Overview of Regulations on Parallel Importation in China --- From the perspective of trademark parallel importation

2011/1/17By Yan Guizhen, Associate Professor with Intellectual Property Institute of Tongji University,[Comprehensive Reports]

Before the 2009 revision of the Patent Law, Chinese laws did not address the issue of parallel importation. China revised the Patent Law, Copyright Law and Trademark Law in 2000 and 2001 respectively, however, the revised basic IP laws all failed to address the issue of parallel importation. Similarly, China’s Anti-Unfair Competition Law, Foreign Trade Law, Customs Law and other laws and regulations don’t address this issue either. Because of the lack of legal basis regarding parallel importation in China, the IP owner is unable to find a legal foundation; the owner has no idea of China’s attitudes towards parallel importation in the event of any occurrences, and can in no way foresee the outcome of the case.
There have been many instances of parallel importation in real trade, such as “Lipton” black tea, and “Comfort washing products,” but the IP owners did not assert their rights. Therefore, it has been an important issue for us to address the phenomenon of parallel importation, conduct research and reviews, and enact relevant countermeasures.
Adjustments to Chinese IP laws on parallel importation need to address mainly two issues: First, provide a definition of parallel importation. Currently in China, the academia lacks a consistent understanding of the concept of parallel importation; even in the judicial field, opinions differ as to what parallel importation is. Therefore, China should, first of all, make a definition of parallel importation in relevant laws. A correct definition of the phenomenon of parallel importation can help distinguish between “genuine products,” “counterfeit products,” “shoddy products” and “pirated products,” and can correctly apply the principle of exhaustion of rights or the principle of implied license. Second, clarification and review of policies on parallel importation. Currently in China, only Patent Law makes direct provisions on parallel importation, Trademark Law and Copyright Law do not have explicit policies on the issue.
I. Definition of Parallel Importation
This author thinks that parallel importation is defined on the basis of “association.” The so-called parallel importation refers to acts or phenomena the international trade, without authorization from the domestic IP owner, of the importation of goods, which are put on the market by the IP owner or with his consent, or of importation of goods with IP rights associated with the rights of the IP owner. The basis on which parallel importation is defined is association between imported goods and the domestic IP owner. Only when there is some association between the imported goods and the domestic IP owner can the importation be taken as parallel importation, thus directly excluding infringement acts, such as counterfeiting and piracy, from acts of parallel importation.
Judging from the judicial practices of other countries, if there is not any “association” between imported goods with identical intellectual achievements and the domestic IP owner, such importation is usually directly declared as an act of infringement.
Suppose Party A registers a trademark on certain goods in Country A, and Party B registers the identical trademark on the identical goods in Country B. If an importer imports goods from country B and puts the goods on the market of Country A, Country A will usually rule simply that such importation constitutes an act of trademark infringement. Because in this situation, the domestic IP owner is not the same as the manufacturer of the imports (namely the IP owner), and the imported goods do not have any “association” with the IP owner.
The territoriality of IP rights makes it possible for identical products to have two independent trademark rights in two regions. The imported goods are not put on the market by the domestic IP owner or with his consent, the rights of the domestic trademark owner remain to be exercised, and there is no question as to whether the rights holder has benefited from the marketing. If others, without his consent, import goods bearing the IP rights, his rights will be damaged.
Where the imported goods are manufactured by the third party independent of the IP owner, different countries generally agree on marketing rights, and the exclusive marketing rights may be used to prevent initial and subsequent sales. Therefore, where the goods are put on the market by a third party independent of the IP owner, judicial practices of different countries, generally, regard it as simple infringement, and the IP owner may exercise his rights to prevent importation and sales.
Conversely, where the imported goods are put on the market by the same person (or corporation as well, sic passim), or by someone other than the same person, who has association with the IP owner, the IP owner may have already exercised his rights. In other words, the IP owner has obtained returns through the exercise of the rights. Whether the IP owner has the ability to control the goods has become a point of controversy, and the phenomenon is the one that causes widespread controversies in parallel importation.
