Legality of Parallel imports in India

Reading time : 12 minutes

Introduction:

Parallel imports basically refer to the genuine and legitimately acquired goods from the respective rights holder and thereafter sold at lower prices through trade channels which are legally [1]unauthorized. Consequently, these goods may be sold in the same market or a different market depending upon various situations. Taking India into regard, Parallel importation finds itself linked to the Principle of Exhaustion of Rights under the Trademark Act 1999 where each state is entitled to allow or prohibit parallel imports within its own legal framework. Since Parallel Importation is basically a trade practice so it is regulated under Intellectual Property Law as well as Competition Law. Firstly with regard to Trademark Law, parallel importation significantly affects the rights of a manufacturer or trader as trademarks allow traders to earn goodwill and to protect their commercial reputation. It is very well understood that parallel importers commence and undertake their activities for money since parallel importation occurs as a result of currency rate fluctuations and tax rate and scale differences which ultimately allows goods to be resold after a significant profit margin when sold at more expensive and lucrative markets. This also happens to be the main reason as to why Parallel Imports are generally referred to as ‘Grey Market Areas’ since the goods are genuine but the trade channels through which these goods pass through are definitely not.

Definition:

Parallel importation can be defined as ‘the importation of goods outside the distribution channels contractually negotiated by the manufacturer.’1 This Concept can be explained in a simplified manner. Suppose, Mr. S is an importer in India. A hypothetical product, for instance, a book, is available for sale in India for Rs. 4000, but the same is available for sale in Bangladesh for Rs. 1,600. Mr. S imports the said book from Bangladesh from a different distribution channel from the one originally negotiated in the contract and sells it at a profit margin in India. The example above shows the fundamental concept of parallel imports. However, from a legal point of view, the concept itself is far from simple. In order to analyse the term “parallel importation” from a legal point of view, it is imperative that the concept of Exhaustion of Intellectual Property Rights, is known.

Principle of Exhaustion of Intellectual Property Rights:

The exhaustion of intellectual property rights constitutes one of the limits of Intellectual Property Rights. Once a given product has been sold under the authorization of the IP owner, the reselling, rental, lending and other third party commercial uses of IP-protected goods in domestic and international markets is governed by the principle.[2]

After a product is covered by an IP right, such as by a patent right, has been sold by the IP right owner or by others with the consent of the owner, the IP right is said to be exhausted. It can no longer be exercised by the owner. This limitation is also referred to as the Exhaustion Doctrine or First Sale Doctrine. For example, if an inventor accepts a new form of patent, the inventor (or someone else to whom his patent is sold) can technically prevent other businesses from making and distributing such a parable.  Nevertheless, buyers who obtained it from the patent proprietor cannot be prevented from engaging in the re-sale of the product to third parties. The same goes for patents for software technology. If the patent holders, for example via Microsoft through GitHub, redistributes a piece of software with a proprietary algorithm, the patent shall be exhausted. It is clearly understood that ‘Exhaustion’ refers to a ‘limit’ or ‘constraint’ of intellectual property in relation to the selling of a commodity. Also previously referred to as the First Sale Doctrine. The principle that the purchaser of a product “A” (the name/logo by which the good is marked) loses control over the potential sale of the products exhausts the exclusive right of the brand owner to sale that good, whether by further selling, renting, etc.

The Indian Legal System on Parallel Imports:

As already stated, Parallel Imports come under the purview of the Principle of Exhaustion of Rights under the Trademarks Act, 1999. The principle of exhaustion of rights is stated in Article 6 of the Agreement on Trade-Related Aspects of Intellectual Property Rights, which states that “nothing in this Agreement shall be used to address the issue of the exhaustion of intellectual property rights”. Hence, each state is entitled either to prohibit or to allow parallel imports within its own legal system. Two major concerns that are often debated in the context of parallel importation and trademarks in India are whether parallel importation amounts to infringement under Section 29 of the Trademarks Act and whether India recognises the principle of international exhaustion of rights under Section 30 of the Trademarks Act.

Cisco Technologies v Shrikanth 2006 (31) PTC 538 was one of the first cases involving parallel import and trademark law in India, in which the Delhi High Court issued an ex-parte injunction in favour of the appellant and prohibited the defendant from importing computer hardware and hardware parts under the trademark CISCO (which was registered in India). The appellant claimed that: “CISCO products such as routers and switches are mission and human critical hardware components used in network infrastructure; that the product of the Plaintiff is used in critical networks such as railways, air-traffic control, hospitals, air defences etc.; that malfunctioning/failure of the product of the Plaintiff would result in huge losses due to failure of these networks; that keeping in view the critical importance of the product in question, it becomes imperative to ensure that neither counterfeit sales nor sales by misrepresentation take place… and that public interest has to be kept in mind while determining the issue whether ex-pare ad interim relief should flow to the Plaintiff at this stage.” [3]

