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.

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 case under review arose from a suit by the Omega, SA, manufacturer of the well known watch by that name, against Costco Wholesale Corp. to block sales of genuine Omega watches manufactured in Switzerland, sold abroad and then shipped in the gray market to resellers in the US who sold them to Costco.  The Omega watches bear a copyrighted globe design on the underside of the watch.

Omega alleged violations of its distribution rights under 17 U.S.C. 106(3) and unauthorized importation of a copyrighted work(the globe design) in violation of 17 U.S.C. §602(a).   The district court granted summary judgment to Costco based on its defense under the first sale doctrine.

The Ninth Circuit reversed, holding that pursuant to L’Anza the first sale doctrine set forth in Section 109(a) does not apply to foreign-made copies of a U.S. copyrighted work, unless those same copies have already been sold in the United States with the copyright owner’s consent.

The case under review therefore raises a slightly different factual situation from L’Anza.  Unlike in  L’Anza which involved US made goods exported and then re-imported in the gray market, the decision under review involves foreign manufactured and sold goods which are were imported into the US for resale.  The fact that the goods are even more clearly not subject to protection under the L’Anza definition suggests that the Court may be ready to reconsider its earlier decision.

One interesting theory argued in the original case was the question of whether the manufacturer of a primarily non-copyrightable commercial product can imbue it with all of the elements of copyright protection by merely adding a design to the exterior.  Particularly where the consumer cannot be said to be purchasing the product because of the copyrighted work.  It was argued in the briefs that a compulsory royalty free  license may be created under such circumstances.  Stevens seem to mention this theory favorably in the decision.

We will be watching the case closely.

At trial, Office Depot obtained a judgment and assigned it to DS Holdings in 2000.  DS went after 190 domain names that were registered in Zuccarini’s name. DS sought to have a receiver appointed over the domain names. The district court granted DS’s request to have the receiver appointed, and Zuccarini appealed. Zuccarini’s appeal focused on whether it was proper to appoint the receiver in the Northern District of California, since the domain names were not necessarily “located” there.

The court of appeals applied California law to the question of whether domains constituted property.  The Court ruled that domains were intangible property subject to seizure.  Then, taking guidance from elements of the Anti-Cybersquating Consumer Protection Act (ACPA), although ACPA was not implicated in the case, the Court found in rem jurisdiction where the “registrar, registry, or other domain name authority” is located.

For a more thorough review of the decision see Eric Goldman’s Blog.

• 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.

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 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.

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.

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.”