article
Controlling the grey market
1 June 2008
Grey goods are a huge problem for brand owners, particularly
manufacturers of high value goods with worldwide distribution.
Conversely, they are a huge opportunity for entrepreneurs seeking
to make profits from the price differential between
jurisdictions.
Ordinarily, grey goods are not illegal. They are not counterfeit
goods, nor second-hand goods. Rather, they are genuine goods
manufactured by or under license from the brand owner, which have
already been placed on the market but are then sold through
alternative distribution channels without the consent of the brand
owner to take advantage of price differentials between
jurisdictions. Parallel imports can generate high profits for
entrepreneurs. In an era in which free trade is widely promoted,
but in which the gap between the wealth of nations is increasing,
grey goods have naturally become a huge industry.
However for brand owners, the ability to control the market for
their goods, establish requisite profit margins and protect brand
reputation and exclusivity is vital to the survival of the product,
the brand and the business. Combating grey goods can represent an
increasingly unwinnable fire fight.
Within the EEA, the overriding principle of free movement of
goods means that a concept of rights exhaustion restricts the
rights of brand owners. This does not prevent brand owners
objecting to the placing of goods onto the market without
authorisation, but once placed on the market the brand owner’s
rights are said to be exhausted.
The concept is similar to the US “first-sale doctrine” of rights
exhaustion, first set out in Bobbs-Merrill v. Straus, 210
U.S. 339 (1908). However, the doctrine as applied to trademark law
is subject to caveats that severely restrict its effect. Goods can
only be imported if they come from an entity affiliated with the
brand owner and are not materially different to those marketed in
the United States. The position is similar in Canada, although the
threshold for deviating from the first sale doctrine is much
higher.
The US concept of first sale exhaustion encompasses
international exhaustion. By contrast, the law in the EU is more
brand-friendly. The position is now reasonably clear regarding
parallel imports into the EEA from outside, following a string of
cases over the last 10 years (Silouette International
[1998]; Sebago [1999]; Zino & Davidoff
[1999]; Levi v Tesco [2002]; Adidas-Salomon AG v
Microhaven [2003]; Roche Products Ltd v Kent
Pharmaceuticals Ltd [2006]; Mastercigars Direct Ltd v
Hunters & Frankau Ltd [2007]). These decisions have
established that there is no concept of international exhaustion of
trade mark rights under Community law, although the analysis
becomes more difficult where goods are damaged or re-packaged.
Therefore, trade mark owners with rights in the EU can object to
such importation of goods, unless it can be shown that consent has
been given. To this extent the EEA has become an oasis of
protectionism that gives much greater protection to brand owners
than many other jurisdictions.
Grey goods are a significant market and an increasingly
significant difficulty for brand owners. In that context, now is
perhaps a good time to step back from the issue and consider how
the law should develop. The arguments for and against free trade
have been well rehearsed, but the dynamics of the argument are
changing. Protectionist attitudes may be out of sync with the
position of most commentators, and indeed governments, but they
highlight some important practical concerns that free trade damages
legitimate business and consumer interests.
The legal framework
In the EU, the starting point in looking at any trade mark
infringement issue is Council Directive 98/104/EEC. Under Article
5(1) of the Directive, the use by a third party, in the course of
trade, of any sign which is identical with a registered trade mark,
in respect of goods or services which are identical with those for
which the mark is registered, constitutes trade mark
infringement.
“Use”, as defined by Article 5(3)(c) of the TMA, includes the
import or export of goods under the said sign. However, prima facie
infringement arising as a result of import or export is subject to
a caveat in Article 7, in that where the opportunity to assert
trade mark rights over a good has already passed, the right is said
to be “exhausted”.
This is logical enough. It would be perverse to allow a brand
owner to assert trade mark rights against a legitimate recipient of
the goods once the brand owner has allowed them onto the market
with its consent. However, determining what constitutes the market,
and what constitutes consent, can be difficult.
The position under EU law is different depending upon whether
one considers goods moving within the EEA (intra-Community
exhaustion) or entering the EEA from outside (international
exhaustion).
International exhaustion
The strict wording of Article 7 of the Directive leaves open the
question of international exhaustion. However, the ECJ’s decision
in Silhouette International GmbH & Co KG v Hartlauer
Handelgesellschaft mbH (C-355/96) [1998] FSR 729 laid to rest
any doubts over the issue.
