What are parallel imports?
The realm of intellectual property, particularly in the context of parallel imports, is a labyrinth of legal intricacies. This article endeavours to demystify the contentious issue of trademark infringement within parallel imports. It offers abrief analysis of the legal underpinnings, criteria for adjudication and some pragmatic guidance for operational practices.
Parallel imports can cause conflicts of interest because of price differences between different countries for the same product. That is, parallel imported products are usually cheaper than the same product sold domestically. Distributors in importing countries do not want such behaviour, and trademark infringement litigation has become the most common means of preventing it.
The parallel importing of trademarks – a transnational trade practice – straddles the line between legitimate commerce and trademark infringement. The crux of the controversy hinges on whether importing genuine goods without the trademark owner's consent constitutes an infringement. In practice, the courts usually posit that a fair resolution requires a balanced approach that considers both the trademark's functions and the importer's conduct.
Any determination of whether a parallel import constitutes a trademark infringement should be based on the legislative intention of the Trademark Law, according to the criterion of whether it damages the function of the trademark. In balancing the interests of all parties, comprehensive consideration should be given to whether a parallel import will damage the trademark's source function, quality assurance function and reputation. If the source of the imports is clear and legal, the trademark identification is complete and the packaging, quality and characteristics have not been altered, then there is no infringement – and vice versa.
Theoretical defence paths for parallel imports in customs enforcement
The main theoretical defences against allegations of trademark infringement in parallel imports focus on exhaustion of rights, implied licence and nominative use.
Although nominative use has not yet been explicitly cited in Chinese trademark law as a defence for non-infringement, it is in the spirit of the law to protect the correspondence between the mark and its product source, rather than to create a monopoly for trademark holders in the circulation of goods. In other words, the principle of trademark rights exhaustion is a fundamental tenet of free market dynamics.
On this basis, if the allegedly infringing goods are indeed traced back to trademark holders or their authorised parties, the trademark holders – having recouped the trademark's commercial value through the initial sale – are precluded from obstructing subsequent sales or legitimate marketing endeavours. To do otherwise would impede a free and fair marketplace. Consequently, the judiciary should embrace parallel imports as a non-infringing defence.
Nominative use of trademarks by the alleged infringer serves to identify the nature or quality of the goods objectively, or their target customers, authentically derived from the trademark holders. Before selling in importing marketplaces, parallel importers must use the trademark to denote the goods' sources, preserving the link to the trademark holders. The trademark holders shall tolerate such legitimate nominative use.
Although there is an absence of explicit nominative use provisions in China's Trademark Law, it has been affirmed by the Beijing High Court as a guiding basis for adjudication. The Guangzhou IP Court also advocates a holistic assessment for nominative use, taking into account the goodwill of importers and sellers – verifying, in particular, the legitimacy of the users' purpose and the rationality and necessity of the method – to ascertain whether the use constitutes 'fair use'.
Key examination criteria for parallel imports
From a review of legitimate sources in similar disputes, it can be seen that the court's initial focus is the legitimacy of the goods' sources. When the goods lack a legitimate source, the case is diverted from the parallel imports track and may be subject to regulations governing counterfeit and substandard products.
Having established the legitimacy of the goods, the court then discerns the relationship between domestic and foreign trademark holders. If the trademark holders are distinct entities, devoid of any affiliation, this does not constitute a genuine parallel import. In this circumstance, the court is inclined to consider an infringement upon the domestic trademark holders' exclusive rights. Conversely, when the trademark holders either are the same entity or share an affiliated relationship, the matter is considered a parallel import issue that warrants further judicial examination.
Assuming that the domestic and foreign trademark holders are either identical or affiliated, the court's decision hinges on whether the importation impairs the trademark's core functions, namely identification, quality assurance and the conveyance of goodwill. In ascertaining the presence of infringement, the court meticulously evaluates the impacts on these functions.
Trademark trial practice in parallel import cases in China
Trademark identification
Theoretically, disrupting the identification function means confusing or breaking the connection between a specific symbol and a specific product. Trademark law does not protect the symbol itself but rather evaluates whether it is likely to cause confusion or misidentification. The market value of a trademark lies in its ability to associate a specific commercial entity with a specific product. Hence, the spirit behind the Chinese Trademark Law is to protect the unique and definitive relationship between the trademark and designated products.
