Parallel importation of trademarks has always been a hot and thorny issue in the fields of IP and the international trade and is hotly debated internationally. Because occurrences of parallel importation emerged relatively late in China, the majority of the general public has never heard of this concept, and even within the industry quite a number of people cannot tell clearly what on earth parallel importation is. At present China’s Trademark Law, implementing regulations and other relevant laws don’t have explicit provisions on parallel importation, leaving statutory blanks in this regard.

In practice, China rarely encounters cases of parallel importation, mainly because China is currently a low-priced country and high-priced products are unlikely to be imported into low-priced countries, because no profits can be reaped through price differences. However, with the deepening of opening-up and continuous development of foreign trade, China will encounter more cases of parallel importation. Therefore, how to regulate the issue of parallel importation has become a hotly debated topic in the theoretical circle, drawing increasing attention from the public.

In recent years, three well-known cases, namely, the “Lux soap case,” “AN’GE clothing case” and the “Michelin tire case,” have not only related to disputes over parallel importation in the trademark field but also led to judicial proceedings. These are three common examples of cases that have drawn direct attention from the relevant people regarding the issue of parallel importation.

The Lux soap case, which started in 1999 by Unilever, is China’s first case of trademark infringement with parallel importation as the cause of action. Under agreements entered into with Unilever, Shanghai Unilever Co., Ltd. (“Shanghai Unilever”) was authorized to exclusively use LUX trademark in the Chinese mainland.

In May 1999, a Guangzhou-based Company J declared at Guangzhou Fushan Customs an intent to import 895 boxes of Thailand-made LUX soap. Shanghai Unilever lodged a lawsuit before Guangzhou Intermediate People’s Court in July on the grounds of infringement based on its exclusive rights to use the LUX trademark. The court ruled that the defendant should stop infringement, apologize to the plaintiff and compensate losses.

As regards the issue of parallel importation mentioned in the defendant’s defense, the defendant failed to provide sufficient evidence to prove that the batch of soap was sourced from the trademark registrant or with its consent, therefore, the defense was not untenable. The Lux trademark infringement case took place during the Asian financial crisis. The Thai baht had depreciated substantially while China’s RMB remained strong, and China was a high-priced market, which led to the parallel importation. Since China’s Trademark Law does not have clear provisions on parallel importation, the judgment failed to respond directly to the issue of parallel importation, but bypassed this issue. Instead the court’s ruling was based on infringement on the part of the defendant for importation of counterfeit trademarked products on the grounds of failure of the importer to prove that the imports were genuine. The case was China’s first case of parallel importation.

In 2000, the AN’GE clothing case was heard by the Beijing Second Intermediate People’s Court, was another case of parallel importation. In this case, the plaintiff, Beijing Fahuayilin Trading Co., Ltd., had the exclusive rights to use the (French) AN’GE trademark and distribute its products in some Chinese cities, under a license agreement entered into with AN’GE Co., Ltd. in October 2000. The defendant, Beijing Shiji Hengyuan Science & Trading Co., Ltd. began in April 2001 to sell AN’GE clothing at a retail store owned by the other defendant, the Pacific Department Store Co., Ltd. at Chongqing Metropolitan Plaza. The AN’GE clothing being sold was imported by others from the clothing distributor of AN’GE in Hong Kong, Hong Kong Ruijin Company. Plaintiff claimed that the two defendants had infringed upon its exclusive dealership rights, violated the business principle of good faith, and sought an injunction against Shiji Hengyuan for unfair competition, compensatory damages, and a public apology. The court found that the acts of the defendants did not amount to unfair competition, and rejected Plaintiff’s claims. The plaintiff in the case chose unfair competition, rather than trademark infringement, as a cause of action, thus avoiding the issue of parallel importation.

On April 24, 2009, Changsha Intermediate People’s Court heard a special IP case. The plaintiff was a well-known tire manufacturer and a Fortune 500 company, Michelin Group. The defendants were two private businesses selling tires in Changsha.

