PARALLEL IMPORT:A CONUNDRUM

PARALLEL IMPORT: A CONUNDRUM

By Suwarn Rajan, Advocate & Patent  Agent, Managing Partner, CARE INTELLECT,NEW DELHI,

Email:careintellect66@yahoo.com,www.careintellect.com

Definition

At first, Parallel import – i.e. imports that have not been authorized by original manufacturers- of trademark shall be defined. If a person legally imports a product with the same trademarks as the one of the exclusive license of the domestic person without the consent of the person having the ownership of trademark or the domestic person owning the right of trademark exclusive license, the import activity is regarded as trademark parallel import.

The term parallel imports  refers to goods containing copyrightable material or bearing trademarks imported from outside of the country. These goods are usually imported because the particular version or style is either unavailable here or the cost of the imported goods is lower. Lower costs may be the result of fluctuations in currencies, or simply due to the structure of distribution imposed by the manufacturer. Parallel imports are generally imported without actual authorization from the proprietor of the copyrights or trademarks. However, the rights holder of either the copyrights or trademarks had, in some manner, authorized the initial reproduction and sale.

The problem of "grey market goods," also known as "parallel imports," is pervasive in international trade. Grey market goods are products lawfully manufactured outside the country, and then imported into the country without the permission of owner of the trademark, copyright or patent associated with the product in that country. In the most common situation a  dealer finds that, due to favorable exchange rates or for other reasons, it can obtain a product overseas for less than the price charged by the authorized  distributor in the country. The dealer then imports the product into the country, undercutting the price of the product sold by the authorized  distributor.

A parallel import is a non-counterfeit product imported from another country without the permission of the intellectual property owner. Parallel imports are often referred to as grey product, and are implicated in issues of international trade, and intellectual property.

The practice of parallel importing mainly occurs for two reasons:

1) Different versions of a product are produced for sale in different markets, eg Top Gear Magazine (UK Edition) is officially sold in UK and Top Gear Magazine (Australia Edition) is officially sold in Australia. But some unofficial distributors in Australia also sell Top Gear Magazine (UK Edition).

2) Companies, either the manufacturer or the distributor, set different price points for their products in different markets. Parallel importers ordinarily purchase products in one country at a price (P1) which is cheaper than the price at which they are sold in a second country (P2), import the products into the second country, and sell the products in that country at a price which is usually between P1 and P2.(Wikipedia)

As  economy becomes increasingly globalized, prudent trademark owners will remember that it is their responsibility to maintain control over the distribution channels, as well as the ultimate geographic sale location, of their branded products. Markets around the world are being flooded with “parallel imports” and “gray market” goods - branded goods that are imported into a market and sold there without the consent of the owner of the trademark in the markets. These goods are not counterfeit (i.e., manufactured by someone other than the brand owner). Rather, they are manufactured by, for, or under license by the brand owner, but are imported into a jurisdiction different from that intended by the trademark owner. The question for trademark owners is, what rights do they have to stop the sale of gray market goods?

APPROACH FOLLOWED BY DIFFERENT COUNTRIES

Although many countries permit parallel imports, little uniformity exists in the overall approach to this problem. This becomes clear from Article 6 of the intellectual property provisions of the World Trade Organization Agreement (GATT-TRIPS), which provides that as long as appropriate laws regarding parallel imports do not violate the non-discrimination rules of most favored nation and national treatment, "nothing in this Agreement shall be used to address the issue of the exhaustion of intellectual property rights". This international body left the treatment of parallel imports to national law. Absent international consensus, individual national approaches must be examined.

There are two prevailing theories regarding exhaustion, namely, that once goods bearing a trademark have been placed into commerce by, or with the consent of, the trademark owner either (a) the owner cannot use his trademark rights to prevent the further distribution of such goods anywhere, the so-called international exhaustion rule; or (b) he cannot use his trademark rights to prevent further distribution of such goods in the same country, but may prevent such distribution in other countries, the so-called national exhaustion rule.