In that case, the defendant had imported spectacles into Austria
from Bulgaria, the latter being a non-EEA territory at the time.
The defendant contended that the Directive contained no express
prohibition upon importing products into the EEA where they had
been placed by the proprietor on the market in non-EEA territories.
However, the Claimant argued that the Directive’s silence on the
matter indicated that exhaustion applied solely to products
marketed in the EEA.
The ECJ held that the Directive did not mean that rights were
exhausted once they were put onto the market outside the EEA.
Moreover, to allow national courts to decide the question of
international exhaustion would contradict the Directive’s aim of
harmonising legislation within the internal market.
Consent
The ECJ had already ruled in Sebago Inc v GB Unic SA
(C-173/98) [2000] RPC 63 that only where consent had been given by
the brand owner for specific goods to be brought into the EEA could
a proprietor’s rights be said to have been exhausted. However, the
case of Zino Davidoff SA v A & G Imports Ltd [1999]
RPC 631 raised a more interesting question.
In that case, the claimant manufactured luxury toiletries in
France and distributed the goods worldwide. The defendants imported
them from Singapore. The claimant had entered into a distribution
agreement with an Asian company, giving the company the right to
distribute the toiletries within the territory, which included
Singapore. The company was prohibited from selling the goods
outside the defined territory and it had agreed in turn to restrict
any party to whom goods were directly supplied in the same way.
The claimant’s case focused on its belief that the defendant had
failed to circumvent the Silhouette principle. It argued that it
was not sufficient to deem consent to international exhaustion
merely because the manufacturer had placed the goods on a non-EEA
market.
The matter was referred to the ECJ, which held that whilst a
trade mark proprietor’s consent could be inferred, it must be
unequivocally demonstrated that the owner had agreed not to oppose
the placing of goods on the market within the EEA. Consent could
not be implied by virtue of the fact that, despite a contractual
right to unlimited resale, the proprietor had failed to restrict
subsequent purchasers of the goods from selling outside the
contractual territory. In practice, therefore, this seemed to mean
that express consent was required.
However, the position was further clarified in the UK in
Mastercigars Direct Ltd v Hunters & Frankau Ltd;
Corporacion Habanos SA v Mastercigars Direct Ltd &
another (Part 20 claim) [2007] EWCA Civ 176. Here, the Court
of Appeal found that parallel imports of Cuban cigars into the EEA
did not constitute trade mark infringement because implied consent
could be found from the conduct of the manufacturer of the cigars
and in particular its dealings with official outlets in Cuba.
The decision was followed in February this year by a decision
the High Court that parallel imports of Honda motorbikes did not
constitute trade mark infringement because Honda Australia
Motorcycle and Power Equipment Pty Ltd (Honda Australia) had
impliedly consented to their importation (Honda Motor Co. Ltd
and others v KJM Superbikes Ltd and others [2008] EWHC 338
(Ch)).
At one level, the latter two cases actually illustrate how
difficult it is to show implied consent: they are both decisions on
their facts. However, taken together they do suggest the UK Courts
at least are beginning to take a slightly softer view on what
constitutes consent.
Burden of proof
After Silhouette, Sebago and Davidoff it seemed the position of
the brand owner regarding imports from outside the EEA was
relatively secure. It would take a brave trader to import such
goods unless he could show unequivocally that there was some level
of unequivocal and unambiguous consent to importation into the EEA
from the brand owner higher up the distribution chain.
However, Van Doren + Q GmbH v Lifestyle sports [2003]
ECR I-3051; [2003] ETMR 74 ECJ - which involved the sale of Stussy
branded clothing, imported from outside the EEA, in Germany - added
a new ingredient to the mix in deciding that, whilst ordinarily the
burden of proof on proving consent for the purposes of Article 5
and 7 of the Directive lay with the Defendant, this obligation was
qualified where the Defendant can show that there is a real risk of
partitioning the market if he bears such a burden, particularly
where the brand owner operates using an exclusive distribution
system. In such circumstances the burden of proof lies with the
trade mark proprietor to show that the goods were initially placed
on the market outside the EEA.
It appears the concern of the EJC was that, realistically, a
grey goods trader would rarely be able to demonstrate goods were
put on the market within the EEA. Certainly, the decision continues
to pose problems for brand owners who do not tightly control and
monitor their distribution systems.
