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INNOVATION IN THE AGE OF PARALLEL IMPORTS: LESSONS FROM INDIA’S MURKY HISTORY OF TRADEMARK LAW


Photo by Will Esayenko on Unsplash

This post has been authored by Manvendra Singh Jadon, pursuing an LL.M. in Intellectual Property Law from NALSAR University of Law, Hyderabad.


Introduction


The economics of trade in India is changing diversely, and the dynamic nature of these trade channels has primarily affected the market discourse[i] in the present scenario. With an ever-shrinking base of resources, the phenomenon of import/export transactions concerning goods and services in the business ecosystem is at an all-time high. In this periscope of affairs, falls the burgeoning issue of ‘parallel importation’ of goods.


Parallel Importation


Parallel importation (Gray Market Goods) is the process of engaging in imports of ‘branded IP protected goods’ in a given host market, without the consent of the IP owner.[ii]These goods are not counterfeit, as they are packaged and formulated by the original manufacturer or its licensees, but are destined for jurisdictions, other than the ones where they are imported.[iii]


‘Disruptive pricing’[iv], ‘marketing gimmicks’[v], and ‘cultural inequalities’[vi] have added fuel to the fire and parallel importation[vii]has become a norm in the emerging and developing markets[viii]. Though it can deftly be argued that importation of products in unregulated markets does cater to innovative practices being undertaken[ix]by inferior firms in order to balance the heterogeneity factor and costs incurred in trade, continuous damage is caused to existing producer firms. This further goes on to inhibit investment[x] in the field of ‘research and development.’[xi] Although the issue of parallel importation has been mostly debated in the context of Trademark Law (especially in India), patent law complexities form the crux of the present-day discussions, as nations in Africa and Asia, are largely dependent on life-saving pharmaceutical drugs for sustaining times of crises.[xii]


On a counter-narrative, it can be argued that parallel importation is a resultant of a sound international trade system which encourages[xiii] free and unheralded[xiv] distribution of goods[xv]by lifting trade barriers.[xvi]Such free trade helps to evade the possibility of moving into the realms of an oligopolistic domestic market dominated by big firms through the introduction of competition[xvii]in the market. It is also well known that, IP rights are not unlimited and hence there are quite a few limitations in form of duration, scope, right to repair and fair use principles etc. In the same vein, exhaustion principle ‘means the consumption of IP rights in the subject matter of goods, as a consequence of a legitimate transfer of title in the tangible article that houses the IP asset in question’.[xviii] Judge Posner, in Jack Walters & Sons Corp. v. Morton Building, Inc., famously said,[xix] that “the absence of exhaustion, if every time a car owner wished to resell his/her used car needed to request a license from the car maker, that would lead to an absurd situation of implying automatic compulsory licenses.” [xx]


The exhaustion can be of different types; namely national,[xxi]international,[xxii]and regional exhaustion.[xxiii]Although exhaustion principle is applicable to all downstream sales,[xxiv]it does not work in absolutist terms. Hence, the original IP owner still retains the exclusive bundled rights of repairing, reformulating the IP, reconstructing, packaging and manufacturing the goods denoted by their IP.[xxv]


Furthermore, parallel import is not illegal per se if the importer buys the product through authorised sales channels of the said product and the country of the issue has allowed for such imports to happen[xxvi]in light of the protective patent laws existing in the country. The proposition of legality arises when this arbitrage opportunity is exploited by introducing deceptive[xxvii](as to the origin[xxviii]and source identification[xxix]) or black market goods[xxx]in the market, thereby destroying the brand value[xxxi]of the leading products.


A single-judge bench decision of the Delhi High Court in Microsoft Corporation & Anr v. Jayesh & Anr.,[xxxii] in relation to trademarks related parallel importation matter did mention the different varieties of imported goods, but refused to rule on the specific legality of each one of them. Conclusively though, the court did hold that goods materially altered are violative of the original trademarks. The Court said: There may exist three separate instances of parallel importation, the first category being where goods are counterfeit goods (sold through illegal channels without express or indirect authorization of the original owner), [Second] other being grey market goods (having being sold to take benefit of price arbitrage and obtained through express authorization of the owner or its licensees), and the [Third] last being counterfeit goods/grey market goods which have been materially altered and modified.[xxxiii]


Previously in 2012, a Delhi High Court Judgment in Kapil Wadhwa v. Samsung Electronics,[xxxiv]in the context of Trademarks while espousing an approach towards international exhaustion, held the following instances ‘as legitimate reasons’ which entitle a proprietor to oppose further dealings in his goods under sub-section (4) of Section 30, even in the teeth of sub-section (3):

[A] With respect to the physical condition being changed or impaired, even in the absence of a statutory provision, the registered proprietor of a trademark would have the right to oppose further dealings in those goods.

[B] Difference in services and warranties

[C] Differences in packaging

[D] Differences in quality control, pricing and presentation


Alternatively, the court did recognize the grey market goods of Samsung brand to be legitimate parallel imports, primarily applying international exhaustion and noting that the first sale[xxxv]of a trademarked product anywhere across the world, would categorically lead to exhaustion of monopoly IP rights in that product for the original manufacturer or its authorized licensees. This was in spite of the product being earmarked or manufactured for a different jurisdiction[xxxvi]than the one where it is being imported. As a corollary to this, it was further notified[xxxvii]by the Customs Board that parallel imports are legal in relation to trademarks and patents, though the situation is still murky[xxxviii]with respect to copyrights.[xxxix]


In spite of the arguments in favour, the criticism levied against this alternative approach is that the importation of patented goods distort the market[xl]which hinders prospect of advancement in the destination country as firms become hesitant