The Manufacturing Hinderance of a PDO


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European Trademark Law and Geographical Indications, Fall 2008 Class

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The Manufacturing Hinderance of a PDO

  1. 1. The Manufacturing Hindrance of a PDO Kathleen Broughton Case Western Reserve University School of Law September 15, 2008 European Trademark Law and Geographical Indications Professor Ricolfi Fall 2008
  2. 2. I. GIs and PDOs in light of TRIPS The Trade Related Aspects of Intellectual Property Rights (TRIPs) Agreement entered intoforce on January 1, 1995 and is administered by the World Trade Organization (WTO). TheTRIPs Agreement commits member state governments to enact and enforce intellectual propertyrights (IPRs) laws. The purpose of TRIPs is to create consistency in IPRs legal standards. Article7 of the TRIPs Agreement states that “the protection and enforcement of intellectual propertyrights should contribute to the promotion of technological innovation and to the transfer anddissemination of technology, to the mutual advantage of producers and user of technologicalknowledge and in a manner conducive to social and economic welfare, and to a balance of rightsand obligations.”1 This Article creates a potential conflict of interest between manufacturingmethods implemented by a company and the company‟s desire to utilize a geographical indicator(GI) or protected designation of origin (PDO) mark in commerce. Protecting intellectual property is “viewed as an important part of the process ofcommercialization of such assets in the national as well as in the international marketplace.”2Commercializing innovation typically requires a company to stay ahead of its competitors through“making a small improvement in the quality of existing products, as compared with those of thecompetitor.”3 The manufacturing techniques utilized to improve quality production and reduceoperation costs have a direct correlation to the policies of using a GI or PDO because restrictionson manufacturing, such as location of production, could negatively impact commercialization. PDOs are identifying marks used GIs are also regional “source identifiers, indicators ofquality, and are as valuable to producers from particular regions as are trademarks” and are used topromote the goods of a particular region. 4 A GI mark is different from a trademark because atrademark is used to identify “an enterprise which offers a product in the market,” whereas a GI“identifies a geographical area to which a quality, reputation or other characteristic of a product isattributable.” 5 The benefit of using a GI or PDO over a trademark is that a consumer will expect acertain level of guaranteed quality of a product from a specific region. European states areinclined to use GIs or PDOs to protect heritage and culture of a region, whereas Under Article22.2(a) of TRIPs, member states are required to “provide the legal means for interested parties toprevent the use of any means in the designation or presentation of a good that indicates or suggeststhat the good in question originates in a geographical area other than the true place of origin in amanner which misleads the public as to the geographical origin of the good.” 6 In today‟s globalmarket, reputation is critical for a company and its product to remain competitive. Through theuse of a PDO or GI, a company is representing to the public that its product meets a particularquality standard from an exclusive region or territory. The emerging question, therefore, iswhether the benefits of utilizing a PDO or GI mark outweigh the benefits of the manufacturer toapply cost-analysis and utilize operation research and management to determine what the bestmethod is to produce a product.1 Trade Related Aspects of Intellectual Property Rights Agreement (January 1, 1995), Article 7.2 Shahid Alikhan and Raghunath Mashelkar, Intellectual Property and Competitive Strategies in the 21st Century,page 57 (Kluwer Law International 2004).3 Id.4 Id. at 17.5 Id.6 Trade Related Aspects of Intellectual Property Rights Agreement (January 1, 1995), Article 22.
