Parallel import and related intellectual property problems
By X. David Zheng (China Intellectual Property)
Updated: 2015-06-26

I. Introduction

Parallel importation is no simple foreign trade phenomenon, with multiple motivations, commingling benefits and harms to consumer interests, which should not be handled with a uniform treatment, for, it is neither a simple problem for standardizing trade regulations, nor for intellectual property (IP) treatment alone. Careful consideration ought to be taken, by means of judicial and administrative efforts, of various factors with case-by-case study on advantages and disadvantages of various parallel import activities, before appropriate measures could be made.

Parallel importation may be referred to as “grey market,” “international goods,” “shui huo” (水货), or even smuggled goods, etc. The basic reason for its existence is the parallel importer’s benefit from cost or price differentials on particular commodities derived from distribution, transportation or sales channels than the official ones, which may or may not be lawful. The word “lawful” here means both the laws and regulations, and private agreement under contract. Some of the parallel importation activities are willfully conducted by manufacturers, to expand market by circumventing the laws of the importing countries.

II. Instances of parallel importation

Because some parallel importation activities are legitimate while others may be in violation of domestic laws and regulation, special attention needs to be paid to the various instances of parallel importation, particularly in relation to intellectual properties.

1. Passenger vehicles

Most imported passenger vehicles for consumer use are sold and serviced by “4S” dealers whose prices are usually doubled, sometimes more than those in foreign markets, due in part to import duties, or because of additional cost of transportation.

There may be other factors such as monopoly pricing, production quantity and positioning goods effect that lead to inflated prices. Suppose, a car under Brand A is priced for 500,000 yuan in China, and in its home country, because of absence of tariffs and duties, it may be sold for $30,000 which carries a differential of 314,000 yuan, or nearly 2/3 of its Chinese price.

Parallel import by third parties is in principle an infringement of the right of IP proprietors, but may be excepted from liability if the products are in very small quantities and for personal use purposes. Others may be subject to infringement liabilities if for commercial purposes. Such importation should be made under license (which of course would not be beneficial to the parallel importer at all). Meanwhile, such importation could also be made by original manufacturers, which has the effect of (1) increasing manufacturers’ overall economic gains; ( 2 ) lowering the prices for consumers by eliminating distribution costs; (3) inconvenient maintenance because of sales outside of official dealerships. The post sale problems arise when sale is made outside of the 4S dealership channels, and lack professional quality in competing maintenance facilities, which may be improved by creating market mechanisms for car service industries.

2. Tires

The “Yokohama” Tire Case In August 2001, a Ford SUV of Gansu High Authorities was traveling in Xi’An City highway when a tire blew up killing four inside. The evidence showed the tire was a Yokohama tire (Model P255/70R16); the tire was purchased by vehicle owner, one year after use of the original tires, from a “Lanzhou Auto Parts Sales Department (unregistered, undocumented, and untraceable).

It was found that the model of tire was not certified by China’s CCIB, was designed to be used in North America, never officially exported to China, and was undocumented at the Customs. The case did not go forward due to lack of evidence to show nexus between Yokohama Company and the accidents.

The “Michelin” Tire Trademark Infringement Case Defendants were small businesses in Changsha City selling tires. The tires at issue were purchased from Huanle Tires of Yuhua District of Changsha, who in turn purchased from Gangda Tire Sales Center of Guangzhou. Plaintiff contended that the tires were genuine products bought in Japan, but they were made for European and Brazilian markets, and were never certified by China’s compulsory standard. Therefore, plaintiff could not and never did sell the tires onto Chinese market.

3. Cellphones

As is well known, besides official versions of Apple mobile iPhones, there are plenty of U.S., Japanese, and Hong Kong versions of iPhones sold in China, which are not officially endorsed, and even if for personal use, should be subject to customs duties. The author has not seen any statistical numbers, but by common sense, there are large quantities of them, particularly the Hong Kong version, which is at least acceptable to, and serviceable by, Apple company.

III. IP and other issues

1. Exhaustion doctrine

The Exhaustion Doctrine apparently occupies the central position in the parallel importation problem, but the doctrine is redundant in that it creates more problems than it solves.

The doctrine originated in the 1873 U.S. Supreme Court decision in Adams v. Burke which held that once a patented product was sold and the patentee received a royalty, the exclusive right to use and to make further sale of the product is transferred to the purchaser, that is, the patentee’s exclusive right to use and to sell has been “exhausted.” There has derived from this doctrine further “domestic” and “international” doctrines which hold different opinions.

This doctrine of exhaustion of rights exaggerates the legal effects of the patentee selling the patented products. First of all, it has to be made very clear: intellectual properties are never transferred with the sale of a patented product; whatever can be “exhausted” may refer only to chattel right in particular things, and not IP rights.

There is another doctrine on the scope of patent licensing in the U.S., i.e., the General Talking Pictures Doctrine, from the 1938 U.S. Supreme Court decision in General Talking Pictures Corp. v. Western Electronics Co. which held that territories of use under patent license may be restricted by contracts, and a licensee, knowing this restriction, may be liable for breach of contract by using the patent outside the territories.

