Parallel imports: trademarked vs copyrighted

Financial Express, June 12, 2012

By Pradeep S Mehta

Whether or not they are beneficial for an economy has to be decided case by case and sector by sector

In a recent order, the Swiss Competition Commission has levied a record fine of SFR156m on BMW automobile company in Germany for impeding direct and parallel imports into Switzerland by preventing their dealers in the European Economic Area to sell cars in non-EEA countries. In 2011, Nikon, the camera manufacturer was fined SFR12.5m for a similar act. If we look at India, Hindustan Lever Ltd was able to get a stay order from the Bombay High Court a few years ago on import of Lux soaps by Indian traders from Indonesia. It was cheaper there because of the huge depreciation of their Rupiah. In jargon, this type of trade is termed parallel imports, which is basically a competition policy instrument and does not violate intellectual property laws. Alas, there has been much confusion about parallel imports, which has now been settled by the government. But the catch is that while trademarked or patented goods can pass through the filter, copyrighted goods (books, DVDs etc.) may not, due to bad politics and policy incoherence.

On March 29, 2012, the Central Board of Customs & Excise issued a circular clarifying the legal position on the issue. Expectedly, this did cause some dismay. The genesis of the debate was the Delhi High Court Order of February 2012 in a Samsung Case (the judgment is under appeal, however). The said Circular clarifies that parallel import is allowed under Indian Patents Act, 1970 and Trade Marks Act, 1999.

Parallel imports are goods produced genuinely under protection of a trademark, patent, or copyright, placed in one market, and then imported into another market without the approval of the IPR holder. In general, whether or not a country allows parallel import is dependent on what its IP laws says about ‘exhaustion of IP rights’: IPRs in goods getting exhausted once they are legitimately put into the market. If its IP laws recognise international exhaustion, the parallel imports are legal, and if it recognises only national exhaustion then parallel imports would be illegal.

There are varied practices around the world as far as ‘exhaustion’ of IPRs is concerned. For instance, in general terms, while India, Australia, Japan etc have international exhaustion regimes, those like the US and the EU do not follow international exhaustion regimes (the EU, however, has a regional exhaustion regime). These differences got reflected in the Uruguay Round negotiations of GATT and it was agreed that any dispute related to the exhaustion of IPRs would be outside the scope of WTO/TRIPs Agreement. This facilitated the adoption of different approaches with respect to parallel import by countries.

As in the Samsung case, music was also played in a case involving Dell computers. Three Indian importers (Venktron Digital Systems, Sapphire Micro System and Momentum Technologies) imported around 500 Dell laptops into India from China. During the process of clearing the consignment at Customs, an alert was registered by Dell India Pvt Ltd for possible trademark infringement of their trademark ‘Dell’. Consequently, after hearing all the parties, the Customs Commissioner passed an order in favour of the three importers, based on clear understanding of Section 30(3) (b) of Trade Marks Act, 1999. This provides that where the goods bearing a registered trademark are ‘lawfully acquired’, further sale or other dealing in such goods by the purchaser, or by a person claiming to represent him, is not considered an infringement by reason of the goods having been put on the market under the registered trademark by the proprietor or with his consent. However, such goods should not have been materially altered or impaired after they were put in the market. As in the Samsung case, the Dell matter is likely to go into appeal and it would be interesting to see how courts interpret this section of the Trade Marks Act.

Be that as it may, there is significant amount of clarity that the Indian Trade Marks Act prevents the trademark owner to take a plea of infringement and prohibit the marketing of goods in any geographical area once the trademarked goods are lawfully acquired by a person. The trademark owner, however, can restrict parallel import if there is contractual restriction on the licensee and/or distributor not to allow parallel trade (or sell to parallel traders), claiming breach of contract. Here competition law aspect assumes importance as it tends to discourage presence of such restrictive clauses in any contract.

Similarly, the Indian Patents law clearly allows parallel imports, even though, understandably, there has been no dispute with respect to parallel import involving patent infringement. Section 107A (b) of the Patents Act, 1970 provides that importation of patented products by any person from a person who is ‘duly authorised under the law’ to produce and sell or distribute the product shall not be considered as an infringement of patent rights.

India, having undertaken an international exhaustion regime for patents and trademarks, has also proposed an amendment in the Copyright Act, 1957. The Copyright Amendment Bill, which was passed by the Lok Sabha on May 22, 2012 (Rajya Sabha passed it on May 17), originally contained a provision recognising ‘international exhaustion’. However, this was dropped in the final version that was eventually passed, ignoring even the recommendation of the Standing Committee. Unfortunately, as has happened in many such cases, no debate took place in the Parliament on this point.

The issue of policy incoherence arises here. Patents, trademarks and design IPR issues are administered by the Department of Industrial Policy & Promotion, while copyright administration is under the human resources development ministry. As all bills are processed by the law ministry, which is supposed to bring in coherence, it perhaps just sleeps. One can see this in thousands of cases.

The end result at present is that a copyright owner can block parallel import into India of goods like books, VCDs, DVDs etc. By not allowing parallel imports in cases of copyright-protected goods, more complex issues in certain cases may arise where an item may have trademark as well as copyright protection. For instance, certain preloaded software in computers or mobiles may be protectable by the Indian Copyright Act, and hence parallel import of such goods may not only involve trademarks (which cannot be blocked) but also copyright (which can be blocked).

But is parallel trade only an IP law issue? It is also a competition law and consumer policy issue, since openness enhances competition and consumer welfare. Some countries are already looking at this from the competition law angle. The Competition Act, 2002 of India does contain provisions that can be applied to remove hurdles to parallel imports. The preambular objectives of the Competition Act (which speak about freedom of trade, consumer welfare etc) are prima facie favourable to parallel imports. Apart from this, specific provisions of the Competition Act cover exclusivity or refusal to deal or abuse of dominance, because they can lead to appreciable adverse effect on competition. If the origin of such malpractices is abroad, the CCI can also investigate the same under the powers of extraterritoriality.

Since parallel imports are a complex issue, answers to the question of whether they are beneficial or not for an economy may vary from case to case and sector to sector. The CCI, therefore, would have to analyse the issue on a case-to-case basis.

The author is Secretary General, CUTS International. Ujjwal Kumar of CUTS contributed to this article.

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