Parallel Imports and Exhaustion of Trademark Rights

In this era of globalization, markets worldwide are being swamped with ‘parallel import’ goods. Parallel import occurs when the original products (and not counterfeit products) are imported cheaply to a country without the authorization of the product owner who has Intellectual Property Rights (IPRs) over the products. Unlike black market goods, parallel import goods are legitimate. However, they are sold outside normal distribution channels by entities that may have no relationship with the producer of the goods. This type of importation poses a risk of competition on the producers over their products, which are marketed as per the principle of differential pricing. Due to differential pricing, the importers can buy the products from the markets of one country at an affordable price and sell the same at a price, which is lower than that prevailing in the second country where the products are imported.

Consequently, the issue that arises is that of the rights of the trademark owners. The practice of parallel imports is based on the principle of exhaustion, whereby the exclusive right of the trademark holder to import the product is exhausted when it first enters the market legitimately and is bought by consumers. The basic idea on which this principle rests is that no owner can benefit twice from the same product. However, this principle has been interpreted differently by different nations, and these interpretations have had a significant impact on the policies of various countries in the adoption of parallel imports.

What is the Doctrine of Exhaustion?

According to the doctrine of exhaustion, once an Intellectual Property (IP) rights holder sells a product to which his IPRs are attached in a particular jurisdiction, the rights holder must allow the resale of that product in that jurisdiction. In this case, the Trademark Rights covering the product are ‘exhausted’ by the first sale.

There are two types of exhaustion regimes: national and international.

1. National Exhaustion

National exhaustion is a principle that considers the brand owner’s trademark rights exhausted for a specific country or region once goods concerning which the trademark is used have been put on the market in that particular country or region by the trademark owner or with the owner’s consent. The exhaustion does not extend to other countries or regions, which allows the owner to rely on his trademark rights to prevent the unauthorized sale of these goods in other markets.

2. International Exhaustion

International exhaustion is the principle that once goods concerning which the trademark is used have been put on the market somewhere in the world by a trademark owner or with the owner’s consent, the owner has exhausted its trademark rights concerning the sale of those goods anywhere across the globe.

Some nations observe national exhaustion, whereas others observe international exhaustion of trademark rights. Depending upon the jurisdiction, the trademark owner needs to plan his protection strategy.

Ramifications of Parallel Importation

Parallel importation has both legal and economic ramifications. Economically, it promotes the availability of trademarked goods at different prices, which prevents the formation of a trade monopoly. A monopolistic approach in a parallel import-free market would give rise to inflated prices of the goods sold by the trademark owner or authorized dealer. In the absence of cheaper alternatives, consumers would be obliged to purchase goods at a price set by the monopolist. The same could harm the overall market, as well as the supply and demand.

Legally, it is vital to prevent deception and confusion among consumers regarding the source or quality of products and to protect the economic interests of trademark owners. Only if the parallel imported products are materially different from those sold directly can a trademark owner file a lawsuit for passing off, falsification, and infringement.

Thus, the positive effect of parallel importation is that it keeps prices in check and provides consumers with goods at lower prices. Parallel imports prevent trademark owners from exercising their exclusive right to divide markets and thus promote free trade, subject to the exhaustion doctrine followed in the particular country. The negative effect is that the brand owner’s distribution arrangements and ability to monitor the quality of trademarked goods are restricted. Parallel imports are also often used as a tool to cash in on the reputation and goodwill of the trademark owner, which can give rise to an action for passing off.

While consumers may benefit from lower prices for trademarked goods, parallel imports do not inevitably guarantee quality assurance or an aftercare service and may thus give rise to consumer dissatisfaction and cause harm to the reputation and goodwill of the trademark. On the other hand, however, the consumer as an end-user has the final choice and is the ultimate beneficiary of parallel imports. Most consumers would purchase a branded product from authorized dealers only and stay cautious of the consequences if they did otherwise. Similarly, in the case of pharmaceuticals, consumers would generally exercise extra caution and purchase the same from trusted distributors or pharmacies.

Dealing with Parallel Importation

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, and 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 his marks.

The primary function of a trademark is to protect the proprietor of the trademark from misuse of the brand and to prevent trademark owners from the prospect of dividing the market and thus distorting competition. Branded products, imported through parallel imports, act as a powerful barrier to the development of counterfeiting. At the same time, for developing economies, this practice seems favorable in the short run; however, in the long run, it is against their economic interest and endangers their welfare. The same is why the World Trade Organization (WTO) has not created any compulsory provision in this respect but has given the freedom to member states to legislate on their own, according to their situations. It is advisable to look into the situations of a specific geographical area, the mindset of the population, and the state of the economy before deciding on an ultimate verdict on the concept of parallel import. It is against this context that some nations or regions have made the exhaustion regime subject to considerations of trade policy, an approach that goes hand in hand with the foundational principles of the IPRs in question.