Industry insight
Policing parallel imports
around the world
Contributing firm
Baker & McKenzie
Author
James Whymark
Brand owners often identify parallel imports as
one of the key commercial issues facing their
business. The treatment of parallel imports
(also known as ‘grey-market’ goods) varies
considerably between jurisdictions, which
means that implementing a global strategy to
tackle this issue is often difficult. However, in
many cases rights holders can protect against
unauthorised parallel imports through national
or regional exhaustion principles, or on the basis
of legitimate concerns regarding the quality or
treatment of parallel imported products.
This chapter considers how parallel imports
are treated in various jurisdictions and what
brand owners can do to control the sale of
parallel imports and prevent the unauthorised
dilution of markets. While the question of
parallel imports applies equally to IP rights
such as patents or copyright, this chapter
focuses on the actions available to brand
owners based on trademark rights.
What are parallel imports?
The term ‘parallel imports’ refers to branded
goods or products that are imported into a
market and sold there by a third party without
the consent of the owner of the IP rights
contained in that product. Parallel imports are
therefore genuine products which have been
manufactured by the brand owner (or with
its consent), but which have been produced
or authorised for sale in another specific
jurisdiction. Consequently, third parties may
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try to take advantage of the typical price
differentials found in different jurisdictions
selling the same branded product. For example,
a branded product may cost $50 in the United
States, but only $10 in Mexico, creating an
economic incentive to import those products
from a low-cost to a high-cost jurisdiction.
How do parallel imports affect brand owners?
The grey market is considered by many brand
owners as a significant commercial issue
which has an adverse impact on sales. Parallel
imports often result in lower sales of authorised
products, the dilution of IP rights – and in many
cases consumer confusion – an inability to
control quality and potentially health and safety
concerns. They are, therefore, often seen as an
equivalent business risk to counterfeit products,
as they cut across the monopoly granted
through the registration of national trademarks.
However, whereas counterfeit and pirated
goods almost universally constitute infringing
products, the importation of parallel goods is
legitimate in many jurisdictions. This reflects
the balance between monopoly rights granted
under IP laws and laws that protect fair
competition. While many jurisdictions provide
grounds for brand owners to tackle parallel
imports, it is important to keep this balance
in mind – overstepping the mark can lead to
breaches of competition laws.
How parallel imports are treated: the
doctrine of exhaustion of rights
Whether a brand owner can prevent the import
of genuine products from their jurisdiction
of origin to another, higher-value jurisdiction
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depends on the interpretation of the doctrine of
exhaustion of rights.
The basic principle of the doctrine of
exhaustion of rights is that when a branded
product is placed on the market by the brand
owner or with its consent, the owner relinquishes
its IP rights in that product; they are exhausted,
as the brand owner has realised the economic
value of the product. Therefore, the brand owner
cannot prevent the resale of that product.
The Agreement on Trade-Related Aspects of
IP Rights (TRIPs) expressly states that it shall not
be used to interpret or harmonise the laws on
exhaustion of rights, and therefore allows TRIPs
member states to practise their own laws for
exhaustion of IP rights. Whether a brand owner
can take action against the import of a branded
product into a different jurisdiction depends on
the national laws of that recipient jurisdiction.
This has led to three forms of national laws
dealing with exhaustion:
•international exhaustion;
•national exhaustion; and
•regional exhaustion.
International exhaustion jurisdictions
At one end of the spectrum are those
jurisdictions which adhere to a principle of
international exhaustion. Where national laws
recognise international exhaustion, once a brand
owner makes or consents to the sale of a product,
its rights to control the movement of that
product anywhere in the world are extinguished.
The divide between international exhaustion
jurisdictions and regional/national exhaustion
jurisdictions often falls along the divide between
developing and developed countries. Developing
countries adopt international exhaustion to
facilitate the free movement of cheaper branded
products, whereas developed countries tend to
provide greater protections to brand owners by
encouraging and protecting trademark rights.
However, these dividing lines are often blurred.
Markets which recognise international
exhaustion in respect of trademark rights (and
thus provide only limited scope for brand
owners to take action against parallel imports)
include Argentina, Chile, China, Japan, South
Korea, Switzerland and Thailand.
In addition, the Indian appellant courts
have recently confirmed that India follows the
principle of international exhaustion.
30 Anti-counterfeiting 2014 – A Global Guide
National exhaustion of rights
At the other end of the spectrum is national
exhaustion, where a brand owner must have
consented to the offering for sale of a product
in the jurisdiction. In those jurisdictions which
endorse national exhaustion, a brand owner
can legitimately object to the import and sale
of products which have originally been sold or
marketed abroad.
