Parallels in Russia: Upcoming changes

In recent years Russian importers, IP lawyers, authorities, and most importantly trade mark owners, have been engaged in a passionate debate about parallels (genuine goods imported into a country by unauthorised importers).

Whilst existing legislation in Russia and the Eurasian Economic Union (EAEU – of which Russia is a member along with Belarus, Kazakhstan, Armenia and Kyrgyzstan) considers importing and selling of parallels as acts of trade mark infringement, recent court practice has been unclear and at times controversial.

The recent decision of the Constitutional Court of Russia announced on February 13th has confirmed that the provisions of the Civil Code through which the principle of national exhaustion applies in Russia (and regional exhaustion within the EAEU). However the decision also brought in an additional level of uncertainty which will only start to be clarified as the courts hear cases and start to develop a new court practice.

Parallels in Russia: Provisions of the Law, attitude of the Government and other member states of the EAEU

In addressing the legality of parallel trade, current Russian trade mark law is clear and unambiguous. The concept of national exhaustion applies. Russian law provides that a trade mark owner's rights are only exhausted in Russia once the rights holder places goods bearing the trade mark on the market in Russia itself or through its authorised importer/distributor. Putting the very same goods into a foreign market, will not exhaust the trade mark owner's rights in Russia. As a result, parallel imports are classified as prima facie infringement, such that a trade mark owner is allowed to claim damages in a civil action and even claim seizure of parallels.

Some in Russia (even some officials) argue that policy makers should take steps to ensure parallel imports are permitted, arguing that such imports benefit consumers in times of economic difficulty by helping drive down prices. The imported goods are not counterfeit, but genuine items which are available at lower cost through channels other than via the brand owner and/or the brand owner’s authorised distributors. As the living standards of average Russian families continue to stagnate amidst a difficult economic climate of stalling growth and high inflation, the argument goes that Russian consumers are being forced to pay a significant premium for goods that can easily be sourced more cheaply abroad. Needless to say, most rights owners oppose this argument. They argue the benefits of purchasing only through authorised channels (such as after sales care/warranty support) and maintain that rights owners must be empowered to protect themselves – and the Russian market more widely – from the damaging impact of cheaper competition and falling prices, even if the cheaper competition comes via their own goods. They also point out the ease with which counterfeits can be mixed with parallels.

The most prominent and fervent advocate in favour of permitting parallel imports is the Federal Antimonopoly Service (FAS). One of their key responsibilities is to ensure price competition in the market. A draft plan presented by the FAS calls for the legalization of parallel imports of a limited number of goods, most notably auto parts and pharmaceuticals. As a consequence, the concept of national exhaustion of trade mark rights would be revised to a new concept, which mixes both national and international exhaustion of trade mark rights, depending on the type of goods.

Russia is a key member of the Eurasian Economic Union which treats the 5 countries as a single area for Customs purposes. In theory, therefore, Russia cannot “go it alone” on the concept of exhaustion of rights, and needs the other 4 countries to agree. This looks unlikely at present with Belarus, in particular, being a loud advocate against parallels.

Court practice on the issue

Whilst, therefore, the underlying laws regarding parallel imports probably can’t be changed in the short term, court practice might be amended according to the latest trends. Formally, there is no system of precedent in Russia, but in practice judges do look to previous decisions for guidance, even if they are not bound to follow them.

Until recently, court practice on the issue has been clear: in most cases trade mark owners have received damages and court orders regarding seizure of parallels. However, in the last couple of years a significant number of claims of trade mark owners regarding parallels have been refused. It’s notable, however, that judges have been basing their decisions, rejecting claims that parallels infringe trade mark rights, on formal grounds (such as non-compliance with mandatory pre-trial proceedings, or “poor” evidence represented by rights holders). None of the judges have decided to challenge Russian trade mark law, and “in word” they agree that parallel imports are Illicit. But “in deed” they have been rejecting civil claims in regard to parallel imports and followed the trend to limit protection of rights holders in relation to parallel imports.

The two cases described below have taken this trend to a new level.

KYB Corporation vs. the FAS

In July 2017 the FAS issued official warnings to a number of automotive manufacturers regarding some of their activities that “bear signs of anticompetitive practices”.

