The MARQUES Anti-Counterfeiting and Parallel Trade Team has published a chart illustrating rules on exhaustion of IP rights in 53 jurisdictions. The chart covers topics including defences, criminal sanctions and damages. It also summarises relevant recent case law.

In this blog post, Elena Bojinova Miller introduces the topic and highlights the interesting issues raised by Team members in some jurisdictions.

An example of one of the countries covered in the chart is shown below. MARQUES members can access the full chart here.

What are parallel imports?

Parallel imports are goods produced genuinely under protection of a trade mark, patent or copyright, placed into circulation in one market, and then imported into another market without the authorization of the owner of the IP right.

The ability of a right holder to exclude parallel imports legally from a particular market depends on the importing nation’s treatment of exhaustion of IP rights.

International exhaustion is the principle that, once goods in relation to which the trade mark is used have been put on the market by a trade mark owner or with its consent somewhere in the world, the trade mark owner has exhausted its trade mark rights in relation to the sale of those goods anywhere in the world.

National exhaustion describes a system that considers the brand owner’s trade mark rights exhausted for a specific country or region once goods in relation to which the trade mark is used have been put on the market in this particular country or region by the trade mark owner or with its consent. The exhaustion does not extend to other countries or regions, thereby allowing the trade mark owner to rely on its trade mark rights to prevent the unauthorized sale of these goods in other markets.

Some countries adhere to the international exhaustion system but will prohibit the sale of parallel imports if they are materially different from the goods that the trade mark owner has authorized to be put on the market in that country. Countries employing a material differences approach may have different standards for what they consider to be “material”

The MARQUES Anti-Counterfeiting and Parallel Trade Team has gathered and prepared a chart consisting of 53 jurisdictions, addressing the treatment of the parallel import regime.

After we prepared and analysed the chart, several questions arose:

The UK regime post-Brexit

The UK government has published a statement on the exhaustion regime that would apply if the UK leaves the EU without a deal on 31 October 2019. This says that “the UK will continue to recognise the EEA regional exhaustion regime from exit day to provide continuity in the immediate term for businesses and consumers”. It adds: “The government is currently considering all options for how the exhaustion regime should operate after this temporary period. The government is undertaking a research programme to support this decision.”

Looking ahead, it is unclear whether and how jurisprudence will factor into the debate about exhaustion of rights post-Brexit. Various options are open to the UK, including a national exhaustion system, whereby trade mark owners could oppose any onward sale of a protected product outside the UK, or an international one, which would encourage free movement of UK-manufactured goods globally. With a soft Brexit (the ability to remain within the EEA exhaustion system), it is worth looking at the alternatives and what these will mean for the pharmaceutical industry at large.

Clear advantages are presented by a national exhaustion system. In particular, this would address the issues regarding repackaging and relabelling, and offers the strongest protection for trade mark owners who wish to enforce their rights globally against parallel importers. However, this could also result in the most protectionist system and could be a barrier to free trade with other countries, by driving up prices in the UK.

International exhaustion creates its own issues, both from an IP and quality perspective. With less ability to enforce trade marks against parallel importers, brand protection could be eroded and the pharmaceutical sector could see potential quality control issues as UK drugs are freely repackaged and sold on into different markets. It remains to be seen whether and how the UK could legislate for trade mark holders to be able to oppose parallel imports in such a system – and whether this would follow the CJEU case law or provide stronger rights for trade mark owners.

There will also be practical difficulties of transitioning to a new exhaustion regime. While the EU and UK seem to have agreed in principle that rights exhausted in the UK and EU before the end of the transitional period should remain exhausted, any shift to a national or international exhaustion system would require the identification of exactly which goods were exhausted before and after the relevant date. Accuracy and collection of documents shall become critical.

