by Olaf Kretzschmar and Jordan Ball – ONE IP INTERNATIONAL PTY LTD
Do you think that being the owner of a registered trade mark for your brand puts you in the driver’s seat and in total control of how and by whom your brand is used? Think again! All trade mark owners need to beware of parallel importers who are permitted to sell your products without infringing on your Intellectual Property.
Regardless of whether you are a trade mark owner or the parallel importer, here is what you should consider.
What is Parallel Importation?
Parallel importing, otherwise commonly known as grey importing, involves the import and distribution of genuine trade marked goods by parties other than the trade mark owner or their agent. In contrast to counterfeit products, products which are the subject of parallel importation laws were produced abroad with the consent of the trade mark owner.
Unauthorised third parties seek to profit by purchasing these products in markets where they are cheaper before importing them into countries where they can be sold at a higher price. In doing so, this transfers the ability to profit away from the trade mark owner and their authorised distributors.
The presence of this arbitrage opportunity occurs for various reasons, but most commonly because of a lower quality product prepared for a lower cost point to address a different demographic in the relevant market. The product may well utilise lower-quality materials, have a lower build quality or be produced in accordance with different national standards. On the other hand, some companies may sell the same product at a higher rate merely due to the lower level of competition in the domestic market. In the Australian context, price discrimination has been common, particularly in the software and multimedia businesses, and the higher costs present in the Australian market has been dubbed the “Australia tax”.
Regulating Parallel Importation in Australia
Prior to the introduction of s 123 Trade Marks Act 1995, the Common Law attitude to parallel importation was that the third parties were not using the mark as a trade mark, namely as a badge of origin. Section 123 Trade Marks Act 1995 provided a defence for third parties to rely upon during infringement actions. Functionally, this served to ‘exhaust’ the trade mark owners exclusive rights to the mark. This shifted the onus onto trade mark owners to self-regulate such conduct through a contract, licensing other corporate arrangements.
Unfortunately, it does not seem that the government has been satisfied by the interpretation and application of the provisions culminating in further changes. The most recent amendment in Australia (the Intellectual Property Laws Amendment (Productivity Commission Response Part 1 and Other Measures) Act 2018) received Royal Assent on 24 August 2018.
Although it remains untested, the amendment appears to achieve the legislative intent that had failed to be realised by the repealed s 123. Practically, s 122A to the Trade Marks Act 1995 firmly cements the permissibility of parallel importation into Australia.
Section 122A Trade Marks Act 1995 codifies the precise circumstances in which parallel importation is legal. To rely on the defence, the importer must establish that they had made reasonable inquires in relation to the mark (s 122A(1)(b) Trade Marks Act 1995) and that at the time of use, a reasonable person would have concluded that the mark had been applied to the goods by or with the consent of a relevant person (s 122A(1)(c) Trade Marks Act 1995). The relevant person being:
- the registered owner
- the authorised user
- a person permitted to use the mark by the owner
- a person permitted to use the trademark by an authorised user
- a person with significant influence over the use of the mark by either a) or b), or
- an associated entity.
Government policy
The amendments demonstrate a clear desire by the government for parallel importation to be permissible. Ultimately, this attitude is justified on the basis that increased competition would lower costs for Australians. This, in turn, is seen as a primary avenue for combatting the “Australia Tax”.
The perils of Parallel Importation
While consumers may potentially reap the benefits of lower costs the new laws come at a significant cost to intellectual property owners. Firstly, there is the direct cost of lost sales. Additionally, there is a significant risk to the goodwill of the businesses whose products are being sold. While the third-party importers are benefitting from the sales of the lower quality goods, it is the trade mark owner that suffers the reputational damage of products that were not intended for the domestic market.
Importantly, the consumer also incurs greater risk. Despite knowing of a certain brand as reflecting on a quality product, purchasing from a parallel importer may result in money being thrown away after a lower quality good. To add insult to injury there may then be far fewer avenues for recourse against a parallel importer than the genuine retailer.
What this means for your business
If you are an international business distributing the same product line in multiple markets at different price points or distributing product lines tailored to the individual market then it may be necessary to reassess your international IP strategy. You will no longer be able to rely on assignments and other contractual arrangements to defeat the parallel importers’ defence. It will no longer be possible to rely on your IP to protect yourself. Instead, you will need to reassess your pricing and international marketing structures to evaluate how your business can thwart parallel importers.
