Trademark Infringement in Parallel Importation

Analysis of Trademark Infringement in Parallel Importation

Authors: Bryce Bao, Olivia Ma

I. Parallel Imports

Parallel importation refers to that when a trademark is protected in more than two countries, people legitimately purchase the goods bearing the registered trademark from the market of a country that allows the sale and then put the goods into the market of another country that protects the trademark through entry inspection without the consent of the trademark owner. In conclusion, parallel importation shall meet the following conditions:

1. The rights holders have the legal rights to the trademark affixed to the goods in both the exporting and importing countries.
2. Parallel imports shall be genuine goods with trademarks attached.
3. The trademark owners of the exporting country and the importing country are substantially the same.
4. Without the consent of the trademark owner.
5. Parallel imports enter China through normal and legitimate customs supervision procedures.

II. Subject of Rights against Parallel Importers and Basis of Claim

According to Article 60.1 of the Trademark Law, “Where any dispute arises from any of infringements upon the right to exclusively use a registered trademark…the trademark registrant or an interested party may institute an action in a people’s court…”. According to Article 4 of the Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of Law in Examining Trademark Civil Disputes, “the interested party referred to in Article 60.1 of the Trademark Law, includes the licensee of the license contract for the use of a registered trademark, the legal successor to the property rights of a registered trademark, etc. The licensee of the license contract for the exclusive use of a registered trademark may bring a lawsuit to the people’s court when his/her right to exclusively use a registered trademark is infringed. The licensee of the license contract for the exclusive use of a registered trademark may file a lawsuit with the trademark registrant or file a lawsuit on his own without the trademark registrant; the licensee of the license contract for the general use of a registered trademark may file a lawsuit with the clear authorization of the trademark registrant”. Therefore, Trademark Law and judicial interpretation allow trademark owners and interested parties to protect their rights against infringement upon the right to exclusively use registered trademarks.

In practice, some trademark licensees claim that the parallel importers should be held liable for the infringement upon the right to use a trademark instead of the infringement upon the right to exclusively use a trademark. Is there any legal basis?

The basic norms for requesting protection of the right to exclusively use a trademark come from the provisions of the Trademark Law, while the basis for requesting protection of the right to use a trademark comes from the provisions of the license contract for trademark use? The right to use a trademark exclusively is a legal right and is exclusive; The right to use a trademark is not a legal right, but a creditor’s right formed by the license contract for trademark use, which is relative and difficult to confront a third party outside the contract.

III. Whether the Trademark Owner is Subject to the Principle of Exhaustion of Rights

As for the principle of exhaustion of rights behind parallel importation, TRIPS takes an open attitude. Different countries take different attitudes according to their own national conditions. Countries that adopt the principle of exhaustion of domestic rights generally prohibit parallel importation. Countries that adopt the principle of exhaustion of international rights allow parallel importation. In China’s current law, exhaustion of rights as a defense ground in parallel importation is not applicable and is difficult to obtain judicial support.

In the case of (2020) Yue 73 Min Zhong No. 1944, the Guangzhou Intellectual Property Court held that the exhaustion of trademark rights in a foreign country based on the trademark law of that country shall not be a defense ground to claim non-infringement upon trademark rights due to the exhaustion of registered trademark rights of the rights holder in China, so the international exhaustion of trademark rights in parallel importation does not stand.

IV. Whether Parallel Imports Constitute Trademark Infringement

Generally speaking, trademarks mainly have three functions: identifying sources, assuring quality, and advertising. In practice, the identification of trademark infringement in the field of parallel importation in China mainly focuses on whether the source identification function of the trademark involved in the case is damaged, and judges generally focus on whether the trademark confuses the consumers. In parallel importation, common confusion behaviors are as follows: a foreign trademark is translated into Chinese without the consent of the trademark owner and the translation is similar to the registered trademark. Chinese labels are affixed to the goods without authorization.

In the second instance civil judgment of the case (2020) Zhe Min Zhong No. 326 made by the Zhejiang Higher People’s Court on trademark rights infringement dispute between Budweiser InBev Investment (China) Co., Ltd. and Xiamen Gu Long Import and Export Co., Ltd., the Court held that: “the importer affixing Chinese mark on the parallel imports that is translated by himself/herself and is not consistent with the Chinese trademark registered and used by the rights holder in China, will undermine the correspondence between the rights holder’s Chinese trademark and his/her English trademark, weaken the rights holder’s efforts to improve the popularity of the Chinese trademark and expand the domestic market, and, at the same time, break the connection between the rights holder’s Chinese trademark and his/her goods, and damage the source identifying function of the Chinese trademark, which shall ‘cause damage to the right to exclusively use a registered trademark of others’ as referred to in Article 57.7 of the Trademark Law, and constitute trademark infringement”.

V. Other Criteria for Determining Whether Parallel Importation Infringes on the Right to Exclusively Use a Registered Trademark

On the basis of the source-identifying function, trademarks also derive the function of assuring quality and carrying a business reputation. Common behaviors that damage the quality-assuring function and business reputation-carrying function are as follows: changing product packaging without authorization; abrasing code without authorization; selling imported authentic products without safety certification, etc.

