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.

Within two weeks of an alleged leak we have another bigger and better document allegedly stepping through the internet terms of the highly secretive Anti-Counterfeiting Trade Agreement (ACTA).  The new document appears to be a European Union (EU) paper outlining the Internet and Civil Enforcement chapters, and setting forth proposals from the U.S. and responses from the EU, Japan, and other negotiating countries.  Highlights include:

• US advocacy of anti-circumvention controls and opposition from the EU, Japan and New Zealand.
• Arguments for internet service provider liability for knowing facilitation of infringement.
• US advocacy of global implementation of a Digital Millennium Copyright Act (DMCA) style enforcement protocol.
• Advocacy by some countries of limiting ACTA civil enforcement provisions to trademarks and copyrights and not to all intellectual property.
• The EU is seeking injunctive powers against infringing intermediaries.

For more information check out the article on Michael Geist’s Blog.

An alleged excerpt of the secretive Anti-Counterfeiting Trade Agreement (ACTA) has been disseminated as a PDF on a Google file share site.  The PDF is allegedly the proposed language for Article 2.17 of the act providing for internet and digital transmission restrictions.  The file is titled  “Enforcement procedures in the digital environment” and is divided into 7 numbered paragraphs and subsections.

The key provisions revealed in the document include:

• a duty to technology firms to shut down infringement where they have “actual knowledge” that such is taking place;
• a trademark takedown procedures similar to the current copyright takedown procedures;
• an expansion of the DMCA’s injunction against breaking digital locks;
• civil and criminal remedies to be supplemental and cumulative to other remedies;
• a provision for forcing ISPs to implement procedures to monitor for infringements and to address violations. (a footnote suggests that terminating user accounts for repeat infringers)

If genuine, this excerpt discloses many of the concerns with the Act that Internet advocates have been condemning.  For example, the duty to shut down infringement on actual knowledge that infringements may be occurring has previously been suggested in legal arguments.  Critics have characterized the argument as equivalent to requiring a Xerox to stop selling copiers to Kinkos because it has actual knowledge that infringements take place at Kinko’s outlets.  Likewise the termination of accounts are criticized because an entire family’s account is cancelled because of acts which may have been committed by third parties or by a child.  Furthermore, denial of service would arise without legal process and without a specific guaranteed appeal process.

There has been no confirmation that the document is genuine.

In the recent case of Beltronics USA, Inc. v. Midwest Inventory Distribution, LLC, No. 07-3340 (10th Cir. April 9, 2009), the 10th Circuit ruled that differences in warranty and service terms can constitute a “material” difference which prevents resale despite under the first sale doctrine.  Beltronics is a manufacturer of electronics equipment which it sells under its Beltronics trademark.  Beltronics maintained at least two authorized distributors who agreed to sell the products for a specified minimum price.  Apparently in violation of their distribution agreements, those distributors sold Beltronics radar detectors to Midwest, which in turn resold them as “new” on the internet auction site eBay.

To prevent Beltronics from discovering that Midwest’s inventory had been supplied by the two distributors, the distributors either replaced each radar detector’s original
serial number label with a phony label or removed the original label altogether
before shipping equipment to Midwest.  On rare occasions, when the distributors
supplied Midwest with a radar detector bearing an original serial number label,
Midwest removed the label prior to resale.

In September 2007, Beltronics filed suit against Midwest alleging (1) counterfeiting and federal trademark infringement under 15 U.S.C. § 1114; (2) false designation or origin under 15 U.S.C. § 1125; and (3) trademark infringement, unfair competition, and passing off in violation of state law.  Beltronics also sought a preliminary injunction.  The preliminary injunction was granted and Midwest appealed.

On appeal the 10th Circuit rejected the argument that “material” differences should be limited to physical differences.    The absence of manufacturer warranty service was material difference enough.   While affirming that adequate disclosure could insulate the sale, the 10th Circuit affirmed the lower court’s rulling that the disclosure placed on the product listing by Midwest was insufficient.  Midwest’s disclosure stated:

WARRANTY – WE PROVIDE A 1 YEAR DEFECTIVE
REPLACEMENT WARRANTY.  THE MFG WILL NOT HONOR
THE WARRANTY IF PURCHASED OFF EBAY.  SINCE WE
HONOR THE WARRANTY, THE SERIAL NUMBER HAS BEEN
REMOVED AND RETAINED BY US.

The district court rejected this disclosure as insufficient because no notice was provided on the products themselves and the disclosure failed to address software updates and other support elements.  Evidence of actual confusion by consumers contacting Beltronics for warranty service further sealed the decision.

The European Commission has enacted a 40% reduction in the official fees required to obtain a Community Trade Mark by merging the application and registration fees.  Previously an application fee was paid at the start of the registration process and an additional fee was paid once the registration was granted.  Effective May 1, 2009, the registration fee portion has been eliminated for all pending and future applications.  The current total official fees for a CTM application are € 1,050.00 for a paper application and € 900 for an electronic application.  Effective August 1, 2009, the official fee for a CTM international application under the Madrid Protocol will be reduced to € 870.00.

This change reflects a desire to encourage great use of the CTM system by small and mid-size firms.  “As a non-profit-making European agency, we have been trying to play our part in providing value for money in this essential service. Taking into account the earlier cut in trade mark fees in 2005, through efficiency measures and greater use of computer technology we have been able to more than halve the cost of Community trade marks over a five year period.”

Finding good books on the parallel market is not an easy task. Despite its long and prominent history in US and European legal practice, the parallel market is usually relegated by most writers to a chapter regarding diversion of goods. It is therefore a treat to find an entire treatise devoted to the parallel market. The fact that it is both readable and intelligent is a plus.

