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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 to invest[xli]in the long process of innovation.[xlii] Additionally, such imported products lack the customer support[xliii]and after-sales service[xliv]provided by the original manufacturer, though in some cases, such anti-competitive measures can be struck down, if the parallel import is taking place legally with the consent of the original manufacturer or without material alteration of the original IP protected goods.
In the context of India, individual landmark decisions[xlv]have come through which though does not talk specifically about importation have aided a long way in providing a sustainable rights-based approach towards intellectual property.[xlvi]These judgments do not undermine IP rights and in fact, it has been well provided in § 83 clause (c) of The Indian Patents Act, 1970 that enforcement of patent rights contribute to technological innovation and dissemination of technology but it does not mean that patent rights should be abused and utilised as a puppet to adversely affect international transfer of goods (clause (f)). Even though TRIPS[xlvii] has mandated that nations have sovereignty to decide upon the issue of parallel import of protected goods, a sizeable number of countries like India and other emerging economies have allowed for parallel importation and international exhaustion.[xlviii]
On the other hand countries like the United States of America, United Kingdom apply the principle of ‘Exhaustion of Rights’, a doctrine which finds its roots in Germany[xlix]but has been fundamental in shaping up the changing landscapes of IP rights in almost majority of the developed economies. The doctrine was first used in the USA in the case of Bloomer v. Michigan. This Exhaustion of Rights approach gives credence to the general principle[l] that: ‘Sale of a product is Transfer of Property and with an outright sale the seller parts away with rights in the product and no law can provide the right to reap away the benefits of a property once sold’.
Conclusion
Exhaustion of Rights has been at the centre of the debate around the world and the majority of the developed economies shy away from the prospect of exhausting rights of the IP holder in order to be more marketable and to gain stronghold as centre of innovation.In fact, the International Trademark Association for years has been rallying around countries to reintroduce national exhaustion principle in their jurisdiction but to no avail. Nonetheless, it can be argued without an iota of doubt that innovation is directly proportionate to monopoly IP rights but if unrestricted rights are offered to the innovators, it can lead to an abysmal imbalance that can critically affect and cripple the emerging economies in times of crises. Conclusively, the debate on the interface of importation and IP rights centres on the issue of innovation. Thus, to keep this raging debate at bay, jurisdictions have nothing but to necessarily strike a balance between principles of competition in the market and protection of rights.
End-Notes
[i] Jenson & Bjarne S., The Dynamic Systems of Basic Economic Growth Models (Springer Publications, 1994). [ii] International Trademark Association Policy Advisory on Parallel Imports, (Feb 19, 2020) https://www.inta.org/Advocacy/Pages/ParallelImportsGrayMarket.aspx. [iii] Id. [iv] Parallel Imports majorly due to manufacturers exerting ‘vertical price controls’ (disruptive pricing) over the downstream control over the distributors. [v][v] Without Parallel Imports in place, the producers have a leeway to invest in different marketing strategies which boost the net profit margin for corporations, without the fear of fear-riding on protected IP by competitors. [vi] Cultural Inequalities refers to the inequitable access to branded goods (specifically in context of pharmaceuticals) in developed countries and developing countries, which leads to parallel importation of such goods within the local market without the consent of the owner of the IP or the manufacturer. [vii] Frederick M. Abbott, Parallel Importation: Economic And Social Welfare Dimensions, International Institute for Sustainable Development (2007). [viii] Stefan M Miller, Parallel Imports: Towards A Flexible Uniform International Rule, 15 ournal of Comm. Biotech. 