Generally speaking, “association” of imported goods with the IP owner means that the imported goods are put on the market by the IP owner, or the goods are put on the market by a licensee, parent-subsidiary companies or branches or joint venture companies that has an economic association with the IP owner, or the IP rights incorporated in imported goods have the “same source” with the rights of the IP owner. It includes the following three circumstances:
(1) The imported goods are put on the market by the IP owner;
(2) The imported goods are put on the market by the licensee, parent-subsidiary companies or branches or joint venture companies, all having economic association with the IP owner, in which circumstance consent is considered as given; or
(3) The IP rights incorporated in imported goods have the “same source” with the rights of the IP owner.
Monopolistic as it is, the IP right remains dubious as to its scope, and opinions vary on if or how restrictions ought to be imposed. These are not merely matters of IP protection, but involve issues of international trade and market monopoly.
For these reasons, different countries, based on their specific conditions, choose approaches that best suit their national interests. Some have taken the approach that rights the of the IP owner have been exhausted or conclude that there are circumstances of implied license. In these cases parallel importation cannot be prevented. Others take the opposite approach and determine that the rights are not exhausted and the IP owner has the right to prevent parallel importation. As a result, extensive debates have been held as to the legality of parallel importation. Different courts have different opinions and even scholars have begun debating the issue of parallel importation. In general, academic discussions on parallel importation mainly cover the above-mentioned circumstances. Therefore, the key element in determining whether a party’s actions constitute parallel importation mainly hinge on determining whether the imported goods have any association with the IP owner.
II. Legal Basis for IP Regulations on Parallel Importation in Other Countries
Because China’s Trademark Law does not regulate parallel importation, it is highly necessary for us to understand foreign IP regulations on parallel importation for future legislation. As regards ways of regulating parallel importation, some countries directly make use of IP laws to regulate parallel importation, for example, Australia’s copyright law directly addresses parallel importation. Other countries, through judicial precedents, establish principles of IP laws to regulate parallel importation. Therefore, it can be seen that foreign IP regulations on parallel importation consist of statute laws and case laws.
Currently in countries and regions worldwide there are three approaches towards parallel importation: first, permit; second, prohibit; and third, restrict conditionally. In fact, attitudes taken by different countries directly relate to applicable principles of IP laws.
To be specific, IP regulations on parallel importation are embodied by applications of the relevant principles of laws, which include exhaustion of rights (national exhaustion, international exhaustion and revisions of international exhaustion), and the principle of implied license.
(1) In the trademark area, exhaustion means that once the product bearing a trademark has been released into the market, the owner of the mark relinquishes control over the product, and his rights are thus considered to have been exhausted; he is unable to stop any further sale or use by others of the product. The exhaustion of rights principle, when applied to parallel importation, can be divided into national exhaustion, international exhaustion and revisions to international exhaustion. The principle of national exhaustion of rights is only applicable to circumstances where the first sale takes place in the national market. Under the doctrine of national exhaustion principle, parallel importation is considered illegal and an infringing act.
Since the first sale of parallel imported goods generally takes place abroad, the IP owner has not exhausted his domestic rights. The international exhaustion principle means that the IP owner cannot control further sale of goods, regardless of whether the first sale takes place at home or abroad, provided that the first sale is made by the IP owner or with his consent. Under the doctrine of international exhaustion, parallel importation is legal.
(2) Application of the territorial principle and the universal principle in US trademark field
The territorial principle corresponds to the principle of national exhaustion and universal principle corresponds to the principle of international exhaustion. The two principles are applied in the field of trademarks in the United States. In US judicial practices of trademark parallel importation, the courts usually apply the two principles in gray-market cases. The universal principle means that goods bearing legitimate trademarks can be imported into any country for sale without infringing exclusive use rights of the same trademark owner in the importing country. The territorial principle means that the trademark is exclusively owned or used by its registrant or user within national jurisdictions, and the trademark rights, which were granted under the laws of different countries, are independent of each other.