THE UNITED STATES APPROACH

Although there are a number of laws in the United States that address the issue of parallel imports of trademarked products, the treatment of parallel imports is fairly uniform. In an early decision permitting the unauthorized importation and sale of genuine bottled water from Europe, it was held that once a trademarked product is placed on the market, trade mark rights may not be used to control the product's further destination  Apollinaris Co. Ltd v. Scherer , 27 Fed 18 (SDNY 1886). Although decided under common law principles of trademark law, this early decision was subsequently applied to the codified trademark law and has remained the law to this day under the infringement provisions of the present day Lanham Act. Thus US laws have long considered that the nature of trademark rights, at least with respect to parallel imports, are universal, namely, once a genuine trademarked product is placed on the global marketplace anywhere in the world, by or with the consent of the trademark owner, the trademark owner may not control the further distribution of that product under a theory of trademark infringement. This theory of parallel imports is said to be the rule of universal, or international, exhaustion.

The U.S. Supreme Court has recently decided a case involving parallel imports in the copyright context, although the imports involved would not normally be thought of as warranting copyright protection. The goods were hair care products that contained a label bearing copyrightable subject matter.

The Copyright Law provides the right to exclude others from using any one of a bundle of exclusive rights. The primary rights provided by Section 106 of the Copyright Act are the right to exclude others from (1) reproducing the copyrighted work, (2) preparing derivative works, (3) distributing copies of a work, (4) performing a work publicly and (5) publicly displaying a copyrighted work. The particular right under the Copyright Laws that is of interest in connection with parallel imports is the third right of exclusion: the distribution right.

Distribution

The distribution right has limitations. Once a physical copy of a work has been lawfully distributed under the copyright law, the right for further distribution or the right to exclude further distribution is limited by the First Sale Doctrine. Once the copyright owner has parted with the copy of a work, the purchaser can then lawfully distribute that physical copy without further authorization from the copyright holder. The first sale doctrine was at one time judge-made law. It was approved by the U.S. Supreme Court back in 1908, in a decision holding that the resale of a book could not be stopped by the copyright proprietor. (The concept also exists abroad and it is known as the doctrine of "exhaustion" in Europe.)

Following Section 106, and beginning with Section 107 are a number of exceptions to the exclusive rights of the copyright proprietor. In the 1976 Copyright Act, the first sale doctrine became Section 109(a), which states:

"Notwithstanding the provisions of section 106(3), the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord. . . ."

Importation

Can a copyright holder prevent the importation of copies lawfully purchased abroad despite the first sale doctrine? Section 602 of the Copyright Act prohibits infringing importation of copies or phonorecords. The question is: what is the effect of importation of so called authorized works in relationship to the First Sale Doctrine, Section 109(a), in view of section 602.

In the past, the issue has been dealt with by several Federal Courts of Appeal. The Ninth Circuit Court of Appeals in BMG v. Perez held that the importation of phonorecords, which were lawfully purchased in Mexico, nevertheless violated U.S. Copyright Law when they were imported into the United States. The Ninth Circuit pointed out that since copyrights are territorial, U.S. Copyright Law is not applicable outside of the United States and thus, first sale had not occurred in Mexico. The Third Circuit Court of Appeals in Sebastian Int' l, Inc. v. Consumer Contacts (PTY) Ltd. had adopted a seemingly contrary position permitting the importation of hair care products having labels with copyrightable material.

In the case of Quality King Distributors, Inc. v. L'Anza Research International, Inc., the U.S. Supreme Court has recently given at least a partial answer to this question by reviewing a Ninth Circuit decision barring parallel imports. The case involved the importation of hair salon products that had labels containing copyrightable subject matter affixed to the packaging. Therefore, the subject of the importation was really the hair care products, and not the copyrightable subject matter. The labels appeared to be used as a way to assure the manufacturer that its products--destined for Malta at a considerably lower price point than sold in U.S. salons--would not find their way back to the United States.

In effect, the copyrightable subject matter on labels was used as a way to attempt to prevent parallel importation of the hair care products into the United States. The U.S. Supreme Court held that the importation clause of the Copyright Law could not prevent the importation of these goods in view of the first sale doctrine expressed in Section 109(a) of the Copyright Act.