In April 2008, Plaintiff found Defendants selling products which violated Plaintiff’s exclusive rights to use the registered trademark and lodged a lawsuit before the court claiming 100,000 Yuan in damages. Defendants argued that the tires they sold were genuine products manufactured in Japan by the plaintiff and were legally obtained. Therefore, the sales would not infringe upon the plaintiff’s exclusive trademark rights. The first-instance court ruled that the defendants be enjoined from infringement and the plaintiff be compensated in the amount of 5,000 Yuan in damages. The case was regarded by Chinese courts as the first ruling involving parallel importation of trademarks, thus attracting wide attention and discussions.

A series of issues have arisen from the foregoing cases: how to define parallel importation of trademarks; how to view trademark parallel importation in accordance with the current China laws; whether trademark parallel importation can be regulated by the relevant laws of China.

In theoretical circles, no uniform definitions exist for trademark parallel importation. In general, trademark parallel importation refers to acts of an importer, in international trade, to import, without authorization of a trademark proprietor (including a trademark registrant or a licensee), goods bearing identical trademarks from a foreign country where it is authorized for manufacture.

According to Dr. Yan Guizhen, Assoc. Prof. of Tongji University, the occurrence of parallel importation is due to price differences of IP products in different countries. As it is a profitable business, the importer obtains products on the foreign market and imports them into the domestic market. In this way, parallel importation occurs. Low prices of the parallel imported goods have caused great impact on the domestic sales of the products by the IP owners in the importing country, giving rise to the question of whether to allow parallel importation or not.

It is understood that debates relating to parallel importation in the IP field are mainly embodied in the “doctrine of exhaustion,” namely, international exhaustion over domestic exhaustion. According to the doctrine, after the goods bearing a trademark are first put on the market by the trademark owner or with his consent, the trademark owner will lose his control over the goods, leading to the exhaustion of his rights. Distribution and resale of the goods, in whatever way, shall not constitute infringement. The doctrine of exhaustion can be further divided into national exhaustion and international exhaustion.

Many countries set out restrictions on trademark parallel importation with the view of safeguarding their economic interests and protecting exclusive trademark use rights. Generally speaking, countries advocating free trade recognize international exhaustion and allow parallel importation, while those opposing free trade usually reject the international exhaustion and prohibit parallel importation. Developed countries strongly advocate the doctrine of national exhaustion of trademark rights based on their competitive positions in international trade and intellectual property rights protection.

The International Trademark Association (INTA) has always been concerned about the issue of parallel importation. During an interview with China IP, Ma Qiang, chairman of the Association’s Parallel Imports Committee Asia-Pacific Subcommittee said: “The subcommittee, after research, found that currently, the national (or regional) exhaustion theory has occupied a dominant position in the world. A review of worldwide laws from many countries from 2004 through 2005 showed that most people were for national or regional exhaustion.” Chen Min, Chief Representative of INTA China Office also expressly stated that the INTA was against parallel importation, for national or regional exhaustion, and against international exhaustion.

Li Qunying, director of the IP Division of Policy and Law Department under the General Administration of Customs, said that parallel importation and smuggling are two faces of the same coin. IP owners usually hold negative attitudes towards parallel importation. In particular, trademark owners usually strongly demand the cessation of parallel importation, partly because world famous brands are usually strict with geographical divisions of production and sales, and implement different pricing strategies in different regions. If free flow of goods bearing the identical brands is allowed across different markets, global marketing strategies of the brand owner will be damaged. On the other hand, parallel importation will cause impact on dealers and subsidiaries of the brand owner in the importing country. The dealers and subsidiaries need to invest a great deal in market promotions and advertising, while parallel importers make a profit, without investing a penny, out of the market explored by others, which is usually called an act of free riding.

Strictly speaking, free riding bears the hallmarks of unfair competition. Furthermore, because  goods manufactured by different countries with identical trademark are, more or less, different in formulas and quality, parallel imported goods may likely cause confusion among customers over the origin of the goods, causing some adverse effects on the goods in the domestic market.

However, some are for parallel importation. They think that parallel imported goods are not counterfeits and have legitimate sources. Parallel importation can also promote trade liberalization, encourage competition, break monopolies, and make rational use of resources. In the meanwhile, parallel importation reduces prices and increases sources, enabling consumers to have more freedom of choice.

Li Qunying said: “Because China’s Trademark Law does not expressly specify whether parallel importation is legal or not, currently the Customs does not have a legal basis to determine whether parallel imported goods are infringing. However, the LUX judgment by Guangzhou Intermediate People’s Court and later the infringement judgment by Guangxi Court with regards to the two cases of parallel importation from Vietnam of OMO detergents have, more or less, have had some impact on law enforcement of the Customs.”