If you are a parallel importer of branded goods, then you can likely be confident your conduct is legal. Provided you have made suitable enquires at the place of production and have a reasonable belief that the articles are indeed genuine you will not be infringing a registered trade mark by the importation and sale of their products. If an action is brought against you, it will only be necessary to show that it was reasonable to assume the trademark was validly applied rather than meeting the strict evidentiary burden that the registered owner actually applied or consented to the application of the mark.
International approach
Section 122A applies the principle of “international exhaustion” that is otherwise commonly accepted in European and many other international markets. This means that the trade mark owners rights are exhausted once their goods are sold in their home jurisdiction.
What the International Rules on Parallel Importation mean for businesses
Unlike in the past, where trade mark owners were still able to to prevent parallel imports of their goods by cutting the defence for importers through assignments of trade marks or by implementing various specific corporate and contractual arrangements, parallel importers no longer face an evidentiary burden in litigation, as they will not have to prove that the registered owner actually applied the trade mark to the goods or consented to the application of the trade mark to the goods by another party. In fact they only have to prove, that it was “reasonable for a parallel importer to assume as such”. The principle of “international exhaustion” means, that the trade mark owner’s rights are exhausted once they market their goods in their home jurisdiction.
Cases such as Sporte Leisure Pty Ltd & Ors v Paul’s International Pty Ltd & Ors [2010] FCA 1162 and Lonsdale Australia Limited v Paul’s Retail Pty Ltd [2012] FCA 584 can no longer serve as authorities, as they are effectively overruled.
What could be observed in the coming years, is a change in provisions made, leading to the effect, that ownership of trade marks by Australian companies, holding it just as an agent of large International companies.
One might wonder, why some amount of control is withdrawn from trade mark owners by the law. This is because it is considered, that parallel imports are considered to benefit competition.
Importantly, this is not to say that a comprehensive international trade mark strategy is not of value. Such a plan will protect your business from being abused in other markets such as in a counterfeiting scenario. The changes simply mean that they will not protect you from parallel importers.
Where there is no option for complete prevention of parallel imports, here is what you should consider reducing the number of parallel imports of your products:
- adopt a pricing strategy, similar to the otherwise imported goods, as parallel trade is generally only engaged in by importers in relation to products where the margin to be gained is considerable;
- where products bought directly from the manufacturer or subsidiary or licensee of a manufacturer lead to rebates or any forms of discount, the motivation to buy parallel can be minimised by negating the margin available to parallel traders to a large or considerable extent;
- when customers are offered promotional incentives, such as free sample products or special buys they could be encouraged to purchase products directly from the manufacturer or its subsidiary/licensee;
- drafting future contracts, the right way, ensures parallel trade in cases of reimport may be preventable;
- introducing shorter best before dates for unpreserved products may reduce the scope of parallel trade to some extent, as parallel imported products generally require a longer time to reach the market;
- a quota allocation system could be adopted, where each wholesaler is allocated a certain amount of products, based on historical demand and the requirements of the local market within which the wholesaler is located, which could at least limit parallel trade to a certain extent, as wholesalers tend to supply their own market before exporting products to other countries;
- the existing trade mark rights should be enforced, especially when a parallel importer commences to repackage or relabel its products, which can be considered as trade mark infringement, as a parallel trader can only repackage a product, when such repackaging, by taking an objective view, is considered to be necessary for the sale of the product in the importing country, so the owner of the trade mark may object to the repackaging if it affects the original condition of the product or if the presentation of the repackaged product damages the reputation of the trade mark;
- the parallel importer should send a notice to the owner of the trade mark, advising of the marketing of the repackaged product and it is recommended, that the trade mark owner requests to see a sample of the repackaged product.
Implementing and adopting any of the above considerations requires informed decisions. It is strongly suggested to consult an expert in trade mark and competition law.
For a closer look at the law of trade mark law in general and the International law of various jurisdictions in relation to parallel importation in particular, please visit www.one-ip.com.au or call +61 (0)2 8277 4114.
About the Authors
Olaf Kretzschmar
CEO, ONE IP INTERNATIONAL PTY LTD
Australian Registered Foreign Lawyer/
Attorney-at-Law (Germany)
Jordan Ball
IP Consultant, ONE IP INTERNATIONAL PTY LTD
ONE IP INTERNATIONAL PTY LTD – Level 32, 200 George Street – SYDNEY NSW 2000 AUSTRALIA
