Parallel Imports And International Exhaustion

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The term "parallel importation" refers to goods produced and sold legally, and subsequently exported.
India International Law
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Parallel Importation-The Concept

The term "parallel importation" refers to goods produced and sold legally, and subsequently exported. 'Parallel imports' are genuine goods that are legitimately acquired from the rights holder and subsequently sold at lower prices through unauthorised trade channels in the same or a different market.

As parallel importation is essentially a trade practice, it is regulated under both IP law and competition law. In the trademark law context, parallel importation significantly affects the rights of a manufacturer or trader, as trademarks help traders to earn goodwill in the market and to protect their commercial reputation. As territorial rights, trademarks also indicate the source of the trademarked products or services. A conflict, therefore, arises when parallel importation results in a misrepresentation of the source, reputation or quality of the trademarked goods.

Parallel imports are also referred to as 'grey-market' goods because although the goods may be genuine, they are sold through unauthorized trade channels.

Parallel Imports basically constitute import of Non-Counterfeit or Genuine Goods from one country to another without the permission of the IP owner. The products are indeed legal, but are unauthorized because they are imported without the permission of the Proprietor. The products thus, imported are often termed as Grey Products (and not black, owing to the fact that they are genuine). The Parallel Imports cases are closely related to Trademarks and Copyrights issues and also equally to the International Trade Market, as practically observed when people import goods (for example books or mobile phones) which have Trademarks and Copyrights attached with them.

Doctrine of Exhaustion

Doctrine of Exhaustion means that an owner of a particular good ceases to have control over further sale of his goods once he has made a valid transaction of sale. In other words, if the trademarked goods are once put on the market by the owner or by his consent, and once purchased legitimately, the trademark owner or any one deriving his title from him cannot prevent further sale of such good, as the exclusive right to sell goods bearing the mark is 'exhausted' by the first sale; then the exclusive right to sell goods bearing the mark cannot be exercised twice in respect of the same goods. Hence, this doctrine is also called as the doctrine of first sale. What's more - there are different modes of exhaustion as well, which are recognized internationally.

  1. Doctrine of International exhaustion works on the assumption that the whole world is one market or one country and thus goods once sold in any part of such market or country operates as exhaustion of rights of the trademark owner over such goods.
  2. Doctrine of Regional exhaustion applies when goods bearing a trademark are first sold by or with the consent of the owner in any country, which is a part of any specific region, then the owner cannot prevent subsequent sale in his own country or in any other country which is also a part of that specific region. The European Union has adopted regional exhaustion.
  3. Doctrine of National exhaustion stipulates that once a product has been sold in the domestic market for the first time by or with the consent of the owner, for which he has received a consideration, he then ceases to have control over any subsequent sale of the same in the domestic market, in the sense that he can neither prevent subsequent sale of the said product nor can he claim any profit arising from a subsequent sale nor can he sue for infringement of his trademark. The rationale behind this principle is that the owner has already derived a profit arising out of the first sale; hence, he cannot keep deriving profit out of a sale that was not made by him.

Law in India

In India, parallel importation is intricately linked to the principle of exhaustion of rights under the Trademarks Act, 1999. The principle of exhaustion of rights is enshrined in Article 6 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs), which states that "nothing in this Agreement shall be used to address the issue of the exhaustion of intellectual property rights". Hence, each state is entitled either to prohibit or to allow parallel imports within its own legal framework.

Two major issues that are often discussed in the context of parallel importation and trademarks in India are, whether parallel importation constitutes infringement under Section 29 of the Trademarks Act and whether India recognizes the principle of international exhaustion of rights under Section 30 of the Trademarks Act.

Two clauses had been incorporated in the Trade Marks Act under the pre-existing Section 30 viz. subclauses 3 & 4. Section 30 deals with limits on the effect of a registered trademark. The new subclause 3 prevents the trademark owner from prohibiting the sale of goods in any geographical area on grounds of trademark rights, once three goods under the registered trademark are lawfully acquired by another person. Subsection 4 states that subsection 3 shall not apply when the condition of goods is changed or impaired after they have been put on the market.

The new provisions give a right to the proprietor of a registered trademark to oppose further dealings in the goods, if legitimate reasons exist. The new sub clauses 3 & 4 recognize the principle of 'exhaustion of rights' of the trademark owner.