These two principles are different from national exhaustion and international exhaustion principles on a theoretical basis, which is a question of the independence of IP rights. But logically, there is no relationship between independence and territoriality of IP rights and parallel importation. The occurrence of the first sale is a legal fact, such occurrence will likely result in exhaustion of rights. Whether such result is due to the first sale in national or foreign markets is a question for national legislations and does not have anything to do with foreign laws.
(3) Implied license principle (mostly applicable to patents)
The implied license principle, when applied in parallel importation, refers to use of the implied license principle to restrict rights of the IP owner in a bid to allow parallel importation. If the IP owner does not make explicit restrictions on subsequent disposal of goods in the license agreement or first sale agreement, it can be presumed that the IP owner has granted an implied license, authorizing purchasers and subsequent ones to freely dispose of the purchased goods. Importation of goods the importer purchased back into the country where the IP owner is domiciled does not constitute patent infringement because infringement requires an unauthorized sale of patented goods. In the case of an implied license, the sale does not constitute infringement because authorization is implied.
III. China’s Choice
As regards China’s strategies to respond to parallel importation, the author is of the view that, in principle, international exhaustion principle should be adopted in the trademark field to allow parallel importation. Countries around the world choose applications of IP principles on the basis of their interests in terms of parallel importation. Those opposing parallel importation usually adopt the national exhaustion principle to prevent parallel importation; while those supportive of parallel importation adopt international exhaustion principle or implied license principle to allow parallel importation. The territoriality exhaustion principle is applicable within the European Union. Applications of the principles, seemingly, can be resolved through IP laws. But, as a matter of fact, different countries only make use of IP theories to tackle “on” or “off” issues in parallel importation. While determining factors in “on” or “off” polices not only relate to the international IP protection strategies, but also to international trade strategies. Therefore, the issue of parallel importation is not only an issue of IP protection, but more of the international trade, because parallel importation affects international, regional and national trade affairs.
At present, developed countries and developing countries are widely split over attitudes towards patent parallel importation, but their attitudes towards trademark parallel importation are not as fierce as those of patents.
Compared with a patent, a trademark does not involve a creation. Traditionally, a trademark mainly serves to maintain fair trade. A trademark is a tool used to indicate the origin of goods, prevent others from selling the same branded goods which may result in public confusion and damage the reputation of the trademark owner. It is a modern trend to treat trademarks like property rights.
In the United States, theories of exhaustion of rights or implied license have not been applied in the trademark field. In the US, a trademark is seen as a guarantee of the origin of goods to prevent confusion in trade and to protect the business reputations and commercial interests of the trademark owner. Therefore, trademark rights will not be exhausted by any commercial use, and will only be infringed upon due to impairment of its functions to identify goods.
The marketing of the trademarked goods without consent from the trademark owner is one such circumstance, because under such circumstance, the trademark owner cannot be held accountable for the quality of the goods. It is also an act of infringement if there are excess quantities beyond the authorized production. The excess products are deemed as counterfeit goods. When the trademarked products are put in the market by the IP owner, parallel importation is generally allowed too.
A country mainly takes into account trade and IP protections in making polices on parallel importation. From the trade protection perspective, allowing parallel importation is conducive to trade liberalization. As a developing country, allowing parallel importation will permit access to lower cost IP products and benefit consumers; Secondly, China enjoys a low-cost labor force and is also a big country in processing and exporting of IP products. Thus we have a competitive edge in the manufacturing and sale of the same products in the international market. Encouraging parallel importation and trying to reach certain international consensus are also beneficial to parallel exportation of our enterprises. Thirdly, adopting policies in favor of parallel importation also indicates that China has consistent and supportive attitudes towards trade liberalization in line with the global trends of international trade liberalization.

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