The Supreme Court has held that the principle of international exhaustion of trademark rights no longer applies in Germany, within the meaning of the German Marks Act 1994.

The Court issued its decision in a trademark infringement action that the Levi Strauss Group commenced against the defendant, who had imported into Germany genuine, used jeans bearing the plaintiff's trademarks, which a third party had obtained in the United States, bleached, re-dyed in garish colors and cut into shorts. The plaintiff alleged that the caustic chemicals used in the bleaching process had diminished the factory quality of the jeans and sought, inter alia, damages and an injunction barring further sales of re-dyed jeans without its consent.

The court of first instance granted the plaintiff's claims, but the appellate court partially reversed the lower court, enjoining only further instances of re-dying the plaintiff's jeans. The appellate court refused to enjoin further imports of new, unused jeans on the ground that under the 1936 Trademark Act, in force at the time, a trademark owner's right to control the distribution of its goods was exhausted once the goods had been placed on the market anywhere in the world. An exception existed, however, in cases where the material characteristics of the goods had been altered without the trademark owner's consent.

The Supreme Court reversed the appellate court, holding that the case should be decided under the law in effect at the time judgment is rendered. Under the present law, which was revised in compliance with the European Community Trademark Directive, it is considered that trademark exhaustion is limited to the European Economic Area. Thus, the plaintiff could generally prohibit the import of jeans bearing its trademarks into the European Economic Area without its consent, not merely those which had been altered.

The Supreme Court noted that its decision would be construed as contrary to the principles of international free trade, but found no evidence that limiting exhaustion to the European Economic Area conflicted either with European law or German constitutional law. The Court reasoned that the European Union was free to enter into treaties with major non-European trading partners to counteract any protectionist effects of limiting exhaustion to the European Economic Area.