Parallel Trade In Europe, by Christopher Stothers, published by Hart Publishing is just such a treat. As revealed by its title, it explores the history and development of the parallel market trade in Europe. Mr. Stothers, a solicitor working for Milbank, Tweed, Hadley & McCloy LLP, in London, clearly has developed a broad and rich understanding of the topic.

The experience with the parallel market in Europe is very different from that in the US. The difference in how parallel market rights apply “inside the community” versus “outside the community” has no familiar parallel in US practice. Similarly re-packaging restrictions follow unique restrictions. As a result, the book provides European practitioners with a great refresher and non-European practitioners with a very readable introduction.
Sample chapter headings include:

2.I.B. Industrial and Commercial Property
2.IV.A. General Rights to Prevent Repackaging.
2.VI. Rights which are not Subject to Exhaustion
3.I. Art. 81. Anti-compettitive Agreements
5.I.B. International Exhaustion under Community Legislation
5.I.E. Internal Enforcement.

Overall, Parallel Trade in Europe will provide the casual reader with a great overview of the fascinating history and status of parallel market law in Europe and will provide the professional practitioner with an invaluable reference resource. I enjoyed the book and highly recommend it.

Apple, Inc., manufacturer of the well known line of computers and software, filed suit on July 3 in the federal district court for the northern district of California against Florida company Psystar, Inc.   The suit alleges counts for violation of its shrink wrap license, trademark and copyright infringement.  Psystar has been manufacturing and selling a line of computers which sell pre-installed with Apple’s OSX operating system.  Apple’s shrink wrap license which comes with OSX specifically requires that the software be installed only on Apple branded computers.  Psystar has previously expressed defiance at claims that it might be violating Apple’s rights.  Statements that Apple’s license might violate US monopoly law have been attributed to Psystar employees.  We will monitor.

The commercial court in Paris has awarded luxury bag maker LVMH Moet Hennessy Louis Vuitton (“LVMH”) and fashion house Christian Dior Couture (“Dior”) 38.6 million euro ($61 million) as damages against eBay for the sale of counterfeit and parallel market goods on its online auction site.  Amongst the court’s findings were statements that eBay was guilty of gross misconduct by failing to put into place appropriate measures to prevent the sale of counterfeit goods. This precedent setting decision obligates online auction services to prevent illegal activity.  Moreover, eBay is exposed to continuing penalties is accused products are not removed from the site.

This decision comes hot on the heels of a recent decision by another French court awarding Hermes International 20,000 euro, or $31,600, for failing to adequately supervise sales of allegedly counterfeit products.  By French standards the amount of the judgment in the LVMH decision is substantial.  Most commentators have suggested that it will embolden a rash of similar suits by other luxury brand owners.

eBay has responded to the decision by announcing it intent to appeal and by releasing public statements labeling the decision a major strike against the consumer and on-line resellers.  eBay insists that it take reasonable precautions against the sale of counterfeit goods.  However, eBay has previously taken the position that since it never takes physical possession of the goods traded on its site, it is unable to guarantee that counterfeit goods will be caught in every instance.  As recently as late 2006, eBay launched its latest anti-counterfeiting initiative .  This initiative included restrictions on the listing of brand name items and on cross border trade.

One troublesome aspect of the decision is the chilling effect that it is likely to have on the on-line resale of genuine branded goods.  The heightened risk of decisions such as this one, if not reversed, will make it difficult of on-line resellers to allow the sale of any branded products.  As a result, brand owners will effectively be able to extend their control over products beyond the first sale effectively making themselves gatekeepers for litigation shy online auction houses.

The decision by the commercial court of Paris could bode badly for eBay on this side of the pond where it faces a similar lawsuit filed by Tiffany and Co. in the United States.    The Tiffany case likewise accuses eBay of facilitating the sale of counterfeit goods and serving as an instrumentality of illegal activity.   A decision in the Tiffany case is expected soon.

The International Trademark Association (“INTA”), a worldwide association of Intellectual Property attorneys has circulated a paper detailing arguments against the parallel market. The paper was presented by Annette Freeman, of Spruson & Ferguson, Sydney, Australia, not as an analysis of the issues but as talking points for persons wishing to advocate “national exhaustion.” The concept of “national exhaustion” suggests that the rights of the trademark owner are only exhausted within the country that the goods are sold. This concept is at variance with current law in the US and Canada which recognize that a sale of a trademarked good anywhere in the world exhausts the trademark owner’s right to control the resale of the work except under certain limited circumstances.

The paper suggests the following consumer expectations dictate against parallel market sales:

1. Reassurance that the branded product is reliable, of a certain quality;
2. Receiving the expected quality and satisfaction from the purchase;
3. Confidence that the branded product is the same as that purchased previously and is equally suitable for their needs;
4. Trust in the quality or value that the brand signifies to them;
5. In many cases, convenience of wide availability; and
6. Expectation that the branded product will be backed by the brand owner with quality guarantees or after-sales service.

The paper also cites numerous frequently used arguments against the parallel market including: consumer savings in purchasing parallel goods are not substantial, packaging of parallel goods is often altered, regional incompatibility in electronics (caused by mfg. region coding), lack of warranty support, risk of hidden counterfeits and material differences in out of region products.

INTA, an organization which is heavily dominated by the attorneys of brand owners, has taken a position that “parallel imports are harmful to brand owners, except in the case of imports between countries that are in recognized regions with truly harmonized markets.” Therefore, the Association supports national exhaustion or, in appropriate cases, regional exhaustion of rights.

Those of you who already have an INTA password can read the paper in the most recent INTA Bulletin

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.