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The legality of parallel imports remains a grey area in India, write Pravin Anand and Nishchal Anand

The evolution of the law relating to parallel imports in India could aptly be titled “Four Shades of Grey”. This is because four decisions of Delhi High Court collectively form the cornerstone of the law relating to grey market goods in India.

7International exhaustion and material differences (first shade of grey, 2006-11): One of the first cases dealing with parallel imports in India was Samsung v G Choudhary. The court assumed India would follow the principle of international exhaustion of trademark rights. It borrowed the “material differences doctrine” from US courts and held that if there are physical or non-physical differences between the product meant for sale in India and the imported product, the trademark owner would have the right to stop sales of the imported goods.

National exhaustion (second shade of grey, 2012): Next was Samsung v Kapil Wadhwa, in which a defendant challenged the material differences doctrine for the first time, stating that imported products must be physically changed or altered and the mere importation of a slightly different product would not amount to infringement. Countering this argument, the plaintiff contended that the act of importing a different product not meant for sale in India would itself amount to changing or impairing the goods. The plaintiff also for the first time argued that India follows the principle of national exhaustion of trademark rights. In addition, the plaintiff cited the principle of “legitimate reasons”, stating that change or impairment of goods was one of many reasons for trademark owners to stop parallel imports. The single judge agreed with the plaintiff’s contention that India follows the principle of national exhaustion, interpreting the expression “the market” used in the Trade Marks Act, 1999, to mean a domestic market. In view of this, the court did not deal with the issues of legitimate reasons and material differences.

International exhaustion (third shade of grey, 2012-13): The defendants in the same matter appealed to a division bench of Delhi High Court, challenging the single judge’s findings. The bench stated that the expression “the market” was ambiguous and concluded that India follows the principle of international exhaustion. Even though the single judge had not dealt with the issue of material differences, the bench went on to hold that material differences in a regime of international exhaustion would only apply where the condition of the goods had been physically and actually altered after being acquired by the importer. However, the bench appreciated that differences in warranty and after-sales service had the potential to harm consumers. The defendants were directed to conspicuously put a disclaimer on their premises stating that Samsung would not be responsible for any warranty or after-sales service for any products purchased from them. The solution may seem superficial. Considering that the defendants are importers and distributors, would the disclaimer percolate down to the end consumer?

International exhaustion and lawful acquisition (fourth shade of grey, 2014): In two matters before a single judge of Delhi High Court, Philip Morris Brands was granted relief against retailers of grey market Marlboro cigarettes. The products failed to comply with local packaging and labelling laws and lacked the mandatory health warnings. The single judge considered the findings of the division bench in the Samsung case and held that even with international exhaustion, the defendants would have to prove that the goods they sold had been “lawfully acquired”. In effect, the defendants would need to disclose documents such as an import licence, bills of lading, invoices, import duty payment receipts, etc. They would also need to divulge the source of their goods and whether it is legitimate. Proving the legitimacy of the imported goods would be a heavy burden for the defendants. The defendants in these cases did not appear before the court let alone discharge their onus. Thus the court did not explore the issue of differences in the packaging and health warning of the products.

The need for black or white

Samsung has appealed the findings of the division bench in Kapil Wadhwa v Samsung and the matter is pending in the Supreme Court of India. The issue justifiably requires the attention of the Supreme Court as the decision on which principle of exhaustion India follows could have huge implications not only for brand owners and importers but also for the Indian economy. Perhaps this is why supporters of both sides, including associations such as the International Trademark Association, have applied to intervene in the matter.

Brand owners argue against international exhaustion, lamenting that it stifles innovation, hampers technology transfer, reduces incentives to invest in a market, encourages counterfeiting and is detrimental to consumers. On the other hand, importers contend that national exhaustion violates the basic principle of free trade and commerce, especially when the world is rapidly evolving towards the model of conducting business electronically.

The Supreme Court is the referee in this match and the world can but hold its breath, wait and watch!

Pravin Anand is the managing partner and Nishchal Anand is a senior associate at Anand and Anand.

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Email: pravin@anandandanand.com

nishchal@anandandanand.com

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