August 2018 (MOSCOW): It is important to time stamp this review because the law as to parallel importation in Russia is quickly evolving and the subject is a moving target.
After the introduction of Part IV of the Russian Civil Code, the first notable gray market decision was the Porsche case in 2009. There was much discussion in the following years as to what Russia's stand on parallel importation should be and in the last two years the topic has been closely scrutinized by the Eurasian Economic Union, The Federal Anti-monopoly Service (FAS), the Arbitration Court, the Constitutional Court, the IP Court and most recently the State Duma.
Under Part IV of the Civil Code
Since the introduction of Part IV of the Civil Code in 2008, it has been clear that Russia operates as a national exhaustion of rights country. Under the provisions in Part IV, it is a form of trademark infringement when goods are introduced into commerce in Russia, without consent, by anyone other than the owner of the registered trademarks.
The Porsche Case
The first court case to consider the provisions under Part IV was the Central excise customs v. LLC Genesis Case No. 10458/08 (February 3, 2009) in the Supreme Arbitration Court of the Russian Federation. This is commonly referred to as the Porsche case as it related to the parallel importation of a Porsche Cayenne S.
Russia's Customs officials seized one Porsche Cayenne being imported into Russia without consent of the brand owner. Although the car had been legally bought, it was confiscated without compensation and deemed to be a counterfeit and was therefore subject to seizure and destruction. The case was heard by three courts all ruling in favor of Porsche (who opposed the importation) before reaching the Supreme Court of Arbitration (now the Supreme Court).
The Supreme Court decided that because the trademark had been legally placed on the Porsche, the mere importation of the car was not an illegal use of the trademark because the vehicle was not a counterfeit. The court determined that the importer should not face administrative liability under Article 14.10 of the Code of Administrative Offenses and the vehicle should not be confiscated and destroyed. Although the trademark owner could not seize and destroy the goods at the border, the trademark owner could pursue a civil claim of trademark infringement by reason of parallel importation.
Since the decision in the Porsche case, it has been clear that goods that are mere gray goods and not counterfeits cannot be seized by Customs and will be allowed to enter Russia; the brand owner will have a civil cause of action against the importer for trademark infringement under Part IV of the Civil Code.
In the Eurasian Economic Union
Russia is a member of the Eurasian Economic Union along with Armenia, Belarus, Kazakhstan, and Kyrgyzstan. All member states apply the regional principle of exhaustion of trademark rights1.
In April 2017, the Eurasian Economic Commission - the executive body of the EAEU adopted Resolution No 30 enabling its Council, at its discretion, to introduce temporary industry exceptions to the regional exhaustion of rights principle with the effect of legalizing imports for certain types of goods:
The Eurasian Intergovernmental Council can temporarily apply, in relation to particular categories of goods, the principle of exhaustion of exclusive rights in a trademark...according to which there is no infringement of exclusive rights in a trademark...if the trademark is used in relation to goods that have been legally introduced into circulation in any member-state or in any third country by the trademark holder himself or by other persons upon his consent.
Under the amendment, each member-state of the EAEU would be authorized to propose industry exceptions to the regional principle of exhaustion, e.g., for spare parts for automobiles or for drugs or medical devices. All member-states would have to agree to those exemptions.
According to Resolution No 30, the deadline to finish the intergovernmental ratification was July 1, 2017; however, there is no news of such ratification. There is continued uncertainty as to whether ratification will materialize in the near future.
In the FAS and the Arbitration Court
The FAS Initiative to Amend Part IV of the Civil Code
The Russian FAS has been very active in advocating for complete legalization of parallel importation in Russia. In 2014, it fashioned an initiative in the form of a draft law to amend Art. 1487 of the Russian Civil Code and to replace national exhaustion of trademark rights with international exhaustion. In the draft, there was an exception clause for trademarks whose owners could demonstrate that efforts had been made to localize manufacturing of substitutional equivalent goods in Russia:
[...] The rights holder can prohibit or limit importation in Russia of goods that have been introduced into circulation by him or upon his consent outside of Russia provided that the rights holder or another person upon his consent has made efforts to localize manufacturing of substitutional goods in Russia.