1. Changing the packaging, such as using the sub-packaging purchased from a third party, printed with the trademark involved in the case, not marking the subpackage’s information without the consent of the trademark owner:

In the first instance civil judgment of the case (2015) Hang Yu Zhi Chu Zi No. 416 made by the People’s Court of Yuhang District, Hangzhou City, Zhejiang Province on the trademark rights infringement dispute between Bu Er Jia (Hangzhou) Food Co., Ltd. and individual Qian Hailiang, Zhejiang Taobao Network Co., Ltd., the Court held that, although the candies involved in the case sub-packaged and sold by Qian Hailiang in three specifications, come from Bu Er Jia (Hangzhou) Food Co., Ltd., and the packaging of the three specifications used by him are also attached with mark identical or similar to the trademark involved, and from the perspective of the relevant public, there is no direct consequence of confusing the source of the goods, still, Qian Hailiang’s sub-packaging behavior reduces the reputation of the goods held by relevant public to the trademark involved, damages the reputation bearing function of the trademark involved, and constitutes trademark infringement because in addition to the basic functions of protecting and containing goods, the packaging of the goods also plays an important role in beautifying and advertising the goods, and improving the value of the goods.

2. Unauthorized erasure of product identification code:

In the first instance, the civil judgment of the case (2017) Zhe 01 Min Chu No. 972 made by Zhejiang Hangzhou Intermediate People’s Court on trademark rights infringement and unfair competition dispute between Mary Kay (China) Co., Ltd. and individual Ma Shunxian, and the first instance civil judgment of the case (2013) Su Zhong Zhi Min Chu Zi No. 0175 made by Jiangsu Suzhou Intermediate People’s Court on unfair competition and monopoly dispute among Jue Dui Co., Ltd., Pernod Ricard (China) Trading Co., Ltd. and Suzhou Long Xin Yuan Wine Co., Ltd., the Court held that “the parallel importer erasing the identification code of the goods involved in the case affects the identifying function of the trademark, causes confusion among consumers at the same time, and also hinders the trademark owner’s tracking management of product quality, interferes with the trademark owner’s rights to control product quality, and causes damages to the trademark rights and interests of the trademark owner. Such an act constitutes “causing other damages to the right of others to exclusively use a registered trademark” as referred to in Article 57.7 of the Trademark Law and constitutes trademark infringement.

But does the erasing necessarily constitute infringement? In the case of (2021) Ji 06 Zhi Min Chu No. 79, the Defendant did not conceal the act of erasing the code to sell, strictly abided by the principle of good faith, and informed consumers of the true situation of the goods with prominent marks. Consumers made their own purchases on the premise of knowing the true situation, which would not have any impact on the consumers’ rights and interests or affect the consumers’ identifying the source of the goods. Therefore, the Court held that such “code erasing/code scraping” behavior did not substantially change the appearance and quality of the goods, nor did it damage the trademark logo of the goods. Although some traceability codes were removed, it did not affect the function of indicating the source of the goods, nor did it affect consumers’ evaluation of the quality and reputation of the goods, nor would it affect consumers’ use of the goods, nor would it cause confusion among the relevant public. Therefore, we can conclude from the above cases that, if Defendant conducts “code erasing/code scraping” on the original manufacturer’s products but the “code erasing/code scraping” does not affect identifying the source of goods, the such act does not constitute trademark infringement. The conditions are as follows: 1) Only the traceability code of the goods is slightly worn after “code erasing/code scraping”, and other overall packaging remains an original state, without any damage to the original trademark; 2) The product information is completely consistent with the information on the packaging. If the product itself is genuine without quality problems, whether to save the QR code or not has no impact on consumers’ rights and interests, nor can it reflect the original manufacturer’s product quality management system, price control system, sales channel management system and other information; 3) The products with codes erased or scraped are genuine; 4) There is no evidence to prove that the “code erasing/code scraping” has a negative impact on the reputation of the trademark owner.

3. Sales of imported authentic goods without safety certification:

In the case of trademark rights infringement dispute among Ji Li Bei Food (Shanghai) Co., Ltd., Beijing Hao Shi Hao Chi Import and Export Co., Ltd., and Anhui Yang Ping Xing E-commerce Co., Ltd. [Case No.: (2018) Jing 0101 Min Chu No. 13472], the Court held that the alleged infringing goods are food that has excessive additives and do not conform to China’s food safety standards and may have safety hazards. The negative evaluation of the goods caused by food safety problems or illegal situations of such goods will be directed to the trademark owner through the involved trademark marked on the goods. Therefore, the products sold by the two Defendants have damaged the function of the rights holder’s trademark in ensuring the quality of the goods and the reputation of the provider of the good and have damaged the registrant’s right to exclusively use the trademark.

VI. Summary

Based on the above cases, the identification of trademark infringement in the field of parallel importation should mainly consider whether the source-identifying function is damaged; whether the quality-assuring function is damaged; and whether the business reputation carried by the trademark is damaged.

The trademark owner shall fully consider his/her business arrangements and price strategies in different countries and regions, fully communicate with the trademark licensee on the use of the trademark, and timely monitor relevant unauthorized infringement upon the right to exclusively use the trademark.

For trademark licensees, it is recommended to strengthen the protection of his/her trademark use rights by agreeing with relevant terms in the contract. For instance, when signing a trademark license contract, the licensee may, through the contract agreement, impose an additional obligation on the licensor (the trademark owner) that the product buyer without the trademark use rights shall not export the products to the country where the trademark licensee is located. If the trademark owner is unable to effectively stop the parallel importation, the licensee of the importing country has the right to reduce the payment of trademark royalties.

For parallel importers, the original state of imported goods shall be maintained as much as possible. No processing, modification, or repackaging of imported goods shall be carried out, especially no translation of foreign trademarks. The parallel importers shall ensure that they obtain goods through legitimate channels, confirm, and verify the conditions for sales and qualification certification, and pay customs duties on time.