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Monday, 5 December 2011

Exhaustion of rights and International Law

Marketing of products abroad will not involve exhaustion. Under Article 4 and 6(3) of Paris Convention; principle of territoriality is applied for Trade Marks. Further TRIPs agreement has left the question of exhaustion and Parallel Imports open for member states. Article 6 particularly mentions that “for the purposes of dispute settlement under this agreement, subject to the provisions of Article 3 and 4 above nothing in this agreement shall be used to address the issue of the exhaustion of Intellectual Property Rights”[1] which makes clear that this does not affect the issue of Exhaustion[2]. The effect of the provisions in the TRIPs agreement that are relevant to the exhaustion of Intellectual Property Rights is to leave each member free to establish its own regime, subject to the MFN and National Treatment provisions of Article 3 & 4, for such exhaustion without challenge.
International law thus leaves the question of exhaustion and Parallel imports up to each country. Hence the practice of Parallel Imports is legally allowed, under article 7 of the directive, within the European Union as well as in India, under section 30 after the adoption of Trademarks Act 1999.

A Swot Analysis of Different Parallel Import Legislation

The European Economic Area (European union)
The EEA law of the principle of exhaustion is being developing for last twenty five years. The EEA has adopted regional exhaustion where by an act of sale in one country is equivalent to it being an act of sale in any country within the region. EEA follows the rule of free movement of goods within the EEA. The fundamental principle of the free movement of goods reflects the European Unions’ goal of achieving a single market[3]. Prior to the Harmonization directive (89/104/EU), Article 28 and 30 of the Rome Treaty laid down the rules for the free movement of goods, which is as follows:
Article 28 lay down: “.... qualitative restrictions on imports and all measures having equivalent effect shall be prohibited between Member State. However this provision shall not preclude prohibition or restriction on imports, exports or goods in transit justified on the grounds of..... the protection of industrial and commercial property.
Article 30 lays down: “... such restrictions or prohibitions shall not, however, constitute a means of arbitrary discrimination or a disguised restriction on the trade between Member states[4]”.
In simple words, any intellectual property right which confine the trade between the member states shall only be defensible if this is to safeguard the essential function for the intellectual property right concerned. These provisions of the treaty, in light of judicial precedents by ECJ, were codified under Article 7 of Directive 2008/95/EU (Earlier, Trademark Directive 89/104/EU).

Article 7[5] states:
1.      “The trade mark shall not entitle the proprietor to prohibit its use in relation to goods which have been put on the market in the Community under that trade mark by the proprietor or with his consent”.
2.      “Paragraph 1 shall not apply where there exist legitimate reasons for the proprietor to oppose further commercialization of the goods, especially where the condition of the goods is changed or impaired after they have been put on the market”[6].

The EU law on parallel import or rule of exhaustion is categorised into two:
·         First sale is outside the EEA
·         First sale within the EEA

First sale is outside EEA

Article 7 of the Trademark Directive as well as Section 12 of the Trademark act 1994 was uncertain about the international exhaustion. There were no provisions relating to international exhaustion. Article 7 only dealt with the situation where the goods where placed within the EEA. In other word it only concentrates on the community market (European context). Due to this ignorance on the question of international exhaustion, there was a huge confusion between the countries. And the countries were free to adopt the rule of international exhaustion. Some countries adopted the international exhaustion were as some adopted the regional exhaustion only. Prior to the Trademark Directive, the question of whether on international exhaustion was totally a matter for the internal law of the member state, as seen in the case EMI Records Ltd vs. CBS United Kingdom Ltd.[7] But in 1984, after the Explanatory Memorandum for the Directive, published as a part of the proposal[8] to amend the CTMR, it became clear that EEA did not adopt international exhaustion.

