India: Selective Distribution System And Trademark Exhaustion

Last Updated: 29 June 2018
Article by Intepat Team

Selective Distribution System

A "Selective Distribution System" functions through a trademark holder-authorized channel for sale of its products. The purpose behind this arrangement is to have a control on the product distribution method so that only recognized platforms could undertake sale of such products on behalf of the producers/trademark holders. Generally, the intention is to preserve the brand prestige of a product. These channels are largely preferred by the trademark holders or producers of luxurious goods. An example for this could be derived from the recent ruling of European Court of Justice on the case concerning Coty Germany GmbH v Parfümerie Akzente GmbH (Case C-230/16). In the above said ruling the ECJ confirmed that a supplier of luxury goods may prohibit authorised retailers from selling its products on third party platforms, such as Amazon and eBay. According to trademark experts, this ruling brings much needed certainty for manufacturers seeking to protect the 'luxury image' of their luxury and prestige products through selective distribution systems. However, the ruling does not favour an absolute ban on sale of contract goods online or through third party platforms. The main objective of the decision was to contain platforms which operate in a discernible manner towards consumers. Also, it remains to be seen if the ECJ is willing to extend the aim of "preservation of a luxury image" into other branches of business.

Doctrine of Trademark Exhaustion

The doctrine stipulates that a trademark owner ceases to have control over further sale of its products once the products have been transferred into market through a legal and valid transaction. The jurisprudential aspect of this doctrine is that since the owner has already derived profit made by first sale he cannot restrict further sale of the same product or demand extra benefit arising out of subsequent sales.

Different modes of exhaustion may be categorized as follows:-

  • International Exhaustion- Whole world comprises of a single market and hence sale of goods anywhere in the world results in exhaustion of trademark rights over such goods.
  • Regional Exhaustion- When trademark registered goods are sold in a particular region, the owner ceases to have any control on further sale of such goods in that specific region. This doctrine has been adopted by the European Union.
  • National Exhaustion- Once a product has been sold in the domestic market, the trademark owner ceases to have any control on further sale of such goods in such domestic market.

A Legal Panorama

Section 30(3) & (4) of the Trade Marks Act, 1999 squarely deal with the issue of trademark exhaustion in India. The provision recognizes trademark exhaustion for further sale of or dealing with goods in the market which have been lawfully acquired by a person. A sense of ambiguity always prevailed with regard to interpretation of the word "market" in the said provision. Whether it incorporated international market within its scope or it restricts to domestic market only? Consequently, the question of legality of parallel imports in India was considered minutely by the court of law.

The judgement of Hon'ble Delhi High Court in the landmark case of Kapil Wadhwa v. Samsung Electronics 2013 (53) PTC 112 (Del.) (DB) elaborately deals with the abovesaid questions of law. The Learned Single Judge held that India follows national exhaustion doctrine and not international exhaustion doctrine. Hence, the defendants were restrained from importing and dealing in printers and their ink cartridges/toners bearing the trademark SAMSUNG.

On appeal, the division bench overruled the order of the learned single judge after a detailed analysis of Section 30(3) & Section 30(4) of the Trade Marks Act, 1999, Statement of Objects and Reasons of the Trade Mark Bill, 1999, Report of the Rajya Sabha Standing Committee in respect of Copyright Amendment Bill, 2010. In its judgement the Hon'ble Bench held that the term "market" contemplated by Section 30(3) of the Trade Marks Act, 1999 is the international market. Therefore, a combined understanding of all the relevant legal documents suggested that Indian Parliament intended to follow the international exhaustion doctrine. As a result, the defendants were allowed to import and sale the printers and ink cartridges bearing the trademark SAMSUNG. Nevertheless, the Hon'ble Court struck a balance between the interests of both the parties by directing defendants to prominently display in their showrooms that for such products which have been parallelly imported the plaintiff company does not give any warranty qua the goods nor provide any after service.

Conclusion

Needless to say, a selective distribution system is always preferred by elite brand owners so as to preserve their market reputation and mitigate chances of IPR infringements. However, a strict and watertight channel for flow of goods may not be appealing to many jurisdictions especially the developing countries. Preceding the TRIPS Agreement, when the international community debated in the Uruguay Discussions, the Indian position was to permit parallel imports. Communications from India at the Uruguay Round of the General Agreement on Tariffs and Trade dated July 10, 1989 on "Standards and Principles Concerning the Availability, Scope & Use of Trade Related Intellectual Property Rights" clearly brings out that India favoured the Doctrine of Exhaustion of Rights linked to parallel imports.

The trademark holders have alternate remedies if they apprehend that their IP rights are infringed by an illegal parallel import in India. They may resort to provisions of Intellectual Property Rights (Imported Goods) Enforcement Rules, 2007 and the Customs Act, 1962 wherein an application may be made to the Commissioner of Customs at the port where the infringing goods are likely to be imported. On arriving at a conclusion that alleged infringement or illegality is established, the Customs Authority may seize the goods under section 111 of the Customs Act and Rule 7(9) of the 2007 Rules.

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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