon University Aberdeen)

Case C-5/11 Titus Alexander Jochen Donner, Court of Justice of the European Union, 21 June 2012

Journal of Intellectual Property Law & Practice (2012) doi: 10.1093/jiplp/jps177, first published online: November 29, 2012

Traders who target customers in a specific European Union Member State for unlawful sales of copyright works can face criminal prosecution in that jurisdiction even if the goods in question are not protected by copyright law in the country of origin; such traders cannot rely of the general principle of the free movement of goods.

Legal context

This case concerns a clash of differing national copyright laws between European Union (EU) Member States with the overarching EU notion of free movement of goods. The latter is manifested by Article 34 of the Treaty on the functioning if the European Union (TFEU) which prohibits quantitative restrictions on imports and all measures having equivalent effects. However, Article 36 TFEU offers a number of exceptions to this prohibition. Of key importance for this case is the protection of industrial and commercial property, which includes copyright law, as a justification for barriers to intra-EU trade.

German law renders the distribution of unlawful copies of protected copyright works a criminal offence, implementing Article 4(1) of Directive 2001/29 on copyright in the information society (the ‘InfoSoc Directive’). That article concerns the right of owners of copyright works to exclusively control their distribution to the public. While the goods in question did not enjoy copyright protection in the country of origin at the time, they did so in Germany. Did German copyright law constitute an illegal barrier to intra-EU trade, or was it lawful courtesy of Article 36 TFEU?

Facts

An Italian company, Dimensione, sold replicas of Bauhaus-style furniture of well-known designers, with some of its targeted customer base being located in Germany. Dimensione used marketing materials tailored and aimed at the German market. Donner operated a transport business which would collect the sold items in Italy and deliver them to the German purchasers. While at the time of the sales the replicas did not benefit from copyright protection under Italian copyright law, they did so under German copyright law. There was an argument that although the contracts were completed in Italy, the German customers would only have possession of the goods when they were delivered to them. This, in turn, meant that the replicas were distributed to (the German) public under Article 4(1) of the InfoSoc directive without the permission of the owners of the copyright. The key issue in the German courts was whether Donner's acts constituted aiding and abetting an act of copyright infringement under ss 17, 106 and 108a UrhG (Author's Rights Act) and §27 StGB (Criminal Code). Under German law, goods are distributed when the property is actually transferred to the public and the seller can no longer legally dispose of them. While Donner argued that this transfer had been completed in Italy when he paid for the goods there and then on behalf of the German customers, the Landgericht (Regional Court) Munich II opined that the actual transfer occurred when the goods were delivered to the German customers (and they reimbursed him for the price of the goods and cost of freight). This, in turn, made German law applicable and the Munich court duly convicted Donner.

Donner appealed to the Bundesgerichtshof (Federal Court of Justice), arguing that his conviction, inter alia, contravened the EU's free movement of goods principles, as German copyright law had been used to an artificial partitioning the Single Market. The court asked the European Court of Justice (ECJ) for a preliminary ruling on the following questions: Are Articles 34 and 36 TFEU governing the free movement of goods to be interpreted as precluding the criminal offence of aiding and abetting the prohibited distribution of copyright-protected works resulting from the application of national criminal law where, on a cross-border sale of a work that is copyright protected in Germany,

• that work is taken to Germany from a Member State of the European Union and de facto power of disposal thereof is transferred in Germany,

• but the transfer of ownership took place in the other Member State in which copyright protection for the work did not exist or was unenforceable as against third parties?

Figure 1: E1027 table by Eileen Gray, an example of the type of goods subject to the dispute (Source: courtesy of steelform.com, used with permission. Clubmarx 19:24, 24 November 2004 (UTC))

Figure 2: Barcelona Chair by Ludwig Mies van der Rohe, an example of the type of goods subject to the dispute (courtesy of Sailko (author) under Creative Commons Licence 3.0)

Analysis

Interpreting Article 4(1) of the InfoSoc Directive broadly, the ECJ held that ‘distribution to the public’ could be constituted by various activities, rather than one particular type of act. The whole range from concluding the contract to the delivery of goods to customers would be within the ambit. Consequently, the exclusive distribution right could be infringed in different Member States by cross-border sales. If there is evidence that a trader specifically targets customers in a particular Member State, this would constitute ‘distribution to the public’. If a trader set up websites using specific languages, design and distribution of advertising materials and the provision of tailored delivery and payment systems are all relevant in the court's assessment on a case-by-case basis. In respect of traders such as Donner, a national court would have to be satisfied that they themselves were involved in the targeting of the public and whether they were aware of the activities by the actual seller.

The ECJ agreed that there was a potential conflict between the national legislation and the free movement of goods principle anchored in Article 34 TFEU: clearly, an offence of aiding and abetting the distribution of goods protected by copyright constituted a restriction of the free movement of goods. While this contravened Article 34 TFEU, it was possible to justify this restriction under Article 36 TFEU. The ECJ argued that where goods were placed on the market because of differences between national copyright laws, bypassing the permission of the right-holder, national law could be used to restrict the free movement of goods. Consequently, the free movement principle would not trump an offence of aiding and abetting unlawful distribution of goods protected by copyright anchored in national law.

