Last year, some international brands launched rigorous operations to crack down on counterfeits sold both in store and on electronic commerce sites. However, the operations also targeted genuine products sourced from other purchase channels.

The pride of Chanel

Chanel, the luxury tycoon, sued Chongqing Jinmei West Department Store (Jinmei West) for trademark infringement and unfair competition, and claimed 300,000 yuan for damages. At trial, attorney of Chanel Luo Zhenghong stated, “The Chanel company have registered both Chinese and English word marks as well as graphics marks related to the Chanel brand in China years ago, its corporate English name ‘CHANEL’ has been identified as well-known trademark in multiple classes by the Trademark Office of the State Administration for Industry & Commerce of the People’s Republic of China, and is eligible to cross-class protection. However, Jinmei West used the corporate English name in the store without authorization, which constituted trademark infringement and unfair competition.”

In face of the prosecution and evidence, Zhao Yang attorney of Jinmei West held that the Chanel products sold in the store were genuine goods which were purchased through lawful channels. He also showed the legitimate purchase lists, documentation for customs clearance formalities as well as proving evidence of documentation in court.

When China IP contacted Zhao Yang for more information, attorney Zhao expressed his thoughts. He insisted that Jinmei West has neither infringed Chanel’s trademark right nor conducted false promotion. The Chanel English character and graphics appeared in the shop windows and counters were only for indication of goodwill.

Afterwards, China IP contacted Luo Zhenghong, the attorney of Chanel, who declined to comment further in response to his client’s complaint.

The argument of whether Jinmei West has infringed the Chanel trademark still remains controversial based on the attorneys’ statements of both parties.

A ruling is still pending on the case as of the publication of this article. However, the provisions of the Trademark Law state that trademark usage is protected mainly to ensure that consumers can choose products and services through trademark’s recognition function, and prevent them from being confused about the source of products and services, thereby sustaining the trademark holders’ business reputation. If the court approves the legality of the purchase channel of Jinmei West, the focus of dispute will then lie in whether Jinmei West has acted within the legitimate scope and in accordance with the business conventions during its sales of the Chanel products and use of Chanel trademarks.

Zhang Aiwu, Par tner at Guangdong Yogo Law Firm stated that, as provided in the Implementing Regulations of the Trademark Law of the People’s Republic of China, the applicable scope of the use of trademark refers to affixing trademarks to commodities, commodity packages or containers as well as commodity exchange documents or use of trademarks in advertisements, exhibitions and other commercial activities. While the Beijing Higher Peoples’ Court explicitly defines in the Interpretation Concerning the Application of Laws in the Trial of Cases of Civil Disputes Arising from Trademarks that during the sales process, it is legal to use other’s registered trademark within a necessary extent in order to indicate the products’ source and function.

Though similar cases involving parallel importation such as the above Chanel case had happened in China before, Trademark Law made no specific stipulation to resolve this problem.

The restrictions of business convention

Why has the phenomenon of cracking down on “genuine products” appeared, such as Chanel’s action? The adoration of luxury goods by the Chinese people should be one reason, and this is also the reason why the purchase and sales channels of luxury goods in China are in chaos, which in turn foments the knockoff market. Sales channels, such as parallel importation, under the counter sales, the knockoff market, counterfeits and OEM have disturbed the layout of the luxury industry in China. In recent years, some international luxury enterprises attach increasing importance to their sales channels in China; many Chinese enterprises have been sued for unauthorized sales of luxury goods.

According to the report published by the World Luxury Association, the total consumption of luxury products in Chinese Mainland reached 12.6 billion US dollars at the end of 2011 (excluding private planes, yachts and limousines), which accounts for 28% of the world’s total consumption. China has become the largest luxury consumption country in the world.

Such business opportunities are irresistible to various sales channels. However, getting sales authorization of those luxury brands in China is not easy.

Zhou Ting, President of the Fortune Character Institute and considered an expert in the area of luxury sales, once said, “Luxury brands have strict control over purchase and sales channels, not all brands and distributors can have the products, the luxury enterprises have a strict examination and authorization system over distributors.”

It is understood that from preparation to the final operation of the business, it generally takes almost 3 years for the management team to introduce a luxury brand to China; they must expend a great deal of manpower and material resources during the investment attraction process, including the negotiation of business conditions, management team formation, site selection, decoration style and even the layout of products. It is the strict examination of distributors on the sales authorization of the luxury brand that forces many Chinese stores to choose the path of self-trade, i.e. cooperate with an authorized distributor abroad, sign a purchase contract and sell the product in China; Jinmei West is one of them.

