The Gray Blog

The following is a report on recent cases involving parallel imports in China which appeared in Vivien Chan’s July newsletter.  Our thanks to Vivien Chan for permission to reproduce the report.

PROTECTION AGAINST PARALLEL IMPORTS IN CHINA

Parallel imports have historically been difficult to protect against due to the authenticity of the goods. Due to the lack of clarity of the state of the law, trademark owners have rarely chosen to litigate on the matter. The Michelin judgment, handed down in April 2009, casts light on the court’s perspective in dealing with such cases.

APPLICABLE LEGISLATION

The PRC Trademark Law, together with its Implementing Regulations, were last amended in 2002. Although the legislation does not specifically mention parallel imports, domestic trademark proprietors may try to rely on Article 50(a) of the Regulations and Article 52(1) of the Trademark Law for protection. Article 50(a) of the Regulations provides that it is an infringement of the trademark proprietor’s exclusive right to use a registered mark by:

“using [the mark] on identical or similar commodities or using a sign which is identical or similar to the registered trademark of other people as the name of commodity or as the decoration of commodity so that the general public are misled.”

The Regulations supplemented Article 52(1) of the Trademark Law which states that it is an infringing act to:

“us[e] a trademark that is identical with or similar to a registered trademark in connection with the same or similar goods without the authorization of the owner of the registered trademark.”

Both of these clauses, however, only protect trademark owners with registered trademarks in China.

CONFLICTING CASE LAW?

The Lux case (1999) was the first ever case decided on parallel imports. The plaintiff was the Chinese exclusive licensee of the trademark “Lux”, which was originally registered in China by the foreign trademark owner. The defendant in this case parallel imported genuine “Lux” soaps made in Thailand.

The Guangzhou Intermediate People’s Court held that the plaintiff had exclusive rights of the “Lux” trademark, which included the exclusive right to import, and that such a right should be protected. Without the authorization of the foreign trademark owner, the importation of the soaps was an infringement. The defendant was ordered to cease the importation.

This decision, welcomed by trademark owners, was however not followed by An’ ge in 2000. In An’ ge , the plaintiff argued that the two defendants infringed his exclusive right as an exclusive licensee to sell the products, and violated the business principle of honesty and credit. The plaintiff advocated therefore that it was unfair competition. The defendants argued that their activities were legal because the parallel imports followed the formal import procedures.

At first instance, the judge held that the defendants’ behavior constituted legal business operations. The judge opined that parallel importer’s resale activity was permissible, because contractual rights between two parties could not directly be asserted against a third party. There were also no statutory restrictions stipulating that the buyers who bought the products must be direct consumers or users. This decision was upheld by the appeal court.

An’ ge is a disappointing departure from Lux. It can however be distinguished as the plaintiff in this case did not own a registered trademark. Article 50(a) of the Regulations and Article 52(1) of the Trademark Law therefore could not apply. The plaintiffs had to rely on the Unfair Competition laws for protection. An’ ge is therefore arguably not a departure from the Lux case. The latest decision in Michelin further affirms this position.

THE MICHELIN DECISION

The Michelin Group brought a lawsuit against two tire dealers engaged in the unauthorized sale of authentic, Michelin-branded tires in China. Here, the tires had not been approved under the China Compulsory Product Certification (3C) system, which is a statutory system to safeguard consumers’ rights and interests.

The Changsha Intermediate People’s Court found in favour of Michelin Group. It held that since the products in question were subject to the inspection required by the 3C system before importation, the tires had not been legally imported into China and should not have been sold in the Chinese market.

The court also noted that because the tires had not been inspected under the 3C system, certain quality and safety issues may arise, and it is foreseeable that consumers will attribute any such problems to the Michelin Group as the manufacturer. Consequently, the standard of quality denoted by the Michelin trademark and plaintiff’s reputation as a leading tire manufacturer could be substantially damaged. The court therefore found that even though the products were not counterfeit, the defendants’ sales of the tires without Michelin’s approval and without 3C certification constituted an infringement of the trademark owner’s rights.

SIGNIFICANCE OF MICHELIN

Michelin affirms the courts’ approach in Lux, which is favourable to trademark owners. No doubt a stricter read of the case would be to interpret it as only protecting the owners where the goods are subject to the 3C certification system, or some sort of statutory quality control measure. Even then, the 3C certificate system is a very broad statutory measure covering more than 20 groups of products, including household electrical appliances, information technology equipments, telecommunication equipments, motor vehicles, etc.

Michelin, together with Lux can therefore be used as a persuasive precedent for trademark owners who are facing parallel importation by unauthorized distributors and especially where the goods are subject to statutory quality control measures.

U.S. Customs and Border Protection (“CBP”) has released its mid year intellectual property (“IP”) seizure statistics for 2008.  Patterns that are evident from these numbers are a significant increase in value of goods seized per shipment and the continued growth of China as a source of IP violations.

