Defense of Exhaustion of Trademark Rights in Cross-Border E-commerce

By Zhang Lingling Judge, Beijing Intellectual Property Court,[Trademark]

With the prosperity of e-commerce and the Internet, more trademark-related issues have emerged in cross border trade. Among them, it becomes a topic of hot debate whether the defense of exhaustion of trademark rights is applicable where a trademark-related conflict arises between an e-business that buys genuine products from a foreign country and resell them in China and the trademark licensee of the products that has acquired an exclusive license to use the trademark in China or the trademark proprietor who has registered the trademark by himself in China.
 
I. Exhaustion of trademark rights in parallel importation
In fact, the exhaustion o f trademark rights in cross-border e-commerce is associated with that of parallel importation, which is classic. Parallel importation happens mainly due to a price difference for the same product between the importing country and the exporting country, so that a higher profit can be realized on the same product in the importing country than in the exporting country. Since China’s accession into the World Trade Organization (WTO) and lowering tariffs thereafter, the cost-related issues that hinder parallel importation have been gradually eliminated. In addition, the growth of the national economy and the domestic market, the uplift of the national purchasing power and the popularization of the "Internet+” mode have made parallel importation-related issues stand out increasingly. It is well known that countries that emphasize the regionality of trademarks by, for example, denying the regional or international exhaustion of trademark rights tend to be trade protectionists. As to whether and how to adjust itself with respect to parallel importation in cross border e-commerce, the Chinese government should consider it on the level of international trade policy.
 
II. Exhaustion of trademark rights in traditional international trade
There are not stipulations of the exhaustion of trademark rights under China’s Trademark Law, and the domestic, regional or international exhaustion of trademark rights is not expressly provided for in any other laws in China. In addition, parallel importation is not explicitly prohibited by the Trademark Law. Considering that the main purpose to allow the exhaustion of trademark rights as a defense against trademark infringement allegations is to establish a uniform market, and to affirm the fundamental rule of civil law that "Everything which is not forbidden is allowed,” it is generally held in practice that parallel importation does not constitute a trademark infringement. There have been cases where in traditional international trade, the exhaustion of trademark rights in connection with parallel importation were generally affirmed as a proper defense.
 
In Atlantic C Trade Consultation Co., Ltd. (Atlantic C) v. Beijing Uniworld International Trading Co., Ltd. (UIT) for Trademark Infringement, UIT successfully defended itself by using the exhaustion of trademark rights. In the case, Atlantic C had acquired the exclusive user right of the trademark concerned in the territory of Mainland China. UIT submitted, among others, its contract with TRIGONFOOD B.V. in the Netherlands, the certificate of origin and the health certificate, to prove that UIT had legally imported from the Netherlands the KÖSTRITZER-branded beers and resold them in China, that the place of origin of the beers was Germany, and that the beers were brewed by " 酷者” (Kuzhe), which owns the same name, address of BräuhausKöstritzer with the case-involved trademark right owner " 库斯亭泽” (Kusitingze), known as another translation of BräuhausKöstritzer. Thus, the existing evidence sufficiently proved that the beers UIT sold were from BräuhausKöstritzer or its affiliated company, and were not counterfeit products that passed off as genuine K?STRITZER products. Although no consent was given by the exclusive trademark licensee in China when the goods were imported by UIT, the court affirmed the defense raised by UIT on the exhaustion of trademark rights.
 
The case shows that the defense o f exhaustion o f trademark rights is established, as long as the defendant proves that the goods he markets are genuine by submitting legal evidence that they were sourced from the products launched and primarily sold by the trademark owner in the market.
 
III. Exhaustion of trademark rights in cross-border e-commerce
1. The defense of exhaustion of trademark rights cannot be established when domestic trademark owners are concerned in cross-border e-commerce
A trademark is regional, in that different regions have in place different trademark systems and laws. In China, the Trademark Law requires trademarks to be registered and once registered, a trademark is protected by its exclusive user right. In cross-border e-commerce, when the foreign trademark owner is not the same as the domestic one, even if the cross border e-merchant proves that his goods were sourced from those legally launched by the foreign trademark owner into the market, it cannot be used as a reasonable defense against the allegation that he has infringed upon the exclusive trademark user right of the domestic trademark owner.
 
