Trade wars for ‘gray’ import


Recently, more and more Ukrainian holders contribute intellectual property objects to the Customs Register. Main purpose of this application is blocking violation of intellectual property rights while import and export, in other words, identifying and fighting counterfeit.
One of the key issues of international trade and intellectual property is parallel or so-called ‘gray’ import.

A parallel import is a non-counterfeit product imported from another country without the permission of the intellectual property owner. Such import usually works in the automotive industry, electronics, cosmetics, pharmaceuticals, and many others.
Why the owners of IP rights are trying to ban ‘gray’ import? Notice, that some producers are interested in such import, because the goods are legally paid and are not counterfeit.
Reasons of banning such imports are usually associated with:
  • distribution network. The official distributors are interested in market monopoly. Often ‘gray’ products are cheaper. Therefore, distributors refer the owner of the brand - with requirements to prohibit the ‘gray’ import;
  • quality and descriptions of products differs for each country. For example, cars manufactured for the market of the Middle East differ from vehicles manufactured for European market;
  • distinction of standards authorized in different countries;
  • impossibility of warranty services, since this function is up to the official importer.

  • Should the ‘gray’ import be prohibited or not - a rhetorical question. Probably, each manufacturer should give answer by himself. As well each customer may choose between cheaper products and original products developed for its market, sold by official distributor.
    Since I am involved in IP rights protection, in this article, I want to stop on issue about trade wars and competition between ‘gray’ importers.

    Legitimacy
    The legitimacy of ‘parallel import’ directly depends on the approach to the principle of exhaustion of rights established in the legislation of a country. According to this concept, once IP right holders sell in a particular jurisdiction a product to which their IP rights are attached, they must allow the resale of that product in that jurisdiction. In other words, if you bought the original cosmetic and perfume products, you have the right to sell it as well the buyer also has a right to sell it. Thus, the chain is constructed from the manufacturer to wholesalers, from wholesalers to the retailer. There are three approaches to this principle:
    - International - exhaustion occurs after the sale of the goods in any country. According to this approach, neither the producers nor the authorized distributors can not ban the sale of ‘gray’ products;
    - National - these regimes are followed by countries and regions that only allow trademarked goods that have been exhausted to be resold in the national area that the goods are from. It does not allow for goods to be sold outside of those areas.
    - Regional - valid in EU countries. According to this principle it does not allow for goods to be sold outside of EU.

    Rights exhaustion in Ukraine
    The issue of exhaustion of rights is debatable in Ukraine. On the one hand in the part 6 of Article 16 ‘the owner can prohibit the sale of products and after its introducing into the civil commerce, if there are weighty grounds to forbid such use, in particular in case the condition of product changed or the quality of product lowered’. In this case Law doesn’t consider a particular country, so we can talk about international approach.
    However, there are other expert opinions which referring to the territorial nature of rights on the trademark, consider that introducing into the civil commerce concerns Ukraine territory, and therefore the principle of national exhaustion of rights has an affect.

    Court practice
    Few cases about international approach to exhaustion principle are represented in Ukrainian court practice. Thus, Malinowski District Court (Odessa region) hold case 521/6940/14-н on May 30, 2014. Under this administrative case South Customs suspended declaration of goods (mobile phones, tablets) with trademarks ‘Sony’, ‘LG’, ‘Samsung’, ‘Apple’, ‘HTS’, ‘Nokia’. Under court order, ‘the Ukrainian legislation defines the principle of intellectual property rights exhaustion’. Due to this fact, the commission of a lawful ‘first sale’ of goods under the trademark right holder loses the right to ban the use of the trademark for this particular product, including in the event of further commercial use of the product by third parties in any form. In this case, we are talking not about violation of IP rights, but about losing control over the distribution channels. Ukrainian legislation on intellectual property issues does not contain provisions regarding the prohibition or restriction of ‘parallel import’, and does not impose any obligation to fight with it.

    In my opinion, legislative settlement of exhaustion principle is necessary for correct and unambiguous understanding. Such practice is used in other countries. The only way for owner to prohibit the ‘gray’ imports is referring to the same Article 16 appealing to lower quality of the product after its introducing into the civil commerce. For example, fuel system of a vehicle produced for the US market is developed for different quality of fuel than in Ukraine. Situation could arise when composition of the food product includes a prohibited ingredient for other country.

    Mariya Ortynska
    Attorney-at-Law, Trademark and Patent Attorney of Ukraine

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