Introduction to Parallel Imports
Parallel imports are items designed to be sold in one part of the world, which are they bought by a third party and imported against the brand’s intentions. Parallel import means that patented or marked goods are bought in a foreign market and resold in the domestic market. Parallel imports (or gray market goods) refers to branded goods that are imported into one market and sold there in that market without the consent of the intellectual property owner. These are known as passive Parallel Imports. Instead, active Parallel Imports occurs when foreign licensees enter the market in competition with the patent holder or trade mark. The goods are manufactured by or under the license of the brand owner and are therefore not counterfeit, but may have been prepared or packaged for a particular jurisdiction and a different jurisdiction than the brand owner intended has been imported into.
What are Parallel Imports (or gray market goods)?
Meaning of Parallel Imports: – Any item that has been imported and is being sold outside the brand’s official channels of distribution are known as a Parallel Imports (or gray market goods . Parallel Imports are non-counterfeit products that are imported from another country without the permission of the intellectual property owner. Parallel Imports are often referred to as gray goods or gray-market goods (US: gray goods). The goods are authentic or genuine goods (as opposed to counterfeit goods), meaning that they have actually been manufactured by or under the license of the brand owner.
The grey market now prevails over the white market for it. Electronics, literature, periodicals, software, accoutrements, automobiles, and many other things are examples of this. Unless local courts rule differently, it is usually legal. An EU-based reseller, for instance, might discover that new Nike sneakers are more affordable elsewhere. For the purpose of buying the shoes, they visit an authorised dealer abroad. Since Nike already has merchandise approved for the EU, selling these shoes there would be considered a parallel import. Parallel imports aren’t fake or counterfeit, which is something you should know. The reseller bought the authentic Nike shoes from a licenced retailer. It is just from another country and is no longer within Nike’s control.
Brands could offer the same product at a different price in the US and Chinese markets. When a company purchases a product from that brand in China and sells it in the US, or the other way around, this is known as a parallel import. The first sale theory determines whether parallel imports are legal.
However, they may have been prepared or packaged for a particular jurisdiction, and then imported into a different jurisdiction than the brand owner intended. Parallel Importers usually buy products in one country at a price that is cheaper than the price at which they are sold in another country. They then import the products into the other country.
The products are then sold at a price that is usually somewhere between the normal price found in the country of export and the country of import. Parallel imports are regulated differently in different jurisdictions; There is no consistency in the laws relating to parallel imports between countries. Neither the Berne Convention nor the Paris Convention explicitly prohibits parallel imports.
For example, a trade mark owner’s ability to control further sales of a product bearing his mark usually ceases after the sale of that product. The concept usually arises in the context of parallel imports, and may therefore be relevant at a national, regional or international level. If the rights in one jurisdiction expire, the owner of the intellectual property may not be able to enforce his rights in the other jurisdiction.
Is Parallel Importation Illegal?
According to the first sale doctrine, once a product is sold for the first time, all remaining rights a brand may have to its distribution are forfeited or used up. After that, the item may be sold again by the purchaser. But when and where a buyer is permitted to resale goods?
National and International Exhaustion are two notions that are derived from the first sale doctrine: –
- National Exhaustion: – The first sale doctrine is limited to products sold in a single nation under National Exhaustion. National exhaustion is a mechanism that considers the brand owner’s trademark rights exhausted for a specific country or region whenever goods in connection with which the trademark is used have been sold in that specific country or region by the trademark owner or with the owner’s consent. The owner can use its trademark rights to stop the unlicensed sale of these goods in other marketplaces because the exhaustion does not apply to those nations or areas.
Let’s use a different illustration. Consider a scenario in which Rolex has unveiled a new watch in the US but not in Canada. Let’s also imagine that Canada applies the national exhaustion rule. A Canadian reseller would be required to hold off on selling an authorised product until it was made available in their country under the national exhaustion rule. They were unable to import it from the US and market it in Canada. They would have to purchase from a Canadian authorised channel. Without Rolex first selling it there, it would be unlawful for them to sell in Canada.
- International Exhaustion: – International exhaustion is the idea that once goods associated with a trademark have been sold anywhere in the world, whether by the trademark owner or with their permission, the owner has exhausted their trademark rights in connection with those sales. However, in the event of global exhaustion, that reseller might be able to sell new Rolex watches in Canada before the brand itself. They could travel to the US, buy Rolex timepieces made there, and sell them in Canada. This is due to the fact that there is only one “first sale” of the product on the global market, under the international exhaustion principle. In this case, a seller might purchase Rolex watches from the US market and resell them in any other nation with international exhaustion rules.
