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.

The European Commission has issued revised antitrust rules that allow luxury goods manufacturers who own less than 30% market share in any particular market to restrict the distribution of their goods through online resellers. The press release issued by the Commission states that the “Regulation allows manufacturers to protect an exclusive distributor from active sales by other distributors, in order to encourage that distributor to invest in the exclusively allocated territory or customer group.”

This new rule is of particular importance to online retailers such as EBay and Amazon. Under the new rules manufacturers could impose “hardcore” restrictions on on-line resellers forcing them to refuse sales in particular markets or to reroute customers to particular resellers. These new rules are valid for 12 years.

The commission has indicated that it will monitor the application of the law for any abuses.

The European Court of Justice has ruled in GlaxoSmithKline Services Unlimited v Commission and Others, a case arising from Spain, that differentiated pricing agreements intended to discourage parallel market sales violate European competition laws but has found that exemptions to that rule were not properly investigated.

In March 1998, the pharmaceuticals manufacturer GlaxoSmithKline Unlimited (‘GSK’) entered into an agreement with 75 Spanish wholesalers establishing a two tier price structure for medicinal products sold in Spain or exported from Spain.  The purpose of this differentiated pricing structure was to discourage parallel market sales of pharmaceuticals.

GSK submitted its price conditions to the European Commission seeking a ruling that they did not violate European rules against competitive restrictions. On May 8, 2001, the Commission decided that GSK’s general sales conditions were prohibited by Community competition law, because they constituted an agreement restricting competition and because GSK had not proved that the agreement met a recognized exception.

GSK brought suit seeking to overturn the Commission’s ruling.  On September 27, 2006 the court of first instance upheld the Commission’s finding principal finding but required the Commission to do further investigation regarding GSK’s claim of exemption.  Both GSK and the Commission appealed.

On October 6, 2009, the European Court of Justice, in its appellate capacity, affirmed the lower court’s ruling that GSK’s agreement violates European rules against competitive restrictions.  The Court also found that in order to be subject to an exemption, an agreement must contribute to improving the production or distribution of goods or to promoting technical or economic progress.  The Court affirmed the Court of the First Instance’s ruling that the Commission had not conducted an adequate review of the claim of exemption.

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.

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.

Effective August 8, 2007, new customs regulations came into effect in the Republic of Croatia greatly expanding the rights of Croatian trademark owners to stop, seize and destroy infringing and, potentially, parallel market goods. Based on Article 70, paragraph 3 of the Croatian Customs Law, the new regulation amends the handling of suspect goods.

The new regulation has the following key elements:

• the extension of Customs measures providing protection for IP rights to goods circulating by mail;
• a simplified procedure for seizure and destruction of infringing goods.

The principal impact of the mail change is likely to be on goods purchased over the internet and delivered to the purchaser by mail.

The provisions of the amended Regulation which provide a simplified procedure for the destruction of infringing goods raise greater concerns and confusion. According to Anamarija Stancic of SD PETOSEVIC, an intellectual property practice with offices in Albania and throughout the former Yugoslavia, the rights holder is now able to submit the request for the destruction of detained goods which are under customs surveillance without an obligation to establish that the detained goods are infringing. Previously, the goods would be held by Croatian Customs while the Croatian trademark owner sought and obtained a final decision from a court of law. This process was very time consuming due to Croatian requirements regarding notice to all interested parties to the litigation.

This new regulation raises positive and negative concerns. On the one hand, it greatly enhances the ability of Croatian trademark owners to protect their rights administratively at the border. On the other hand, it raises serious concerns about possible abuses and the due process rights of the importers. Anyone doing business in the Croatian market or transshipping through Croatia would be well advised to monitor how this regulation develops and is enforced.

Thanks for information in this article to Anamarija Stancic at SD PETOSEVIC Croatia.

The Moscow News Weekly reports on a crackdown by the government of the Russian Federation against gray market electronics. In an effort to re-engineer the current market, the government is temporarily discontinuing import duties on digital cameras and cellular phone components while, on the other hand, Russian Customs begins recording the serial numbers of all laptops and other digital devices imported into Russia. The goal is to encourage domestic assembly and to discourage cheap parallel market imports which presently constitute a substantial majority of Russian imports.

In an effort to show their support for this new policy initiative, some of the largest chain stores in the nation have signed a declaration circulated by the Russian Association of Trading Companies and Manufacturers of Consumer Electronics and Computers (RATEK),committing to purchase goods from authorized suppliers.  Some experts have expressed doubt in the policy’s effectiveness.
For the full article click here.

The British Medicines and Healthcare Products Agency (MHRA) has issued a drug alert and recall regarding the presence of allegedly counterfeit Zyprexa® 10 mg tablets in the United Kingdom. Zyprexa® is an anti-psychotic drug, manufactured by Eli Lilly Company, which is used to treat persons with schizophrenia and bi-polar disorder. The counterfeit pills only contain about 60% of the labeled active ingredient and may contain other degradants. The suspect products being recalled include any parallel distributed stock of Lots A200127, A216454 and A229505 (and lot variants) of Olanzapine tablets 10mg branded as Zyprexa®.

According the the MHRA the counterfeit product entered the British market through parallel market imports from France. The MHRA noted in its alert that the European Medicines Agency (EMEA) has allowed 40 UK parallel market distributors to supply this product to the British market but did not clarify if this counterfeit product entered the market through one of these parallel market distributors.

Parallel medicines and health care products may legally be sold in the parallel market within the European Union. Britain recognizes two forms of parallel trade in such products based on the authorizing agency. Parallel distributed products have a marketing authorization issued by the EMEA and parallel imported products have a marketing authorization issued by the MHRA. In both cases the repacking and relabelling are inspected by the MHRA but the importation and/or distribution takes place outside the original manufacturer’s supply chain.

The Spanish affiliate of LG Electronics, the Korean electronic manufacturer, has renewed its claims that Spain is losing millions of Euros in taxes as a result of parallel market sales. According to LG Spain, the failure to pay import taxes gives parallel market importers a substantial advantage over the authorized reseller.

In addition, LG Spain and its partners, claim that the country is injured because parallel market importers fail to pay electronic residue fees. Under Spanish law all manufacturers and importers of electronics are obligated to register with the Registry of Industrial Businesses for Residues of Electronic Aparatuses and Electronics [Establecimientos Industriales para Residuos de Aparatos Eléctricos y Electrónicos (REI)] The purpose of the REI is to then determine the percentage of materials that each manufacturer is introducing into the marketplace in order to calculate the electronic residue handling fees that the manufacturer must pay. Of the approximately 10,000 manufacturers in the Spanish market only approximately 10% are allegedly registered.

LG Spain’s battle against parallel market resellers of , principally, CD and DVD players and recorders in Spain has been on-going for several years. In November of 2005, LG Spain reported that it has lost over 10 million Euros to parallel market imports the previous year. In response, LG announced an ambitious two-stage strategy of notifying unauthorized resellers and launching legal actions against those that did not reach amicable settlements. (Under European law importing products bearing copyrighted works without the consent of the copyright owner is actionable. See article regarding CD Wow case earlier in this blog).

There were no subsequent press releases regarding the success or failure of this approach. Clearly, the latest statements suggest that the parallel market sales continue to pose a problem for LG Spain.

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