The FAS proposal was withdrawn after an adverse assessment of the regulatory impact by the Ministry of Economic Development (the Ministry) in February 2015. Addressing the FAS's proposed amendments, the Ministry found that the introduction of international exhaustion of rights contradicts relatively recent legislation of the Eurasian Economic Union which already provides for regional exhaustion.
The Ministry further pointed out that the proposed exceptions to the international exhaustion regime for companies that localize manufacturing in Russia are inconsistent with international IP treaties to which Russia is a party, namely, Art. 3, 4 of the TRIPS Agreement and Art. 2(2) of the Paris Convention, viz.: "Each Member shall accord to the nationals of other Members treatment no less favorable than that it accords to its own nationals with regard to the protection) of intellectual property..."
The Ministry may have also thought that the proposed changes contained vague wording:
It is not clear what does the «localization of manufacturing mean». The procedure of confirmation that the rights holder has «manufacturing of substitutional goods in Russia» is unclear. It is also uncertain which goods can be considered «substitutional» in the meaning of Art, 1487(2) of the Civil Code.
The Ministry cited both the 2013 survey of companies doing business in Russia by the Russian Ministry of Industry and Trade as well as experts from different industries to show that there were additional risks associated with the legalization of parallel importation, including:
- an increased volume of counterfeit goods entering the Russian market;
- a cause for brand owners to consider moving their production capacities outside Russia;
- a decrease in foreign direct investments;
- an expectation that the desired decreases in prices might not materialize; and
- a risk that consumers would likely receive less customer service.
In light of the above, the Ministry found that the FAS's initiative would be harmful for the economy and consumers and they effectively blocked the proposed FAS amendment.
The Continuing Efforts by the FAS
Despite the adverse assessment of its initiative by the Ministry of Economic Development, the FAS continues to advocate for legalization of parallel importation.
According to information published on its own Web page in July 2017, the FAS issued a warning to Daimler AG, Renault, KYB Corporation, and to YD-Diagnostics that suggested that these organizations might be in breach of Russian anti-monopoly laws because they were unreasonably refusing, when asked on a case-by-case basis, to consent to parallel importation of goods.
The FAS warning stems from routine requests made by importers of goods seeking permission from brand owners to import genuine branded goods made elsewhere. The brand owners are said to have either refused permission or to have simply not responded. The FAS said that failing to consent may be a form of unfair competition.
According to the online publication, RusAutoNews, the FAS appears to be trying to discourage manufacturers of spare parts and medical equipment from interfering with the importation of genuine goods by legitimate but unauthorized distributors.
In an interview, the Deputy Head of the FAS, Andrei Kashevarov, clarified that a refusal by a brand owner to consent to an import request can be justified in cases where the goods are not genuine or when their production is already "localized" in Russia. He also noted that, at the time, the FAS had not determined that either Daimler or Renault had localized production in Russia. The FAS position seems to be aligned with the Government's broader program aimed at increasing "localization" viz., localized manufacturing by foreign companies in Russia.
The warning to Daimler, KYB Corporation, Renault, and YD-Diagnostics simply obliged the companies to stop restricting the independent importation of their products within a month; otherwise, each of the companies would face a possible fine up to 500,000 RUB (about $8,500 USD) under the Code of Administrative Offences (N 195-FZ).
The FAS was acting under the Russian Law on Protection of Competition (N 135-FZ) and the Decree of the FAS N 57/16 of January 22, 2016, which requires legal entities to comply with an FAS warning within the term specified in the warning (see Article 39.1(5), Russian Federal Law on the Protection of Competition (N 135-FZ) of 26.07.2006; and Section 3.1, FAS Decree N 57/16 of 22.01.2016).
Had the recipients of the FAS notice failed to comply, the FAS was empowered to initiate administrative proceedings and the FAS' ultimate decision could be appealed in court within 3 months. KYB Corporation, one of the recipients of the warning, sought relief in the Arbitration Court (Commercial Court).