The material differences approach is similar to the international exhaustion system but prohibits the sale of parallel imports if they are materially different from the goods that the trademark owner has authorized to be put on the market in a given country. What is considered “material” may vary from jurisdiction to jurisdiction.
The problematic part is that local courts can uphold either national or global exhaustion. International law does not mandate either one or the other. Therefore, a parallel import without prior market presence may be permitted in one country but not in another.
Problems with Parallel Imports
There are few probelems associated with Parallel Imports, those are as follows: –
- A company that sells a parallel imported item is not an authorized dealer of that item. In addition, they are unable to provide a manufacturer’s warranty. This might not be a huge concern for the buyer when purchasing items like books or toiletries. But this might be an issue for software, watches, and gadgets. Usually, these things require maintenance or updates. Without a guarantee, purchasing a new laptop would be risky.
- A seller may provide a third-party warranty in this circumstance. However, if something goes wrong, the consumer has no recourse with the actual manufacturer. Consider the different warranty options when you are purchasing. A new item’s third-party warranty is a clear sign that it is a parallel import.
- A consumer may believe that the parallel import product that they are purchasing is exactly the same as the local distributor’s product. However, it is likely the parallel imports were made overseas, so it may not have been subjected to inspections and manufacturing standards. As a result, it may be of lower quality than those sold by the local distributor.
- There may not be much you can do to prevent a parallel import of your product because parallel imports are permitted on a state-by-state basis. The national exhaustion rule is applied in various nations. Importing unapproved goods is prohibited in many states because only importers recognised by the manufacturer are permitted to do it. One of these countries is Brazil.
- However, many nations adhere to the international exhaustion principle. People can purchase your goods and import it into these nations for resale once it is offered elsewhere on the global market. Parallel import limits differ from place to place, therefore we advise you to speak with a local attorney to learn more about the laws in your area.
Parallel Importation and Trademark Laws
In India, parallel importation is complicated linked to the principle of exhaustion of rights under the Trademarks Act, 1999. The principle of exhaustion of rights is given 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.
One of the earliest cases on the issue of parallel imports is Albert Bonan vs. Imperial Tobacco Company (1929) 31 BOMLR 1388, which was settled under the provisions of the Indian Trade Marks Act, 1889. The issue of termination of rights was not specifically dealt with in India.
However, Section 30(2) of the Trade and Merchandise Marks Act, 1958 provides that where goods bearing a registered trademark are lawfully acquired by any person, those goods shall be made by that person or by the person making a claim under it, the sale of or other dealings in those goods by that person or by a person claiming under or through him is not an infringement of the trade mark by reason only of the trade mark having been assigned by the registered proprietor to some other person after the acquisition of those goods.
Similarly, Section 30 of the Trademark Act, 1999, which deals with the extent of the effect of a registered trade mark, reads as follows: –
- Section 3: – Goods bearing a registered trade mark herein are legally acquired by any person, by sale of goods in the market or otherwise by that person or by a person claiming to be dealing in those goods by reason of business only is not a violation.
- the registered trade mark has been assigned by the registered owner to any other person after the acquisition of those goods; either
- the goods have been placed on the market under a registered trade mark by or with the consent of the owner.
- Section 4: – Sub-section (3) shall not apply where the owner has valid reasons to oppose further treatment, in particular where the condition of the goods has been changed or has deteriorated after being placed in the market.
The object of Section 30(2)(c)(i) is to prevent the owner of the trademark from claiming infringement of the product which he has produced and to which he has attached the trade mark. It has been held that where a parent company (or a group of companies) chooses to manufacture and sell wholly or partly through subsidiaries in different parts of the world bearing the same trade mark, neither parent company nor any member group of the company nor any subsidiary may complain in any country if those products are sold or resold under that trade mark. Legal ownership of the mark does not extend and enables the owner or registered user to ensure that products manufactured elsewhere (such as the UK or the USA) are not sold within the territory of any country.
However, section 30(4) seeks to protect the rights of the trademark holder by giving him the right to oppose any further commercial in the trademarked goods, where the owner has the valid right to oppose further dealings in the particular goods, where the condition goods have been altered or damaged after they have been put on the market.
