Parallel/Grey imports v. Exhaustion[1]
I What are grey goods or parallel imported goods?
The term „parallel imports” or „grey goods” is not defined by law.
In practice, parallel imports are regarded as genuine, original goods, placed on a market in one country by the owner of the intellectual property right or with his consent, which are imported for sale in another country, without the owner’s consent.
It is important to bear in mind that grey goods/parallel imports are not counterfeit or pirated goods.
It is also important to keep in mind that the genuine goods have already been put on the market, by the right holder or with his consent.
The problem relating to the infringement of intellectual property rights by parallel imports arises at the moment they are imported from one market, where rights have been exercised, in order to be sold to a different market, where the right owner has not used its intellectual property rights.
Usually, goods marketed in different markets differ in terms of quality controls, ingredients, packaging, marketing methods, which reflect in a different price level.
The parallel importer is deriving a benefit by purchasing the genuine product at a cheaper price in country A and subsequently selling it at a higher price in country B.
From the consumer’s point of view, parallel imports appear to be desirable because they are genuine products, affordable at lower prices.
Parallel imports also benefit free market competition, by preventing partition, control of the market and abuses through exclusive and territorial intellectual property rights.
From the intellectual property right owners, the licensees and authorized distributors perspective, parallel imports are undesirable.
They consider that parallel imports unfairly escape the necessary costs for market entry, such as local marketing, advertising, regulation compliance, product liability, research, costs which are normally passed to local consumers and reflect in local prices.
Other legitimate reasons to oppose parallel trading relate to issues of consumer protection, because, often, parallel imports are not provided together with the warranties and service guarantees which come with the authorized sales.
Also, parallel imports may comply with different product safety standards. If destined for marketing in one country, parallel imports may come with instructions written in a foreign language, which could lead to misuse of products and cause injuries.
Such repetitive negative consumer experiences with grey goods or parallel imports damage the intellectual property owner’s and its authorized distributors reputation and goodwill.
Ultimately, fair, free and undistorted competition on the market is discouraged.
II Is it possible to stop parallel imports by relying on intellectual property rights?
Intellectual property rights are, by nature, exclusive and territorial.
That means that the right holder has the exclusive right to use its property right and to stop others from using it, in a given territory.
The risk is that the right holder may use its rights to partition markets and to control further commercialization of goods bearing the intellectual property right.
In order to limit the scope of the exclusivity of the intellectual property rights, the legislation provides the principle of „exhaustion” of rights, upon first sale.
According to the principle of exhaustion of intellectual property rights, once a product bearing an intellectual property right, has been put on the market with the owner’s consent, he can not rely on the exclusive right to prohibit further sales of that product.
Exhaustion of intellectual property rights is in connection with the territory on which the intellectual property right can not be exercised after the first sale.
At present, different law systems use one of the three standards of intellectual property rights exhaustion:
There is no international agreement on the standard of exhaustion of intellectual property rights.
According the art. 6 of the TRIPS Agreement, subject to compliance with the non-discrimination rules of most favorite nation and with the principle of national treatment, „nothing in this Agreement shall be used to address the issue of exhaustion of intellectual property rights”.
Because the three different approaches coexist, different legal systems are inconsistent on the issues of whether parallel imports violate intellectual property rights and under what conditions.
III The principle of Community exhaustion
The principle of community exhaustion applies to all types of intellectual property rights.
Most of the cases in which right holders try to stop parallel imports are related to trade mark rights and, in order to simplify the issue this paper will limit its analysis to trade mark rights.
Article 295 of the EC Treaty [Treaty establishing the European Community] states clearly that „the Treaty shall in no way prejudice the rules of Member States governing the system of property ownership”.
This article coexists with the provisions on free movement of goods stating that „the existence of trade mark rights should not constitute a means of arbitrary discrimination or disguised restriction on trade between Member States” and on free and undistorted competition.
In order to reconcile the conflicting provisions and to ensure the achievement of the common market, the European Court of Justice defined the core of each intellectual property right and developed the doctrine of the „essential function” / specific subject matter”.
According to the European Court of Justice case-law, the specific subject-matter of a trade mark is, in particular, to guarantee to the owner that he has the exclusive right to use that mark for the purpose of putting a product on the market for the first time and thus to protect him against competitors wishing to take unfair advantage of the status and reputation of the trade mark by selling products illegally bearing it.
The scope of exclusivity given to the right holder shall reflect the essential function of the trade mark.
