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Parallel Imports And International Exhaustion

Parallel Imports And International Exhaustion are two inter-related topics. Parallel Imports refer to purchasing goods sold in a different jurisdiction and importing them for further sale in another jurisdiction, through unauthorized channels. And International Exhaustion refers to the exhaustion of the right of an Intellectual Property right owner, with regards to preventing the buyer from circulating or selling the goods bearing the Intellectual Property, further. Different jurisdictions follow the different doctrines of exhaustion. If a jurisdiction follows International Exhaustion, only then can Parallel Imports in that jurisdiction be considered as legal. The article analyses the legality of the doctrine globally and India in particular.

Introduction

Parallel Import

Parallel Imports, also known as the grey market goods denote the goods that are imported in a country’s market without the permission of the Intellectual Property owner and sold thereafter. It is necessary to understand that these goods are not counterfeit, pirated, or fake but are manufactured under proper license and sold legally.[1] These products are genuine and legal but are called so because they are imported through unauthorized channels. This is the main reason why they are known as grey market goods, neither black nor white. Basically, in this practice a good is manufactured and sold in one jurisdiction and then imported through unauthorized channels in another jurisdiction, then sold there.

The reason parallel import is practiced is the fact that a particular product may be sold at different prices in different jurisdictions. A person may take this opportunity and import such branded goods from the jurisdiction having cheaper goods and sell them in the jurisdiction where the same goods are sold at a higher price, making profits. This difference in prices may arise due to several reasons such as a change in distribution channels, price discrimination, or instability of currencies.

The validity and legality of this practice in a given country depend entirely on the doctrine of exhaustion it follows. And since it affects the rights of the Intellectual Property owner and the trade in the country, laws related to Intellectual property and Competition also apply.

Doctrine of Exhaustion

Intellectual Property owners have several exclusive rights depending on the property, such as the right to use, import, sell, reproduce, display, etc. However, these rights come with certain exceptions and limitations, one of which is exhaustion.[2] It denotes the extent to which an owner can control the sale and circulation of his Intellectual Property. As per the doctrine of exhaustion, once a valid sale is made by the IP owner or any person authorized under him, then he can not control further circulation or sale of such goods.  Since, the exclusive right he had to sell the product exhausts when the first sale of such good takes place, he can not exercise his right again concerning the same good. This is why the doctrine is also known as the doctrine of the first sale. The exhaustion of some of these exclusive rights is important because otherwise, the owner would be able to control the use and sale by the purchaser of the goods. Meaning hereby that a person would not be able to enjoy the goods without the fear of infringement if the doctrine of exhaustion does not exist.

The doctrine is also necessary to curb the monopoly of the Intellectual Property owner in the market and protect the interest of the public in general. It prevents the owner of the IP to gain profits repeatedly from the same goods. However, the doctrine only comes into the picture after the first sale is made validly by the IP owner of any person authorized under him. It must be noted that the buyer does not get any right on the Intellectual Property after the purchase but only on the particular goods.[3]

Since Intellectual Property Rights are territorial and different jurisdictions have different laws concerning them, there are three types of exhaustion. Namely, National, Regional and International exhaustion. In National Exhaustion, once goods are sold in the domestic market of a nation by the IP owner or any person authorized under him with his consent, he loses control over such goods and can not prevent any circulation of such goods in the domestic market. However, the buyer can not sell the product outside the domestic market as the rights of the owner are exhausted only in the domestic market. Therefore, a person can not circulate or sell the goods abroad without the consent of the Intellectual Property owner. Similarly, in regional exhaustion when goods are sold by the IP owner or any person authorized under him to sell in a certain region, then the exclusive rights of the owner are exhausted in the said region and he can not prevent the circulation of such goods in the region. A well-known example of it is the European Union.

In case of International Exhaustion, it is assumed that the world is a single market place and therefore, once the first sale of goods is made by the IP owner or any person authorized under him anywhere in the world, the IP owner exhausts his exclusive right to sale and uses that particular product all over the world, This means that he can not prevent any person from circulating, exporting or importing the product anywhere in the world, subject to it being brought legally. In this article, we shall be dealing with International Exhaustion in particular.

Position Globally

The Trade-related Aspects of Intellectual Property Rights [4](TRIPS) agreements reflect the change in trade and need to protect the Intellectual Properties. However, the issue of Parallel Imports and International Exhaustion remains unresolved by it. These issues are so argumentative that the parties to the agreement could not come to a concrete conclusion.

As per Article 6 of the TRIPS agreement nothing in the agreement should be used to address the issue of Intellectual Property Rights exhaustion.  It’s meaning is made clear by Article 5(d) of the Doha Declaration [5]which clarifies that the Articles of the TRIPS agreement give each member the right to create their laws for the issue of international exhaustion.