21-43 (2009). [ix]Andrea Mantovani & Alireza Naghavi, Parallel Imports and Innovation in an Emerging Economy, Centre for Economic Research (Recent) 038, University of Modena and Reggio E., Dept. of Economics (2010). [x] Changying Li, Competition, Parallel Imports And Cost‐Reducing Innovation, 53(3) Scottish Journal of Political Economy 377-397 (2006); Changying Li & Robles, Jack, Product Innovation And Parallel Trade, 25(2) International Journal of Industrial Organization 417-429 (2007). [xi] International Trademark Association Position Paper on Parallel Imports, (Feb 19, 2020)http://www.inta.org/Advocacy/Documents/2015/INTA_PIC_Position_Paper.pdf [xii] Sengupta, A., Parallel Imports in the Pharmaceutical Sector: Must India be More Liberal?, 12 Journal of Intellectual Property Rights, 400-409;Pai, Y., The Hermeneutics of the patent exhaustion doctrine in India in Irene Calboli et.al. (eds.), Research Handbook on Intellectual Property Exhaustion and Parallel Imports (Edward Elgar, 2018). [xiii] Bonadio, E., Parallel Imports In A Global Market: Should A Generalised International Exhaustion Be The Next Step?,33(3) European Intellectual Property Review153-161 (2011). [xiv] Fact Sheet: TRIPS and Pharmaceutical Patents, WTO,https://www.wto.org/english/tratop_e/trips_e/factsheet_pharm02_e.htm (last visited Feb 19, 2020). [xv] Rajnish Kumar Rai, Parallel Imports and Unparallel Laws: Does the WTO Need to Harmonize the Parallel Import Law, 46(3) Journal of World Trade 657–694 (2012). [xvi] Changying Li, Vertical Product Innovation and Parallel Imports, 50(1) Singapore Economic Review 35-46 (2005). [xvii] Ahmadi, Reza & B. Rachel Yang, Parallel Imports: Challenges from Unauthorized Distribution Channels, 19(3) Marketing Science Journal 279-94 (2000). [xviii] Secretariat, Interface between Exhaustion of Intellectual Property Rights and Competition Law, World Intl. Prop. Org. CDIP/4/4 Rev./Study/INF/2 (2011). [xix] Jack Walters & Sons Corp. v. Morton Building, Inc., 737 F.2d 698, 704 (7th Cir. 1984). [xx] Supra note XV at 4. [xxi] ‘In the national approach, the rights of the owner of the trademark are seen to be exhausted only in that specific domestic territory where the trademarked products are placed by the owner or with his or her consent. The proprietor of the trademark has greater freedom to decide whether to place his trademarked products in different states or not’; Samuel Dobrin & Archil Chochia, The Concepts of Trademark Exhaustion and Parallel Imports: A Comparative Analysis between the EU and the USA, 6(2) Baltic Journal of European Studies 28-57 (2016). [xxii] ‘Under international exhaustion, if the goods are put in the market by the IP holder, or with his consent, in any of the countries where his right is protected, that will exhaust his rights for other national jurisdictions as well 23 as where he enjoys the similar right’; Garima Iyer & Tania Sebastian, Exhaustion of Rights and Parallel Imports with Special Reference to Intellectual Property Laws in India, 2(1) Journal Of National Law University Delhi 26-53 (2018). [xxiii] ‘Regional exhaustion (re), the right expires upon First sale within a well-defined region comprising a group of countries but not outside it’; SeeKamal Saggi, The Regional Exhaustion of Intellectual Property, Vanderbilt University 1-18 (2013). [xxiv] Shubha Ghosh, The Implementation of Exhaustion Policies Lessons from National Experiences, 40 ICTSD Programme on Innovation, Technology and Intellectual Property 3-72 (2013). [xxv] Marco M., The Exhaustion of Intellectual Property Rights, 6(3) Jour. Of World Intell. Prop. 421-440 (2003). [xxvi] Christopher Heath, Parallel Imports and International Trade, 28 I.I.C. 623 (1997); John C. Hilke, Free Trading or Free-Riding: An Examination of the Theories and Available Empirical Evidence on Gray Market Imports, 31 World Competition L & Econ. Rev. 75 (1988); Herman Cohen Jehoram, Prohibition of Parallel Imports Through Intellectual Property Rights, 30 I.I.C. 495 (1999); E.C. Vandenburgh, The Problem of Importation of Genuinely Marked Goods is not a Trademark Problem, 49 Trademark Rep. 707 (1959). [xxvii] Philip Morris Products S.A & Anr v. Anil Kumar Singh & Ors, CS (OS) 500/2010. [xxviii] Louis Vuitton Malletier v. Abdul Salim & Ors, CS (OS) 90/2006. [xxix] Rahul Bajaj, Countering the Menace of Counterfeits, SpicyIP (2016), (Feb 19, 2020).)https://spicyip.com/2016/08/countering-the-menace-of-counterfeits.html. [xxx] Casio Keisanki Kabushiki Kaisha v. Rakesh Sethi and Ors, CS (OS) No.929/2005. [xxxi] Kitchen P.J., Brand Equity And Brand Vulnerability: The Impact Of Gray Marketing/Parallel Importing On Brand Equity and Values, 37(10) European Journal of Marketing1332-1349. [xxxii] Microsoft Corporation & Anr v. Jayesh & Anr ., CS (OS) 1067/2007. [xxxiii] Id. [xxxiv] Kapil Wadhwa v. Samsung Electronics, 2013 (53) PTC 112 (Del.) [xxxv] Priya Sampath, Parallel Imports in India: A Trademark Law Perspective, Gamechanger Law Advisors(2018),(March 13, 2020) https://www.gamechangerlaw.com/parallel-imports-in-india-a-trade-mark-law-perspective/. [xxxvi] Fabio Giacopello, Parallel Imports: The Battle between Safe and Cheap, HFG Law & Intellectual Property (2018), available at https://www.lexology.com/library/detail.aspx?g=6c9c110c-863c-447d-a71b-a2ef2b893521. [xxxvii] Prashant Reddy, Customs Board Issues Circular Allowing ‘Parallel Imports’ Under Patents Act and Trademarks Act, SpicyIP, (March 13, 2020)https://spicyip.com/2012/05/customs-board-issues-circular-allowing.html. [xxxviii] BananaIP Reporter, The Impact of Parallel Import of Copyright on Publishers in India in Light of Copyright Amendment Bill, BananaIP, (March 13, 2020) at https://www.bananaip.com/ip-news-center/impact-of-parallel-imports-of-copyright/. [xxxix] John Wiley and Sons Inc. and Ors. v. Prabhat Chander Kumar Jain, 2010 (44) PTC 675 (Del). [xl] Flamagas, SA v. Irfan Ahmed and Ors, CS (Comm.) 895/2016. [xli] Tomaso Duso et.al, The Welfare Impact of Parallel Imports: A Structural Approach Applied to the German Market for Oral Anti-diabetics, Düsseldorf Institute for Competition Economics, Working Paper 137, (2014). [xlii] Shubha Ghosh, Irene Calboli, Exhausting Intellectual Property Rights: A Comparative Law and Policy Analysis (1sted. Cambridge Publications, 2018). [xliii] Rubinetterie Bresciane Bonomi SpA via M. Bonimi v. M/s. Lehry Instrumentation & Valves Pvt. Ltd., C.S.No.891 of 2015. [xliv] Matrix Info Systems Private v. Intel Corporation & Ors, Case No. 05 of 2019, Competition Commission of India, August 2019. [xlv] Novartis Ag v. Union of India, (2013) 6 SCC 1. [xlvi] Bayer Corporation v. Union of India, 162 (2009) DLT 371. [xlvii] TRIPS: Agreement on Trade-Related Aspects of Intellectual Property Rights, art 6, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, 1869 U.N.T.S. 299. [xlviii] Indian Patents Act, 1970, § 107; Trademarks Act, 1999, §30. [xlix] Nicola Harvey, Linking to a ‘New Public’: Parallels with the Principle of Exhaustion, Lund University (2015). [l] Basheer, S. & Kochupillai, M., TRIPS, PatentsAnd Parallel Imports In India: A Proposal For Amendment, 2 Indian J. Intell. Prop. L. 63 (2009).