The Directive codified the principle of community exhaustion of trade mark rights in its article 7 (1): „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 trade mark by the proprietor or with his consent”.
The two cumulative conditions for exhaustion of trade mark rights are related to 1. the market on which the goods were first put in commerce – only the European Community market and to 2. the consent of the trade mark owner to release of goods on the market.
4.1. Member states were not left with the right to adopt the international exhaustion principle, as stated in the Silhouette case [Case C-355/96 Silhouette International v. Hartlauer].
The trade mark owner Silhouette International Schmied GmbH produced and marketed sunglasses through a selective distribution network on the Community market and most countries of the world. Silhouette refused to supply Hartlauer Handelsgesellschaft mbH with its sun glasses for trade on Austrian markets. Harlauer succeeded to buy genuine sunglasses outside the European Community and to put them on the community market.
The ECJ held that Silhouette had not exhausted its trade mark rights within the European Community and had the right to stop the importation and selling of the genuine goods on the EC market.
4.2. The consent of the trade mark owner is required in respect of each individual item of the marketed products, as stated in the Sebago case [Case C-173/98].
The US company Sebago distributed in Belgium goods manufactured in El Salvador through its exclusive distributor. The claim of infringement of trade mark rights was brought against GB Unic SA, which acquired Sebago shoes manufactured in El Salvador and sold them in Belgium.
The ECJ ruled that the requirement of consent is not satisfied if identical or similar goods bearing the same trade mark have already been put on the EC market with the owner’s consent.
Consent is required in respect of each individual item of the product put on the EC market.
4.3. The trade mark owner’s consent can be either express or tacit, as stated in the joined cases Davidoff and Levi Strauss [Cases C-414/99 and C-416/99].
Davidoff sold cosmetic products in Singapore through an exclusive distributor. By agreement, the distributor was limited only to markets outside the EC and had the obligation to impose the same restriction on its sub-retailers and sub-distributors. A&G bought the products on the Asian market and sold them in the UK.
Levi Strauss sold jeans on the UK market thorough its authorized distributor. The contracts Levi Strauss entered with its distributors contained no restrictive territorial clauses. Levi Strauss refused to enter a distribution agreement with big supermarket chains Tesco and Costco, who managed to obtain genuine Levi Strauss jeans from authorized distributors on markets outside the EC.
The European Court of Justice set the requirements for inferring tacit consent of the trade mark owner.
The burden of proving tacit consent rests on the parallel importer.
Tacit consent can be inferred from circumstances which unequivocally demonstrate that the trade mark owner had given up any of his exclusive trade mark rights.
Mere silence does not imply consent of the trade mark owner.
The fact that the trade mark owner did not communicate to all subsequent purchasers of the goods placed on the market outside the EC its opposition to goods being marketed in the EC does not imply consent.
The fact that the goods do not carry a notice of prohibition of sales on the EC market does not imply consent.
The fact that the trade mark owner has transferred the ownership of the goods bearing the trade mark without imposing any contractual restrictions does not imply consent.
5.1. Council Regulation 1383/2003 [Council Regulation (EC) No 1383/2003 of 22 July 2003 concerning customs action against goods suspected of infringing certain intellectual property rights and the measures to be taken against goods found to have infringed such rights] entered in force on 1st of July 2004 and repealed the Regulation 3295/1994.
It enables the right holder who suspects that certain goods infringe his intellectual property rights to lodge a written application for action with the relevant customs authorities, giving an accurate and detailed description of the goods in question, information concerning the nature of the fraud and the name and address of the contact person appointed by the right-holder.
Customs authorities may take action against such goods when goods are entered for release for free circulation or export within the Community or when they are found during checks on goods entering or leaving the Community customs territory, placed under a suspensive procedure, in the process of being re-exported, or placed in a free zone or free warehouse.
The measures consist mainly of detention by the customs authorities of suspected goods, for a certain period of time, subject to the right holder undertaking legal action against the infringer.
Member States may set up a simplified procedure to enable the customs authorities to have the goods destroyed.
5.2. The Directive 2004/48 [of 29 April 2004 on the enforcement of intellectual property rights] provides for harmonized measures and procedures needed to ensure the enforcement of intellectual property rights and appropriate action against those responsible for counterfeiting and piracy.
The Directive provides for provisional and precautionary measures, such as interlocutory injunctions, the seizure of the fixed and non-fixed assets of the alleged infringer, including the blocking of his/her bank accounts and other assets.