This means that each member nation can decide whether it wants to implement the doctrine of international exhaustion or not. This has created a disorder concerning following this doctrine.

Position in India

In India, different laws exist for different Intellectual Properties such as the Patent Act, Trademark Act, Copyright Act, etc. Therefore, whether international exhaustion is practiced in India or not can be answered as a whole. In India, it depends entirely on the Intellectual Property in question.

Trademarks

To know whether India follows international exhaustion in the context of Trademarks, it is necessary to understand the two subsections 3 and 4 incorporated under Section 30 of the Trade Marks Act,1999. It deals with the limits on the effects of a registered trademark.[6] As per subsection 3 of the said Section, a sale of goods acquired lawfully bearing registered trademark can not be said to be an infringement and the trademark owner can not prevent the sale of such goods in a market. However, subsection 4 states that subsection 3 will not apply in case the condition of such goods is altered after being put in the market.

However, the term market has not been clarified in the Act. If the term refers to only the domestic market then national exhaustion applies and if it refers to the global market then international exhaustion applies. A quick reading of the Section might suggest the domestic market thereby implying the use of national exhaustion. Therefore, to clarify it is necessary to refer to certain case laws.

In the case of Kapil Wadhwa v. Samsung Electronics[7], Kapil was a former authorized dealer of the printers of the company. He practiced parallel imports and managed to get the Samsung printers at a cheaper price. Samsung argued that these goods did not follow certain statutory norms and that the defendant ran a website where he sold these Samsung printers at a cheaper price. Whereas the defendant argued that under Section 30 of the Trade Marks Act, Samsung can not impose restrictions and his acts did not amount to infringement.

An order was passed releasing the goods to the defendant with certain directions. The defendant went in an appeal against the order. Samsung argued that since the defendant sold the goods bearing the Trademark it affects the goodwill of the company. Therefore, the court ordered the defendant to declare that the goods were imported and the company did not give any warranty for these goods.

The Court also clarified that the term market under Section 30 refers to the global market and not just the domestic one. And stated that Indian Trademark law follows international exhaustion.

Similarly, in another case of Xerox Corporation v. Puneet Suri[8], the company claimed that the defendant infringed their trademark by importing second-hand machines bearing their trademark and later selling them. The court held that the import and sale of Xerox machines did not constitute infringement if no changes were made to the machine.

Patents

Section 107A subsection (b) of the Patents Act, 1970 was inserted in 2002 and amended by the Patents (Amendment) Act of 2005. The provision provides that an act of importing patented goods by a person from another person who is authorized under the law to make, circulate, or sell the goods can not be considered as an infringement.[9] It means that the patent laws in India do not prevent the parallel importation of goods.

Copyrights

As per Section 14 of the Copyright Act, 1957 copyright in case of musical, literary, or dramatic work includes issuing copies of a work to the public that are not already in circulation.[10] It does not mention already in circulation in India particularly. This implies that international exhaustion concerning the copyright in India might exist.[11] Also, the amendment made in the Act in the year 2012 inserted a new Section 52(zc) that states importing artistic or literary work, incidental to goods being imported does not amount to infringement.[12] The amendment also introduced exhaustion of rights after the first sale to sound recordings and cinematographic films.

Designs

Section 22 of the Design Act, 2000 states that while copyright exists in any design, it is unlawful to import any goods belonging to the class in which the design is registered and applied for sale. However, this importation can be affected after the permission of the design owner.[13] Therefore, it can be said that parallel importation and the doctrine of international exhaustion do not seem to apply in the case of Designs.

Conclusion

Parallel Importation and International Exhaustion is a complex issue because it does not have a concrete position internationally. Moreover, even considering it only in India different Intellectual Property laws take a different stance. Whether parallel importation should be allowed in all the countries or not, and if yes then for all or some of the Intellectual Properties. This question is hard to answer keeping in mind various advantages and disadvantages it carries for the rights owner and the consumers. On one hand, it provides the same goods in the market at a cheaper price curbing monopoly and promoting trade. And on the other hand, it affects the goodwill and reputation of the manufacturer.

While it is up to the government to decide for which Intellectual Property, parallel import, and exhaustion should be allowed and for which it should not. The courts should step in and at least clarify the current status of the applicability of the doctrine of international exhaustion to various Intellectual Properties.

Frequently Asked Questions

  1. What do Parallel Imports mean?
  2. What are International Exhaustion and its types?
  3. What does the TRIPS Agreement state about exhaustion?
  4. Does the Trade Marks Act allow International Exhaustion?
  5. Is the stance of various IP laws clear regarding International Exhaustion and Parallel Imports?

Reference

Published by Saksham Srivastava

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