  3. 3. This paper analyzes the problems arising in manufacturing processes and costs stemmingfrom the use of a PDO. First, the discussion will focus on the Prosciutto di Parma case (ParmaHam), which is the primary European common law that defined the manufacturers use of a PDObased upon a regulating association. Then, the discussion will shift to analyze the use of a PDOmark under traditional trademark policies. Finally, an explanation of modern manufacturingtechniques will provide insight as to why a PDO can create a hindrance on manufacturers. Insummary, the use of the PDO is useful to preserve a particular product‟s production in a particularregion but such production is at the potential harm of restricting modern manufacturing techniques. II. Premise of the Prosciutto di Parma Case In 2001, the Parma Ham case was first reviewed in English courts. Parma hams areknown throughout the world as a meat delicacy because of the traditional methods and standardsthe people of Parma, Italy implement to produce, process and prepare the ham. To preservethese traditional standards, a national PDO was registered in the Italian Patent and TrademarkOffice and was governed by the “Consorzio del Prosciutto di Parma” or Parma HamAssociation.7 This PDO stamp was then placed upon all Parma hams produced in the regionunder the regulations specified by the Parma Ham Association. This stamp was used as anindicator for consumers to identify the product‟s exclusivity and quality. The concern with the use of the PDO mark on the parma hams arose after Hygrade FoodsLtd (Hygrade), located in Corsham in Wiltshire, England, began importing boned Parma hamsfrom one of the producers and completed the manufacturing production of the hams by slicingand packaging the hams. The hams packaged at Hygrade did not bear the PDO mark nor wasthere any concern as to the authenticity of the mark. Hygrade would then supply these packagedhams to Asda Stores Ltd. (Asda), who sold them in their supermarkets. The Association claimedthat such procedures were in conflict with regulating state and national law. In the English court, the Plaintiff, the Parma Ham Association, argued its reliance ofItalian law to enforce the Association‟s regulations in using the Parma Ham PDO against aparma ham producer who moved packaging operations into England. Under Italian Law No. 26of 13 February 1990, Article 1 lays the foundation of PDO protection for “…ham equipped witha distinguishing mark that allows permanent identification, obtained by processing fresh legs ofnational pigs…produced according to the provisions laid down in this law and aged in the[traditional] area of production…” (emphasis added).8 Article 6 exclusively indicates that themark should be permanently fixed on the product.9 The article further indicates that if nomethod can be utilized to create such permanent marking, then “packaging operations shall becarried out in the [traditional] production area…” (emphasis added).10 The House of Lords heldthat the case must be analyzed and decided upon by the European Court of Justice (ECJ) since7 Consorzio Del Prosciutto di Parma v. ASDA Stores Limited and Others, Opinions of the Lords of Appeal forJudgment.8 Id.9 Id.10 Id.
  4. 4. there were conflicting state and European Commission laws with non-apparent clarity as to thedictating laws and regulations. When the ECJ reviewed the case in 2003, the court analyzed four main issues indetermining whether or not the producer was acting in an acceptable manner under regulation toutilize the PDO mark. These issues are: 1) “whether Regulation No. 2081/92 must be interpretedas precluding the use of a PDO from being conditional on operations such as the slicing andpackaging of the product taking place in the region of production,” 2) “whether imposing such acondition on the use of the PDO Prosciutto di Parma for ham marketed in slices constitutes ameasure having equivalent effect to a quantitative restriction on exports within the meaning ofArticle 29 EC,” 3) “whether, if that is so, the condition in question may be regarded as justified,and hence compatible with Article 29 EC,” and 4) “whether that condition may be relied onagainst economic operators when it has not been brought to their notice.”11 The ECJ held that the manufacturing techniques of slicing and packaging carried out inEngland implemented by the producers were in violation of Regulation No. 2081/92. The ECJalso noted that the Regulation “does not exclude the application of special technical rules tooperations leading to different presentations on the market of the same product” but the“specification of the PDO Prosciutto di Parma expressly mentions the requirement of slicing andpackaging the product in the region of production for ham marketed in slices.”12 Thus, to use thePDO marking on the Parma Ham, the slicing and packaging must take place in the same regionwhere it is produced. The court reasoned that the specification “is intended to allow the personsentitled to use the PDO to keep under their control one of the ways in which the product appearson the market.”13 The court noted that Parma Ham is usually sold in slices and thus slicing is animportant element of the overall ham manufacturing operation. The court then solidified itsreasoning in determining that “any deterioration in the quality or authenticity of ham sliced andpackaged outside the region of production, resulting from materialization of the risks associatedwith slicing and packaging, might harm the reputation of all ham marketed under the PDOProsciutto di Parma, including that sliced and packaged in the region of production under thecontrol of the group of producers entitled to use the PDO.” 14 As a result, the ECJ ruled that the entire manufacturing operation of Parma ham must bein the same region from production to processing to packaging. The court recognized, however,that there was not adequate publicity in the Community legislation to impose criminal or civilpenalties against the economic operators. One could premise that this case provided notice toParma ham producers that they are required to complete the entire manufacturing operation inthe designation of origin to utilize the PDO marking and that third parties are no longer allowedto package the Parma hams since this ruling may serve as sufficient notice that such act isprohibited under Regulation No. 2081/92.15 Additionally, there was a concern as to thecontractual relations between the producers, Hydrade and Asda – however concern of this paper11 Consorzio Del Prosciutto di Parma v. ASDA Stores Limited and Others, European Court of Justice, Case C-108/01, 20 May 2003.12 Id.13 Id.14 Id.15 Id.
