Trademark Infringement in Connection with Parallel Importation

2011/01/17,By Huang Hui and Huang Yibiao,[Comprehensive Reports]

(Huang Hui)                                                           (Huang Yibiao)
\Parallel importation involving intellectual property rights and the doctrine of exhaustion have evoked different theories from which no consensus has been achieved in national legislatures worldwide. Meanwhile, the issue has been dodged in various international treaties, for example, the TRIPs Agreement provides in Article 6 that “ nothing in this Agreement shall be used to address the issue of the exhaustion of intellectual property rights.” In China, parallel importation, particularly the issue of trademark parallel importation, has been a hot topic in theoretical discussions. Based on the relevant legislations and domestic judicial precedents, this article makes a preliminary discussion about legal issues surrounding trademark infringement in parallel importation without going into detail about many issues, in a bid to solicit more valuable opinions.
I. Definitions of Parallel Importation and the Doctrine Exhaustion
Parallel importation has been accorded with different definitions in writings at home and abroad. This article will start from a typical explanation, i.e., a certain home country trademark owner first sells his products bearing the mark in a foreign market where a buyer imports the products back into the home country. The Exhaustion doctrine of trademark rights is defined as the limitation on a trademark owner’s right to assert his trademark rights, after the mark owner or his licensee has put the products bearing his  mark onto the market, against subsequent sale or transfer by another. In other words, a trademark owner is estopped from the further flow of his trademarked goods once he has released them in the marketplace. In this definition, if the first sale is made in the domestic market, it is domestic exhaustion; if, however, it is first made in a foreign country, it will be international exhaustion (the concept of the international exhaustion, to some extent, leads easily to misunderstanding). In China, there is broad consensus on the national exhaustion of trademark rights within the context of the Trademark Law.
It should be noted that in discussions about parallel importation, we do not care whether the national trademark owner has any right to the given trademark in a foreign country where the first sale of the product takes place. Whether there is a trademark right in a foreign country does not affect parallel importation, as long as the subject who puts the product on sale in a foreign country and the national trademark owner are one and the same, which constitutes parallel importation and falls within the circumstances of international exhaustion of trademark rights. On the basis of the territoriality principle of trademark rights, it is not necessary to take into account trademark ownership in a foreign country in determining protection of national trademark rights.
II. Whether China’s Current Trademark Law can Prohibit Parallel Importation
Although there is a consensus on the “national exhaustion of rights” among theorists and even justice departments, the Trademark Law of China has so far not provided any provisions on the “exhaustion of rights.” In this case, according to Article 52 (1) of the Trademark Law, “use of a trademark that is the same as or similar to a registered trademark for identical or similar goods without the permission of the trademark registrant,” the trademark owner, after putting the goods using his own trademark on the market, still has the right to prohibit resale of the goods, because sale of goods with the trademark equals use of the trademark.
The foregoing understanding makes sense within the context of literal interpretations of legal provisions. Article 52 (1) of the Trademark Law covers circumstances of unauthorized use of trademarks on the goods of trademark owners, but fails to read as “unauthorized use by others of identical or similar trademarks on the goods without permission.” In theory, the exclusive right to use trademarks does not end spontaneously after the goods are put on the market, and can be further extended to the course of continuing use after the first sale of the goods bearing the trademarks. The theory is expressly adopted by England.
Nevertheless, it is clear that most people would think it goes beyond the extent necessary for the protection of trademark rights and is not conducive to the normal flow of goods and socio-economic development. Therefore, most statute law countries and regions set forth provisions on “exhaustion of rights” in their trademark laws. For example, Article L713-4 of French Intellectual Property Code provides that “The right conferred by a mark shall not entitle an owner to prohibit its use in relation to goods which have been put on the market in the European Economic Community or the European Economic Area under that mark by the proprietor or with his consent.” The first paragraph of Article 7 of the First Council Directive of the European Union states “The trade mark shall not entitle the proprietor to prohibit its use in relation to goods which have been put on the market in the Community under that trade mark by the proprietor or with his consent.” The second paragraph of Taiwan’s Trademark Act provides that “Where goods bearing a registered trademark are traded or circulated in the marketplace by the trademark right holder or by an authorized person, or are offered for auction or disposal by a relevant agency, the right holder shall not claim trademark rights on the said goods.”