An important case on international exhaustion was the ‘Silhouette case’.In Silhouette International Schmied GmbH & Co v Hartlauer HGmbH, the issue involved was:
(1) Is Article 7(1) of the First Council Directive 89/104/EEC of 21 December 1988 to approximate the laws of the Member States relating to trade marks (OJ 1989 L 40, p. 1) to be interpreted as meaning that the trade mark entitles its proprietor to prohibit a third party from using the mark for goods which have been put on the market under that mark in a State which is not a Contracting State? On which the court held that “under Art.7 exhaustion of rights occurred only when the product had been put on the market within the EEA. H's argument went against both the wording of Art.7 and the purpose of the Directive, which was to safeguard the functioning of the internal market. Article 5 to Art.7 had to be construed as providing a complete harmonisation of substantive rules governing the rights conferred by trademarks, and divergence in national rules applying to exhaustion of rights would inevitably hinder the free movement of goods and services,”
(2) May the proprietor of the trade mark on the basis of Article 7(1) of the Trade Marks Directive alone seek an order that the third party cease using the trade mark for goods which have been put on the market under that mark in a State which is not a Contracting State?. Court held that Art.7 (1) did not, per se, give a proprietor the right to restrain third parties from using his mark for products placed on the market outside the EEA. However, Member States were required, in implementing Art.5 of the Directive, to ensure that a proprietor could obtain an order to restrain third parties from infringing his rights, and domestic law was to be interpreted by national courts so far as possible to achieve the purpose of the Directive[9]

After this decision, it was clear that the member states could not include their own domestic international exhaustion rules, and it is well settle that the goods places outside the EEA can be prevented from being imported within EEA by the owner of the trademark, but it can only be prevented if the good are placed within the EEA without the consent of the trademark owner. Now, the next important question arose from it was on the term “consent” in Para (1) of article 7.


The first attempt by the parallel importer to construct this term in their favour was in the case of Sebago Inc vs. GB Unic SA[10], where the issue involved was that the proprietor of the trademark had consented a batch of shoes to be put into the market the defendants argued the proprietor consent to identical goods to be placed onto the market was deemed. The ECJ rejected this issue and held “even though Article 7 of the Directive was silent on this issue, it was necessary for the importer to demonstrate a trademark proprietor’s consent to the particular batch in question. The principle of consent therefore only applies to the individual goods themselves and not to the class of goods to which they belong”.

Implied consent/ unequivocal consent

The owner of the trade mark does not automatically get the right to prevent the importation of the good to EEA, which are placed outside the EEA; he can do so if the good are imported without his consent. The consent of the proprietor can be implied. In 1999, ECJ disagreed with Laddie J’s analysis in Zina Davidoff SA vs. G Imports Ltd[11]  said that, this consent of the owner of the trademark can be implied but this consent is to be drawn by the facts and circumstances preceding the placing of the goods within market, the consent must be positive and unequivocal. This means that, the necessary consent cannot be inferred from the fact that the owner of the trademark had not expressly prohibited the exporting of the goods to and their further marketing in the EEA. However, the trademark proprietor’s consent to further marketing need not be express, but if the parallel importer provides evidence of an unequivocal intention on the part of trademark owner that he would be comfortable for the goods to be taken to the EEA for further marketing then proprietor does not have the right to stop the imports, as it will then be considered that the goods are places in the market with the consent of the trademark owner. So, the owner of the trademark has to impose sufficient restriction on to the distributor outside EEA so that the good are not imported within the EEA.

Although after the decision on Davidoff case it was concrete that the consent of the trademark owner can be implied, but until 2007 there was no case in which implied consent could be established, it was considered very difficult to mount a successfully case of implied consent. In 2007 the English Court for the first time, establish an unequivocal consent in Mastercigars vs. Hunters & Frankau[12].  “The appellant purchased Cuban cigars from the retail outlet in Cuba an imported them into United Kingdom, the retail outlet was permitted by the trade mark owner to sell up to twenty five (USD) worth of cigars to an individual per transaction, and to provide document for export through Customs. The appellant’s consignment was seized by United Kingdom Customs at the instigation of the exclusive UK distributor. On appeal, it was held that the trade mark proprietor had consented to the goods being put on the market in the EEA. Consent could be implied, and ‘unequivocal’ did not mean that the defendant had to prove implied consent. The proprietor’s permit to the retail outlet to sell cigar for export indicated unequivocally his consent to the use of the trade marks on the purchasers’ home markets, and also, the export quantity which was allowed to an individual to buy was much higher for self consumption”[13].
So in light of the above said cases it is clear that “registered trade mark shall confer on the proprietor exclusive rights therein. The proprietor shall be entitled to prevent all third parties not having his consent from using the in the course of trade”[14]

First sale is within EEA

Under the Trademark Act 1938, The United Kingdom and other common law countries for the first time introduced the law on doctrine of exhaustion. At that time the proprietor of the trademark could prevent the importation of parallel imports by filing an action of infringement or passing off. As the European community developed, a doctrine of exhaustion of rights began to take shape under the principle of free movement of goods[15].
After a period and the decision of the ECJ[16], it was finally established that trademark right will rest with proprietor unless the goods which are placed in the community market by the trademark proprietor or with is consent. Article 7 of the Directive deals with this specific provision i.e. the doctrine of exhaustion of right within the EEA. So it is evident from this fact that the European Economic Area exercises regional exhaustion.