  5. 5. is focused on whether or not the use of a PDO mark hinders more than helps manufacturerswhom desire to implement modern manufacturing techniques. III. Analysis of PDO use on the Parma Ham packaging in question The ruling of the ECJ regarding the manufacturing of Parma hams is unique. The courtand the parties involved agreed that “the protection conferred by a PDO does not normallyextend to operations such as slicing and packaging the product.”16 The court noted that thepackaging in another region will typically be allowed unless the overseeing specificationexplicitly indicates otherwise.17 The Italian Law No. 26 explicitly states the completemanufacturing requirements of the ham to take place in the same region. The Italian lawestablished for the manufacturing of Parma hams is for the protection of both producers andconsumers because the hams have unique and distinguishable characteristics that could nototherwise be protected. However, there are concerns raised to the analysis made by the ECJ ofthe use of the PDO including whether or not there was deception in the use of the mark andwhether or not the packaging could take place outside of the region while still meeting orexceeding the customer‟s expectations in the quality of the product. i. Use of the PDO under Trademark Principles There are three main policies underlying trademark law. The first is an exclusive right to“prevent consumer confusion and reduce consumer search costs.”18 Second, due to consumerexpectation, a trademark is to “encourage trademark owners to invest in and maintain aconsistent level of quality.”19 The third policy of trademark law is to protect the trademarkowner from a competitor to “free ride on the good will of the trademark owner.”20 The use of aGI or PDO mark is to provide an additional level of protection beyond a trademark because theguidelines to use a GI or PDO require stricter laws to acquire and maintain use of such markings.Although the use of a GI or PDO is not utilized in the US, it still bears importance in Europe. Under the EC No 510/2006 (previously EC No 2081/92), Article 2 provides the purposeof PDOs and GIs; the requirements to protect a PDO are more stringent than the requirements toprotect a GI. As defined under the regulation, a PDO describes an agricultural product or afoodstuff with “quality or characteristics of which are essentially or exclusively due to aparticular geographical environment with its inherent natural and human factors.” [emphasisadded] 21 The GI, on the other hand, describes an agricultural product or a foodstuff “whichpossesses a specific quality, reputation or other characteristics attributable to that geographicalorigin.”22 The PDO standards set forth in the EC 510/2006 indicate that the production,processing and preparation take place in the defined geographical area. On the other hand, theGI standards only require that the production and/or processing and/or preparation take place inthe same defined geographical area. Roland Knaak, an International IP attorney residing in16 Id.17 Id.18 Craig Nard, David Barnes, and Michael Madison. The Law of Intellectual Property, 2 (Aspen Publishers 2006).19 Id.20 Id.21 Official Journal of the European Union Council Regulation No 510/2006 Article 2 (March 31, 2006).22 Id.
