‘Grey market’ IP issues on trademarks back in limelight

The huge price differential of certain branded goods on the overseas and domestic markets, the enhancement of the consumption capacity of Chinese people, and the lack of confidence in domestic products have spawned new cross-border merchandise trading models, such as overseas purchase for domestic principals and direct purchase on foreign websites. The trading model has shifted from traditional import-export, purchase for another when travelling and personal purchase for another to dedicated cross-border e-commerce. Policies relating to parallel imports, such as the 2016 Several Opinions on the Pilot Project for Promoting the Parallel Import of Motor Vehicles and the Interim Administrative Measures for the Pilot Project for the Parallel Import of Motor Vehicles, issued in succession by the Shanghai and Tianjin pilot zones, have again drawn attention to the intellectual property (IP) issue of “parallel imports” that is intimately connected with cross-border transactions.

Parallel import of trademarked goods again draws attention. The Patent Law contains express provisions that permit parallel import. The term “parallel import of trademarked goods”, also termed the “grey market”, generally refers to a situation where, in international trade, an importer, without a licence from the domestic trademark registrant, imports from abroad through lawful channels authorized products of the trademark rights holder or a licensee, with such products covered by trademark rights in China.

Cross-border e-commerce for the most part takes the form of a platform model or self-operation model. The platform model only provides a trading platform for buyers and sellers (like Yangmatou). Whether acts by a platform constitute parallel import is an issue that is still being debated. However, the operator of e-commerce that takes the form of the self-operation model will itself make the arrangements for an overseas source of genuine products and use bonded warehouses or other such means to provide sales, logistics, after-sales and other such services to customers, usually without a licence from the exclusive agent for the brand in China, constituting a typical act of parallel import. Such parallel importation has a substantive impact on the market share and economic performance of the exclusive agent in China. Although the products brought in through parallel import are genuine, they are not licensed by the domestic trademark registrant or licensor, making it worth exploring whether such an act constitutes trademark infringement.

Is it infringement? On this, the Trademark Law is silent. “Exhaustion of trademark right” is the main argument against parallel importation constituting trademark infringement. The phrase “exhaustion of trademark right” means that a trademark right is exhausted the first time that a good is lawfully sold, and the trademark rights holder has no right to stop the further transfer or use of the good. The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) leaves signatories the sovereign space to make their own determinations on the exhaustion of rights in IP. If international exhaustion is recognized, parallel import does not constitute trademark infringement. If it is not recognized, the act of selling or importing of parallel imported goods constitutes infringement against the trademark rights holder or licensee in the country in question.

Whether the parallel import of trademarked goods constitutes infringement is both a legal issue and has an intimate connection with a country’s trade policies, bringing with it a strong policy colouration. The attitudes and system designs of the US, Japan, the EU and China towards the treatment of the parallel import of trademarked goods and the exhaustion of international rights are not completely identical. From the perspective of mainland China’s current situation, its Patent Law’s permitting parallel imports is not unconnected with its huge demand for the use of advanced technologies. In the trademark field, e-commerce platforms are active as never before and cross-border transaction turnover is continuously increasing. Taking the automotive industry as an example, under the existing domestic agency model, auto enterprises and their dealers have quasi-monopoly positions, and one sees a large price differential for the same brand and model of vehicle outside and inside China. The parallel import of vehicles can allow consumers to purchase genuine brand vehicles at a price much lower than the sales price offered by domestic dealers. Although this does affect the interests of dealers in China, its positive aspects clearly outweigh the negative aspects, such that the policy balance is naturally tilting towards the legalization of parallel imports of vehicles.

Court precedents. Cases involving parallel imports handled by Chinese courts in the past include the “LUX” soap case, “MICHELIN” brand tyre case, the “VICTORIA’S SECRET” trademark case, the Atlantic C Trade Consulting v Beijing Uniworld International case (a trademark infringement case), the “Le Coq Sportif” trademark infringement case, etc. These cases include some where a finding of infringement was rendered and some that recognize the exhaustion of international rights, and in which a finding of no infringement was rendered. On the whole, the trend in recent years has been to deem that parallel imports do not constitute trademark infringement. Under certain circumstances, a court may render a finding of trademark infringement, such as when the domestic trademark rights holder and the foreign trademark rights holder are different persons and there is a substantive difference in the quality of the goods brought in through parallel import, as compared with the goods in the import country, potentially causing consumers to misidentify the origin of the products.

Guarding against legal risks. The parallel import of trademarked products hits the interests of exclusive domestic agents the hardest, but unlike anything since the appearance of e-commerce platforms. Accordingly, when executing an agency agreement, a domestic agent should not only provide for such issues as compensation for damages, remedies, etc., relating to parallel imports in the terms, but should also safeguard its own rights and interests through legal actions when the parallel import of trademarked goods breach jus cogens or there are other differences between the goods provided and the agent’s goods.

For domestic agents endeavouring to secure trademark rights in China or establish a difference between products from China and products brought in through parallel import, independent package designs for such products to give rise to specific cognition of the source of the products among consumers are also measures available to guard against the impact of products brought in through parallel import.