Jurisdictions with national exhaustion
give brand owners absolute control over the
distribution of their products and generally
provide a greater level of protection over the
supply chain. For example, the ability for brand
owners to take action against unauthorised
parallel imports means that:
•parallel importers cannot free ride on the
investment made by the brand owner to
promote a product;
•pricing can be varied between jurisdictions;
and
•licensing of trademark rights is easier.
The number of countries adopting a purely
national exhaustion principle is limited. As
set out below, a number of countries adopt
regional exhaustion across the European
Economic Area (EEA) which, in effect, forms
a wider geographical version of national
exhaustion. However, countries such as Brazil
and Mauritius also follow a national exhaustion
principle. Russia has historically adopted a
national exhaustion regime, although there are
current proposals to switch to an international
exhaustion regime in the future.
United States – a halfway house
The position in the United States (as with a
number of other jurisdictions) is something
of a hybrid. Whereas true national exhaustion
jurisdictions have specific express terms that
allow brand owners to bring infringement
actions in respect of parallel imports, there is
no established trademark exhaustion principle
under the federal Lanham Act.
Nevertheless, US case law has resulted in some
protections available to brand owners to prevent
parallel products entering the US market. The
courts have long recognised that trademark rights
are exhausted on the authorised manufacturer’s
first sale of a product, provided that the product is
genuine and is unchanged.
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Industry insight
However, parallel products will still result in
trademark infringement where the product is
altered or repackaged in a material way so that the
consumer could be deceived as to the origin of the
product or the quality expected of the product.
This is typically the case where the actual
product is identical to that sold in the United
States but, due to regulations in non-US
jurisdictions or consumer tastes in those
jurisdictions, the product packaging and user
instructions may be different.
Regional exhaustion – EU treatment of
parallel imports
In Europe, a wider version of national
exhaustion has been adopted which applies to
the entire European Economic Area (EEA). The
EEA comprises the 28 EU member states and
Iceland, Liechtenstein and Norway.
The basic position in the EEA is that if a
particular consignment of products has been
put onto the market by the brand owner in
the EEA or with its consent, the trademark
rights attaching to that product are exhausted.
However, regional exhaustion stops at the
borders of the EEA. For brand owners, this means
that in general, it is not possible to control the
movement of branded products within the EEA
once they are placed in the market (although
see below for some exceptions). The European
Commission is willing to impose large fines on
anti-competitive behaviour. However, branded
products entering the EEA from outside Europe
without authorisation from the brand owner will
constitute trademark-infringing goods. These
overarching rules apply to all EEA member states.
Notably, Switzerland does not form part
of the EEA and has adopted the approach that
there will be a breach of Swiss competition
law if an agreement is formed preventing the
import of products from the European Union to
Switzerland. Therefore, in effect, it has adopted a
system based closely on regional exhaustion.
When can brand owners object to import?
In simple terms, those jurisdictions that
recognise a principle of national or regional
exhaustion provide scope for brand owners to
prevent the import of unauthorised parallel
products. Once the products have entered the
jurisdiction (ie, passed through customs control),
a brand owner can claim trademark infringement
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in respect of those products.
In some jurisdictions, even those that may
recognise a principle of international exhaustion,
a brand owner may nevertheless object to the
import of a product if the quality or safety of the
product may have been compromised.
This principle is found in a number of
jurisdictions, including the United States.
Often jurisdiction-specific labelling or product
safety requirements are mandated on products.
For example, in Indonesia it is necessary to
obtain a certificate of compliance with national
standardisation requirements in relation to
certain types of goods. A similar requirement
is found in Vietnam and Colombia, where
telecommunications products must be certified
and registered with the Telecommunications
Ministry before being sold in the
respective market.
By their nature, parallel products may not
fulfil these national regulatory standards and
may not have the mandatory certifications to
be sold in a particular jurisdiction. Therefore,
regulatory non-compliance provides another line
of attack to tackle unauthorised parallel imports.
Similarly, in the European Union products
are often repackaged when they are shipped
between member states in order to reflect
local languages or comply with national
standards. Brand owners are entitled to object
to intra-member state trade if the manner
of repackaging detrimentally changes the
condition of the goods. Extensive case law has
developed as to what types of repackaging are
acceptable and what would constitute legitimate
reasons for objection. Parallel importers are
also required to notify the brand owner of
an intention to import products so that an
assessment may be carried out.
What can brand owners do to enhance their
chances of stopping parallel imports?