In the case of Xerox Corporation vs. The plaintiff Shailesh Patel on 20 February, 2007 submitted before the court that some of the defendants were importing or selling Xerox second hand machines, which is not permitted despite the fact that they have the necessary documents for import. This argument is based, inter alia, on the provisions of sections 30(3) and (4) of the Trade Marks Act, 1999. The plaintiffs also pointed out that they have arrangements in the U.S.A whereby they sell second−hand machines with the stipulation that the user of such machines can only be in U.S.A. On the other hand, the defendants submitted before the court that there was more than the said source for obtaining second hand machines since it is possible that a party, who purchases a machine of xerox, decides to sell the same to a third party without entering into any written agreement or exchange scheme with the plaintiff. t was further submitted that the interest of the plaintiffs is taken care of Sub−section (4) of Section 30 of the said Act since the defendants undertake that in case the goods are changed or impaired, they will not put the same into market. Thus, it is stated that only such of the machines be permitted to be imported, which have proper documentation and there is no change or impairment. In case after importation, there is any change or impairment, the condition of removal of the xerox sticker would have to apply to those machines. The court said that “I am of the view that it would be appropriate to permit the import of such Xerox machines, having proper documents, provided there is no alteration or loss to the machine. Such prohibition of alteration or loss is not limited to physical characteristics only, but also in relation to the working system and the software used for the said purpose. If any change occurs after import, the sticker of Xerox should be removed to indicate to the purchaser that the machine should be replaced with a Xerox machine.
TRIPS Regulation on Parallel Imports
TRIPS offers member states a great deal of flexibility in determining the level and degree of exhaustion. According to Article 28 of TRIPS, the patented product or method must only be made, used, offer available for purchase, sold, or imported by the patentee.
However, commentary (6) to Article 28 adds a small caveat to the selective right to import by stating that this right [i.e., the right of importation], like all other rights conferred under this Agreement with respect to the use, sale, importation, or other distribution of goods, is subject to the provisions of Article 6.
Thus, nothing in this Agreement may be used to address the issue of the depletion of intellectual property rights, according to Article 6. Article 5(d) of the Doha Declaration, which expresses that the effect of the TRIPS Agreement provisions that are relevant to the exhaustion of intellectual property rights is to leave each member free to establish its own regime for such exhaustion without challenge, provides clarification regarding the significance of Article 6.
Accordingly, it is evident that TRIPS allows Member States to limit the exceptional right to import guaranteed by Article 28 to the extent that such restriction occasionally pertains to the concept of exhaustion, with Member States having the freedom to choose their own exhaustion rule.
Parallel imports has consequences on the legal and financial fronts. Economically, it encourages the sale of branded goods at a range of prices, preventing the creation of a monopoly in the market. A monopolistic strategy would result in higher pricing for the items offered by the trademark owner or authorised dealer in a parallel import-free market. Consumers would be compelled to acquire things at the monopolist’s predetermined price in the absence of less expensive alternatives. Both supply and demand as well as the broader market may be negatively impacted by this.
Legally, it is crucial to avoid customer confusion and misinformation about the origin or quality of items, as well as to safeguard trademark owners’ financial interests. A trademark owner cannot file a lawsuit, including for passing off, falsification, or infringement, unless the parallel imported goods are fundamentally different from those offered directly.
Therefore, the benefit of parallel importation is that it drives down prices and gives customers access to products at reduced costs. Parallel imports, according to the exhaustion theory applied in the specific jurisdiction, prevent trademark owners from using their exclusive right to divide markets and so actually support free trade. The manufacturer’s capacity to oversee the quality of trademarked items is constrained, which has a detrimental effect on the manufacturer’s distribution plans. A passing off action may result from parallel imports, which are frequently utilised as a technique to profit from the goodwill and reputation of the trademark owner.
Parallel imports may not always ensure quality assurance or an aftercare service, which may lead to consumer discontent and harm the name and goodwill of the trademark even though consumers may benefit from lower costs for trademarked items. However, on a more pragmatic level, the consumer, who serves as the end user, has the final say and benefits the most from parallel commerce. The majority of customers would only buy an Apple or Sony goods from authorised retailers because they are aware of the consequences of doing otherwise. Similar to this, people would often take extra precautions when buying drugs and only do so from reputable wholesalers, chemists, or hospitals.