Exploring the parallel universe of legitimate trademarked imports

By Wang Yadong and Hu Cuiqin, Run Ming Law Office
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At the beginning of this year, the Swarovski brand issued a public statement claiming that it had not licensed any websites in China to sell its products. Subsequently, numerous international luxury brands like Louis Vuitton, Gucci, Coach, Prada, etc. followed suit, stating that they had not authorised e-commerce websites to sell their products. Certain e-commerce websites vigorously responded, claiming that all of the luxury goods they were selling were sourced through legitimate channels. For a time, both sides bickered about the issue of authorisation.

Such incidents relate to legal issues of the parallel import of trademarked goods and exhaustion of trademark rights. This column analyses the legal theories and practical issues relating to this type of trade.

Wang Yadong, Executive Partner, Run Ming Law Office
Wang Yadong
Executive Partner
Run Ming Law Office

Basis for debate

In international trade, the act where an importer, without the authority of the trademark rights holder, imports identical trademarked goods produced under a lawful licence and sells them in its home country is known as the parallel import of trademarked goods. Such imports have the following characteristics: (1) they involve two legal jurisdictions and the same trademark rights of the trademark rights holder are protected in both legal jurisdictions; (2) the imported goods come from a lawful source, i.e. they are “genuine goods”; and (3) the act by the importer has not been authorised by the trademark rights holder.

As to whether the parallel import of trademarked goods infringes upon the exclusive right to use a trademark, among theorists both arguments exist, which in fact reflects the conflict between the doctrine of the exhaustion of trademark rights and the principle of territoriality of trademarks.

Doctrine of the exhaustion of trademark rights: The side that supports the view of “non-infringement” argues that once the trademark rights holder consents to the entry onto the market of a good that lawfully bears its trademark, it loses control over that good, and no one needs the permission of the trademark rights holder to resell or use the good.

According to this doctrine, the trademark rights holder has realised its benefits once it first sells the goods, and in fact it is next to impossible for a trademark rights holder to control the circulation of the goods, so accordingly the resale of such goods anywhere internationally should not be deemed infringement.

Principle of territoriality of trademarks: The side that asserts that the parallel import of trademarked goods is “infringement” argues that a trademark registered in a country is completely exclusive within that country’s territory. The said country, when providing trademark protection and sanctioning infringement, excludes the import of any unlicensed goods sourced from abroad, without consideration of whether the source of the goods in other countries is lawful, and that is so because the effect of the laws of the other countries does not extend to the country in question. Accordingly, this side argues for the prohibition of parallel imports.

Different countries and regions reflect different views and attitudes in respect of the doctrine and the principle involved in the parallel import of trademarked goods. The Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS agreement) adopts an evasive attitude toward this issue, permitting member countries or regions to effect their own interpretation.

PRC judicial practice

The permission of parallel imports is often viewed as a matter of policy consideration of the state. What is reflected behind the doctrine of rights exhaustion is the international trade policy of a country. On the issue of parallel imports, the PRC has not rashly taken an attitude of absolute acceptance or rejection; and in judicial practice, the results of specific cases tried by the courts have not all been the same.

Hu Cuiqin Lawyer Run Ming Law Office
Hu Cuiqin
Lawyer
Run Ming Law Office

In the 1999 Lux Soap case, the court rendered its judgment from the perspective that the importer could not substantiate that its imports were genuine goods, finding that it was infringing on the grounds of counterfeit goods. In the 2000 AN’GE clothing case, the court held that the trademark rights holder’s exclusive sales rights could not preclude other business operators from obtaining “AN’GE” clothing by legal means, and ruled that the importer’s act did not constitute unfair competition. In the 2009 Michelin tyre case, the court held that notwithstanding that the tyres sold by the importer were manufactured in Japan by the trademark rights holder and bore the Michelin trademark, the products did not carry China’s 3C certification mark, and quality-wise there were latent hazards and traffic accidents occurring as a result, and other such negative criticism would, as a result of the Michelin trademark, point in the direction of the trademark rights holder and thereby harm the trademark rights holder’s goodwill. Accordingly, it found that the importer’s act infringed the trademark rights holder’s trademark rights.

Legal remedies

The silence of the Trademark Law on the issue of parallel imports does not mean that importers’ acts are completely free of restrictions. If an importer’s act harms the lawful rights and interests of a trademark rights holder, the trademark rights holder may seek protection pursuant to the Trademark Law, the Unfair Competition Law, etc.

If an importer fails to produce proof of lawful source for an imported good, its import act substantively does not constitute an act of parallel importation. Pursuant to the second paragraph of Article 51 of the Trademark Law the trademark rights holder may directly claim that the importer infringed its exclusive right to use its registered trademark.

When an importer and a trademark rights holder are competitors, the competitor could exploit without consideration the goodwill independently established in the country by the trademark rights holder to increase the chance that the consumer purchases the imported good, thereby seizing the trademark rights holder’s sales market in the country, causing it to suffer the adverse consequence of economic losses. If such a circumstance arises, the trademark rights holder may, in respect of such an act of “hitch-hiking”, request protection based on relevant provisions of the Unfair Competition Law.

Wang Yadong is the executive partner and Hu Cuiqin is a lawyer at Run Ming Law Office

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