  6. 6. Munich, explained that the relationship between the product and the geographical origin must becloser than designations of origin within the meaning of the Regulation.23 Therefore, the Parmaham manufacturing was under question because the Association chose to utilize the morerestrictive PDO mark rather than the GI mark. The Italian Law No. 26 explicitly stated whatmanufacturing techniques are required to gain protection under a PDO mark. The concern raisedin the Italian Law protecting Parma ham is the necessity of such strict manufacturingrequirements compared to the policy aims of trademark protection. The first policy underlying trademark law is the exclusive right to prevent consumerconfusion. Under the Parma Ham Regulation Article 4.2, the labeling requirements werespecific to indicate that the packaging shall take place in the same region as production to qualifyfor a PDO marking. To prevent consumer confusion the packaging should then explicitlyindicate such location. It was argued that the “supervision of the packaging is entirely for thepurpose of ensuring the authenticity of the sliced ham.”24 The Parma ham packaging underquestion bore a mark indicating the ham was “made by traditional methods to guarantee theirauthentic flavour and quality and Produced in Italy, packed in the UK for Asda StoresLimited.”25 It would appear that consumers would not be confused from the packaging of theham since it explicitly indicates the packaging location. The lack of actual or potential consumerconfusion was further demonstrated because neither party questioned such potential confusion,let alone presenting supportive evidence. The second policy underlying trademark law is to encourage trademark owners to investin the quality of their product. The House of Lords noted that the “purpose of protection of thePDO, according to the recitals to the Regulation, is to enable the consumer to „purchase highquality products with guarantees as to the method of production and origin.‟”26 Of courseclaiming manufacturing must take place in only one geographical region to ensure productquality begs the question as to whether or not the quality of the product is affected if thepackaging of a product is completed in a region outside of where the production and processingoccurred. It is arguably reasonable to require packaging to take place in the same region oforigin as the production and processing of a product. Simultaneously, in application of modernmanufacturing principles, packaging can take place in a region other than the location ofproduction and not diminish the product‟s quality. Therefore, this trademark policy is metregardless of manufacturing location if the manufacturing techniques are identical in bothregions and care is taken in the logistics of transporting the product. The third policy underlying trademark law is to protect the trademark owner fromcompetitors piggy-backing on the success of the original owner. Here, the PDO is betterprotected if all manufacturing processes are executed in the same geographical region becausethere will be no concern of misrepresentation in the product. In the analysis of the Parma Ham23 Roland Knaak, Case Law of the European Court of Justice on the Protection of Geographical Indications andDisignations of Origin Pursuant to EC Regulation No. 2081/92, International Review of Industrial Property andCopyright Law, Volume 32 No. 4, 378 (2001).24 Consorzio Del Prosciutto di Parma v. ASDA Stores Limited and Others, European Court of Justice, Case C-108/01, 20 May 2003.25 Id.26 Consorzio Del Prosciutto di Parma v. ASDA Stores Limited and Others, Opinions of the Lords of Appeal forJudgment.
