article
Controlling the grey market: EU law and the arguments for and against parallel imports
23 June 2008
Introduction
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 MastercigarsDirect 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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