Placing of the goods on the market
Another major issue in this area is the point at which goods can
be said to have been placed on the market.
The first major case in this area was Peak Holding AB v
Axolin-Elinor AB [2005] ETMR 28 where it was held that
releasing of the goods into the market within the EEA required an
act of sale by the trade mark owner, ie the transfer of the actual
right of disposal.
This decision has been followed by several others. In Class
International BV v Colgate-Palmolive & Others [2006] Ch
154, the ECJ ruled that, providing non-EC goods were not placed on
the market within the EC, and customs regulations had been complied
with, the mere introduction of those goods into the EC did not
constitute “importing” and the trade mark proprietor did not,
therefore, have grounds for objection.
In the recent decision of Eli Lilly and Company and Lilly
Icos LLC v 8PM Chemists Limited [2008] EWCA Civ 24, the
defendant pharmacy was supplying prescription drugs to US customers
via a Canadian website. The orders were processed by a supplier
based in Turkey, who placed the original boxes inside unmarked
brown packaging. These packages were then placed inside yet more
boxing and sent to the defendant in the UK. The UK employees
removed the larger boxes, added postage to the brown packaging and
sent the goods to the US customers. The original packaging was not
exposed in the UK.
The claimant argued that the defendant had imported or exported
the products, thus falling foul of TMA provisions. The Court of
Appeal, however, found that the defendant’s goods were not
imported; the products were not in free circulation within the
Community and therefore, the trade marks were not used in the
course of trade.
Intra-community exhaustion
If the position as regards parallel imports into the EEA is
essentially protectionist, the position intra-community is all
about freedom of movement, in line with the governing tenants of
Community law.
However, there has always been an inherent struggle between the
grant of monopolies over intellectual property rights and the free
movement of goods within the EC. A registered trade mark is not
infringed by use of that mark in respect of goods which have been
placed on the market within the EEA under the mark by the
proprietor or otherwise with his consent. This concept is enshrined
in the Treaty of Rome and the position was confirmed in the leading
case of Bristol Myers Squibb v Paranova A/S. Express
provision for exhaustion of trade marks rights across the EC was
made in Art 7 of the Directive and the Agreement of the European
Economic Area saw exhaustion extending across the EEA.
Following implementation of the Directive, much of the case law
development in connection with parallel importing has concerned
interpretation of Art 7 of the Directive and in particular the
impact of Art 7(2), which relates to “legitimate reasons for
opposing further commercialisation of the goods”. Many of these
cases have considered the legitimacy of repackaging and relabelling
of pharmaceutical goods, in particular “co-branding” (where the
importer applies its own get-up to the products) and “de-branding”
(where the importer uses a product’s generic name rather than the
manufacturer’s trade mark).
Repackaging and relabelling of
pharmaceuticals
The case of Bristol Myers Squibb v Paranova first
clarified the point in relation to repackaging.
Bristol Myers Squibb brought an infringement action against
Paranova in respect of a number of Danish trade mark registrations
for pharmaceutical products. The Defendant had been engaged in
purchasing products, supplied by the Claimant to less expensive
markets in Europe, for the purposes of importing the same into
Member States where the goods commanded a higher price. The
Defendant was able to resell the products at prices undercutting
those of the Claimant whilst yielding a profit.
The goods were repackaged in packs of different sizes, some
product names were altered, products identified the manufacturer as
Bristol Myers Squibb and the importer/re-packager as Paranova and
the Claimant’s trade mark was affixed to the repackaged
products.
The ECJ ruled that a trade mark proprietor may take advantage of
Art 7(2), and oppose “further commercialisation” where legitimate
reasons exist, unless each of the following five conditions
apply.
1. Invoking trade mark rights in order to prevent parallel
imports would result in the artificial partitioning of markets
within the EU - Essentially, this condition introduced a
requirement of necessity.
2. The repackaging process does not adversely affect the
original condition of the goods - In accordance with European and
domestic legislature, a proprietor may oppose parallel importation
where the condition of the goods has been changed or impaired.
3. The new packaging clearly identifies the repackager and the
manufacturer
The importer is required to:
(a) Identify the repackager and manufacturer on the external
packaging; and
(b) Make clear the origin of any items added to the package, so
as not to create the impression that the trade mark proprietor is
responsible for such items.