  7. 7. case, there was no question as to whether or not a competitor was attempting to piggy back fromthe Parma ham PDO. If there was an allowance for the packaging to take place in a differentgeographical region, it is questionable as to whether or not imitation manufacturers wouldattempt to create knock-off products because the Association would have less control over themark of the product. A trademark infringement claim, based on consumer confusion couldcommence if such a problem arose when an association distributed the geographical locations ofthe manufacturing processes. ii. Implementation of Manufacturing Techniques When the producers in question contracted with Hygrade to complete the manufacturingof the Parma Hams, the producers either did not consider the PDO regulation or did not believetheir manufacturing operations were violating the regulation. It appears that the ECJ‟s reasoningfor requiring all manufacturing to take place in the same region for the use of the Parma HamPDO is to maintain the integrity of the quality of the product. The producers were likely focusedon production that implemented the highest level of manufacturing performance in relationshipto time, cost, and quality regardless of a PDO marking regulation. From a manufacturer‟sperspective, the “objective of the manufacturing manager is to produce a quality product, onschedule, at the lowest possible cost, with a minimum of capital investment and a maximum ofemployee satisfaction.”27 In the traditional methods of performing operations research andimplementing improvements, a mainstream philosophy of manufacturing is that “there is only one way that a company can be competitive: all parts in every product must be produced in the precise dimensions given on the drawings. Developing quality products in a manner that actually reduces costs is a major tenet of the approach to quality instituted by Taguchi. This approach involves combining engineering and statistical methods to achieve improvements in cost and quality by optimizing product design and manufacturing methods.”28This means that quality of a product improves with consistency in the production. If operationsare consistent in the manufacturing, then the question posed is whether or not it is a necessity tocarry out the manufacturing processes in a single location. Many industrialized countries continually learn from each others manufacturingtechniques to remain competitive. When modern manufacturing was developed near the turn ofthe 20th century, the focus of production was on quantity. This is the time when stream linedassembly processes were first introduced to manufacturing. Over time, the manufacturing focusshifted from quantity to quality.29 Currently, “according to many observers, we are now in themidst of the third wave of manufacturing, which first became noticeable in the early 1980s.” 30 This third wave is known as world-class manufacturing (“WCM”). The concept ofWCM, or lean manufacturing is27 Benjamin Niebel and Andris Freivalds. Methods, Standards, and Work Design, 3, (11th ed., McGraw Hill 2003).28 Id at 81.29 J. Barry DuVall. Contemporary Manufacturing Processes, 35, (Goodheart-Willcox Company 1996).30 Id.
  8. 8. when a company has gone through continual improvement to the extent necessary to assure that better quality products are being consistently produced at less cost. World-class manufacturers are experts at producing quality products. Efficiency in performance has been sharpened to the point where lead times are almost nonexistent. WCM firms can be effectively viewed as the integrators: they know how to utilize all the principles of effective technology management, and they can do it faster and better. 31In applying WCM one of the many statistical analysis applied is 6 Sigma. 6 Sigma is themeasure of variability. It is a name given to indicate how much of the data falls within thecustomers‟ requirements. The higher the process sigma, the fewer the defects in parts produced.Statistically, 6 Sigma is only 3.4 failures per million opportunities. The concept of 6 Sigma ismore than just a statistic; it is a concept in the manufacturing world to signify change in theproduction to produce quality products in rapid time. One of the driving factors for companies toutilize 6 Sigma techniques in manufacturing is customer‟s voice. Corporations realize the onlyway to remain competitive is to satisfy the needs of the customers, which typically includes ahigh quality product at the best price. One of the methods used to define the customer‟s voice into qualitative data is throughquality function deployment (“QFD”). QFD “supports and documents the benchmarking andcustomer-need-analysis processes, and its intent to improve the quality of products in thebroadest sense.”32 This method is a tool for managers and engineers to develop strategies toimprove their manufacturing process over time. QFD is used to “make clear the relationships between customer needs and engineeringrequirements, document benchmarking data (both quantitative and qualitative), formspecifications by establishing target values on each engineering requirement, check for conflictsin engineering requirements, and finally record expected technical difficulty.” 33 By utilizingQFD principles, a manufacturing process is improved based on the customer‟s needs. Customerstoday not only expect, but demand, high quality in their products. To produce high qualityproducts, there must be consistency in the manufacturing processes. Japan is one of the leadingindustrialized countries utilizing WCM techniques. The Japanese are known for implementing quality checks in every aspect of themanufacturing process. In Japan, “quality control or quality assurance is defined as thedevelopment, design, manufacture, and service of products that will satisfy the customer‟s needsat the lowest possible cost.” 34 To achieve high levels of quality assurance, “few inspectionprocedures are assigned to specialized inspectors; usually the final inspections are made from the31 Id 38.32 Kevin Otto and Kristin Wood. Product design. Techniques in reverse engineering and new product development,290, (Prentice Hall 2001).33 Id.34 Yasuhiro Monden. Toyota Production Systems, 221, (3rd ed., Chapman & Hall 1998).