Section 30 sub-clauses (3) and (4)[1] of the Indian Trademarks Act, 1999, deal with the exhaustion of rights after first sale of goods. From a cursory reading of the same, one would deduce that the intention of the legislature was to recognize domestic exhaustion only.

In the case of Kapil Wadhwa v Samsung Electronics , the main issue was whether the Indian Trade Marks Act, 1999, embodies the International Exhaustion Principle or National Exhaustion principle when the Registered Proprietor of Trade Mark places the goods in the market under Registered Trade Mark. The 1st plaintiff in the case was Samsung Electronics Company Limited, Korea and the 2nd plaintiff was its Indian subsidiary and exclusive licensee in India. The 1st plaintiff produced records to show 7 registrations for the mark "SAMSUNG" across classes 7, 9 and 11.

The defendant was admittedly an erstwhile authorized dealer of Samsung products, more specifically printers. The cause of action arose due to the sales of imported Samsung printers by the defendant. These "grey market" goods, though genuine Samsung printers, were, as per the plaintiff, not sold with due adherence to various statutory norms including affixing a MRP, not being given with a manufacturers guarantee, and most interestingly, "not earmarked to be sold in the Indian market". A further grievance was that the defendant was operating a website whereby the imported Samsung printers were offered at a price much lower than that of the plaintiffs and that the defendants used a technique of "deep hyper linking" to establish that they were connected with the plaintiffs. The court was pleased to pass an order, partially modifying the order dated June 3, 2011, passed in the local commissioner application and the goods were released to the defendants with few directions. Arguments raised by the defendant were, "It is a settled law that the import, sale or resale of genuine printers by the defendants does not amount to infringement, dilution and passing off. The plaintiffs cannot impose restriction on sale or resale of genuine products originating from the plaintiffs. The present acts of the defendants are permissible under Section 30 of the Act of 1999."

The defendants went into appeal and appeal was partially allowed. Impugned judgment and order dated February 17, 2012, was set aside in so far as the appellants have been restrained from importing printers, ink cartridges/toners bearing the trade mark Samsung/SAMSUNG and selling the same in India. The counsels for Plaintiffs (Respondents) submitted before the Court, that an ordinary customer, who is provided with the warranties and after sales service by the Defendant (Appellant) may form a bad impression of product of Plaintiffs (Respondents), which can lead to damage of reputation of Plaintiffs (Respondents). The Division Bench while setting aside the order of the Learned Single Judge directed the Appellants/Defendants to prominently display in their showrooms that the products sold by them have been imported from abroad and that the Respondents (Plaintiffs) do not give any warranty qua the goods nor provide any after service and that the warranty and after sales service is provided by the appellants personally. The Court also held that India follows International exhaustion of rights.

Conclusion:

Parallel importation has both legal and economic ramifications. Economically, it promotes the availability of trademarked goods at different prices, which prevents the establishment of a trade monopoly. A monopolistic approach, in a parallel import-free market would lead to inflated prices of the goods sold by the trademark owner or authorised dealer. In the absence of cheaper alternatives, consumers would be obliged to purchase goods at the price set by the monopolist. This could have an adverse effect on the overall market, as well as on supply and demand.

Legally, it is essential to prevent deception and confusion among consumers regarding the source or quality of products, and to protect the economic interests of trademark owners. Only if the parallel imported products are materially different from those sold directly can a trademark owner file suit, including for passing off, falsification and infringement.

Therefore, the positive impact of parallel importation is that it forces prices down and provides consumers with goods at lower prices. Parallel imports prevent trademark owners from exercising their exclusive right to divide markets and thus, actually promote free trade, subject to the exhaustion doctrine followed in the particular country. The negative impact is that the manufacturer's distribution arrangements and ability to monitor the quality of trademarked goods are restricted. Parallel imports are also often used as a tool to cash in on the reputation and goodwill of the trademark owner; this can give rise to an action for passing off.

While consumers may benefit from lower prices for trademarked goods, parallel imports do not necessarily guarantee quality assurance or an aftercare service, and may thus, result in consumer dissatisfaction and cause damage to the reputation and goodwill of the trademark. On a more practical note, however, the consumer as end user has the ultimate choice and is the ultimate beneficiary of parallel trade. Most consumers would purchase an Apple or Sony product from authorized dealers only and would be aware of the repercussions if they did otherwise. Similarly, in the case of pharmaceuticals, consumers would generally exercise extra caution and purchase the same from trusted distributors, chemists or hospitals.

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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