The manufacturers had sought to control the manner of distribution of the goods because they were destined for high priced salon sales (as opposed to lower priced retail sales) in the United States. From the Manufacturers perspective, the trademark laws had not been effective because they tended to be fuzzy. Consumer protectionism, at times, tended to favor parallel imports where the public was not in any significant way being deceived. The goods, if they were genuine, might be permitted to be imported based upon the difficult-to-reconcile parallel imports trademark cases.

The Copyright Laws seemed to provide a clearer demarcation as to infringement. However, the Supreme Court has seemingly taken the position that the Copyright Laws may not be used in this manner to prevent parallel imports. It appears that the Supreme Court was probably trying to say that the distributor could not use Copyright Laws as a method of controlling markets and distribution channels by the expedient of a label containing copyrightable subject matter.

Particularly noted in the concurring opinion of the Supreme Court's decision is the fact that the goods were originally manufactured in the United States, then shipped out of the United States and then re-imported. The significance is that the copyright distribution right had already been exhausted by the act of distribution from the United States. The decision might have different had the work originally been completely manufactured or made outside of the United States. The entertainment industry had been watching this case with interest. Allegedly, the In conclusion, the result of the decision was not surprising. Nothing in the opinion prevents the barring of piratical copies. This was not the subject of the proceeding. The Ninth Circuit, which includes the Southern California entertainment industry, took the position that the importation clause prevails and that the goods could not be imported. The Supreme Court took a strict view of the First Sale Doctrine. This was easy to do since the goods had originated from the United States, and the Court could readily reach the conclusion that the rights were exhausted. As a result, other than to send a message to manufacturers that they should not be too cavalier in using the trick of a label on a product in connection with the copyright system, the decision was not so startling. The copyright system may have other, more important tasks: to protect rather than to squander its power over control of manufacturers' international marketing scheme.

THE EUROPEAN UNION APPROACH

The European Union  consists of fifteen member states, namely Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom adopted a regional exhaustion rule that originally developed through decisional law on the theory that the ability to prevent further distribution of genuine goods would distort trade among the member states. A seminal case on this issue involved a Dutch trademark owner, which was also the distributor and subsidiary of an English manufacturer, and which sought to prevent the unauthorized sale in Holland of drugs made by the parent company in England. The European Court of Justice held that although the EEC Treaty guaranteed the existence of trademark rights granted by the individual member states, since such rights restrict the free movement of goods, their exercise must be limited to protecting the specific subject matter of the trademark right, namely, to provide an exclusive right for the owner to put trademarked products into circulation and to protect the owner against competitors selling products that illegally bear the trademark. However, the right in a trademark must be considered exhausted after it is placed on the market by or with the approval of the trademark owner, otherwise the trademark owner would be able to partition national markets and restrict trade between the member states, a result that is unnecessary to preserve the specific subject matter of the trademark right Centrapharm v. Winthorp , 1974 ECR 1183.Thus the principle of exhaustion of rights was adopted with respect to trademarks, although this has been adopted only on a regional level; namely, only with respect to goods first placed on the market within the Community, or EMI v. CBS , 1976 ECR 811, holding that parallel imports made in the United States could not impair the free movement of goods between the member states previously imported into the Community through a member state Phytheron International SA v. Jean Bourdon SA , [1997] 3 CMLR 199.

This regional exhaustion rule has been codified in the harmonization directive  ("Directive"), in accordance with which the member states were required to conform their national trademark laws. Article 7 of the Directive provides that "the trade mark shall not entitle the proprietor to prohibit its use in relation to goods which have been put on the market in the Community under that trademark by the proprietor or with his consent" except under the provisions of Article 7(2), which exempts altered or damaged goods. In addition, as a result of the Agreement on the European Economic Area (EEA) between the EU and the European Free Trade Association countries of Iceland and Norway, the regional reach of the exhaustion principle in the Harmonization Directive extends to Iceland and Norway, even though Iceland and Norway are entitled to determine for themselves whether to adopt a national, regional or international theory of exhaustionMag Instrument Inc. v. California Trading Company Norway, Ulsteen (1997) EFTA Court, Case E-2/97[1998] 1 CMLR 331, holding that as the European Free Trade Area is not a customs union, each member may decide for themselves what theory of exhaustion to adopt.