Quality assurance
The adjudication of trademark infringement in parallel imports hinges on the substantial impact on the domestic trademark holder or the trademark's functionality. The traditional focus on consumer confusion may overprotect consumer interests at the expense of trademark holders' rights. Given that parallel imports typically apply the same trademark used by domestic holders to identical goods, the Trademark Law requires more than mere confusion to constitute infringement. The essence of the judgment lies in assessing whether parallel imports significantly affect the interests of domestic trademark holders, including potential harm to goodwill and the integrity of the goods.
In instances where the quality of domestic products surpasses that of their foreign counterparts, the impact on the trademark's quality assurance function is less contentious. Yet when foreign goods are of a higher quality, the trademark's function can be undermined. The trademark's role is to ensure consistent quality across all goods bearing the mark, not to vouch for the quality of the goods themselves. Superior quality in imported goods might lead consumers to favour them over domestic products, potentially viewing domestic offerings as inferior or counterfeit. This perception can disrupt the domestic market for trademark holders, affecting both sales and the trademark's reputation and value.
Conveying goodwill
Goodwill, a pivotal intangible asset, encapsulates the overall social perception of a brand. It significantly influences a trademark's value, especially during transfers of trademark rights. It also serves as a critical metric in assessing the damages and penalties in trademark infringement cases. Theoretically, goodwill's carrying function is intrinsically linked to the quality assurance role of trademarks: consumers' trust in a trademark for quality drives the brand's goodwill. The rationale for evaluating infringement from the perspective of goodwill is to prevent trademark holders from being affected by 'unfounded disasters'. In practice, trademark holders need to invest much money and effort to build up a good reputation. If parallel importers are allowed to sell goods in a region without the trademark holders' authorisation, then negative evaluations of the goods caused by, for example, food safety issues or illegal situations will be directed towards the trademark holders, causing significant damage to the goodwill carried by that trademark.
Proactive risk mitigation for cross-border e-commerce in customs enforcement
It is essential for operators of cross-border e-commerce businesses to ascertain the provenance of their products. In particular, they must determine whether the products they are selling are the direct output of the trademark holders or are otherwise authorised. The initial step in overseas procurement involves a verification process to ensure that the products are manufactured by legitimate trademark holders or by manufacturers under a licensing agreement or authorisation letter.
Furthermore, operators must comply with the requirements for cross-border e-commerce retail imports stipulated in the document issued on 28 November 2018 jointly by the Ministry of Commerce, the National Development and Reform Commission, the Ministry of Finance, the General Administration of Customs, the State Taxation Administration and the State Administration for Market Regulation (ShangCaiFa [2018] No. 486). They must also comply with the relevant laws, regulations and administrative rules to fulfil customs, taxation and other procedures so as to ensure that import procedures are legal and compliant.
In addition, e-commerce operators should also prioritise obtaining products through legitimate sales avenues. This may be achieved by establishing direct purchasing agreements with the trademark holders or their licensees. Alternatively, sourcing products from reputable distributors, such as large malls and supermarkets that provide assurances of the products' sources, ensures both legality and authenticity.
Parallel importers should reasonably regulate their import behaviour and fulfil appropriate labelling obligations before putting products on the market. However, the content of the labelling must not exceed a reasonable scope in order to prevent free-riding and damage to the trademark's reputation. When selling parallel imported products, cross-border e-commerce merchants should not use the trademark as the name of their online store, or on store signs, decorations or promotions, and should not prominently display the trademark of parallel imported goods on the home page or in prominent positions on their website. They should also avoid using the trademark as a search keyword for major search engines to prominently display the trademark or use the trademark outside the introduction of the product. This is especially important for well-known trademarks.
In the past, the safe harbour principle established the 'notice-and-takedown' rule for network service providers. After receiving preliminary evidence from rights holders proving infringement, network service provider platforms should promptly take necessary measures and forward the notice to network content providers within the platform. The necessary measures generally include blocking links and forcing the removal of products.
