Brand owners often find parallel importation as one of the key issues facing their businesses. Their hard earned reputation is at stake when their goods are sold by dealers who are not authorized to do so. It is also referred to as “grey market” for the reason that the goods imported and sold are genuine and not counterfeits (fake goods – black market). Parallel imports poses the greatest legal challenge to the maker of well-known brands. It is for these reasons that it is important to analyse its legality.

What is parallel importation?

Parallel importation is a legitimate act of acquiring genuine goods from the rights holder and selling them through unauthorised trade channels in the same or different market at lower prices. The difference in price is due to the fluctuations in the currency rate and tax differentials in different markets which allows resale of goods by a third party in a more expensive market, at a profitable rate.

Parallel importation and Counterfeiting – two different things.

Parallel importation and counterfeiting of goods are two different things. The former is legitimate while the latter is illegal. Counterfeits refer to the imitation of genuine goods with the intent to deceive the members of the trade whereas parallel imports are not imitations but genuine goods of the brand owners which are imported from one market to another without the permission of the right holder and that which are sold in parallel to the right holder’s market. If the grey market goods are materially different from that of the genuine goods then they result in menace causing confusion and passing off, ultimately resulting in infringement.

Parallel imports and Doctrine of Exhaustion of Rights

The parallel importation of goods from the market of its origin to another market depends on the interpretation of the doctrine of exhaustion. The theory basically infers that a good once sold for consideration becomes the property of the purchaser and the former owner has no right in the good sold from the moment it has been sold.  To be more specific, when trademarked products are exposed into the market by the owner or by others with the consent of the owner and the same is being purchased by another from the market, the right of the owner over the trademarked product is said to be exhausted. The rights over the trademarked products has been exhausted by the first sale and it is hence otherwise called the doctrine of first sale. The owner has relinquished the right and has realised the economic benefit and therefore cannot prevent the resale of that product.

There are three different modes of exhaustion, national, regional and international, while the concept of national exhaustion implies that goods once sold in the domestic market by the right holder or any other person with the consent of the right holder, the right over his trademarked product is said to be exhausted on such sale, meaning he cannot prevent subsequent sale in the domestic market.

In the case of regional exhaustion, goods once sold in any country which is a part of specific region then the owner or the right holder is said to have exhausted the right in that particular region.

Under the international theory of exhaustion, the world is considered as a market and the goods sold at any part of the world results in the exhaustion of the right attached to the product.

Is it legal?

Parallel importation under the Trademark law is considered legal. According to section 30(3) of the Act, it does not amount to infringement provided the trademarked products are lawfully acquired from the market for the purpose of importing the same. The section deals with the exhaustion of rights after first sale of goods. The trademark owner has no right to prevent the subsequent sale of his trademarked product in any part of the world due to the fact that Indian courts recognizes the international theory of exhaustion.

The Delhi High Court in Kapil Wadhva v Samsung Electronics, validated the legality of parallel imports and held that the Trademark Act enshrines the principle of international exhaustion of rights. In other words, the exclusive rights of the trademark owner over his goods is exhausted once the goods are exposed in the market either by the trademark owner or with his consent. The term “market” used in section 30(3) of the Act was interpreted in the present case and was given the meaning as to a global market thereby validating the international theory of exhaustion.

A check on the parallel importers

Section 30 (4) of the Act, acts as a check for the parallel importers from causing any damage to the reputation of the trademarked goods. The trademark owner can control the circulation of goods where there is a legitimate reason to oppose, provided the condition of the goods are changed or impaired after they are put in the market.

Conclusion: Parallel importation, a menace to the brand owners

The grey market is considered by the brand owners as a very significant commercial issue which has an evident impact on sales. Due to the presence of cheaper alternatives, consumers would be obliged to purchase those goods circulated in the grey market rather than the authorized products, resulting in lower sales of the same. Adding to it is the dilution of IP rights and the confusion caused among the members of the trade. Thus the only two ways in India to prohibit such unauthorized sale and to plead trademark infringement under the trademark law is when the goods are unlawfully acquired and there had been material change or alteration made causing damage to the goodwill and reputation to the trademark owner.

This article has been authored by Jayashri Suresh, an IP Law practitioner.

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