NAPIB - National Association of the Parallel Importers in Bulgaria

Operation mechanism of the exhaustion of the trademark right doctrine and the parallel import doctrine

The main idea of the doctrine for exhaustion is that it defends the free trade and free movement of commodities doctrine by creating a limitation for the owner of a specific trademark to control the distribution of goods that are protected by this trademark (the right of control over the distribution is exhausted). This limitation becomes effective after the first issue of the goods on the market, done by the trademark owner or by a person authorized by the owner or by a person acting on behalf of the owner. The key issue in applying the doctrine is the one about the place where the exhaustion of the right occurs.

1. There are two approaches in settling the issue about the place where the exhaustion of the right occurs – national and international.

In the case of national exhaustion the right of the trademark owner to control the realisation of the goods bearing this trademark is exhausted after the first sale done by the trademark owner or by a person authorized by the owner in the country where the trademark is registered. After that any trader may implement parallel import and trade with the same goods.

In the case of international exhaustion the first release of the commodity on the market also exhausts the right of control of the trademark owner over the realisation of goods under this trademark. Unlike the national exhaustion, however, the “first release on the market” here is understood as the first sale of the commodity, bearing the same trademark, in any country where the respective trademark is registered. International exhaustion limits the trademark owner’s control over the distribution of goods and allows parallel import of goods under this trademark by third parties even before the trademark owner has released the goods on the market of the import country.

The choice of rights exhaustion depends entirely on the will of the legislator in the respective country. The analysis of the reasons for the choice of one regime of exhaustion of the goods or another shows that the different countries harmonise the type of their exhaustion with the goal of their national economy. There is the impression, for example, that most Asian countries have adopted international exhaustion of trademark rights. Some authors explain this with the fact that these countries are poor in resources and technologies and their economies are more oriented towards export of goods than of technologies. To make their export prosper they need import of technologies and goods that are cheap so that they could be invested in their production and exported back in the form of cheap goods. Japan, although in a slightly different position, has also chosen international exhaustion with the aim to counteract the existing distribution system, which practically does not allow foreign traders to sell goods without the participation of Japanese traders.

The European Union as a common market has adopted the regime of intracommunal exhaustion, which in its nature can be compared to the regime of international exhaustion that is effective only among the countries of the European Economic Community. This type of exhaustion, however, is criticized by some authors, who point out that it takes into consideration only the interests of the traders from the community and not the interests of the other traders.

ÀUS have adopted an exhaustion, which in its nature can be defined as national. Pursuant to Article 1526, b. (“à”) of the Tariff Act as of 1930, the import of goods bearing a trademark that is registered in USA by a person living in USA is prohibited, unless by the time of import the trademark owner’s consent in writing is presented. Regarding parallel import, this regulation is interpreted in a broad sense, namely that parallel import is allowed in the cases when the trademark of the goods, which is imported, belongs to one and the same person, or the owners of the local and the international trademark are intersubordinate companies, or subject to common control. Additional regulations regarding right exhaustion are also included in Lanham Act (Art. 32, 42 and 43 (à)).

The applicability and the efficiency of the two variants of the rights exhaustion doctrine and the parallel import doctrine become clearest in the comparison of their influence on the market. Two types of markets will be analysed briefly to this end:

(1) market with a national exhaustion regime, in which the movement of goods is hindered by trade barriers (mostly the presence of “segmentation", as mentioned above) and does not allow parallel import before the occurrence of rights exhaustion on this territory, and

(2) market with an international exhaustion regime, in which the movement of goods is free and there is an opportunity for parallel import of goods.

In the case of a market with international exhaustion regime there is no opportunity for introduction of price discrimination by the trademark owners due to the presence of real competition in the person of the other traders, who have purchased a commodity bearing the respective trademark at markets where its price is lower.

With regard to the aforementioned, it is natural to draw the conclusion that a market, acting under the regime of international exhaustion, encourages competition among the companies offering a commodity of one and the same trademark. This competition results in reduction of prices in the country of parallel import and leads to a common market where goods move freely, and thus an optimal balance in the protection of the interests of the trademark owner, the principles of free movement of commodities and the protection of the consumer interests are achieved.

We cannot defy the existing opinions against international exhaustion of rights and the admission of parallel import either. According to the opponents of international exhaustion it does not result in price reduction, or in case it does, it is within 1-2% and is obliterated in time. It is further noted that parallel importers do not offer a full set of services accompanying the commodity (e.g. post-warranty service), which does not correspond to the formed image of the commodity as a whole. A common argument against the regime of international exhaustion of rights is that parallel importers take advantage of the investments made by the trademark owner in connection with its release on the market without paying for this, nor compensating the trademark owner in any way for the expenses made. Another major argument against parallel import is that it creates great opportunities for import of goods that are counterfeits of the originals, and also avoids payment of the due import taxes and duties. It is also pointed out that parallel import may have negative consequences with regard to some goods that are harmonized with the indices of specific markets.

Some of the arguments are really grounded but anyway it is accepted that parallel import is the "necessary evil" for the existence of an effective market. It is doubtless that there are losses for the trademark owners due to the presence of parallel import. On the other hand, these losses of theirs are profit for the parallel importers and the goods consumers. The profit from the trademark is distributed among a number of persons, which is a good and socially useful mechanism, which has proved its longevity for more than 40 years and is in the basis of the prospering economies of the European Union, Japan, USA and some developing Asian countries.

Parallel import gives the consumers the opportunity for a choice of trademark goods at lower prices, offered by competing importers. Often the low price is at the expense of the fact that the commodity is "out of fashion", or diverts in some of its characteristics, or lacks some other "extras", accompanying the commodity, which are not included in its price, but the customers themselves agree to this provision of the sales agreement. To the argument that parallel import serves as a disguise for import of counterfeits it can be answered that in this hypothesis the parallel import doctrine is inapplicable, as in this case there is a violation of the intellectual property right. As for the evasion of the collectible state receipts, this phenomenon is a result of inefficient customs control, and not of parallel import. In this sense it is groundless that "The limitation of parallel import will lead to increase in the general profit in the state budget from taxes and excises on the increased value of the imported goods". Such limitation would more often result in reduction in the general profit in the state budget as it will limit competition, which in turn will lead to increase in the prices of goods and reduction in the demand and turnover of these goods.

Parallel import is usually not regulated explicitly as admissible. Its legislation is based on the principle that everything which is not prohibited is allowed. The admission of parallel import often represents a legal construction, which includes a norm designating the type of trademark right exhaustion (national or international) and a norm designating the activities that are violations of the trademark in import. In some countries (for instance Taiwan) such norms are included in one normative act (usually the one regulating the protection of trademarks), whereas in others they are distributed respectively in the law on trademark protection and the antitrust legislation (Vietnam). In other countries (Japan, China) this construction is even more complicated and includes norms of the customs law or administration acts, to which the customs authorities are subordinated (this is usually the ministry of finances).

In the analysis of the issue of the parallel import formulation it is ascertained that in the legislation of most countries (including EU) there is no clear regulation, which specifies when parallel import is admissible. This has imposed the clarification of this issue by court decisions of supreme courts (for EU– the European Court of Justice in Luxembourg) and of the committees on competition protection, acting as peculiar "landmarks" in trade practice.

The doctrine of exhaustion of trademark right and the issue of parallel import in the European community and in the Republic of Bulgaria >>

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