4. The presentation of the product is not liable to damage the
reputation of the trade mark and its proprietor
5. Notice is given to the trade mark proprietor ahead of the
products being put on sale and, if requested, a specimen of that
product is supplied to the proprietor
The question of to whom notice should be given was considered in
Boehringer Ingelheim KG v Swingward Ltd [2002] FSR 61.
Here, the importers altered the product packaging and instruction
leaflets. Some of the original packages carried a label identifying
the parallel importer with the proprietary trade mark remaining on
display. Other products were removed from the original packaging
and repackaged in boxes bearing a reproduction of the trade mark.
All products were accompanied by instruction leaflets carrying the
trade mark. The trade mark owners argued that the alterations made
were not necessary to allow the importer access to the UK market.
On reference, the ECJ ruled that notice must be given directly to
the trade mark proprietor and at the proprietor’s request, a sample
of the product must be provided. The requirement of prior notice
gives the trade mark proprietor the opportunity to examine the
product for the purposes of establishing whether the condition of
goods has been affected and, if so, the opportunity to object to
the proposed sale. The ECJ in that case considered 15 working days
to be an appropriate notice period of notice.
Boehringer
Following reference to the ECJ, the UK High Court ruled that
whilst the Defendant was within its rights to rebox the goods, the
trade mark proprietor was entitled to object to the co-branding and
de-branding that had occurred. The Defendants appealed.
Boehringer was subsequently referred to the ECJ for a second
time, on that occasion by the Court of Appeal. The ECJ ruled that
the Bristol Myers Squibb conditions applied to cases of
“over-stickering”, as well as instances of pharmaceutical
repackaging. Further, the Court held that:
1. the first condition, relating to necessity and artificial
partioning of the markets, applied to the fact of repackaging and
not the manner and style of repackaging;
2. the fourth condition, in respect of presentation, is not
limited to defective, poor quality or untidy
repackaging/relabelling. Relevant factors for consideration include
whether the importer has de-branded or co-branded the goods and
whether any additional label partly or entirely obscures the
proprietor’s trade mark;
3. Whether the reputation of the trade mark was liable to be
damaged by activities such as de-branding or co-branding was a
question of fact to be decided by the national court;
4. it is for the importer to prove that the conditions have been
met, or, regarding conditions 2 and 4, a reasonable presumption
that the conditions have been satisfied; and
5. as regards the fifth condition, if the importer fails to meet
the advance notice requirement, there will be infringement with
each subsequent importation of that product.
The UK Court of Appeal found that, in accordance with the ECJ’s
ruling, co-branding and de-branding were not in principle liable to
damage a trade mark’s reputation. The defendant’s co-branding had
not harmed the marks’ reputations as it was clear that the
importer’s get-up was that of the importer; no commercial
association with the manufacturer was suggested. In terms of
de-branding, the trade mark proprietor was not entitled to require
that its mark remained on products destined for the aftermarket.
Partial de-branding again did not cause damage to a mark’s
reputation per se; the potential for damage depended on all the
circumstances and in that case, the de-branding that had occurred
did not cause such damage.
However, the court was unable to reach a final decision due to a
pending Austrian reference before the ECJ regarding Art 7(2) of the
Directive (Wellcome v Paranova (C-276/05)).
Dealing with grey goods
The position for brand owners under EU law is relatively
straight forward. If goods are circulated around the EU in an
unimpaired form, there is really little that can be done. If goods
appear from outside the EU and no consent was given to their
importation into the EEA, then action can generally be taken. To
that extent, the term grey goods is a little misleading. Goods are
either legal or they are not.
However, the issues for brand owners are one part legal and two
parts practical. One of the major problems for brand owners is
showing where goods have derived from. Often retailers of grey
goods will simply claim they obtained the goods from within the
EEA. Following Van Doren this can make legal action difficult if it
cannot be unambiguously and unequivocally shown that the goods were
placed on the market outside the EEA and that no consent has been
given for the goods to be imported into the EEA.
Pleading innocence does not necessarily get the retailer off the
hook. There is no innocent infringer provision in trade mark law
(See for example Gillette v Edenwest [1994] RPC 279).
However, it does make it difficult for the brand owner to get to
the root of the problem. Often the answer depends upon the extent
to which the brand owner wants either to deal with grey goods when
they appear or wants to tackle the problem at its root. The latter
is generally the more expensive, certainly in terms of legal spend,
but if it is the preferred option then it may be more appropriate
to use investigators to trace the supply chain rather than simply
write to the retailer or take immediate legal action.