However, the regional exhaustion rule does not imply international exhaustion, as held by the European Court of Justice and Silhouette International v. Hartlauer (Case C-355/96)[1998] ETMR 539, holding that Trademark Directive functioned as a complete harmonization of the rules and, therefore, did not permit the member states to adopt an international theory of exhaustion, which would conflict with the EU’s regional theory of exhaustion and cause barriers to the free movement of goods and provision of services.

other national decisions EEA exhaustion rule confirmed by German Federal Supreme Court in GEFÄRBTE JEANS, Case No. I ZR 210/93 (BGH December 14, 1995).However, this does not prevent international ramifications where, for example, parallel imports are in transit from one non-EEA member state, through an EEA member state, to another non-EEA member state, and are seized in the EEA member state as parallel imports voilative of the trademark owner’s trademark rights in the member state The Polo/Lauren Company, L.P. v. PT Dwidua Langgeng Pratama International Freight Forwarders , Case C-383/98 [2000] ECR I-2519.

The community-wide exhaustion principle has also been codified in the European Union's Regulation on the Community Trademark . Therefore, the exhaustion principle under a Community Trademark Registration will be limited to goods that are first placed on the market within the Community (or EEA). As a result, Community trademark rights are not considered to be exhausted, for example, with respect to goods that are first introduced to the global marketplace in the United States or Canada, and then imported into an EEA member state.

It is interesting to note that the European Commission made overtures in 2000 to introduce an international exhaustion theory into Community law, by publishing a working paper on the issue. However, after the working paper was laid open for debate and consideration, the Commission withdrew from the debate by deciding in June 2001 not to propose changes to the law.

International exhaustion and the Commonwealth

As part of the European Union, the United Kingdom applies the European Union law on exhaustion with respect to goods first placed on the market in an EEA country. Article 12 of the new United Kingdom Trade Marks Act of 1994 has enlisted the language of the Directive. However, a separate body of English jurisprudence, developed under the former Trade Marks Act 1938 adopted an international exhaustion principle, uninfluenced by the European Union law, and this body of law, although arguably no longer applicable under the new United Kingdom Trade Marks Act, serves as the model for other British law countries in the Commonwealth.

One of the earliest and leading cases on this issue involved plaintiffs who owned a trademark in the United Kingdom and France but who produced different kinds of Champagne for each national market. The producers objected to the parallel importation into England of "Brut wine" that they produced specifically for the French market. In the decision, the judge reviewed the different theories of how a trademark functions, stating:

It was. . . suggested that, whereas before 1875 a trademark, if established as a trade mark, was a badge of the origin of the goods, the effect of ... the Act of 1875 was to make a registered trade mark a badge of control over his goods, into whosoever's hands they might come, except in so far as he might expressly or by implication have released this right of control. I do not so read the section ... . The section appears to me to mean that the proprietor of a registered trade mark is to have the right exclusively to use such a trade mark in the sense of preventing others from selling wares which he has not marked with the trade mark ... The use of a mark by the defendant which is relied on as an infringement must be a use upon goods which are not genuine goods, i.e. those upon which the plaintiffs' mark is properly used, for anyone may use the plaintiffs' mark on the plaintiffs' goods, since that cannot cause the deception which is the test of infringement Champagne Heidsieck et Cie Monopole Societe Anonyme v. Buxton (1930) 1 Ch. 330.

As a result, the court decided that proprietorship of a registered trade mark does not entitle the proprietor to control the distribution of his branded goods after they have left his hands. Thus, the Commonwealth position considers that a trademark serves as an indication of the origin or source of the goods, not as a "badge of control" which would allow the trademark owner to control the trademarked goods throughout their passage in commerce.

Other British law countries have interpreted these passages to provide no cause of action to trademark owners against sellers of genuine goods on which a trademark has been placed by the trademark owner or registered user As Atari Inc. & Futuretronics Australia Pty. Ltd. v. Fairstar Electronics Pty. Ltd. , (1984) 50 ALR 274 (action to stop import of genuine goods for sale in Australia where first plaintiff owned trademark and second plaintiff was sole Australian distributor) adopted the Champagne theory of exhaustion, denying interlocutory relief. See also R.A. & A. Bailey & Co Ltd v. Boccaccio Pty Ltd. (1986) 6 I.P.R. 279 (S.C. of N.S.W.) (parallel import of genuine BAILEY'S Irish Creme did not infringe trademark since there was no deception as to the origin of the goods). See also in South Africa, Protective Mining and Industrial Equipment Systems (PTY) Limited v. Audiolens (Cape) (Pty) Limited , 1987 (2) S.A. 961 (A), holding that local authorized distributor that was not a registered user of the mark could not stop unauthorized sale of genuine PENTAX products produced by the trademark owner in Japan. Smithers, J. articulated in the Atari/Fairstar case, the trade mark owner who releases goods "on the billowing ocean of trade" will not be able to use the trademark to control the ultimate destination of those goods.