While the laws relating to parallel imports vary
by jurisdiction, there are a number of steps that
brand owners can take to enhance their chances
of stopping parallel imports or taking action when
they are identified and when action can be taken.
Supply chain
Some brand owners lose the ability to take
action against parallel imports because,
although the products were not ultimately
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sold to consumers in a particular jurisdiction,
part of the supply chain passed through the
jurisdiction and may therefore be deemed to
have been “placed on the market”. The European
courts have considered various scenarios
involving intermediaries in the supply chain
and whether their interaction with the products
prevents a claim of trademark infringement. In
general, the EEA position is as follows:
•If goods are stored in a storage facility in an
EEA jurisdiction, but title does not pass to an
EEA-based entity, the trademark rights are
not exhausted.
•If a reseller is located in the EEA and takes
legal title to the products, the rights are
exhausted even if that reseller does not
physically import the products into the EEA.
•Transfer of title in products to a EEA-based
company within the brand owner’s group
does not mean that the rights are not
exhausted (even though there has been no
sale to an end user). European case law has
confirmed that the test is whether a brand
owner has “realised the economic value
of his trademark”. Therefore, if products
are transferred to an EEA-based subsidiary
at market value, this is likely to be seen
as a realisation of the economic value in
the product and the trademark rights are
therefore exhausted. However, if the sale
is for a nominal value or if the purchase
price reflects only the manufacturing
and distribution costs associated with the
products, there are arguments that the
economic value has not been realised.
It is therefore key for brand owners to
identify where each part of the supply chain is
located and, critically, which entities within that
chain take title to the goods.
Product labelling
It is important to ensure that branded products
are clearly marked so that it is easy to identify
their origin and where they are intended to
be marketed. Often the most difficult hurdle
in tackling unauthorised parallel products is
proving that the products were put on the
market outside the jurisdiction (or region).
Therefore, where possible, adequate labelling
should be used to show where the product
was produced and the market for which it
32 Anti-counterfeiting 2014 – A Global Guide
was authorised. As well as being valuable in
proceedings, brand owners that adopt this
accountability can also trace leaks in the supply
chain and seek to address these problems.
Customs
While many customs authorities have
formalised procedures for monitoring
and detaining counterfeit products, many
jurisdictions are unwilling to extend limited
customs resources to tackle the grey market.
This is the position in Europe. EU customs
authorities will not stop parallel imports even
if they are entering from outside the EEA.
Nevertheless, the recordal of trademark rights
with EU customs authorities may lead to
shipments of parallel imports being detained (on
the basis that Customs may suspect a shipment
to be counterfeit), and so a brand owner may
inadvertently become aware of unauthorised
parallel products destined for the European
Union. In some EU jurisdictions it is possible
to take additional legal steps in order to use
this information and prevent the release of
those goods (although these steps tend to be
complicated and costly). German Customs is
the exception as, under separate national laws,
it monitors and detains potentially infringing
parallel products.
Active monitoring
Where brand owners can take action (ie,
in jurisdictions where there is national or
regional exhaustion) and the problem of
unauthorised parallel imports is especially
acute, brand owners are increasingly using
sophisticated active monitoring of the markets
and supply routes to identify and tackle parallel
products. This may involve online or on-theground investigations, surveillance and legal
enforcement actions to gather evidence of
parallel activity and ultimately identify the
sources of unauthorised products.
Comment
The treatment of parallel imports is diverse.
Many jurisdictions provide rights to brand
owners to limit these imports, but proving an
infringement can often be evidentially difficult
and legally complex. However, there are clearly
steps that can be taken to assist brand owners in
tackling this issue. WTR
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Contributor profiles
Baker & McKenzie
Baker & McKenzie
100 New Bridge Street London, EC4V 6JA
United Kingdom
Tel +44 20 7919 1000
Fax +44 20 7919 1999
Web www.bakermckenzie.com
James Whymark
Senior associate
james.whymark@
bakermckenzie.com
James Whymark is a
senior associate in Baker &
McKenzie’s IP department
based in London. His
practice covers all aspects
of both contentious
and non-contentious
intellectual property,
with a particular focus
on global IP enforcement,
brand protection and anticounterfeiting. As part of
his contentious practice, Mr
Whymark has been involved
in trademark, design right,
patent infringement and
passing-off litigation in
the UK High Court. He also
manages a number of global
enforcement and customs
programmes which cover
the implementation and
coordination of enforcement
actions in the United
Kingdom, throughout Europe
and worldwide, for a wide
range of clients in varied
industries.
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