In the Arbitration Court
On December 13, 2017, Russia's Commercial court declared that the warning notice issued by the FAS against KYB Corporation was justifiable and would not be struck down. As earlier pointed out above, according to information published on its own Web page in July 2017, the FAS had issued a warning to Daimler AG, Renault, KYB Corporation, and to YD-Diagnostics that suggested that these organizations were in breach of Russian anti-monopoly laws because they had unreasonably refused, when asked on a case-by-case basis, to consent to parallel importation of goods.
KYB chose to attack the warning notice in Russia's Arbitration (Commercial) Court. KYB's attack was a logical move because, according to the Russian Civil Code, it is a national exhaustion of rights country and a regional exhaustion country under the terms of the agreement in the Eurasian Economic Union, and KYB had every legal right to claim trademark infringement. In deciding that the FAS warning letter would not be struck down, the Court acknowledged the provisions in question in the Civil Code. They, however, went to great lengths to exclude parallel importation from their ambit.
In its thoroughly reasoned, but likely incorrect, judgment, the Court began by acknowledging the traditional approach that has been applied to the interpretation of the legislation:
This provision of the Civil Code..., implies that when foreign-made goods are acquired in the territory of other states directly from the manufacturer or his representatives, it is necessary to have permission of the right holder (execution of a license contract) in order to obtain the right for importing and marketing such goods to/in the territory of the Russian Federation.
...[KYB] points out that his actions constitute the [proper] exercise of the trademark owner's rights, provided for by the RF Civil Code.
The Court then pointed out that the real object of these provisions was to prohibit acts that were likely to cause confusion:
...according to Article 1484.2 and Article 1477.1 of the Code, a trademark right is exercised for the individualization of goods of legal entities... in order to distinguish goods and services of one manufacturer from goods and services of another manufacturer.
Thus, Article 1484.3 of the RF Civil Code defines an infringement of the trademark right as use of the designations similar to said trademark without permission of the right holder in respect of goods for the individualization of which the trademark is registered, or homogeneous goods, if as a result of such use a likelihood of confusion may arise....
The Court then distinguished parallel importation and said that it was not actionable because no confusion or damage to the brand owner is caused:
Under these circumstances, importation of such goods to the Russian Federation does not cause any confusion of the original right holder's goods and goods imported by an independent business entity ("parallel importer"), and does not comprise objective features of a threat to public interests, since these are goods of the same manufacturer (right holder), which are imported and offered for sale, without providing misrepresentations about the manufacturer or the right holder of the individualization means these goods are labeled by...
The provisions of Article 1515 of the RF Civil Code are meant to prevent importation of illegally acquired or manufactured goods labeled by the manufacturer's trademark, since they qualify as counterfeit those goods, labels, packaging of goods that are illegally labeled by the trademark or by confusingly similar designations.
However, as obvious from the submitted materials, the intent was to import the original goods of the right holder, legally acquired from one of the official dealers; therefore, it is reasonable to assume that the manufacturer's rights to receive monetary compensation for the goods are respected, and there is no threat to the brand reputation as a result of the actions for altering (decreasing the quality of goods).
In view of the foregoing, the actions of KYB Corporation for limiting importation by other parties of the goods legally acquired outside the territory of Russia from the right holder's dealers, of legally manufactured automotive spare parts and components, legally labeled by the trademarks of foreign right holders, have the purpose to increase its profits by limiting the earnings of potential competitors and crowding them out from the market.
Acts that are intended to curb parallel importation, the Court said, are therefore a form of unfair completion:
These actions conflict with the principles of integrity, reasonableness and fairness and, generally, are contrary to individual, collective and public rights and legitimate interests of the civil circulation participants; and therefore, comprise the elements of unfair competition.
KYB had 30 days to appeal the decision and while they did file an appeal, it was withdrawn, likely because of a further development as regards parallel importation, this time in the Constitutional Court.
In the Constitutional Court
On February 13, 2018, the Constitutional Court of Russia declared that Russia ought to exercise a much softer stance toward 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, Sony Corporation, 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. Also, 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 people, 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 gray 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 decision of the Constitutional Court has created a new certainty in that the decision establishes 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.
After the Constitutional Court Decision
Following the Constitutional Court's landmark decision, the Russian IP Court, in the Polaris case, confirmed that parallel importation of goods without the brand owner's consent is a sound cause of action for trademark owners.