Australia

In the recent decision of Polo/Lauren Company LP v Ziliani Holdings Pty Ltd [2008] FCA 49, the Federal Court has closed off the capability of trade mark owners to shut down parallel importation of a genuine product using our Copyright Act.

Ziliani purchased genuine out-of-season clothing bearing Polo/Ralph Lauren's polo player logo at heavily discounted prices in the US and imported the clothing into Australia for retail sale. Polo/Ralph Lauren attempted to shut down Ziliani's actions by arguing that the importation amounted to an infringement of their copyright in the polo player logo.

Both Australia's Trade Mark and Copyright Acts had been amended to provide for a specific exemption to infringement in this case in that the Act provided, for example: "The copyright in a work a copy of which is, or is on, or embodied in, a non-infringing accessory to an article is not infringed by importing the accessory with the article". The judge found that Ziliani's conduct came directly under this provision and an exemption applied.

The judgment is one of the first cases to deal with 1998 legislative amendments which were designed to free up the ability of independent third parties to "parallel import" products into Australia. The judge appears to have effectively given teeth to the amendments.

JAPAN AND KOREA

Although many countries allow the war against parallel imports to be fought by private parties in the courts or before administrative tribunals, certain countries, such as Japan and Korea, not only expressly permit parallel imports, but also take affirmative steps to protect parallel importers.

At one time, South Korean customs officials were holding parallel imports at the border pursuant to complaints from either trademark owners or their exclusive licensees. In response, the government issued customs regulations expressly permitting parallel imports, except in certain circumstances. In addition, the government revised the Fair Trade Commission enforcement guidelines under the Monopoly Regulations and Fair Trade Act, enabling the Commission to act against those who attempt to prevent the sale of parallel imports and defining unfair trade practices as, inter alia , interference with the importation, sale or distribution of parallel imports, interfering with advertisements for parallel imports or sponsoring advertisements that criticize parallel imports.

A trademark owner is the party which exclusively owns rights to use the trademark registered in Japan. Under the past prevailing theory, the importer in question would have technically been deemed to be importing designated products bearing a registered trademark without any license from the trademark owner, and the import and sale of such products would have been deemed to constitute trademark infringement.

  However, under the current practice, if such acts fall under "parallel import of genuine goods," they do not constitute trademark infringement, even if no trademark license has been obtained from the trademark owner. As an example, the general requirements of "parallel import of genuine goods," as presented by the Supreme Court in its February 27, 2003 judgment, are as follows:

1.   The trademark on the parallel import goods was duly affixed thereto by the trademark owner in the exporting country or a licensee thereof;

2.   The trademark owners in the exporting country and in Japan are the same party, or may legally or financially deemed to be the same party, such that the trademark on the parallel import goods is deemed to indicate the same origin of goods as the origin indicated by the registered trademark in Japan (i.e., no damage on the origin indication function of the trademark); and

3.   The parallel import goods and products bearing the registered trademark affixed by the trademark owner in Japan are not deemed to substantially differ in the quality guaranteed by the trademark (i.e., no damage on the product quality guarantee function of the trademark).

Importation of products satisfying these requirements will be deemed "parallel import of genuine goods" since it does not preclude a trademark's functions, and therefore will not constitute trademark infringement.

  The products in question imported into Japan by the importer are genuine goods sold by your company in such foreign country, and the trademark affixed thereto by your company in such country is identical to the Japanese trademark. Although the importer does not seem to be related to your company, its importation does not affect the trademark's indication of origin to be your company, or the implication of the quality guaranteed by the trademark. Accordingly, the case is deemed to satisfy all requirements 1 through 3 above, and the import and sale by the importer in Japan does not constitute trademark infringement.