Professor Fu Qiang of Chongqing University Economics and Business Administration said that this phenomenon is closely related to enterprises’ brand construction and the entire consumption environment. On the one hand, luxury consumers are growing in China; high profits of luxury products attract numerous merchants. On the other hand, stores can eliminate the requirement of getting authorization if they attempt to purchase the luxury products directly. While bringing great profits, luxury products can further upgrade a store’s rank and enhance its reputation. Obviously, this manner of sales channel would not be approved by luxury enterprises.

The embarrassment of parallel importation

Profits are the eternal goal for merchants. They know the purchasing demand for luxury goods in the Chinese market as well as the price discrepancy between countries due to intellectual property laws. Therefore, they import the same product from overseas market to make profits. Thus, parallel importation occurs. In practice, whether parallel importations infringe the registered trademark right has long been a controversial issue. Dr. Zhou Hongbo, a lecturer at the Law School of Hangzhou Normal University, stated that parallel importation cannot be universally judged due to the various situations surrounding individual sales agreements. The definition of parallel importation should be clarified because some studies in China have mixed ordinary importation with parallel importation. Take trademark right for example, if the products sold in China have no substantive difference with the imported products (e.g. Chanel products in the foresaid case), taking the source of imported products as the standard, two circumstances arise: first, it should be considered as parallel importation if the products are manufactured by the domestic trademark owner or any of its interested parties, for example, the overseas manufacturer is the parent company, subsidiary company, or affiliated company of the domestic trademark owner. Second, it should be considered as an ordinary import if the source of the products is beyond the foresaid circumstances.

Rui Songyan, Judge for the Beijing No.1 Intermediate People’s Court, held that when judging whether parallel importation constitutes infringement, the key factor lies in whether the import country applies the principle of international exhaustion of trademark rights. If this principle is applied, the owner of the trademark can neither control the sales activities in the export country nor in the import country, including further distribution and resale activities. Therefore, the imported products and the sales activities in the import country do not infringe upon the trademark right that the trademark owner enjoys in the import country, i.e. parallel importation does not constitute infringement.

At present, there is no worldwide consensus on whether international exhaustion of trademark rights should be applied. The Court of Justice of the European Union (CJEU) opposes to the application while the US approves it to a certain extent. Chinese Trademark Law has no clear provisions on the issue.

International practices

China has no explicit provision in law related to parallel importation and trademarks, and though the rulings vary in juridical practices, most courts judge it as trademark infringement. Dr. Zhou Hongbo prefers the US practice. He stated that China can refer to the US practice, as long as the imported products have no substantive discrepancy with the domestic products in packaging and quality, the import shall be considered as exceptions to the American “Customs Regulations,” and therefore be approved and absolved from trademark infringement; while if substantive discrepancy exists, the import shall be prohibited regardless of whether there is exception or not.

According to Dr. Zhou Hongtao, precedents of American are complex; the generally followed “Customs Regulations” contain one principle and three exceptions. The one principle states that no trademarked merchandise shall be imported without the consent of the corresponding trademark holder.

The three exceptions are: (1) where trademarks (registered or unregistered, or trade name) of both countries belong to the same entity; (2) where trademarks (registered or unregistered, or trade name) of both countries belong to the parent or subsidiary company, or the same entity; (3) for registered trademarks, if its foreign manufacturer gets the authorization from the American trademark holder, the imported goods do not constitute any infringement even without the consent of the American trademark holder.

The EU adopts the exhaustion of trademark rights inside the EU market, which means “parallel importation” is allowed among EU member countries, while such imports are resolutely prohibited outside the EU market. Goods with trademark are prohibited from imports of non-EU members without permission, no matter whether the source of the goods has interests or affiliated relations with the trademark holders.

China has provisions on parallel importation in the Patent Law. According to Article 11, without permission of the patentee, no entity or individual is entitled to import the patented product (importation right of patented products); according to Article 69.1, parallel importations are allowed. However, there is no such specific provision in trademark laws and regulations, including the draft revision of the Trademark Law.

With the growing number of luxury brands entering into the Chinese market, the chaotic and various business operation modes obviously are not propitious for further development of the market. The determination of the legitimacy of the parallel importation is not only confined to the Trademark Law, it is more of an issue for nations’ economic policy. To avoid such disputes, Dr. Zhou Hongtao believes that during the sales of goods in foreign countries, enterprises can sign contracts with distributors to prohibit the exports of goods or narrow the price gap of the products in China and abroad, which can dampen importers’ motivation. The best practice is to have a law defining the nature of parallel importation of trademark, ensuring the same judgment criteria in similar cases, resolving the disputes and nipping these troubles in the bud.

(Translated by Emily Tan)