In Polaris Industries Inc. (Brandt JSC) v. Ravenol Russland,2 parallel importer Ravenol Russland purchased POLARIS brand goods (oils and lubricants for cars) in the United States and was importing the product into Russia. The goods were seized at the border, likely being suspected as counterfeit.
The trademark owner, Polaris Industries Inc. and its official distributor in Russia, Brandt JSC then sent a cease-and-desist letter to Ravenol Russland demanding that Ravenol refrain from putting the goods into circulation and that they pay compensation for trademark infringement an amount just under $5,000USD. Although the parallel importer had agreed to pay compensation, this did not stop Polaris Industries from initiating trademark infringement proceedings in the Commercial court of the Rostov Region (trial court) seeking a permanent injunction and destruction of the goods.
On August 29, 2017, before the recent Constitutional Court decision, the Commercial Court of the Rostov Region held that the brand owner had not authorized the parallel importer to use its trademark and therefore the Court granted a permanent injunction.
The parallel importer appealed to the 15th Commercial Court of Appeals (the first appellate instance). The Court of Appeals cited the Constitutional Court decision and pointed out that the brand owner had failed to prove that the imported goods were counterfeit. In particular, Polaris Industries Inc. had not commissioned a forensic examination to prove the goods were counterfeit and therefore the goods were assumed to be mere parallel imports.
The Court of Appeals further rejected the brand owner's contention that the disputed goods might be of substandard quality being nonconformant with the technical regulations of the EAEU:
[...] plaintiff did not motion to commission a forensic examination to resolve the issue of whether the disputed goods are of proper quality, are safe for life and health of people and nature. Plaintiff's claim that the goods can be non-compliant with particular mandatory requirements is plaintiff's subjective suggestion which cannot be accepted as a basis of the decision in this case. Plaintiff failed to provide evidence proving that the disputed goods require special conditions for their transportation, storage, sale etc., which if not complied with can [...] endanger life and health of people, nature etc.
Based on the above findings, the Court of Appeals reversed the decision of the Rostov Region court and dismissed the brand owner's claim on February 22, 2018, just shortly after the Constitutional Court's pronouncement on February 13th.
On further appeal to the IP Court, Polaris Industries Inc. claimed that the Court of Appeals had erroneously disregarded the fact that the goods were imported without consent of the rights holder and had misinterpreted the decision of the Constitutional Court. The brand owner said that the Constitutional Court had confirmed that Russia is a national (regional) exhaustion of rights country; Polaris further said that the Constitutional case still precludes importation of goods from countries other than the EAEU member states and that importation is still only possible with express consent of the trademark owner.
The IP Court began by acknowledging that the Court of Appeals erred when it imposed upon Polaris the burden of proving that the goods were counterfeit; the burden rests with the importer to prove that the goods are legitimate:
Therefore, despite the court of appeals statement the company did not have to motion to the court to commission a forensic examination to show the counterfeit nature of goods because it is the alleged infringer of intellectual property rights who has to prove the absence of fault [...].
The IP Court seemingly took a pro-brand owner approach and Court agreed with Polaris that the Commercial Court of Appeals misinterpreted the Constitutional Court decision. The IP Court agreed that the Constitutional Court has not decided that gray goods can be imported without the consent of the trademark holder:
Therefore, the legality of purchase of the disputed goods in the territory of a foreign state does not mean that the goods can be imported into Russia without consent of the rights holder as was mistakenly stated by the court of appeals.
Finally, the IP Court said that the core question in this case, in line with the Constitutional Court decision, is whether the imported goods are of substandard quality or not. Therefore, the IP Court by its ruling of May 10, 2018, reversed and remanded the case back to the trial court to make this assessment. The preliminary steps on the rehearing by the Commercial court of the Rostov Region were held on July 17, 2018. The defendant tendered evidence as to the legality of the goods. A final hearing on the remanded case is set for the end of August.