In the case of the "Le Coq Sportif” brand, the defendant Xiu.com claimed that the Le Coq Sportif brand was owned by the trademark owner Le Coq Sportif Nederland, which registered the trademark "Le Coq Sportif” in territories outside the People’s Republic of China. Le Coq Sportif Nederland licensed DISTRINANDO SA to manufacture and sell sport suits and sneakers that used the "Le Coq Sportif” logo. The allegedly infringing goods that were sold by Xiu.com were purchased by Liangwei Shoes Co., Ltd. from DISTRINANDO SA through parallel importation. However, in China, the trademark registrant was DESCENTE LTD. other than Le Coq Sportif Nederland. Thus, the same trademark was owned by different owners in China and other countries. The court held that for goods parallel imported from a foreign country, the trademark should always refer to the sole owner other than anybody else, that is, the owner that registered the trademark in the importing country. In the case, DISTRINANDO SA was not a licensee approved by DESCENTE LTD., and Liangwei Shoes Co., Ltd.’s importing the allegedly infringing goods from DISTRINANDO SA with the "Le Coq Sportif” logo did not comply with the parallel importation doctrine. Therefore, the defense of parallel importation raised by Xiu.com was not asserted by the court.
 
The judgment for the Le Coq Sportif case is different from that for the KÖSTRITZER case, mainly because in this case, the trademark concerned had been registered by a registrant that was different from the corresponding foreign trademark owner. If in this circumstance, the defense of exhaustion of trademark rights was allowed, it would certainly damage the exclusive use of trademark right of the domestic trademark registrant. It would also lead to confusion between the trademark and the source of the goods that used the trademark, thus damaging the function of the trademark to refer to the source of the goods. This would seriously impact on the trademark registration system of China.
 
2. The defense of exhaustion of trademark rights can still be established when domestic trademark owners are encountered in cross-border e-commerce 
From the perspective of trademark protection, both the trademark owner and his/her/ its exclusive trademark licensee should be protected by the registered trademark, and have the right of action according to law. However, for parallel importation, whether a trademark right is exhausted or not has to be decided by examining how the trademark is connected with the source of goods that uses the mark. An exclusive license is an agreement between the trademark owner and the trademark licensee with respect to the use of the trademark. Essentially as a contract, it has to be filed with the Trademark Office of China before it can be used against the third party. Moreover, the Trademark Law states that if a licensee is licensed to use a trademark, the goods that use the trademark must indicate the licensee’s name and the place of origin. This secures the relationship between the trademark and the source of the goods, even if there are two or more trademark holders. The trademark owner can license the trademark to one party in China, and to another one or keep it for own use in another country. In parallel importation, the crossborder e-merchant purchases goods that have entered the circulation area in a foreign country and resell it in the Chinese market. The act does not break the relationship between the trademark and the source of the goods, nor does it lead to the situation that the goods imported confuse the goods offered by the Chinese trademark licensee so as to exhaust the trademark right.
 
Therefore, as an essential condition for the exhaustion of the trademark right in parallel importation, the goods concerned have to be sourced from the same trademark owner. Otherwise, if different trademark holders exist, the parallel importation cannot be established, nor can the defense of exhaustion of the trademark right be applied.
 
IV. Some consideration on exhaustion of trademark rights in parallel importation
To achieve global ownership layout, if possible, a trademark owner will certainly go to register his/her/its trademark using different names in different countries, in order to address parallel importation arising out of cross-border e-commerce. Moreover, with increasing parallel importation, the trademark license system, especially exclusive licenses, will surely lose their prior meanings. The full adoption of the defense of exhaustion of trademark rights, that is, the international exhaustion and its impact on the existing international trade pattern should be taken into account by policymakers.
(Translated by Ren Qingtao)

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