The domestic value of goods seized for IP violations at the mid-year point of Fiscal Year (FY) 2008 increased by 2.7% to $113.2 million (M) from $110.1M at the mid-year point of FY 2007.  The total number of IP seizures decreased by 1%, from 7,245 to 7,166.   This suggests a higher value per seizure.  It is important to remember that at least some portion of these seizures are genuine parallel market goods which CBP detains under dubious claims that they may be counterfeit.  CBP demands a letter of authorization from the brand owner which is invariably denied and leads to seizure of the merchandise.

China was the source of the largest number of CBP IP seizures at mid-year FY 2008 with a domestic value of $96.7M, accounting for 85% of the total value seized.  In FY 07, China accounted for 80% of seizure value.  Of even greater concern is the fact that China is the source of 90% of “safety & security” IP seizures.  Safety & Securty seizures generally involve pharmaceuticals and other items viewed as dangerous to the health and safety.

As if the China numbers were not already significant, Hong Kong is treated as a separate entity by CBP for statistical purposes.  That said, Hong Kong qualified as the second largest source of IP related seizures.  Total seizures amounted to more than $5.5 million.  No other country amounted to more than $2 million in seized goods or more than 1% of total seizures.

Clearly the problem with counterfeits originating from China seems to be worsening.  This is not surprising considering the soft glove approach towards China’s IP enforcement policies.
Footwear was the top commodity seized at mid-year FY 2008 with a domestic value of $40.3M, which accounted for 36% of the entire value of infringing goods.

The categories of Handbags/Wallets/Backpacks, Cigarettes, and Sunglasses had significant increases in domestic value at mid-year FY2008 over mid-year FY 2007 values.   Overall the number of footwear seizures has declined by 48% indicating a large increase in the value of the shipments seized.

The Gray Blogger just returned for the USPTO China Road Show.  The program was a huge success drawing nearly 400 registrants.  The speakers from various firms and agencies were very well informed and provided useful insight on the complex problems and opportunities of protecting Intellectual Property in China.  The key takeaway lesson was to plan your IP strategy and take steps to protect your intellectual property before you make public disclosure of your intent to do business in China.  If you wait until you have begun production or distribution, you are already too late.

All in all the presentation was very rewarding and I highly recommend that you consider attending if you have any interest in the subject.  The USPTO will be conducting two additional road shows in the coming year in the mid-west and in California.  Special kudos to Susan Anthony and Conrad Wong, both of the USPTO, and to their team, for running a very professional program.

Approximately 900,000 of tainted allegedly counterfeit toothpaste which are being recalled from public institutions in Georgia, Florida, North Carolina and South Carolina.   Similar finds have been made in other parts of the country, including Puerto Rico, and abroad in Panama, the Dominican Republic and Australia.  Although initial reports stated that the product entered the US through parallel market sales, it is now unclear whether the case involves tainting of an entire supply chain including authorized and unauthorized resellers.

According to a report in the New York Times, drug distributor McKesson Corp said it was recalling its China-made EverFresh brand after it was identified as containing trace amounts of the chemical known as diethylene glycol, a compound used in anti-freeze. Officials from the FDA say that even a trace amount of this chemical could present potential health problems for young children and individuals with kidney conditions.

The manufacturers of these products were identified as Goldcredit International Enterprises Limited, Goldcredit International Trading Company Limited, and Suzhou City Jinmao Daily Chemicals Company Limited.   The counterfeit toothpaste is labeled made in China or, in the most recent finds, as “manufactured in South Africa”, with several misspellings such as ‘South Afrlca’ and ‘Dental Assoxiation’ on the packaging.  The product is sold under several brands including PACIFIC, Dentakleen, BrightMax, DentaPro, Dentakleen Junior and EVERFRESH.

More recently, tainted COLGATE brand toothpaste was also found.  In a press release last week Colgate categorically stated that it does not use, nor has ever used, diethylene glycol as a toothpaste ingredient.

In one of the largest awards ever rendered against a parallel market importer in Europe, CD Wow has been ordered to pay more than 41 million pounds (approx. $80 million) to the British Phonographic Industry (BPI) . The award issued this past month after a five year battle by BPI against the Hong Kong based diverter. CD Wow purchased CD’s which sold at a lower price in the far east, and resold them to retailers in the United Kingdom. The case centered on a European Union law which prohibits the importation into the Union of goods bearing copyrighted works without the consent of the copyright owner. In 2004, CD Wow entered into a settlement agreement with BPI in which CD Wow agreed to cease future sales. The harsh ruling was based on the High Court’s decision that CD Wow violated the terms of this agreement.
The players can be found at:
http://www.bpi.co.uk/
http://www.cdwow.com/