  On the other hand, in an exceptional case in which the products were sold at a lower price in such country since they were substantially different in quality compared to products sold in Japan, the import and sale thereof by the importer in Japan will constitute trademark infringement, on the grounds of importation of products not substantially meeting the quality guaranteed by the registered trademark in Japan. In addition, although it is not clear from the question, if the product quality may have been damaged due to repackaging or repacking for sale in Japan, it will constitute trademark infringement.

Japan also follows the concept of international exhaustion, as seen in a decision by which the parallel import of genuine PARKER pens into Japan was allowed over the objection of the Japanese exclusive distributor. The court held that, although parallel imports may constitute a literal infringement of the trademark law, parallel imports do not affect the function of a trademark under Japanese law, namely, to guarantee the source and quality of the goods, they do not harm the business reputation of the trademark owner and they do not generally mislead consumers PARKER case, Osaka District Court, decision of February 27, 1971, 2-1 Mutaishu 71. See also, La Chemise Lacoste SA v. Shinshin Boeki Co. , Tokyo District Court, decision of December 7, 1984, 1141 Hanrei jiho 143, 543 Hanrei Times 323, holding that trademark registrant could not prevent unauthorized sale of genuine goods that were made in the United States by the exclusive licensee of the registrant's subsidiary.

The Fair Trade Commission Guidelines Concerning Distribution Systems and Business Practices enacted in Japan in 1991 under the Anti-Monopoly Act also prohibit acts that serve to inhibit parallel imports, such as preventing an overseas supplier, except a direct supplier to an exclusive distributor, from supplying products to the parallel importer; alleging, without sufficient basis, that the parallel importer is handling counterfeit products; purchasing all of the parallel imports from the distributor; or unjustly interfering with advertising of parallel imports.

Trademark owners, their licensees and authorized distributors must always be cautious when contemplating preventive or curative action against parallel imports since such action, in many countries, may be considered to conflict with local antitrust and free competition laws.

RUSSIA

On September 10th 2008, the Moscow Arbitrazh Court rejected the claim of a customs authority which initiated an administrative proceeding against a Russian importer. This company imported automotive parts labeled with Honda Motors Co. and Nissan Motor Co. trademarks without being an official distributor for these companies or having any agreements with them. The customs authority accused the Russian firm of importing counterfeit goods and of infringing the trade-mark rights of the Japanese companies. The Court decided that the importer had not breached any trade-mark rights because the imported automotive parts were an original production of Honda Motors Co. and Nissan Motor Co. and therefore they were not deemed to be counterfeit by Russian IP legislation. It should be noted that in the past, the Moscow Arbitrazh court (as well as other Russian Arbitrazh courts) tended not to support unofficial dealers. So in the well-known case that involved importing a Porsche Cayenne car into Russia, the Court decided that such importing without the consent of the right holder was an infringement of trade-mark rights, and that the car was pirated. In this manner, Russian courts have tried to outlaw independent dealers, even if imported goods were original (not fakes).

In this respect the new rulings of highest courts are of particular interest. It has been reported that the RF Supreme Court and the RF Supreme Arbitrazh Court are going to adopt a joint resolution devoted to Part 4 of the Russian Civil Code. Among other things, there is a very interesting position in the development of this resolution which radically limits the activities of independent dealers. According to the draft resolution, an agreement with a right holder granting the right to import relevant goods into Russia is obligatory in any case of importing goods with the right holder’s trademark.

So it seems that the highest courts are going to support the approach of customs authorities, which underpinned the judgment in the “Porsche Cayenne" case. In fact, the legal proposition of independent importers is not very strong. They cannot refer to the exhaustion principle because, according to the Russian Civil Code, it has territorial effect: it works only if relevant goods are introduced in civil law transactions in the territory of Russia. However, in most cases, imported goods are introduced abroad before being imported in to Russia. On the other hand, it is clear that if the joint resolution of the highest courts is adopted in its existing form, independent importers will have to stop their business. In  turn, this may lead to monopolization and price increase. It appears therefore that, in coming up with a resolution, it would be best to take into account the interests of all parties concerned, including consumers.