In China’s legal practices, there are currently no provisions on parallel importation. Therefore, judges differ in their understanding of trademark infringement in hearing the relevant cases.

As the chief judge in the Michelin case, Yu Hui, Director of IP Tribunal of Changsha Intermediate People’s Court, said when interpreting the Court’s reasoning from the trial to the media, “Trademark Law aims at preventing confusion; accordingly, trademark infringement has been defined as an act of causing confusion as to origins. However, Trademark Law fails to give a specific definition of confusion. A trademark contains the intention of the trademark registrant, information regarding the goods, trademark reputation and fame, and other comprehensive information, in a bid to enable the relevant public to truly understand information related to the goods as they make purchases or make contact with the goods. Although the trademark has values independent of the goods, the values still needs to be embodied through sales and purchases of the goods, therefore, no trademark is independent of the goods. Accordingly, when we discuss trademark infringement, we cannot examine the trademark in isolation, but should view the trademark as a comprehensive carrier of information relating to the goods. To be specific, the trademark’s legal relations should be divided into the intention of the trademark registrant, the goods, trademark symbols and the intentions of customers, so that we are able to truly grasp the whole working process of the trademark, and also get a clearer understanding of the nature of trademark infringement. In other words, customers’ misunderstanding of the other three factors may likely constitute trademark infringement.”

Although various domestic circles are largely divided over the issue of parallel importation, they have reached a consensus on one thing; China should accelerate relevant legislation on parallel importation in order to provide legal grounds for dispute resolutions.

Yan Guizhen said regulations on parallel importation involve three legal departments: IP law, antitrust law and international trade law. The primary law to regulate parallel importation is IP law, because the subject matters of parallel importation is IP products, and regulation of IP law on parallel importation mainly aims at solving the conflict between ownership of IP goods, owners and IP rights of IP owners. Therefore, if there is no IP protection, there would be no issue of parallel importation.

“In China’s IP laws, only Patent Law explicitly grants import rights of patented products to patentees, thus limiting parallel importation of patented products. However, Trademark Law and Copyright Law do not prohibit parallel importation. Yan Guizhen said, “Because China is a low-priced region and there are few occurrences of parallel importation. But with the appreciation of the Yuan, parallel importation may emerge in large quantities. China should take precautions as soon as possible and make policies in response. The revision of the Patent Law in 2009 made special legislation on parallel importation and Trademark Law should follow in its steps.”

Li Qunying also said that Regulation on Customs Protection of Intellectual Property Rights provides that “Import and export of goods which are in violation of IP rights protected by Chinese laws and administrative regulations are prohibited.” But the regulation is only a procedural one, and there is a need for Trademark Law to explicitly clarify whether parallel importation has infringed IP rights. Trademark Law must adapt to the development needs in international trade, and explicitly clarify the issue of exhaustion of trademark rights as soon as possible.

Li Qunying further said that prevention of parallel importation is of great significance to China’s current economic development. With the rising living standards of Chinese people, more and more internationally well-known brand products have begun to be manufactured and sold in China. But, at the same time, improvement of people’s living standards will inevitably bring up prices of a variety of production factors. Compared with some neighboring countries, China might have relatively higher prices of goods which will gradually reduce its market competitiveness. Necessary restrictions on parallel importation will better protect China’s national industries, taxation and employment, which is of increasing importance as the protection diminishes in original tariffs and non-tariffs barriers since China’s entry into the World Trade Organization.

Some experts point out that Trademark Law protects not only the interests of rights holders, but also the interests of people, or the public. Parallel importation legislation should, first of all, be based on the current circumstances of China as a developing country, and also draw on the advanced legislative experience and international trends in a step-by-step fashion. When it is not ripe to make legislation, the Supreme People’s Court can publish judicial interpretations to clarify confusion in the current laws.

“So far in China there has not been any case of parallel importation appealed to the Supreme People’s Court, therefore, the Supreme People’s Court has not had an opportunity to render a decision which provides a systematic analyses on the issue. But it is believed that in the near future the relevant departments will explicitly make clarifications on the issue of parallel importation,” said Ma Qiang.