After the adoption of Article 7 of the directive, a number of cases commencing article 7 have come before the ECJ. These cases were mainly relating to the terminology of article, especially relation to the term “consent” in Para (1) and the term “legitimate reason” in Para (2) of article (7).

(1) Consent

As explained above, it is well settle rule the “the trademark proprietor right are not exhausted when the good are place in the market without his consent. The owner has to consent all the goods which are imported with the EEA. The consent cannot be considered as deemed in case for identical goods, of those the owner has consented. The importer has to show the proprietors consent on all the goods which are imported, it cannot be presume that the proprietor had give his consent to the category of the goods imported[17]. Although, the Trademark proprietor’s consent can be implied in some situations, but it is to be drawn by the facts and circumstances preceding the placing of the goods within market.[18]

(2)Legitimate reasons

A large amount of cases concerning doctrine of exhaustion of rights within EEA are raised from the importation of pharmaceutical products. The problem arises where the parallel importer has to repackage or make adjustments to the marked goods, before they are put into the market, so that they are acceptable to the targeted consumers. This situation is based on the rule of necessity, where the goods have to be altered, to ensure that the goods enjoy the same competitive advantage. The parallel importer might have to change the language on the product or change the standard size or quantity of the marked goods due to the national laws of the importing country or even has to affix a different trademark, where the trademark owner uses different trademark in different countries within EEA. At this stage the trademark proprietor has the right to prevent the parallel importer from importing marked goods as it will be considered as a “legitimate reason” with the preview of Para (2) of Article 7.
The legitimate reasons may be categorised into two:
1.      Affixing a different Trademark or Repackaging/Relabeling/Rebranding
2.      Advertising parallel imports
Affixing a Different Trademark
A problem arises where the trademark owner uses different trade marks for the same product in different territories within the EEA, this  prohibits the parallel importer from affixing trade mark that trademark owner uses for the importing country. This situation is called artificial partitioning of the market, where the trademark owner uses different trademarks within the EEA to partition the EEA into separate territorial markets. This is contrary to the goal of achieving a single market. However this problem could not be resolved by just giving parallel importer an unqualified right to affix a different trade mark as it will undermine the legal and economic significance of the trade mark. To tackle this situation ECJ in Bristol-Myers Squibb[19] gave a set of three conditions which the parallel importer has to satisfy before putting the goods into the market. These conditions are as follows[20]:
(a)    Use of trademark rights to prevent imports would contribute to artificial partitioning of markets between the Member states,
(b)   The repackaging did not adversely affect the original condition of the product, and
(c)    The parallel importer complied with certain obligation as to labelling and provision of sample:

Condition (A) - Artificial partitioning of markets between the Member states.
A case where the issue of artificial partitioning and relabeling[21] was involved was the loendersloot case[22], where the loendersloot, removed the word “pure” and the name of the importer from the whiskey bottle and relabelled it and imprinted his own name as a parallel importer, the ECJ agreed with the defendant and held that it was necessary to remove the word “pure” and importers name from the whiskey bottle to be marketed in a particular member states, as without so it was impossible to import (due to national restrictions) and then Bellantine’s right on its trade mark right would contribute to the artificial partitioning of the markets[23].

Condition (B) adversely affecting the original condition of the goods
If the owner of the trademark show that the condition of the goods have changed or impaired before putting into the market then the rule of exhaustion will not apply and he will rest with all the right to prevent such import.
One of the first case on the “change or impairment” was involve was the Levis case[24], where the German court held that the bleaching and then dying the jeans in to a different colour was regarded as modifying the jeans and this act would adversely affect the  Levis brands and the doctrine of exhaustion cannot be applied here. According to the ECJ in BMS case[25], in case of a situation where the goods have been changed or impaired this will be the matter for the national courts to assess on cases by case basis. And the ECJ has laid down some guidance for the national courts.