Accepting the plaintiff’s arguments, the court also observed: “It is the obligation of all statutory and governmental authorities to ensure that laws are not violated by any person in this country. For persons who hold benefit of registered trademarks, Section 140 of the Trade Mark Act, 1999 makes statutory provisions where under the Collector of Customs could prohibit the importation of goods if the import thereof would infringe Section 29(vi)(c) of the Trade Marks Act. I see no reason why the statutory authorities should not prohibit import of such products, import whereof would result or abet in the violation of the proprietary interest of a person in a trademark/trade name.” 3

In the case of M/S General Electric Company v Altamas Khan General Electric the prosecution argued, amongst other things, that the defendants’ import of its genuine products into a territory for which they were not intended violated its trademark and caused it loss. It further argued that the illegal sale caused it loss of reputation, in so far as purchasers that were unable to claim warranty or avail of an aftercare service would likely blame it or hold it responsible. The Delhi High Court found the defendants liable for infringement.

Section 30(4) of the Trademarks Act requires the trademark owner to regulate the flow of products where there are valid grounds for objecting to further trading in goods – in fact where their condition is altered or damaged after they have been introduced on the market. The Delhi High Court Division Bench has narrowly interpreted ‘legitimate grounds’ to include discrepancies in Services and Warranties; Advertising and Promotional efforts; Packaging; Quality Control, Pricing and Presentation and Language of the Product Literature. In India, the only situations under which the owner of a trademark can challenge or ban illegal parallel imports and plead violation under the Trademarks Act are those under which the products have either not been legitimately acquired or have been altered or substantially modified after they have been acquired. Consequently, following the international exhaustion of rights regime, it is not necessary for the parallel importer to show that the owner of the trade mark has either explicitly or indirectly consented to parallel imports. Perhaps the only pressure on the parallel importer is on the consistency and protection of the goods. However, the importer must establish that the products in question have been put on the market globally with or with the consent of the trademark holders, and that they have since been legitimately purchased.

Consequences of Parallel Imports on the Economy and the State:

Parallel Importation has two sided effects which include legal consequences and economic consequences. In an Economic perspective, it promotes a greater availability of trademark good at lower prices and at the same time prevents the establishment of trade monopoly. In the absence of cheaper alternatives, consumers would be forced to purchase goods at the price set by the monopolist and this would have an adverse effect on the market as well as on supply and demand. In a legal perspective it is extremely important to prevent such kind of confusion among the consumers where they are confused about the quality and source of the products they wish to consume and also to protect the economic interests of the trademark owners.  The positive impact of parallel imports is that they force prices down and provide consumers with goods at lower prices. Parallel imports help avoid trademark holders from practicing their preferential right to divide markets and thus to promote free trade subject to the doctrine of exhaustion followed in the particular country. The negative effect is that the sales arrangements of the seller and the opportunity to control the quality of the trademarked products are restricted. Around the same time, parallel imports are also used as a tactic to cash in on the prestige and goodwill of the trademark owner; this may lead to an action to be taken.

Although customers may benefit from cheaper costs for trademarked products, parallel imports do not inherently guarantee quality assurance or aftercare and may thus result in market disappointment and harm to the credibility and goodwill of the trademark. In a more realistic basis, though, as an end-user, the customer has the ultimate preference and the ultimate winner of parallel exchange. Most buyers would only buy an Apple or Sony device from registered distributors and would be aware of the consequences if they did otherwise. Similarly, in the case of pharmaceuticals, customers will usually exercise extra vigilance and buy the same items from reputable distributors, or hospitals.

Conclusion:

In India, the only situations under which the owner of a trademark can challenge or ban illegal parallel imports and plead violation under the Trademarks Act are those under which the products have either not been legitimately acquired or have been altered or substantially modified after they have been acquired. Under Indian trademark law, trademark owners can take legal action only against traders dealing in goods that compromise the goodwill, reputation or quality of the trademark. Parallel importation acts as a reasonable limitation to the trademark owner’s exclusive rights to use the mark in relation to the items for which it has been registered. The decision on whether to allow parallel importation is ultimately a choice between quality control and price control; between the economic rights of trademark owners and consumer access; between trade monopolies and free trade. In the trademark context, parallel importation in no way compromises the trademark owner’s right to sue for infringement, passing off or falsification of its marks. In this sense, by following the principle of international exhaustion of rights, Indian law not only safeguards the reputational assets of a trademark, but also ensures free trade, as mandated by, by eliminating the monopolistic tendencies of profit driven trademark owners.


[1] http://www.wipo.int/sme/en/ip_business/export/international_exhaustion.html

[2] http://www.wipo.int/sme/en/ip_business/export/international_exhaustion.htm

[3] Cisco Technologies v. Shrikanth, 2006 (31); PTC 538

Author: Aabir Shoaib, Chandigarh university.

Editor: Kanishka VaishSenior Editor, LexLife India.

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