Exclusive distribution v parallel import

In cross-border trade, domestic distributors obtain exclusive distributorship in the Chinese market from overseas brand owners, thus increasing domestic marketing and other investment in order to enhance exclusive advantage in domestic sales. However, the exclusive distributorship does not absolutely guarantee the exclusivity of domestic distributors in the domestic market. Besides the impact of smuggled goods of the same brand, exclusive distributors may also face the impact of parallel imports. In order to safeguard the interests of exclusive distributors, countermeasures and planning from a legal perspective are necessary.

Parallel import means that domestic sellers legally buy and import goods from other overseas authorised distributors of the brand. These kinds of goods have the following four characteristics: (1) the goods are genuine and sold by trademark owners or licensees in a different country; (2) the trademark rights of the goods have been exhausted, and the circulation of the goods in the market is not restricted by sole or exclusive license of the trademark; (3) the parallel importer’s importation does not require the permission of the trademark owner or the domestic licensee; and (4) parallel imports are legally imported goods, which are different from illegally “smuggled goods”.

When encountering the impact of such parallel imports, domestic exclusive distributors can choose different paths to try to defend their rights according to the situation.

Infringement of ‘exclusive distributorship’

The so-called exclusive distributorship is not the object of right expressly provided in the Tort Law, but a right arising from the contract between the licensor and the licensee, and has no binding force on the third party who is not a party to the contract. Therefore, even though the exclusive distributor is full of grievances, it is difficult to find a direct legal basis for claiming that the parallel importer infringes its “exclusive distributorship”.

In practice, when no other grounds can be found, the exclusive distributor can attempt to achieve relief by claiming that its commercial interests in the licensed goods have been infringed. Exclusive distributors usually invest a lot of resources in marketing, providing services and cultivating the market in the authorised area, which has formed related commercial interests.

However, the sales behaviour of parallel importers can be seen as “free riding”, and usually cannot provide good after sales service, and their sales behaviour may reduce the brand reputation of related products, thus damaging the commercial interests and property interests of the exclusive distributor.

Infringement of trademark

Parallel import comes to the public’s attention because China promotes diversified competition among market players and advocates free and convenient trade. The public also generally believe that parallel imports will not lead to consumers’ confusion and misidentification, will not damage the trademark’s functions of marking source and guaranteeing quality of goods, and do not constitute infringement of trademark.

On the contrary, if parallel import is strictly restricted, it will lead to monopoly and lack of effective competition in the market, thus restricting trade freedom in a disguised way. This view is also recognized in judicial practice, but it does not mean that exclusive distributors cannot bring a trademark lawsuit to protect their own rights and interests.

First, parallel importers must prove that their goods come from trademark owners or licensees, otherwise they will bear the adverse consequences of failing to provide evidence. Second, the core reason why parallel imports do not constitute the infringement of trademark is because parallel imports do not lead to consumers’ confusion and misidentification. If parallel importers carry out further processing on goods, including changing packaging, changing labels, erasing identification codes, etc., such behaviour may confuse consumers, or damage the goodwill of trademark owners, and then constitute infringement of trademark right.

Finally, under the circumstance where the trademark owner registers both the commodity trademark and the service trademark, even if the parallel importer does not infringe the commodity trademark, if its use of the trademark is enough to produce the effect of identifying the service source, it may constitute infringement of the service trademark.

Unfair competition

Even if parallel import does not infringe trademark, some behaviour of parallel importers when selling related goods in China may still constitute unfair competition. For example, in the case of a dispute over the “Victoria’s Secret” trademark, the court held that although the parallel importer did not infringe the trademark of “Victoria’s Secret”, its claiming to be “the sole designated distributor of Victoria’s Secret, the top underwear brand in the United States” made the public mistakenly think that there was an authorisation and license relationship between the parallel importer and the brand, so it brought unfair competitive advantage and constituted unfair competition.

If the exclusive distributor finds that the parallel importer makes false publicity in the sales process in its authorised area, such as falsely claiming to be the exclusive agent, the sole distributor, the brand-designated store, etc., it may consider filing a lawsuit of unfair competition to protect its rights and interests.

Other remedies

In addition to the above-mentioned judicial remedies, the exclusive distributor can use non-litigation means to achieve relief. If the exclusive distributor meets the requirements of commercial franchise, it can negotiate with the brand owner to conclude a franchise agreement, and file it with the competent commercial authority for the record, according to the law, so as to achieve the exclusive effect, and solve disputes through the relevant competent authority.

In addition, domestic exclusive distributors can consider asking trademark owners to make intellectual property filing with customs to set up a protective barrier at the import link. On the one hand, it is convenient for the brand owner to understand the quantity and subject of parallel imports and strengthen global management; on the other hand, when the impact is serious, it is also beneficial for the exclusive distributor to negotiate business with the brand owner and safeguard its own rights and interests.

Zhan Guohong is a partner at Dentons