In the recent case of Quanta Electronics, Inc. v. LG Electronics, Inc. however, the U.S. Supreme Court relaxed the standard: the Court did not reach contract issues, but merely held that in the absence of clear restrictions of use, the right may be deemed as exhausted.

Even if we accept the above conclusions for the so-called exhaustion doctrine (or “domestic exhaustion”), it may never be extend to an “international” scale.

When an inventor receives patents in both country A and country B, for example, patent A and patent B are separate rights and established under separate national laws (albeit the subject matters and inventorship may be identical) which does not mean that a purchaser who has obtained either express or implied license in country A has necessarily obtained the same license in country B. His practice of the rights (make, use or sell) in country B, without specific permission from the right holder in country B is, technically speaking, an infringement like any other infringement without permission.

There is another popular misunderstanding as to use under patent. As stated before, the patent does confer any right to inventors to use his own inventions; rather it merely confers the right to exclude others from using, or to authorize others to use his invention. When the patentee sells a particular patented product to a purchaser, he by so doing merely transfers the chattel rights including right to use it and make further sale of the specific thing, and not including any of the rights under patent. In other words, no matter how sophisticated a product is when a buyer buys it, it is no different than a simple sheet of paper in patent sense: he has obtained a license to use this sheet of paper, and he may even sell this particular sheet, but he can never say, “Because I have paid for this sheet of paper, I have therefore acquired the right to make, use, or sell any similar sheets of paper.” His right is limited to that particular sheet of paper and that sheet of paper alone.

Moreover, one cannot transfer greater right than he has, i.e., he may not give others the right he himself does not have.

All patents are territorial, or in other words, country A’s patent is effective only in country A; if an inventor also obtains a patent for the same subject matter in country B, his B patent constitutes a separate right under the laws of country B which is an independent right. When a purchaser buys a product in country A, his chattel right is not necessarily extinguished when he crosses the border into anther country, but his chattel right may not be used to defeat the patent in country B, for the simple reason that private right cannot be used to challenge publicly or government sanctioned rights. For example, an independent inventor has made a certain invention, which turns out to fall within the scope of an existing patent. Then he may not make, use, or sell anything under his own invention. If he practices his own invention (a natural right), he infringes the patent. For this reason, independent invention is not a defense to patent infringement. Another example, people may get a license in the United States to “keep and bear arms.” But if one brings his gun to China, can he argue that, “Since I’m licensed to have guns in the U.S., so I should be allowed to lawfully carry guns in China”?

By the same token, a purchaser bringing his foreign purchases into this country, the domestic laws of this country by all means control; if the practice of an invention falls within the scope of a patent, it’s infringement. However, due to the legal axiom of de minimis non curat lex, a patentee might not make a storm in a cup by bringing a lawsuit against private use which has caused little or no injury at all.

But that doesn’t mean the patentee of this country is not entitled to enforcing his rights under the patent. Such imports, if made for commercial purposes, will be no difference from any other ordinary infringing products by unauthorized importation.

And, insofar as patent is concerned, the different national patents over the same invention may not necessarily be owned by the same patentee, because the patent rights could be assigned. Clearly, when the domestic patent ownership is different from that of the foreign patent, then use or sale without permission in this country will be outright infringement.

Many people mistakenly treat exceptions as principles. The de minimis condition of inconsequential noncommercial use may be exempted from liabilities, or even statutorily excepted from patentee’s rights, but too much of an exception may eventually swallow the rule, and patent rights (against infringement) will be gone.

The argument that the rights obtained in country A may be automatically extended to other countries (i.e., the “international exhaustion doctrine”) is sheer nonsense because it confuses chattel rights with patent rights. If this doctrine stands, the patentee should also be able to extend his rights under the patent from country A to other countries without having to separately apply for national patent.

Well, human civilization has not evolved to be so generous.

2. Trademark rights, post sales services and personal injury liabilities

Besides patent problems, parallel import may also cause other problems.

Suppose, purchaser bought a product in country A through legitimate channel by all means.

Is the trademark right over the product exhausted? Some of the rights previously belonging to the trademark owner may be deemed “exhausted,” i.e., the right to use, or to resell, or even to export what was purchased by the Purchaser – the exclusive right originally under the trademark in country A – has been extinguished. But what the Purchaser has acquired due to exhaustion of the trademark right in country A (domestic exhaustion) – is it an absolute right? It has to be admitted, like the patented product, that what has been acquired is merely the chattel right. Once the product enters country B, with no alteration of chattel right, whether the product will infringe the trademark right in country B cannot be judged according to the laws of country A, and, like the patent “international exhaustion” doctrine, the trademark “international exhaustion” doctrine is ungrounded either in theory or in reality.

It may be argued that the parallel imports are “genuine goods,” in that they were acquired “by lawful means.” But what law, under what circumstances? The purchase made in country A by lawful means is indeed all lawful and genuine in every sense; but when the product is imported into country B, things are different.

