Legal Briefing

Parallel imports and trade marks

The In-House Lawyer Logo

India | 01 December 2010

In this era of globalisation, markets around the world are being flooded with ‘parallel import’ goods. Parallel import occurs when the original products (and not counterfeit products) are imported cheaply to a country without the authorisation of the product owner who has intellectual property (IP) rights over the products. Unlike black market goods, parallel import goods are legitimate. However, they are sold outside normal distribution channels by entities who may have no relationship with the producer of the goods. This mode of importation poses, for the producer, a threat of competition over their own products, which had been marketed following the principle of differential pricing.

Due to differential pricing, the importers are able to buy the products from the markets of one country at a cheaper price and sell the same at a price, which is lower than that prevailing in the second country where the products are imported. For example, in Mozambique 100 units of Bayer’s ciprofloxacin (500mg) costs $740, but in India Bayer sells the same drug for $15 (owing to local generic competition). Mozambique can import the product from India without Bayer’s consent.

Consequently, the issue that arises is that of the rights of the trade mark owners. The practice of parallel imports is based on the principle of exhaustion, whereby the exclusive right of the trade mark holder to import the product is exhausted when it first enters the market legitimately and is bought by consumers. The basic premise on which this principle rests is that no owner can benefit twice from the same product. However, this principle has been interpreted differently by different countries and these interpretations have had a profound effect on the policies of various countries in the adoption of parallel imports.

SWOT ANALYSIS OF DIFFERENT PARALLEL IMPORT LEGISLATIONS

All countries allow parallel imports. However, little uniformity exists in the overall approach. Article 6 of the General Agreement on Tariffs and Trade/the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), of the World Trade Organization (WTO) Agreement, provides that appropriate laws regarding parallel imports should be drafted in such a way that they do not violate the non-discrimination rules of the most-favoured national and international treatments:

‘Nothing in this Agreement shall be used to address the issue of the exhaustion of intellectual property rights.’

It is therefore clear that the treatment of parallel imports is subject to the national laws of different countries.

The US adopted the universal rule (international exhaustion through s526 of Tariff Act 1930 and s42 of Lanham (Trademark) Act 1946, with respect to parallel imports). Under these provisions, once a genuine trade marked product is placed in the global market by, or with the consent of, the trade mark owner, no infringement of the rights of the trade mark owner occurs.

The EU has adopted a regional exhaustion rule that has been developed by way of judicial pronouncements, wherein on one occasion it was stated (in Centrapharm v Winthrop [1974]):

‘That the right in a trade mark must be considered exhausted after it is placed on the market by or with the approval of the trade mark owner, otherwise the trade mark 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 trade mark right.’

This has been codified in the Harmonisation Directive (Council Directive 89/104/EEC), in accordance with which the member states were required to conform their national trade mark law. 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 trade mark by the proprietor or with his consent’, except under the provisions of Article 7(2), which exempts altered or damaged goods.

South Korea has issued customs regulations expressly permitting parallel imports, except in certain circumstances. The government has also revised the Fair Trade Commission Enforcement Guidelines under the Monopoly Regulations and Fair Trade Act, which enables the Fair Trade Commission to act against those who attempt to prevent the sale of parallel imports.

INDIAN PERSPECTIVE

Trade mark rights are exclusive and territorial in nature, thereby leading to an impasse, wherein parallel imports maybe construed as trade mark infringement. On one hand, parallel importers are sourcing legitimate products from overseas, but on the other they are bypassing the authorised distribution channels in the importing country. India has adopted the national exhaustion principle to regulate parallel imports, the same being enshrined in s30 of the Trade Marks Act 1999 (the 1999 Act). As per this principle, if the goods are sold for the first time in a domestic market or within the territory of the country in which the trade mark is registered, the owner of that particular trade mark loses their rights over the goods and cannot prevent any subsequent sale of the same in the domestic market of that country. Section 107 of the 1999 Act authorises representation of a trade mark registered abroad to operate in India as long as the same is sufficiently indicated in English.

In Samsung Electronics Company Ltd & anor v G Choudhary & anor [2001], the plaintiff prayed for an interlocutory injunction that, in essence, sought to combat and eradicate the parallel importation (by third parties into India) of products manufactured by the plaintiff itself. The Delhi High Court observed that Indian law was quite liberal in permitting parallel imports of genuine goods bearing registered trade marks, provided that such goods had not been materially altered after they entered the market. The Court held that the trade mark proprietor could, however, impose contractual restrictions on a third party, such as a foreign licensee, against importing genuine goods into India, provided that such restrictions pass muster under the 1999 Act and the Monopolies and Restrictive Trade Practices Act 1969, which was – at the time – India’s competition statute (substituted with the Competition Act 2002).

Furthermore, to comply with the TRIPs obligations, the Indian government notified the Intellectual Property Rights (Imported Goods) Enforcement Rules 2007, regulating prohibitions of parallel import. As per these rules after the registration of the product, the goods that are suspected by the custom authorities to be infringing trade mark rights shall be suspended and proceedings for confiscation of the goods shall take place under s111(d) of the Customs Act 1962. The above mentioned rules, however, do not apply to personal baggage or goods intended for personal use.

Looking ahead

The 1999 Act, which is required to play an instrumental role in controlling distribution channels and partition markets, may, at times, seem to be contrary to the principles of healthy competition. The primary function of a trade mark is to protect the proprietor of the trade mark from misuse of the brand, and to prevent trade mark owners from the possibility of dividing the market and thereby distorting competition. The effect of parallel imports would be beneficial to consumers, retailers and manufacturers. The government intervention to prevent even the threat of arbitrage strengthens the monopoly position of the authorised supplier and raises the risk of excessive pricing or anti-competitive behaviour. Affordable imports of branded products in the Indian market may attract not only traditional brand-users, but also consumers who would not be able to afford these goods under normal circumstances, thereby increasing the overall sales of goods. Branded products, imported through parallel imports, act as a powerful barrier to the development of counterfeiting. It is worth looking into the circumstances of a particular geographical area, mindset of the population and state of the economy before giving a definitive thumbs-up (or down) to the concept of parallel import.

For the developing economies, this practice seems favorable in the short run, but in the long run it is against their economic interest and jeopardises their welfare. This is the reason why the WTO regime has not created any mandatory provision in this respect, but has given liberty to member states to legislate on their own, according to their individual circumstances. It is against this background that some countries or regions have made the exhaustion regime subject to considerations of trade policy, an approach that more often than not fits with the underlying basic principles of the IP rights in question. Therefore, given the multiplicity of causes and ambiguous results, the question of whether regulating parallel imports is beneficial or harmful is ultimately an empirical question that depends on individual state circumstances.

By Niloy Pyne, partner, and Pooja Chakrabarti, associate, Amarchand Mangaldas.

E-mail: niloy.pyrne@amarchand.com;

pooja.chakrabarti@amarchand.com.

The views expressed are those of the authors and do not reflect the official policy or position of Amarchand Mangaldas.