The key issue for any brand owner is therefore to keep a tight
control over its distribution systems, and in particular to ensure
that goods for the EEA market and goods for the non-EEA market are
distinguishable.
However, this is not always enough. It is increasingly difficult
for brand owners to control the supply of grey goods, particularly
with the development of online auction sites such as eBay. The
recent decisions in the French courts (notably eBay v
Hermes and eBay v LVMH decisions, both of which
related to counterfeit goods) give some hope that the auction sites
themselves may soon be forced to take responsibility for the
proliferation of trade mark infringing goods on the internet, but
there will need to be some significant judicial development before
that principle is extended across Europe and is held to apply to
illegal parallel imports.
Often, grey goods that appear on eBay derive from authorised
sellers, who either choose to use the grey market to shift unwanted
stock, are forced onto the market by unrealistic sales targets, or
even use the grey market as part of their own distribution network
in a calculated fashion. Monitoring this phenomenon is vitally
important for brand owners, but taking action to either to prevent
it by imposing restrictive terms and conditions in distribution
agreements can fall foul of competition law (particularly where the
brand owner has a market share above 40%) under Article 82, but
potentially also under Article 81 as well.
In reality, many brand owners simply buy up grey goods to
prevent them reaching the market in the EEA. Sony admitted to doing
this on a large scale in 2006, but the practice is widespread.
A case for an international regime on grey
goods?
It must always be remembered that the essential function of a
trade mark is to serve as a guarantee of origin of goods and
services, enabling customers to distinguish between goods/services
from one trader and those of another. As the ECJ put in Arsenal
v Reed:
“[A trade mark] must offer a guarantee that all the goods or
services bearing it have been manufactured or supplied under the
control of a single undertaking which is responsible for their
quality. … For that guarantee of origin … to be ensured, the
proprietor must be protected against competitors wishing to take
unfair advantage of … the trade mark by selling products illegally
bearing it.”
However, determining what origin means is essential for any
consideration of grey goods.
On one side of the argument there is the premise that grey goods
do not jeopardise the function of a trade mark, since they are
genuine goods. Consumers may not know exactly which route they took
to arrive in their hands, but they understand that they ultimately
derived from the brand owner. Promoting a true global market in
which wealth is more evenly distributed and in which businesses and
consumers alike are given he opportunity to take advantage of
international trade requires freedom from tariffs and prohibitions
on national rules restricting cross-border trade.
The other side of the argument is that, actually this is
unrealistic. Goodwill is developed by brand owners differently in
each jurisdiction, and goods are marketed accordingly. Moreover,
the idea of a global market is simply misleading, since economic
conditions, standards of living, prices, price differentials and
consumer behaviour differ so greatly across jurisdictions.
Therefore the idea of international exhaustion is actually
illogical. Brand owners are consequently faced with the impossible
task of marketing their goods according to each market in which
they operate, knowing that the differentials mean they will be
undercut by grey market traders riding on the back of the
investment in their products and in the market.
The reality is that both arguments are in a sense correct, it is
simply a question of which perspective one takes. A true global
market requires freedom of movement of goods, of that there can be
no doubt. However, it also creates a harsh reality for brand owners
in which controlling their distribution chains is extremely
difficult. Fortress Europe provides real protection for brand
owners in Member States, but even within the EEA there are various
caveats in the general law on international exhaustion that can
frustrate trade mark infringement actions against grey goods
importers. Moreover, commercial practicality means that, faced with
constant instances of grey goods on eBay and through low-price
retailers it is often easier for brand owners to buy up the stock
rather than take legal action against the importers.
In this context there would seem to be a practical – rather than
moral – argument for national exhaustion, whereby trade mark rights
are only exhausted within the country in which they have been
released into the market, or in the case of supra-national
politico-economic unions such as the EU, within that economic area.
The idea may at one level look pro-business and anti-consumer, but
actually brands serve to assist consumers as well as their owners,
and should function both as a guarantee of authorised manufacture
and distribution. After all, many counterfeits actually derive from
the same source as genuine products, they simply aren’t authorised.
In an age where counterfeiting is rife, there would seem to be an
inherent logic in making brand origin a genuine badge of origin in
all senses of the word.
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