Practical significance

In view of previous ECJ rulings, the outcome in this case may be unsurprising. It is nevertheless significant, not least for businesses which trade in goods that attract copyright protection. If they embark on cross-border trade, there is a need to take account of the copyright laws of other Member States. The Advocate-General had remarked—and the ECJ agreed—that the requesting of consent from the respective copyright owners would have been the prudent step to take before embarking on the particular business venture. Viewed in this light, the approach taken by German copyright law could not be regarded as disproportionately restricting intra-EU trade. On a policy level, it is unclear whether this decision will lead the European Commission to consider further attempts at harmonizing further areas of copyright law where national levels of protection differ between Member States. There are prominent examples where previous rulings had led to European copyright legislation in the early 1990s: Case 62/79 Coditel v Cine Vog (Satellite and Cable Directive), Case 158/86 Warner Bros v Christansen (Rental Rights Directive) and Case 341/87 EMI Electrola v Patricia (Term of Protection Directive). In all of those celebrated instances, it was argued that the differences in copyright protection between Member States hindered the completion of the Single Market programme. In copyright and authors' rights terms, there is still a very long way to go before that objective is attained.

There is a recurring argument that ever-increasing cross-border business and consumer activity via the internet and other communications technology require a wider and conceptually based, less piecemeal, approach to harmonization of national copyright laws for the benefit of all stakeholders. Disputes such as Donner may be quite detrimental to both consumer and business confidence in intra-EU trade, besides painting an unclear picture for owners and authors of copyright works. The recent Commission proposal for a directive on ‘collective management of copyright and multi-territorial licensing of rights in musical works for online uses in the internal market’ may only be the first sign of things to come. Given that a more holistic approach to harmonization of copyright law, while desirable, may be illusory, a high number of smaller steps towards that aim are most likely.

Court of Justice balances IP rights and international trade

Author: Anna Giulia Micara (Department of International Studies, Università degli Studi of Milan, Italy)

Koninklijke Philips Electronics NV v Lucheng Meijing Industrial Company Ltd, Far East Sourcing Ltd, Röhlig Hong Kong Ltd, Röhlig Belgium NV and Nokia Corporation v Her Majesty's Commissioners of Revenue and Customs, Court of Justice of the European Union (ECJ), Joined Cases C-446/09 and C-495/09, 1 December 2011

Journal of Intellectual Property Law & Practice (2012) doi: 10.1093/jiplp/jps016, first published online: February 20, 2012

The ECJ found that goods can be considered ‘counterfeit’ or ‘pirated’ where it is proved that they are intended to be put on sale in the EU, while goods coming from a non-Member State which are imitations of goods protected in the EU by a trade mark, copyright, or design cannot be classified as ‘counterfeit’ or ‘pirated’ merely on the basis of the fact that they are brought into the EU under a suspensive procedure. The judgment is particularly interesting because the possibility for customs authorities to stop goods which are technically outside the EU territory was an unsettled and much debated issue.

Legal context

Border measures are a fundamental tool for IP holders. The procedure enables customs to suspend the release of goods suspected of infringing IP rights ex officio or by request of the right holder, therefore immobilizing goods which the holder could not control in the country of production. EU border measures are provided for by Regulation 3295/94 laying down measures concerning the entry into the Community and the export and re-export from the Community of goods infringing certain IP rights as amended by Regulation 1383/2003 concerning customs action against goods suspected of infringing certain IP rights and the measures to be taken against goods found to have infringed such rights. The possibility for customs authorities to stop goods under a customs suspensive procedure was still an unsettled issue. Such suspensive procedures, such as storing goods in a free zone or warehouse or external transit (referring to goods coming from and directed to a third country) imply that goods remain technically outside the EU territory since they are not to be released for free circulation there.

In Case C-383/98, Polo Lauren, the ECJ declared Regulation 3295/94 applicable to non-Community goods in external transit without reference to any need to prove the risk of diversion into the EU market, but stated that ‘after all, the external transit of non-Community goods is not completely devoid of effect on the internal market’. In Case C-281/05 Montex, however, the ECJ held that external transit did not infringe the essential functions of the trade mark in Germany and that, in order for the goods to be stopped by customs, the risk of their possible diversion should be manifest.

The literature is divided. On the one hand, stopping goods not released in the EU market and not presenting risk of fraudulent diversion amounts to a violation of the territoriality principle and hinders legitimate trade; on the other hand, there is the risk that counterfeiters need only to declare a good in external transit in order to sell their goods in the EU. The issue has also been made even more relevant by the case of generic drugs coming from India and directed to Brazil, where they were fully legitimate, but stopped by Dutch authorities because they infringed patent rights in the Netherlands. The nature of the goods, a second-line HIV/AIDS medication for patients awaiting them urgently, made this debate highly relevant and the consistency of EU law with the Trade-related aspects of Intellectual Property Rights (TRIPS) agreement was discussed at the World Trade Organization. Finally, the issue is discussed within the process of revision of Regulation 1383/2003 (proposal COM (2011) 285).

