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Practice Notes

Repair vs. Reform: Even if the product dies, the trademark lives on

You open your closet and notice an old luxury bag with frayed edges. It's old and a bit tattered, but as it's an expensive item from a prestigious label, you haven’t been able to find it in your heart to throw it away.  However, if you can transform the old bag — that has certainly seen better days — into something new, wouldn't it be a novel idea to have a leather craftsperson turn it into a purse?  That is, so long as the artisan is not breaking the law by doing so.   Trademark law generally recognizes the right of the owner of a trademarked product, whether it be a handbag or a luxury car, to resell the item without permission from the manufacturer. Resale by the first purchaser of the original article under the manufacturer’s trademark is neither trademark infringement nor unfair competition.   Trademark rights exhaustion, often referred to as the “first sale doctrine”, is a concept whereby once a trademark owner has sold a product bearing their trademark or granted permission for its sale, they are unable to prevent downstream owners from subsequently selling or reselling the same product. However, complications arise when a trademarked product is altered or dressed up in some way before being resold, or even when the product is reformed or transformed into an entirely different product for its owner.   There was recently an interesting case in Korea dealing with this issue, which we will look at below.   Seoul Central District Court: Case 2022GaHap513476 (October 2023)   In this case, the plaintiff alleged that the defendant’s “reforming” of (genuine) goods bearing the Louis Vuitton trademark into different products constituted trademark infringement and/or an act of unfair competition. Specifically, the defendant offered a “reform” service of taking old or damaged goods and turning them into a new product — for example, taking a bag and transforming it into a different bag, or into wallets, card cases etc. The following example pictures are taken from the court decision:   Before After   The plaintiff’s claims were as follows:   The defendant’s actions constituted “use” of the plaintiff’s trademark, specifically, producing the items corresponded to “[d]isplaying a trademark on goods or packages of goods” per Article 2(2)-11(a) of the Trademark Act, and returning the reformed product to the owner of the bag corresponded to “[t]ransferring or delivering goods or packages of goods on which a trademark is displayed” per Article 2(2)-11(b) of the same Act. The defendant’s sale of “reformed” products constituted “an act of doing damage to distinctiveness or reputation attached to another person's mark” per Article 2-1(c) of the Unfair Competition Prevention and Trade Secret Protection Act.   The defendant’s rebuttals were as follows:   The trademark owner’s rights were exhausted when the bags in question were first sold to consumers. The “reformed” bags were made per individual customers’ specifications and were returned to the same customer, with no intention of selling to third parties, and thus do not fall under the exception to trademark exhaustion (i.e. “processing or repair to the extent of damaging the identity of the original product”). Thus, no new products bearing the trademark were produced. The products in question cannot be considered “goods” for the purpose of “use of a trademark” under the Trademark Act, as the products are individually received from and subsequently returned to the same customer, so are not mass produced or distributed. Further, the marks are not used “as a trademark” as the bag owner would have no confusion concerning the source of the reformed product.   While the court did not consider the unfair competition claim, it decided that the defendant’s actions were “trademark use” that infringed the plaintiff’s registered trademarks for identical/similar designated goods. In reaching this decision, several interesting points were discussed.   The court confirmed that “reforming” of the products was beyond the scope of simple processing/repair; namely, as the reforming was of an extent where the identity of the original product was damaged, it was akin to an act of production and thus the trademark owner should still be permitted to claim the effect of trademark rights. In reaching this conclusion it was not considered relevant that the “reformed” products were only produced for the owner of the original product, and were not sold to third parties.   Addressing the defendant’s rebuttals, the court decided that the products in question are able to be considered “goods” under the Trademark Act as they have inherent exchange value and are capable of being the object of independent commercial transactions. The scale of an infringer’s production capabilities were not considered relevant in protecting the source indication function of a trademark.   While acknowledging that the products in question were not intended to be sold to anyone other than the original bag owner, and thus the recipient of the reformed goods would be unlikely to mistakenly believe they were manufactured and sold by the plaintiff, the court stated that general consumers could still be confused as to the source of the goods if the reformed products are viewed by or transferred to a third party.   As a result, the defendant was ordered to cease production of “reformed” products using fabric/materials indicating the plaintiff’s trademark, and was ordered to pay compensatory damages of 15 million KRW (approx. $11,600 USD). In calculating damages, the court considered the defendant’s revenue attributed to the reformed products (23.8 million KRW, approx. $18,400 USD) but in the absence of data showing profit, and considering the lack of any evidence suggesting the reformed products were sold as used products, settled on a “reasonable amount of damages on the basis of the meaning of all pleadings and the result of the examination of evidence” per Article 110(6) of the Trademark Act.   The decision is currently on appeal to the IP High Court.   Comments   While some have criticized the decision, arguing that the exhaustion of trademark rights should apply equally to the contractor carrying out “reform” work strictly upon request of the product owner, others have welcomed the judgement as it reduces the risk of consumer confusion and damage to the trademark owner’s reputation due to the creation of products that do not meet their quality control standards. In pursuing this claim, rather than seeking a sizable damages payout it is understood that Louis Vuitton wishes to protect the strong reputation its trademark enjoys by discouraging “reforming” by private contractors.   If ultimately confirmed, this decision will be welcomed by brand owners as it would somewhat extend their ability to control use of trademarks beyond the first sale doctrine, and would likely result in a number of infringement lawsuits brought by luxury brand owners against other companies involved in similar “reform” practices.   It is possible such a decision, if confirmed, would also extend to repair/refurbishment services in other consumer sectors such as automobile tuning, upgrading of electronic devices etc. which are typically carried out for the sole benefit of the owner of the product in question, and not for sale to third parties. Further clarification on this point, hopefully with specific criteria for determining at what point processing of an item results in damage to the identity of the original product, will be necessary to avoid consumer and business confusion.   For the meantime, contractors offering aftermarket repair or refurbishment services will need to be more careful about crossing the line between “repair” and “reform” when carrying out customer’s requests.   Any further updates on this issue following the appeal will be reported when available.

2023-12-28
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