In China’s IP legislative practices, the “exhaustion of rights” is not a sure thing which needs no clarification. Article 69 (1) of the current Patent Law provides that “the following circumstance shall not be deemed as a patent right infringement: After a patented product or a product directly obtained by using the patented method is sold by the patentee or sold by any organization or individual with licensing from the patentee, any other person uses, offers to sell, sells or imports that product.” This article covers “exhaustion of rights” and prevents the patentee from exploiting patents to hinder circulation of goods after putting his patented goods on the market. In the article, “not deemed” means that an act which is essentially infringing will not be regarded as an act of infringement. Since the 1984 Patent Law, four subsequent revisions have kept unchanged the provision on exhaustion of rights, namely, “not deemed as a patent right infringement.” Therefore, it can be seen that explicit provisions on incapability of the IP owner to prohibit resale of his goods after being put on the market need to be enacted, otherwise, the IP owner should have the right to prohibit such resale. Based on the above analysis, the authors are of the view that, since China’s Trademark Law does not address “exhaustion of rights”, acts of parallel importation of trademarks can be prohibited in accordance with Article 52 (1) of the Trademark Law, even the subsequent sales of the goods of the IP owner can be directly prohibited in the domestic market. Therefore, on the sole basis of the current legislation, whether trademark parallel importation is infringing or not seems to have little room for discussion.
III. Judging from Cases of Trademark Parallel Importation in China
In light of the above mentioned regulations on exhaustion of rights and its exceptions, it has been a broad consensus on the necessity of “national exhaustion of rights” at least in China, which is not a theoretical obstacle but a legislative silence in trademark laws. It is necessary to recognize “exhaustion of rights” as a precondition for academic discussions over legitimacy of parallel importation of trademarks, which is also the reason why parallel importation always goes hand in hand with “exhaustion of rights.” Previous discussions about parallel importation have not yet reached consistent conclusions, and different opinions among scholars and legislations from countries are enough to explain the difficulty in clarifying its complexity. The authors are of the view that, in accordance with commonplace theories and practices of trademark laws and under specific circumstances, at least the conclusion that all parallel importation does not constitute infringement cannot be explicitly reached. Therefore, the authors would like to share their views on two cases in China.
Case 1: Changsha Intermediate People’s Court (2009) Chang Zhong Min San Chu Zi No. 0073. The plaintiff, French Michelin Group Company found that in the China market, Defendant A imported to China “MICHELIN” tires, which were manufactured by the plaintiff in Japan but failed to obtain China’s 3C safety certification. The plaintiff alleged that tires are important components of vehicles and directly relate to personal safety, therefore, production of tires will adopt different materials, designs, processes and structures in accordance with different regions, use environments and road conditions. Although the plaintiff put the alleged goods on the market, the plaintiff did not intend to put them on sale in China, and the goods did not pass China’s mandatory 3C safety certification and had safety risks. Use of plaintiff’s trademarks registered in China on the goods would seriously affect the plaintiff’s interests and its trademark reputation in the event of any occurrences of problems. Sales of the goods in China by Defendant A constituted acts of infringement upon the plaintiff’s exclusive rights to use the registered trademarks; therefore, the plaintiff lodged a lawsuit before the Chinese court. The Changsha Intermediate People’s Court, after hearing the case, ruled that: “Trademarks serve the purposes of guaranteeing quality of the goods and credibility of goods suppliers. Any damage to the above functions and purposes constitutes trademark infringement. In this case, the plaintiff admitted that its plants in Japan manufactured the allegedly infringing goods, and the ‘MICHELIN’ trademark series were also labeled in Japan, but the goods were marketed in China without the plaintiff’s consent and quality certification. Since the sale of the goods in China was already illegal with possibilities of risks in performance and safety, and damaged the plaintiff’s trademarks in ensuring goods quality and credibility of suppliers, the plaintiff’s exclusive right to use the trademarks had been damaged. Based on the above, the defendant’s sale constituted an act of infringement upon the plaintiff’s exclusive right to use the registered trademarks.”
Case 2: Changsha Intermediate People’s Court (2009) Chang Zhong Min San Chu Zi No.0072. Plaintiff Michelin Group Company found in China that the speed ratings symbol of “MICHELIN” tires sold by Defendant B was changed without authorization to the Y-speed rating (Y-rated tires are capable of speeds up to 300 kilometers per hour and are special tires), but the Michelin tires did not have such high-speed capabilities. The plaintiff claimed that materials and structures of different intensity determine the speed ratings of tires, and low-speed tires are very likely to flatten after being converted into high-speed tires. The alleged products were manufactured and marketed by the plaintiff, but the products had been changed without authorization and endangered the safety of users, and the continuing use of the plaintiff’s trademarks on the products constituted trademark infringement, therefore, the plaintiff launched the lawsuit before the court. After the hearings, the court held that: “One of the important functions of a trademark is to reduce search costs of consumers through its identifying functions. After a trademark registrant puts the products bearing the trademark into the market, the registered trademark, business reputation of the trademark owner incorporated in the trademark, the specific products and its various attributes correspond with each other, thus any change of the elements in the trademark or the product may lead to damage to the identifying and guiding functions of the registered trademark. In this case, the tires whose speed ratings were converted have done harm to the reputation arising out of quality assurance by the trademark registrant and thus constituted trademark infringement.”