Facts

In Case C-446/09, Belgian customs authorities inspected in the port of Antwerp a cargo of electric shavers from China (to an uncertain destination) resembling designs of shavers developed by Philips and protected by Philips in Benelux through an international design registration. Suspecting that the goods inspected were pirated goods, the customs authorities suspended the release of the goods and informed Philips. Afterwards, Philips brought an action against Lucheng, Far East Sourcing, and Röhlig before the Court of First Instance of Antwerp seeking a ruling confirming infringement and an order to pay damages.

In Case C-495/09, Her Majesty's Commissioners of Revenue and Customs (HMRC) inspected at London Heathrow Airport a consignment of mobile phones and accessories, coming from Hong Kong and destined for Colombia, with a sign identical to the Community trade mark registered by Nokia. Suspecting that the goods were fake, HMRC informed Nokia but, when Nokia asked for the seizure of the consignment, HMRC denied the request stating that, in the absence of evidence of diversion into the EU, the goods could not be considered counterfeit, according to case Montex. Consequently, Nokia brought an action against HMRC before the High Court of Justice of England and Wales.

Analysis

The preliminary questions ask, in essence, whether goods coming from a non-Member State which are copies of designs protected in the EU, such as Chinese shavers in Case C-446/09, or imitations of goods protected in the EU by trade marks, such as the mobiles inspected at Heathrow Airport, can be classified as ‘counterfeit’ or ‘pirated’ within the meaning of Regulation 3295/94, as amended by Regulation 1383/2003, considering that they are not released for free circulation in the EU territory but merely on the basis of the fact that they are brought into the customs territory of the EU, under a suspensive procedure referred to in Article 84 of the Customs Code. Indeed, in Case C-446/09, goods were under the customs warehousing procedure, therefore stored in a warehouse under customs supervision, and in Case C-495/09 goods were in external transit. The goods were counterfeit under EU or national law, but they were under customs procedures which did not entail the goods being put into commerce in the EU.

Citing Montex and other cases, the ECJ held that goods placed under a suspensive procedure cannot infringe EU IP rights: they infringe only if they are put on sale in the EU. Concerning the risk of fraudulent diversion, the ECJ noted that customs authorities, in order to detain goods, do not need proof that goods have already been sold, offered for sale, or advertised to EU consumers, it being sufficient that there be material such as to give rise to suspicion. Moreover, it clarified Montex by stating that it is sufficient that, for example, the destination of the goods is not declared or there is no precise or reliable information as to the identity or address of the manufacturer or consignor of the goods, or there is lack of cooperation with customs authorities or documents suggesting the risk of diversion. In Case C-495/09, the ECJ affirmed that national courts should consider relevant that it was impossible to identify the consignor of the goods in question. These examples are broad, so the main argument in favour of the control of goods in external transit (that it is sufficient for counterfeiters to declare a goods under a suspensive procedure, as right holders argued) no longer appears substantiated. The only limit is that a suspicion of risk of fraudulent diversion must be based on facts and not be abstract, so that the ECJ ensures that legitimate international trade is not hindered, even by a temporary detention. Moreover, concerning goods suspected of infringing IP rights in the country of destination, the ECJ noted that customs authorities may cooperate with the customs authorities of third countries under Article 69 TRIPS.

Secondly, dealing with Case C-446/09 where goods were already detained, the ECJ rejected the so-called manufacturing fiction, an approach which appears to have been applied for the first time by a Dutch court in 2004 and which consists in the treatment of non-EU goods in transit as though they had been manufactured in the Member State in which they are situated and are, accordingly, subject to the IP legislation in force in that Member State, regardless of whether those goods are destined for the EU market. Indeed, the court observed that, in the event that the competent authority finds infringement, goods are destroyed or abandoned and therefore operators concerned cannot suffer such dispossession or penalties on the sole basis of a risk of fraud or on the basis of the manufacturing fiction. Consequently, that authority cannot classify as ‘counterfeit’ and ‘pirated’ goods which a customs authority suspects of infringing an IP right applicable in the EU but in respect of which it is not proven that they are intended to be put on sale in the EU. According to the ECJ, the effectiveness of Regulation 1383/2003 is not compromised because the end of detention does not mean that customs have no more control over it since each stage of the suspensive procedure is monitored.

Finally, as Nokia pointed out, the ECJ held that precautionary considerations may militate in favour of an immediate seizure of goods identified as posing health and safety risks, irrespective of the customs procedure under which they are placed, but Regulations 3295/94 and 1383/2003 deal only with IP infringements so these aspects must be assessed on the basis of other EU provisions. Thus a case dealing with, for example, generics could still address elements that have not been fully settled.

Practical significance

The ECJ had the possibility of clarifying an important matter and of establishing a uniform interpretation of EU Regulations 3295/94 and 1383/2003. It is now clear that customs authorities cannot suspend the release or detain goods (in order to immobilize them pending the determination to be made by the authority competent to take a substantive decision) under a suspensive customs procedure, which does not imply goods to be put into the EU market, unless there are indications giving rise to suspicion of fraudulent diversion into the EU market.