If a decision is given on the merits of the case, at the request of the applicant, the judicial authorities may order the recall of the goods which have been found to infringe an intellectual property right and the destruction of counterfeit or pirated goods.
If the decision found an infringement of an intellectual property right, judicial authorities may issue against the infringer an injunction aimed at prohibiting the continuation of the infringement, which may be subject to a recurring penalty payment. The competent judicial authorities may also order pecuniary compensation to be paid to the injured party instead of applying the removal or destruction measures, if that person acted unintentionally and if execution of these measures would cause him/her disproportionate harm.
It does not matter whether the holder of the right or those entitled under him have their registered office in a Member State or outside the Community.
Even if the external transit of non-Community goods is not subject to import duties, nor to other measures of commercial policy, it is not devoid of effect on the internal market.
The risk is that counterfeit goods may be placed under the external transit procedure and may be fraudulently brought on to the Community market.
The case concerned the attachment of the Aquafresh trade mark on original goods imported from South Africa, stored by Class International, owner of those goods, in a warehouse in Rotterdam.
The ECJ ruled that placing non-Community goods bearing a mark under a suspensive customs procedure such as that of external transit is not, per se, interference with the right of the proprietor of the mark to control the initial marketing in the Community.
The trade mark proprietor can oppose the offering for sale or sale of original goods bearing a trade mark and having the customs status of non-Community goods, when the offering is done and/or the sale is effected while the goods are placed under the external transit procedure or the customs warehousing procedure and this necessarily entails their being put on the market in the Community.
The case involved the detention in France, on suspicion of infringement of trade mark, of original spare parts for cars manufactured in Spain and being transported to Poland (before its accession to the EU).
The ECJ considered that the transit does not involve any marketing of the goods in question, therefore it is not liable to infringe the specific subject-matter of the trade mark and cannot be justified on the ground of protection of industrial and commercial property (art. 28 and 30 EC Treaty).
Montex manufactured jeans by exporting the different pieces to Poland, including distinctive signs, under the customs seal procedure, having the pieces sewn together on Polish territory and bringing the completed trousers back to Ireland. Diesel has no protection for the sign in the territory of Ireland.
The dispute concerned an application for an order prohibiting the transit through German territory of goods belonging to Montex bearing the sign Diesel, identical to the registered German trade mark.
IV The principle of international exhaustion – the US example
US laws consider that 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.
US Courts constantly permit the unauthorized importation and sale of genuine products, on the principle that once a trademarked product is placed on the market, trade mark rights may not be used to control the product’s further destination.
V Exceptions to the principle of international exhaustion
There are numerous exceptions to the general principle of exhaustion of trade mark rights, related to the „legitimate reasons”, „especially where the condition of the goods is changed or impaired after they have been put on the market” by the proprietor or with his consent (as stated by art. 7, paragraph 2 of the Directive 89/104/EEC and art. 13 paragraph 2 of the Regulation No. 40/94 and ECJ Cases) or to the standard of „material change” (US Courts Decisions, such as Perugina Case [Lever Brothers Co. v. U.S.; Ferrero U.S.A., Inc. v. Ozak Trading, Inc.]), but this paper will not treat the problem in extenso.
With regard to ECJ cases, exceptions to the principle of Community exhaustion were frequent in relation to pharmaceutical products in cases such as Bristol-Myers Squibb and Others v. Paranova, Eurim-Pharm v. Beiersdorf and Others, MPA Pharma v. Rhone Poulenc.
The ECJ ruled that pharmaceutical trademark owners could restrain the further marketing of their products which have been repackaged, unless:
(1) in doing so, the trademark owner would contribute to the artificial partitioning of the market;
(2) the repackaging did not directly or indirectly affect the original condition of the product (by merely replacing external packaging or adding labels or instructions);
(3) the packaging does not clearly identify the repackager;
(4) the repackaged product is not such as to be liable to damage the reputation of the trademark or its owner;
(5) the importer notifies, and provides requested samples of repackaged products to, the trademark owner before placing them on sale.
The above principles are not confined to the field of pharmaceutical products.
In the Loendersloot v. Ballantine & Son Limited case, concerning bottles of whiskey, the ECJ held that the trademark owner could prohibit the reaffixing of his trademark to genuine goods, with the same exceptions, but it not required the submission of samples to the trade mark owner and the mentioning on the goods of the identity of the party that relabels or repackages them.
[1] Studiul a fost prezentat în cadrul conferinței internaționale a International Bar Association (IBA), organizată la București, 2007.