China's E-Commerce Law builds upon the original safe harbour principle by establishing the 'notice-and-takedown-counter-notice' rule. After receiving the forwarded notice, platform operators can submit a statement stating that there is no infringement. This should include preliminary evidence of non-infringement. If the platform does not receive a complaint or lawsuit notice from the rights holder within 15 days of forwarding the statement to the intellectual property rights holder, it should promptly terminate the measures taken.
E-commerce operators must retain relevant evidence of the legal source of goods while importing as preliminary evidence of non-infringement. Upon receipt of a notice or measures from the e-commerce platform, they should promptly provide defence materials to ensure the normal sales of parallel imported goods as much as possible.
Example cases
Parallel import dispute in customs enforcement
In adjudicating cases involving the parallel import of trademarks, the People's Court concentrates on pivotal factors: the authenticity of the alleged infringing goods, the potential for consumer confusion due to the accused infringing mark and the legitimacy of the mark's use. The Court's role is to ascertain whether such parallel imports amount to trademark infringement. In making these decisions, it relies on the Trademark Law and the fundamental purpose of trademark protection.
Spaten-Franziszkaner-Bräu GmbH, a trademark proprietor, holds rights to trademarks G807592 and G1241072, licensed to Budweiser, an affiliate within the AB InBev Group, a global conglomerate with extensive affiliations. In January 2019, Oriental Science Park Company's parallel import of beer products from a Singaporean exporter was halted by Haizhu Customs on suspicion of trademark rights infringement against Spaten-Franziszkaner-Bräu. The products in question were confirmed to have been manufactured by Spaten-Franziszkaner-Bräu itself. A comparison with authorised products sold by Budweiser on the Taobao and JD e-commerce platforms revealed no significant disparities.
Budweiser initiated legal action at the People's Court of Yuexiu District, Guangzhou, demanding that Oriental Science Park desist from the alleged trademark infringement and seeking reparation for economic damages. Oriental Science Park contended that the products in question were genuine, produced by Spaten-Franziszkaner-Bräu, and that their transaction pertained to beer, not to the sale or licensing of trademark rights. Eventually, the Court indicated that Oriental Science Park's actions reflected standard international trade practices and did not constitute an infringement on Budweiser's trademark rights.
'Victoria's Secret' case: a landmark in trademark parallel importation
The 'Victoria's Secret' case is a seminal precedent in the domain of trademark parallel importation. It is documented in the 12th issue of the Supreme People's Court Bulletin of 2013.
The plaintiff, the Victoria's Secret Company, had secured trademark registration for 'Victoria's Secret' and other marks in China. The defendant, Jintian Company, posed as the plaintiff's general distributor without authorisation. It conducted business through direct sales and franchised stores within China and used the plaintiff's trademarks and company name for product sales.
The Shanghai Second Intermediate People's Court adjudicated that the defendant's conduct did not constitute trademark infringement but rather unfair competition. The rationale was as follows. The defendant had procured authentic products directly from the plaintiff's parent company through legitimate channels, precluding the possibility of counterfeit goods. The use of the plaintiff's registered trademarks on product tags, hangers, packaging and promotional materials was deemed an integral part of the sales process and was insufficient to induce confusion or misidentification among the public concerning the products' origin. Consequently, the defendant's selling of the products in question to retailers was not found to infringe upon the plaintiff's exclusive rights to its registered trademarks.
In this instance, the defendant lacked substantiating evidence to establish its claim to be the 'sole designated general distributor of the renowned American lingerie brand Victoria's Secret', revealing a deliberate attempt to deceive through the fabrication of facts and the propagation of false information. Thus, the Court determined that the actions constituted unfair competition.
The Bulletin summarised the judgment as follows:
Should a foreign brand owner register a brand in China yet delegate the disposition of branded goods overseas, and domestic dealers import and resell these genuine goods through legitimate channels, the principle of trademark rights exhaustion applies. Such imported and resold authentic products shall not mislead or confuse the relevant public about the source of the products and, as such, do not constitute trademark infringement.
Conclusion
The globalisation of business is an unstoppable trend. The approach to parallel imports must therefore balance the inherent needs of trade freedom with providing a theoretical basis of 'rights exhaustion' and establishing 'substantially different' criteria to guide parallel importers towards the awareness of authorisation and comprehensive disclosure of information obligations and infringement defences.
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.