Both of the above two cases involve trademark parallel importation. The authors are of the view that the fundamental condition for trademark infringement is “without authorization.” In the cited cases, the sale of the allegedly infringing tires are permitted in the Japanese market by the plaintiff, but their entry into the Chinese market and conversion of the speed ratings were prohibited by the plaintiff. The theory of “international exhaustion of rights” associated with parallel importation interprets “authorization” as first sale exhaustion, namely, the trademark owner does not have the right to claim against “without authorization” so long as the same products have been put on the market by the trademark owner. Based on the theory, it seems difficult to determine that the sale by the two defendants of the tires, which were authorized to be put on the market by the plaintiff, had constituted trademark infringement.
In the Michelin tires cases, a special point of importance is that the product attributes of the tires marketed by plaintiff changed during the course of the parallel importation. Another question arising out of the cases is how to understand “without authorization” in the Trademark Law, and whether the sale has led to invalidation of “exhaustion of rights” after unauthorized changes of goods and use conditions.
Let’s first analyze the second case. The speed-rating symbol of tires sold by Defendant B was changed to a Y-speed rating, namely 300 km per hour, while the normal speed rating for such tires is V or below with a maximum speed 240 km per hour. Change of the speed symbols have changed attributes of the goods, strictly speaking, the goods were no longer those initially put on the market by the plaintiff. Such circumstance is an exception to “exhaustion of rights”, and the “authorization” conditions for plaintiff’s first sale vanish and return to the state without authorization.
Exceptions to “exhaustion of rights” are not just theoretical issues, but also explicitly stated in legislations in some countries and regions. For example, Article L713-4 of the French Intellectual Property Code provides that “the owner shall continue to have the faculty of opposing any further act of marketing if he can show legitimate reasons, especially where the condition of the goods has been subsequently changed or impaired.”
Whatever the attitudes towards “exhaustion of rights”, the trademark owner should have the right to prohibit any act that changes the attributes of goods and thus gives rise to personal hazards in the course of parallel importation. In the first case, the goods had not been modified. However, because tires supplied to different countries have different technical requirements and certification standards, and the act of marketing tires, designed in accordance with safety standards of one country, and if the other country has changed the conditions of use of the goods, which is likely to endanger personal safety, this falls within the circumstances of changing attributes of the goods, and has also become a legitimate reason for invalidation of the “exhaustion of rights”. In this regard, the second paragraph of Article 7 of the First Council Directive of the European Union provides that “Paragraph 1[provisions on exhaustion of rights] shall not apply where there exist legitimate reasons for the proprietor to oppose further commercialization of the goods, especially where the condition of the goods is changed or impaired after they have been put on the market.”
Unauthorized trademark use does not, naturally, refer to use of goods of others, but also includes use of goods of the trademark owner in the circulation. To avoid excessive exercise of trademark rights by the trademark owner, it is necessary to set limitations in accordance with the principle of “exhaustion of rights”, putting subsequent sales of goods in a state “with authorization”. However, the principle of exhaustion of rights is not absolute and can be excluded under specific circumstances and return to the state of “without authorization”. The Michelin cases are typical in circumstance.
The judgments in the Michelin cases embody better a specific circumstance where others’ sale, through parallel importation, of the goods, which had been put on the market by the trademark owner, constituted trademark infringement. To some extent, the judgments have gone beyond confusion and dilution theories regarding the absolute protection of trademarks.
Prior to the Michelin cases, there were two cases relating to parallel importation in China’s judicial practices, the Lux soap case, adjudicated by the Guangdong High People’s Court. In this instance, the court held that evidence provided by the defendant was insufficient to prove that the goods it imported were licensed to be manufactured by the trademark owner; therefore, the case determined that the defendant had committed trademark infringement but failed to touch upon the issue as to whether the parallel importation had constituted infringement. Another was the AN’GE clothing case heard by the Beijing Second Intermediate People’s Court. The plaintiff did not claim trademark rights but exclusive dealership rights and unfair competition instead, leaving no chance for the court to determine infringement in trademark parallel importation. The Michelin tire cases are the first of its kind in China’s judicial adjudications in which a claim was made for trademark infringement and was positively determined by the court. Regarding trademark infringement in connection with parallel importation, The Changsha Intermediate People’s Court had made an active and creative exploration, though the court failed to address all the issues related to parallel importation. However, the views and legal issues involved deserve further research and discussion.

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