Decision of the Russian Constitutional Court

The question of the legalization of parallel imports, more specifically the import by non-official distributors of goods from outside the Eurasian Economic Union (EAEU, ie Russia, Belarus, Kazakhstan, Armenia and Kyrgyzstan), without the right holder’s consent, has been the subject of a debate between right holders and the Federal Antimonopoly Service of the Russian Federation. On 13 February 2018, the Constitutional Court of the Russian Federation issued Ruling No 8-P, which states that the national principle of exhaustion of exclusive rights to trade marks, in conjunction with the regional principle in the EAEU law, is not in contravention of the RF Constitution, but does not give to right holders unconditional protection against parallel imports.

Although grey imports remain illegal, the burden of proof has dramatically changed: now infringers have almost 50 legal reasons to pay less and minimize the risks of customs seizure.

The constitutional review was initiated by PAG, a notorious Russian importer of labelled medicine goods. The importer was sued by Sony Corporation in 2014, when the Japanese company was notified by a customs post that the PAG was trying to import 60 rolls of medical print paper bearing the Sony trade mark. Although the paper was genuine, Sony argued its trade mark was infringed by PAG buying the goods in Poland and importing them into Russia in circumvention of the official distribution scheme.

The Constitutional Court found the regime of national/regional exhaustion per se valid and enforceable, but it drew a clear distinction between liability imposed for “classic” counterfeit and parallel import, and introduced two new conditions for successful cases against parallel importers. Grey goods could be seized and destroyed, should a trade mark holder prove inadequate quality or risk of negative influence on human health, nature preservation or cultural values. A trade mark holder may not enjoy legal protection against a parallel importer, if he acts in breach of good faith. Good faith heavily depends on pricing policy: a substantial difference between the prices in Russia and other jurisdictions must be explained before the court. The good faith standard is even higher in case of vital goods (drugs, medicine equipment) and the trade mark holder’s compliance with anti-Russian sanctions policy.

The judgment should not influence previously decided cases against parallel importers, but its ratio decidendi will dramatically change the scenario for routine parallel import disputes. Trade mark holders have to become proficient in distinguishing shades of grey imports. Not every attempt to combat grey goods will be successful.

The Constitutional Court declared that there is no impact in Russia for pharmaceutical products for medical use from 2020 onwards. However, for the manufacturers of other goods, especially those in respect of which it is hard to prove a threat to security or human life and health (for example, clothing, luxury goods), the ruling might require the review of their distribution arrangements in relation to Russia.

The Constitutional Court decision might be a compromise caused by the economic penalties imposed on Russia by some countries. But the Court could not introduce international exhaustion of rights because Russia is a member of the EAEU, which has adopted the principle of regional exhaustion.

Decision of the Supreme Court of Cassation in Bulgaria

In 2016 the Supreme Court of Cassation (SCC) of Bulgaria issued a long-awaited decision regarding parallel imports which finally accepted that parallel imports infringe trade mark law. The court ruling is consistent with well-established case law in all the Member States of the European Union and corresponds to the interpretation given by the Court of Justice of the European Union.

Unfortunately, however, the 2016 decision also has a negative side. It is related to the reasoning of the 2009 and 2012 interpretative rulings and, according to the SCC, the infringement, even though trade mark infringement is not addressed and enforceable under the Law on Trade Marks and Geographical Indications.

The Supreme Court of Cassation states that a trade mark proprietor who seeks protection against the breach of his/her right in cases of parallel imports should seek their rights before the courts under the common rules laid down in the Code of Civil Procedure.

A case based on special claims for the establishment and termination of trade mark infringement is dealt with by the order of expedited proceedings. This is intended to bring infringement actions to maximum speed and to offer time-efficient protection of the rights of the holder. Obviously, this will not be the case when it comes to actions that are dealt with under common law. The SCC deprives trade mark holders of the right to seek protection against parallel imports through claims under the Law on Trade Marks and Geographical Indications.

This ruling may lead to ineffective and delayed redundancy protection and ultimately it is possible it will devalue the exclusive right over trade marks.

Elena Bojinova Miller is an attorney with Bojinov & Bojinov Patent Trademark and law Offices in Sofia, Bulgaria and a member of the MARQUES ACPT Team