On February 13, 2018 the Constitutional Court of Russia declared that Russia ought to exercise a much softer stance towards parallel importers.
In Re: Case on Verification of the Constitutionality of Articles 1252.4 etc of the Civil Code in Connection with the Complaint of PAG LLC., the Court was asked to consider whether the provisions that prohibit parallel importation into Russia are constitutional.
PAG LLC was a parallel importer and was found liable for trademark infringement by reason of parallel importation. The Arbitration Court awarded traditional forms of relief for trademark infringement against PAG, namely: a permanent injunction, delivery up for destruction and payment of compensation.
PAG filed a complaint with the Constitutional Court, challenging the constitutionality of the operative provisions in the Civil Code.
PAG had contracted to supply heat-sensitive paper for medical recording devices to a public hospital. The company purchased original products from a Polish supplier and attempted to import the consignment into Russia. The brand owner, a multinational, successfully sued for trademark infringement by reason of the unauthorized importation of the legally acquired goods into Russia.
In its detailed decision, the Constitutional Court began by acknowledging that the TRIPS Agreement does not impose upon member countries a particular commitment as regards trademark exhaustion of rights. And in Russia, the Court acknowledged that the choice of a particular exhaustion of rights regime (national; regional; or international) lies within the exclusive authority of the Russian legislature. The Court further acknowledged that the Civil Code when read in conjunction with Annex 26 of the Treaty of the Eurasian Economic Union (EUEU), establishes a regional exhaustion regime for Russia and the Eurasian Economic Union:
[...] a regional principle of exhaustion of the exclusive trademark right has been established for the member states of the Eurasian Economic Union (EAEU). It means that the trademarked goods that have been put into circulation in the territory of Russia or any other EAEU member state directly by the right holder or with his consent may later freely circulate in the territory all EAEU member states;
[But] importation of trademarked goods into the EAEU territory is allowed only with the consent of the right holders.
The Court concluded that a regional exhaustion of rights regime that creates a statutory ban on parallel importation, does not contravene the Russian Constitution. The power to decide whether parallel importation ought to be illegal or not, they said, is within the discretion of the Federal law makers.
But the 16 member panel added a substantial qualifier - intellectual property rights are not absolute:
"...law enforcement, first of all courts, are obliged to apply provisions of the intellectual property legislation not only due to the conjunction with the main provisions of civil legislation, but also in the context of general legal principles of equality and justice, and shall take into account the requirements of proportionality and balance of competing rights and legitimate interests-private and public, arising from these principles"
The exercise of registered trademark rights, the Court said, must also give due account to the rights and legitimate interests of other parties for example when considering the issue of admissibility of parallel imports. Trademark owners must come to the court only if they are acting in good faith as regards the exercise of their trademark rights.
The Court said that a trademark owner would be seen to be acting in bad faith if s/he restricted imports of specific goods into Russia, or engaged in overpricing on the Russian market or if s/he imposed a market restriction on the flow of goods in support of foreign government sanctions. And any such acts would be regarded as being especially objectionable if they restricted access to goods of vital necessity, for example, certain categories of medicines, life-support equipment, etc.
In the context of an infringement claim based on parallel importation, the Constitutional Court made two very important observations as regards enforceability and the remedies associated with infringement of those trademark rights.
Russian courts, they said, are entitled to dismiss a trademark infringement claim against a parallel importer, in full or in part, in circumstances where the bad faith conduct of a trademark holder might endanger life and health of citizens, or other significant public interests.
If a case of trademark infringement by reason of parallel importation can be made out and the claim is not asserted under circumstances of bad faith, the Court said that the traditional remedies for infringement should nonetheless be toned down. The Constitutional Court said that this is because counterfeiters and parallel importers should not be treated in the same way. The Court said that the remedies and their amounts should not be the same for the importation of grey and counterfeit goods because the amount of damage incurred by the trademark holder is not the same:
When importing counterfeit goods labelled with a trademark, the trademark holder not only incurs losses in the form of lost profits that could have been received from the importation of legally produced goods, but also faces major reputational risks due to non-conformity of goods with the anticipated characteristics and consumers' demands.
There is an obvious difference in the degree of threat to legitimate circulation of goods and the level of public danger for consumers using the goods that are actually counterfeit due to their fake origin versus legitimate goods being qualified as counterfeit solely due to their importation by an unauthorized importer.
The Court made the following additional points:
- since the losses incurred by a trademark holder because of illegal parallel imports are not so severe in comparison to the importation of counterfeit goods, the courts are entitled to reduce the amounts of compensation to be collected from parallel importers; and,
- remedies such as withdrawal from circulation (injunction) and destruction should only be imposed as an exception, for example if their substandard quality is established and, or, to ensure safety, protect life and health of people, protect nature and cultural values.
The question as to whether Russia should do away with national and regional exhaustion of rights altogether has been a hot topic for many years. The decision of the Constitutional Court has made much clearer the country's current policy perspective. It seems that infringement by reason of parallel importation is a constitutionally sound cause of action but that it can now only be asserted in very limited cases with remedies that are quite inconsequential.
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