Like the patent, the trademark right is also exclusive, and either based on common law or registration, the effect is territorial. The international registration system of trademark merely works to facilitate the registration process, and the actual protection is still based on various national laws. Like the patent, the trademark registration obtained in country A is effective only within the borders of country A and no more, while the trademark registration in country B exists independent of any foreign rights. Specifically, if the registration in country A and that in country B are owned by the same proprietor, the importation from country A into country B may be deemed under express or implied license, but this is not necessarily so. If the trademark owner of country B expressly states that such importation is unauthorized, then any such importation will be infringement upon his right in country B, for the simple reason that the trademark rights in country A cannot be automatically extended to country B. For this reason, the argument of “genuine goods” may extend only to the chattel rights; it will be unground if extended to trademark rights.

As to whether the trademark owner will go after the parallel importer, it shall be determined case by case.

Take the photographic equipment, for example. Who can refuse to buy a product that is the same in appearance and quality, but cheaper as the genuine ones? Problem is, the same hardware may not always have the same legal effect. In the United States, for instance, the Japanese parallel imports of cameras may look and function exactly the same, at a much lower price than the official ones, which may be the result of many factors, of which at least one is for sure: American product liability risks are greater, with the largest amount of damages, while in Japan product liability risks are very low.

All these potential cost for litigation and compensation must be factored in. But consumers normally would not consider these factors, or they very much rely on the brand name, in making purchases of products at such attractive “international prices” without American warranties.

From the Japanese camera makers’ perspective, such “international products” will increase their overall sale, generate extra profits, while cause no additional burdens for warranty responsibilities. Why the hell not? In these circumstances, they, being trademark owners, would close their eyes on parallel importation as such.

Apart from trademark problems, parallel importation may also cause serious problems of personal injury or property damage as in the “Yokohama” and “Michelin” tire cases. The former resulted in actual loss of life and property damages, and the latter, in potential injury and present damage to business reputation as well as legitimate trademark rights.

Some scholars argue that a genuine product will not cause trademark infringement as there is no confusion, that the consumer’s confusion due to counterfeit products should not be considered as the same as consumer confusion as to different origins of products from the same trademark owner; and that no trademark infringement therefore should have been found in the Michelin case, because absence of CCC certification of quality will not lead to damage of trademark reputation, or to quality problems.

In the “Michelin” case, the court found smearing of trademark reputation by: The tire products at hand sold on the domestic market without plaintiff’s permission, which, in the absence of the CCC certification for our country, could not be determined as suitable for China, or in compliance with China’s safety regulations.

From the safety perspective, the quality of tires relates to the safety for life and property of the motorist and the passengers. For this reason, tire manufacturers must, when making and selling their products, comply with various speed requirements, various geological and climate features, as well as compulsory certification standards. Those products, failing such CCC certification, may contain safety hazards, in violation of the compulsory mandates of our country. The sale of such tire products, no matter who made them, should be prohibited according to law. Therefore, the key issue in this case is not who made these tires, but rather, whether the unpermitted sale will damage the reputation of the trademark registrant.

The court seemed t o have presumed trademark infringement by focusing only on safety issues, without reaching the trademark issue of deceptive misleading to consumer confusion. Consumer confusion refers to consumer’s misled recognition as to origin of products which may have resulted from two kind of activities: one is that a perpetrator passes off by false representation thereby taking advantage of a trademark owner’s legitimate market interest, for which the perpetrator must be held responsible for all injuries flowing therefrom; another is to shift responsibilities to the trademark owner while making unjust enrichment by misleading consumer into believing that the product comes from the trademark owner. When parallel imports, being made without the trademark owner’s permission, cause personal injuries or property damages, the consumer would mistakenly believe that the parallel imports were made with trademark owner’s permission, therefore pointing their fingers to the trademark owner. If this activity can be said as “causing no confusion” among consumers, and therefore not trademark infringement, it’s worse than “confusion,” because the trademark owner does not have to be responsible for the consequences of counterfeit goods; yet it has to be responsible if the goods are “genuine,” i.e., originally made by it but imported without its permission.

IV. Conclusion

Because of the multiplicity of motivations for parallel importation, the legal issues produced, and its impact on consumers are multifaceted: for consumers, parallel importation is both advantageous for lower prices and disadvantageous for potential uncertainty in liabilities. For these reasons, parallel import problems should better be decided on case-by-case basis, rather than to have a “one-size-for-all” treatment.

The Doctrine of Exhaustion at the center of the parallel import problem is inconclusive, causing misunderstanding as to the distinction between chattel rights and IPRs, whereas the “international exhaustion” doctrine is particularly ungrounded and unsound in theory or in reality, in conflict with the territoriality of IPRs, or even sovereignty.

Parallel imports may also break the Contract Law and Antitrust Law in some cases, however detail analysis on these cases is omitted due to space limitation, readers who are interested to get more information can contact the author through China IP.

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