Condition (C) - labelling and provision of sample
Under this condition the parallel importer has to comply with certain condition concerning the labelling and has to provide an advance notice and a sample to the trademark proprietor. The parallel importer has to indicate on the external packaging as to who repackaged the goods and also if the parallel importer had added an extra product in the package then he has to indicate that product added in the package is not associated with the trademark owner.  In Sony Computer Entertainment Inc vs. Tesco stores Ltd,[26] Lloyd J held that “parallel importer did not have to say explicitly that it had repackaged the product with an additional article, but he was not sure that it had done enough by the notice on the packaging to dispel the impression that Sony was responsible for it”.
The requirement of an advance notice to be given by the parallel importer to the owner of the trademark is a prerequisite to all the conditions of the BMS. It is to ensure that the proposed repackaging actually does affect physical or mental condition of the goods, to give an opportunity to object to their sale. This requirement does not only apply on pharmaceutical products but to other product too (whiskey bottle)[27].
So in light of above cases it is clear that the parallel importer has to stick to all the guidelines which are laid down by ECJ in BMS vs. Paranova[28] for repackaging or relabeling or rebranding to prevent there good from being detained. The trademark owner has the right to prevent the parallel importer from importing marked goods, and placing it within EEA, only when the importer does not comply will all the BMS conditions.

Advertising parallel imports

Under article 7 of the directive, it is possible that the owner of the trade mark can prevent the parallel importer on the basis of repackaging of good, but the owner of the trademark may also prevent the parallel importer on advertising of the good. An important case on this situation was Perfumes Christian Dior SA vs. Evora BV. ECJ held that once the goods are place in the market the owner’s rights are exhausted and the reseller may advertise the goods to spread awareness to the targeted consumers. But when applying the BMS condition the ECJ held that the owner of the trademark can prevent the parallel importer from advertising the products if the advertisement adversely affects the reputation of the trademark (damage the reputation)
Although it is not clear that from the decision of the Perfumes Christian Dior SA vs. Evora BV, that does this principle apply only to luxury goods only.  But ECJ had cleared that the principles which have been developed in the court’s case law relating to trademark shall apply to all the forms of the intellectual property right.

[1] Article 6 of  TRIPS agreement on 21/2/2011
[2] Parallel imports by NAMRATA SHARMA on 21/2/2011
[3] “Article 34 of TFEU, prohibits any legal restrictions on the movement of goods between member states for further marketing unless the restrictions can be justified on grounds of the protection of “industrial and commercial property”. However, Article 36 of the TFEU qualifies the exception by providing that the protection of property rights should not constitute a ‘means of arbitrary discrimination or a disguised restriction’ on trade between member states and that any derogation from the principle of free movement must be limited accordingly”.
[5] The corresponding provision has been incorporated in the Article 13 of the CTMR.
[6] Supra 5
[7] C-51/75 [1976] FSR 457
[8] By international trademark association, Parallel imports: summery of EU law and its application in the EU member states (2005) page  5,  on 23/3/2011 “On the question of international exhaustion of the rights conferred by the community trademark, the commission has formed the opinion that the community legislation should refrain from introducing this principle and make do with the rule of Community – wide exhaustion. The community must, however, be empowered to conclude, at some future time with important trading partners, bilateral or multilateral agreements whereby international exhaustion is introduced by the contracting parties. The restriction to community-wide exhaustion, however, does not prevent national courts from extending this principle, in case of special nature, in particular where even in the absence of a formal agreement, reciprocity is guaranteed”
[9] (Case C-355/96) [1998] E.T.M.R. 539
[10] (c-173/93) 2000 RPC 63
[11] (c-414/99)2002 RPC 20
[12] [2007] EWCA civ 176
[15] Article 28 and 30 of the Rome treaty
[16] CNL sucal NV vs. HAG GF AG [1990] ECR I-3711
[17] Sebago v. G-B Unic
[18] Zina Davidoff SA vs. G Imports Ltd , (c-414/99)2002 RPC 20
[19] (c-427/93) [1997] FSR 102
[20] Morcom, Roughton & Malynicz, The Modern Law of Trade Marks, third edition, p 435
[21] Contition (A) of BMS condition
[22] (c-349/95) (1998) FSR 544
[23] (c-349/95) (1998) FSR 544, Para 43
[24] [1997] ETMR (530)
[25] Supra 23
[26] (2000) ETMR 102
[27] loendersloot case
[28] Supra 23

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