Based on the IP Court's practical approach to interpreting the Constitutional Court decision, it would seem that a brand owner can still sue for trademark infringement by reason of unauthorized parallel importation of goods. In a court action, the importer bears the burden of proving that the goods are not counterfeit; the brand owner then bears the burden of trying to prove that the goods are substandard, unsafe, or not appropriate for the Russian market and the scope of relief to be granted to the brand owner would follow from there. The presiding judge has a continuing discretion to decide what remedies should be awarded in each particular case while being mindful of the Constitutional Court's general instructions.
In the Russian Parliament
As political tensions between the United States and Russia continued to escalate in 2018, the United States boldly extended the list of personal sanctions against Russian individuals and companies as well as sanctions in certain sectors of the economy, such as defense, energy, and metallurgy industry.
The Russian parliament responded with a counter-sanctions draft Bill entitled "On Retaliatory (Counteractive) Measures against the Unfriendly Actions of the United States of America and (or) other foreign states." The Bill was signed into law by President Putin on June 4, 2018 (Federal Law No 127-FZ).
The first version of the draft law contained 16 retaliatory measures, including a provision that appeared to fully legalize parallel importation of U.S.-owned brands:
Article 2. The retaliatory (counteractive) measures include:
[...] 11) The exhaustion of the exclusive right on trademarks in respect to goods according to a list to be determined by the Government of the Russian Federation, whose right holders are citizens of the United States of America and (or) other foreign states, organizations under the jurisdiction of the United States of America and (or) other foreign states, as well as organizations whose capital directly or indirectly, including through third parties (a majority participation over 25 per cent in the capital), there are participating organizations under the jurisdiction of the United States of America and (or) other foreign states [...].
This first version of the draft law received negative outcry from businesses and the general public due to its potential negative effects on the economy and the social well-being of Russian consumers. By the time the draft Bill had been revised and put into force, the list of retaliatory measures was shorter and the provision regarding trademarks no longer appeared. The list of potential retaliatory measures, however, is nonexhaustive and leaves room for the President to introduce further measures.
The Current Situation as Regards Parallel Importation:
Our Considered Viewpoint
- Parallel importation remains as genre of trademark infringement under Part IV of the Civil Code.
- By reason of its membership in the Eurasian Economic Union, Russia operates now as a regional exhaustion of rights country along with Kazakhstan, Belarus, Armenia, and Kyrgyzstan.
- The FAS and/or the courts may in the circumstances of a particular case declare that it would be a prohibited form of illegal unfair competition were a brand owner to attempt to exercise its statutory right to claim trademark infringement under Part IV; typical circumstances where there might be deemed unfair competition would include where the brand owner has no production facilities of its own or no licensee in Russia.
- Temporary industry exemptions authorizing parallel importation for particular categories of goods into the EAEU can and might be introduced by the EAEU.
- Parallel imports may still be temporarily detained at the border in order to ascertain whether they are counterfeit or not and if they are gray market goods they will be allowed to enter the country.
- A brand owner may still initiate a court action for trademark infringement by reason of parallel importation. In such cases, the burden is on the importer to prove that the goods are legitimately acquired gray goods and not counterfeits and the importer appears to bear the further burden of proving that the goods are suitable for use in Russia. Once those two burdens have been met the court may conclude that there is infringement. However, the scope of relief that might be granted, such as a permanent injunction or monetary damages, will be left to the discretion of the court; the burden is on the brand owner to make out a case that it should be entitled to all of the traditional forms of relief; in assessing the remedies the court must take in to account the general policy directions that were given by the Constitutional Court.
1 Part V. of Annex 26 to the Treaty of the Eurasian
Economic Union is entitled: Principle of Exhaustion of
the Exclusive Right for a Trademark and the Trademark of the
Union. Under Article 16, the regional exhaustion principle is
adopted by the Union:
The principle of exhaustion of the exclusive right to a trademark and the trademark of the Union shall be applied on the territories of the Member States, in accordance with which the use of a trademark or the trademark of the Union in relation to goods lawfully put into civil circulation on the territory of any Member State directly by the right holder of the trademark and/or the trademark of the Union or other persons with its consent shall not be regarded as a violation of the exclusive rights to the trademark or the trademark of the Union
2 Case No. A53-15192/2017.
This article was originally published in The Licensing Journal (Wolters Kluwer), and has been republished with permission.
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.