China: Trademark Infringement in Parallel Importation

Last Updated: 24 October 2010
Article by Kalley Chen

On April 24, 2009, the Changsha Intermediate People's Court (the "Court") made a judgment in Michelin Group vs. Tan Guoqiang and Ou Can. In this first instance, the Court ruled that the Defendants, tire dealers Tan Guoqiang and Ou Can, infringed upon the Plaintiff's exclusive right to use the registered trademark, "MICHELIN & Device," by selling imported Japanese-made tires (targeting the Brazilian market) without consent from the trademark owner and without obtaining a Chinese Compulsory Product Certification ("3C Certification").

Some questioned the Court's decision as the tires sold by the Defendants were in fact manufactured by the Michelin's own factory and were not counterfeits. The case concerns the parallel importation of trademarked products, a common occurrence in international trade. Parallel importation of trademarked products refers to branded goods, manufactured and sold in the country or area where the trademark owner is located or where the trademark products are authorized to be manufactured and sold. The trademarked products are then imported into the countries or areas, where the trademark owner or the exclusive licensee enjoys the trademark and related rights without the authorization of the trademark owner and/or the exclusive licensee.

Parallel importation is often motivated by extra benefits. Since manufacturing costs and consumer capability vary in different countries and areas, the trademark owner always sets different prices for their products in different markets. Parallel importers purchase products in one country at a price (P1) which is lower than the price at which they are sold in a second country (P2), and import the products into the second country. Consumers are inclined to buy the imported product in the second country at a price which is lower than P2.

Whether parallel importing of trademarked products constitutes trademark infringement is not specifically addressed in the PRC laws and regulations. There are two prevailing opinions regarding parallel importing in the academic field. Most scholars disagree that parallel imports constitute trademark infringement based on the "Exhaustion of Rights Doctrine," while some believe that trademark infringement shall be established in parallel import based on the locality nature of intellectual property rights ("IPR").

In this case, the Court focused on whether the Defendants' sale of imported MICHELIN tires shall constitute trademark infringement upon the Plaintiff's exclusive right to use the registered trademark "MICHELIN & Device." As the manufacture and sale of tire products shall be in compliance with the relevant speed requirements, geographical and climatic features, the Court held that the Defendants' failure to obtain the 3C Certification for MICHELIN tires which were originally targeting the Brazilian market may raise quality and safety issues. It was foreseeable that consumers would attribute traffic accidents or any other civil disputes 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 would be damaged. Therefore, the Court concluded the Defendants' acts had caused substantial damages to the Plaintiff's exclusive rights to use the trademark "MICHELIN & Device".

The Court's judgment shows that the Exhaustion of Rights Doctrine or the Territoriality Principle alone is insufficient to justify the act of parallel imports. When affirming the trademark infringement, the Court should also consider whether the interests and rights of the trademark owner have been damaged. In this case, the grounds on which the Court established trademark infringement were that the tires had not obtained 3C Certification, and the tires were not manufactured for the Chinese market. According to the Court, tire products should be certified under the 3C system before they are sold in China. Otherwise the quality and safety of the products could not be ensured. Therefore, the Plaintiff's reputation as a leading tire manufacturer trademarked as "MICHELIN & Device" would be damaged. In short, the key issue of this case is the "3C Certification," which represents or proves the quality and safety of the tire products sold in China.

One subsequent issue is whether importation and selling of trademarked products not subject to 3C Certification may cause trademark infringement. According to the Court's ruling, when affirming trademark infringement in parallel importation, the key issue is whether the import and sales activities have damaged the interests and rights of trademark owners. If an imported product is without 3C Certification, it merely indicates that the parallel imported products might have potential quality and safety problems. However, the absence of 3C Certification does not necessarily establish the problems. Therefore, a trademark infringement should be established if the imports and sales of the products that are not targeting the Chinese market would damage the reputation of the trademark owner, even if the parallel imported products are not subject to the 3C Certification. In other words, although the imported products are not subject to 3C Certification, the imports and sales of the products may also constitute trademark infringement conditioned that potential quality problems and safety risks exist within the imported products to be used in China. For example, the said products may not require a 3C Certification, but they are incompliance with other national standards or have potential safety risks in use.

On the contrary, would the import and sales activities constitute trademark infringement if the Defendants had applied for 3C Certification before selling the MICHELIN tires? The answer is no according to the Court's ruling. The MICHELIN tires with 3C Certification means that they are free of quality and safety problems and, therefore, the reputation of the Plaintiff would not be damaged. The trademark owner may inevitably make less profit because of the competition of the parallel imported products in the local market. For example, the price of the trademarked products is RMB 100 in country A and RMB 80 in country B, and the profit is RMB 30 in both country A and B. Parallel importer imports the products that are sold in country B to country A and offer the price at RMB 90. As such, the trademark owner may suffer a profit loss of RMB 10 in country A. In practice, the parallel importing of the trademarked products does not necessarily constitute trademark infringement simply because the trademark owner suffers profit loss.

In Michelin, the Court demonstrated the progress of trademark infringement trials of parallel imported products into China. The ruling of the case set guidance over the issue of whether the imports and sales of parallel trademarked products constitute trademark infringement. The key focus of the issue is whether the alleged acts are detrimental to the interests and rights of the trademark owner. To trademark owners that are harassed by parallel imports, it is possible to take measures to stop others from parallel importing of their trademarked products, if they can prove the products have quality and safety problems in use. For parallel importers, they should ensure that consumers' interests would not be damaged while deriving profits.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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