TM infringement risks associated with ‘cross-border wave’

By Wang Yaxi and Xing Keke, Yuanhe Partners

“Cross-border wave” and “overseas purchasing” have become standard practice for e-commerce platforms. Where an imported good bypasses the trademark holder or its authorized distributor to enter the importing country’s market, “parallel importation” is constituted, and the trademark infringement dispute it gives rise to is in essence a conflict between territorial protection of trademarks and the global circulation of goods.

Parallel importation takes many forms, but this article looks at circumstances that present the following features: (1) a certain trademark is accorded protection in both the exporting country and importing country, and the trademark rights holder is the same in both countries; and (2) a good bearing such registered trademark lawfully sourced in the exporting country is imported and sold in the importing country without a licence from the trademark rights holder or a licensee.

Wang Yaxi
Yuanhe Partners

In recent years, in determining in judicial practice whether a parallel import constitutes trademark infringement, no longer is the focus placed solely on whether the good is genuine and sourced from the trademark rights holder in the exporting country, or a licensee, but rather on examining and determining on the basis of the rule of exhaustion of trademark right whether there is a “potential for confusion”.

This change in approach represents a return to the determination criteria in article 57 of the Trademark Law, with a focus on the function of a trademark in identifying the source of the good. If the trademark on a parallel import good correctly indicates the trademark rights holder, and does not undermine the link between the good and its source, it will not cause consumers to confuse the source of the good, and no finding of trademark infringement should be reached.

Examining parallel imports from the perspective of article 57 of the Trademark Law, if the good produced and sold in the importing country by the trademark rights holder uses both a Chinese and foreign-language trademark, but the good produced and sold in the exporting country only uses the foreign-language trademark, then two circumstances are worth noting in practice.

trademark infringement
Xing Keke
Yuanhe Partners

First, if the rights holder in the foreign-language trademark in the importing country is an affiliate of the trademark holder in the exporting country, is it necessary, when determining the link between the good and the source, to do a penetrative examination of the entities? Are different determination and protection criteria to be used for the trademark rights holder in the importing country and its licensee (with a sole licence)?

Second, if, when selling the parallel import good, the seller uses text identical to the Chinese-language trademark, and such text is not the translation of the foreign-language trademark, does this constitute indicative use? In traditional offline selling, it is relatively easy to determine the scope necessary for indicating the source of the good. However, in the internet environment, publicity includes text, images, audio and video, greatly adding to the complexity of the determination criteria.

In reality, if a determination as to whether a parallel import constitutes trademark infringement is made solely from whether the function of a trademark in identifying the source of a good has been impaired, it is incomplete. Identifying the source of a good is only one of the functions borne by a trademark.

From a business perspective, a trademark embodies the trademark rights holder’s supervision and management of its goods, and a guarantee of quality. For example, article 43 of the Trademark Law specifies that a trademark rights holder is required to monitor the quality of the goods on which a licensee uses its registered trademark. The goods released in different markets by multinational corporations will be modified accordingly, based on the local regulatory requirements, consumer preferences, supply of raw materials, production process, etc., thereby also giving rise to differences in product quality, price, after-sales service, etc.

If a parallel import good is seized due to violation of the regulatory standards of the importing country, or gives rise to negative comments from consumers, it will damage the market reputation of the trademark and impair its function of ensuring quality. Such an adverse effect will radiate to the trademark rights holder in the importing country, or its licensee, through the identical trademark, and harm its interests in the relevant market.

There are precedents for achieving a remedy for an injury caused to the function of a trademark in ensuring quality through the catch-all provision in item (7) of article 57 of the Trademark Law: “Other harm caused to the exclusive right of another to use its registered trademark”.

In the “Jelly Belly” and “吉力贝” (“ji li bei”) trademark infringement case, the plaintiff was the licensee of the registered trademarks “Jelly Belly” and “吉力贝” in China. The defendant imported without authorization “Jelly Belly” candy sold in the US and affixed to it the trademark “吉力贝” for sale in China.

The parallel import good produced in accordance with US food standards contained the food additive sodium diacetate, which, in accordance with national food safety standards of China, may not be used in such foods as candy and chocolate. Accordingly, the court held that the parallel import good presented a latent food safety hazard, thereby undermining the trademark’s function of ensuring the quality of the good and indicating the reputation of the provider of the good, causing injury to the exclusive right to use the trademark and constituting trademark infringement.

In the “Michelin Tyre” case, the court held that the parallel import tyres sold by the defendant had not undergone the “3C” certification mandatorily required by Chinese law, constituted an illegally circulating product that could be harbouring a latent safety hazard, and could harm the interests and goodwill of the trademark rights holder. Accordingly, trademark infringement was constituted.

Apart from ensuring the quality of a good, if the trademark rights holder or its licensee uses a special marketing method, e.g., franchising or direct sale, parallel import goods may also cause harm to this special marketing system. As to whether item (7) of article 57 of the Trademark Law may similarly be applied in such a case remains to be seen.

The issue of trademark infringement in parallel importation also involves such things as replacement of the packaging and concealed trace codes, each aspect manifesting its complexity. In this, not only must consideration be given to protecting the interests of the trademark rights holder, but also the rights and interests of consumers, national trade policies, and the competitive order of the free market need to be balanced against it.

Wang Yaxi and Xing Keke are partners at Yuanhe Partners

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