Are parallel imports legal ?

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Now that China is a steadily-growing marketplace, I am more and more solicited by food expoters with the same questions: can we stop parallel importers? what can we do against them?

The question is rather sensitive give that:

  • food exporters engage more and more in strategic partnershio with distributors in China;
  • more and more food brands open their own subsidiaries in China to directly import their products and better control distribution;
  • big budgets are spent on marketing campaigns to promote brand image, positioning, etc..
  • importer food products always arrive on the shelves with much higher prices than home countries and than Chinese domestic products

Parallel import intercepts the market need for original import products at more affordable price, but at the same time may disrupt the brand positioning strategy and cannibalize the same-brand products sold by official authorized distributors. No surprise that parallel importers are not welcome by food brands….

I have to say that parallel import is not expressly regulated by Chinese law. More than this, based on the interpretation of the most relevant regulations, as well as some important court decisions, we can even consider that parallel import is actually allowed/accepted by the PRC legal system within specific limitations.

The situation is different however depending on whether specific intellectual property rights are concerned.

Patent

The new patent law is basically the only piece of PRC legislation that explicitly allows parallel import.

Article 69.1 in fact expressly states that any use, offer for sale, sale or import of patented products or products produced through patented process which have already been sold by the patent owner or licensee does not constitute patent infringement.

Such provision has been added under the new revision of the patent law in 2008.

Trademark

This is usually the case applicable to food products (they always have trademarks on their packaging; while only sometimes they are protected by patents).

In terms of trademark protection, no law/regulation has provisions explicitly addressing the issue of whether parallel import is allowed or not.

We do have – however – some (not many, yet) significant courts decisions which show that the current approach by PRC system seems not against parallel import of branded products: it appears  allowed as long as it does not have an actual or potential impact on the reputation of the brand itself.

In a case concerning parallel import of vodka branded ABSOLUT, the brand owner sued the parallel importer. In this case, the parallel-imported bottles had their original bar code removed by the parallel-importer. The court gave a favorable decision to the brand owner based on the grounds that:

  • by removing the original bar code, the parallel importer had compromised the integrity of the original product, with potential offense to both consumers and brand owner (in fact, removing the bar code prevents full traceability of the product, which is key to get to know their origin and their distribution channels, as well as to control quality issues throughout the whole distribution chain);
  • the defendant had also stuck a Chinese label on the product and with a translation into Chinese of the word “absolute” without authorization of the brand owner. This altered the general esthetic appearance of the original product, allowing also consumers to question the originality/legitimacy of such product – which would damage the reputation of the brand;

A third case of 2014 involves parallel import of wine branded J.P.CHENET. The brand owner sued the parallel importer on the grounds that the parallel import was against its authorization, and that the parallel-imported product had lower quality (as well as differences in the ingredients and expiry date) with those imported through the official and exclusive China’s distributor. The court ruled in favor of the parallel importer, based on the grounds that:

  • The brand owner had not given sufficient evidence of the purported lower quality of parallel-imported wine;
  • The act of the parallel-importer does not harm the function of the trademark to show the product origin, nor undermines the credibility of the trademark owner or the consumers’ rights.

Very significant is the fact that such decision confirmed the first instance decision, which clearly stated that “Nowdays, free trade is a basic principle between different countries, the general trend is to prevent intentional division of the market and to avoid price monopoly. The trademark law protects the tardemark’s owner’s legal rights, meanwhile it also prohibit him monopolizing the market by using  his dominant position and obtaining unreasonable monopoly interests. PRC laws do not define the importing activities of [the importer] as infringement of registered trademarks, if the imported products are not further processed or changed, but only reasonably labeled with related information that will not confuse related consumers, and thus it will not damage the [Company’s] trademark, neither will it damage the interests of the trademark owner or of  the  related consumers, and thus it is not a trademark infringement”.

We can also refer even to decisions rendered in cases external to the food industry. In a 2009 case concerning parallel import of tires, Michelin (the brand owner) obtained a favorable decision based on the grounds that the parallel-imported products had not obtained the mandatory CCC certification (i.e. the mandatory Chinese safety certification for tires and other automotive components). The court held that – even if the products involved in this case were original – the fact that they were imported without obtaining such mandatory certification was a threat to the integrity of the trademark: in fact, in case of any accident or quality problem on the non-certified tires, MICHELIN brand’s reputation would be negatively affected.

Copyright

The copyright law has no provisions concerning parallel import of products protected by copyright, nor can be found significant court decisions.

Conclusion

In summary, the best way to limit parallel import is controlling the supply chain and the customers/distributors with good clauses, territorial limitations, and non-compete obligations. Product identification technologies can also be used in order to monitor the products flow and identify where the parallel products have been sourced from and – therefore – how to commercially or even legally handle the issue.

However – unless highly regualted products are concerned (such as health food, or animal-origin imported product) it will basically be impossible to fully lock-secure your chain from any potential “parallelism” and legally prevent any risk thereof.

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