  9. 9. point of view of the consumer or management and are not inspections for defects that wouldaffect the flow production.” 35 Many industrialized countries refer to the efficient and effective manufacturing processesof the Japanese. It is possible that the most important reason for continued Japanese success in the manufacturing sector is the keiretsu. This is a form of business and manufacturing organization that links businesses together. It can be thought of as a web of interlocking relationships among manufacturers – often between a large manufacturer and its principal suppliers. 36The keiretsu principles happen in most corporations, large and small, which are apparent fromthe multitude of international agreements established to allow for these exact business practices,such as NAFTA and GATT. In a global economy it is only expected that an operation wouldlikely grow with time to develop the need for manufacturing processes to take place inlogistically different locations. If there is no solidified reasoning as to why the manufacturingprocesses cannot remain consistent in different locations, then there should be no questionsraised as to whether or not the quality of the product is affected. In the case of the Parma Hams, it is very likely that the producers under question wereimplementing WCM techniques. In implementing such strategic techniques, the producers werelikely improving the quality of the product. The modern manufacturing principles utilized bymany competitive companies is in complete conflict with the rationale the ECJ used to determinethat “it must be accepted that checks performed outside the region of production would providefewer guarantees of the quality and authenticity of the product than checks carried out in theregion of production.” 37 This concern raised as to the level of control the producers have overthe product is not justified based on the decisions of the producers and the principles of WCM.If the producers did not trust that Hygrade would maintain the level of quality necessary todistinguish the authenticity of the product, then the producers would not have contracted withthem to carry out the final operations of slicing and packaging the Parma Ham product.Furthermore, since the slicing and packaging are likely automated processes, there likely is aconsistent process that can be carried out in any location. IV. Summary Frequently, especially in intellectual property, the law is molded based upon the changesand improvements made in useful arts. If, therefore, the principle that law is reactionary totechnological innovation is taken as true, then the producers of Parma Ham that implementedmanufacturing techniques of modifying the logistics of the packaging were performing at aWCM level and the regulation dictating use of the PDO mark, as interpreted by the ECJ, is35 Id.36 Niebel and Freivalds. Methods, Standards, and Work Design at 87.37 Consorzio Del Prosciutto di Parma v. ASDA Stores Limited and Others, European Court of Justice, Case C-108/01, 20 May 2003.
  10. 10. creating a hindrance on this particular producer‟s business model. It therefore becomes abalance of objectives as to whether or not it is better to keep operations in one particular region. Some of the reasons to maintain all manufacturing operations in one region are to spurthe local economy of the community producing such regional goods, to preserve the traditionalmethods of production and to maintain complete manufacturing control. On the other hand,some of the reasons to allow manufacturing operations in different regions are on the basicmodern principles of WCM and allowing a business to utilize competitive business strategieswith analyzing logistics and cost efficiency in deciding where manufacturing operations are bestsuited to the product to meet the needs of the customer. In respect to trademark law, themanufacturing techniques implemented by a company should not create consumer confusion andshould, if the manufacturing techniques are utilized consistently, improve the quality of thegoods produced. By utilizing modern manufacturing techniques, a company should become quite effectiveto produce a product with consistent quality standards by way of technical specification. If theproducers of the Parma Ham utilize automation and computers in the manufacturing process, theproduct is likely consistently produced with quality built in to the product. Therefore, ifautomation is a driving factor of the manufacturing, there should be little concern where theactual location of the slicing and packaging of the product takes place. Since the Parma ham isprotected under a PDO and the PDO regulation indicated that all manufacturing operations wereto take place in the same region, the ECJ likely decided the case properly based solely upon theregulation protecting the Parma Ham PDO. If the producers looked for use of a GI, rather than aPDO, however, then the outcome of the case may have been different since a GI holds lessstringent requirements on the manufacturing processes than a PDO.