According to the FAS, these automotive companies (including KYB Corporation which is a manufacturer of auto parts) refused/ignored requests from unauthorised importers to provide them with permission letters which would enable them to import genuine goods into Russia. The assessment of the FAS states that such a refusal infringes the rights of the parallel importer. (By default, any unauthorized import should be detained by Customs for ten days, as such import might contain counterfeit goods. Thus, a detention, even if ultimately uncontested by the rights owner, causes delay and additional cost and inconvenience to an importer, which, according to the FAS, leads to discrimination against importers)..

The FAS in its warning suggested to the automotive companies that they cease and desist from these anti-competitive practices.

But it was just a warning. No trade mark owners have been fined for refusing to issue permission letters in respect of parallels. Not yet, anyway!

One of the recipients of the warning – KYB Corporation – submitted a petition to the Commercial Court of Moscow seeking to revoke the warning issued by the FAS. They wanted the court to rule the warning had no basis in law, and to confirm that trade mark owners would not be acting illegally by refusing to issue permission letters.

The court dismissed the claim of the rights holder on formal grounds. In December 2017 the judge decided that the warning couldn’t be revoked, as it simply reflects the opinion of the FAS, it does not have the force of law, and does not order KYB to take any actions, or to pay any fines. Until the FAS actually acts on its warnings, said the judge, there is no need/reason for the court to intervene. The judge also quoted the assessment of the FAS that parallel importation is a permitted activity, but regarded it as merely the opinion of the authority which he did not need to rule on one way or the other in order to resolve the case before him. Thus, the court was able to sit on the fence.

KYB Corporation has already filed an appeal. The court of second instance should consider the matter in the following months.

Whilst the Commercial Court of Moscow has side-stepped the issue on formal grounds, the decision might be considered by some to be a decision in support of parallel imports on competition grounds. As a result, one of the main business Dailies, Vedomosti, and other opinion makers, announced that “the Commercial court of Moscow legalized parallel imports” - which strictly speaking isn’t correct. Not yet, anyway!

Sony vs. PAG, LLC

In 2014 Sony obtained a favourable court decision against a parallel importer PAG, LLC. The unauthorized importer was ordered to pay damages to Sony, and parallel goods (printing paper for ultrasound apparatus) were seized.

PAG LLC appealed all the way to the Supreme Court of Russia. However, even the Supreme Court hasn’t found any grounds to reverse the first instance decision.

So, the parallel importer submitted a claim to the Constitutional Court of Russia (Russia’s highest court) and asked it to clarify whether enforcement of the articles of the Civil Code which provide for national exhaustion would infringe basic constitutional rights of importers (such as rights of ownership to parallel goods, freedom of enterprise etc.).

To the surprise of many, the Constitutional Court decided to hear the case. In December 2017 the court studied the case during an open hearing. In addition to the director of the importer, the court heard arguments from special representatives of the President of Russia, the Government of Russia, both houses of the Russian Parliament, and the Ministry of Justice. Almost all argued in favour of parallel imports!

They argued that as long as a rights holder has sold its products abroad and willingly put goods into stream of commerce, then further dealings in the very same products can not infringe its rights.  And, therefore, articles of the Civil Code, which make unauthorized importing of genuine goods an act of infringement, should be revised by the Constitutional Court who should issue new guidelines on the issue.

In its decision on the matter (announced on February 13th) the Head of the Constitutional Court hasn’t challenged any provisions of the Civil Code, but he delivered a new ground-breaking interpretation of these articles, which has the force of law to all Russian judges.

The Constitutional Court declared that the provision of the Civil Code which provides for national exhaustion, (and in turn the regional exhaustion principle of EAEU) is not unconstitutional. So the law stands. However, the Court went on to say that there may be circumstances in which the application of the law would be unfair, and in such cases the law should not be applied against a parallel importer.

Thus, according to the Constitutional Court, if a court sees that a claim of a rights holder against a parallel importer might lead to any adverse effects to “vital interests of Russian citizens or other interests of a public nature”, then that court should consider the rights holder’s actions as unfair and should decide in favour of the parallel importer (i.e. dismiss a claim). However, “vital interest and other interest of public nature” is very broad wording and the Constitutional Court provided no further guidance on what may or may not fall within its remit. But, theoretically at least, a right of free entrepreneurship of a parallel importer might be considered as an “interest of public nature”.

Also, according to the Constitutional Court, genuine parallel goods and counterfeit goods do not cause the same damage to rights holders. Therefore, rights holders shouldn’t be awarded the same levels of damages in regard to parallels as they are in regard to counterfeits.

And possibly the most important part of the decision – the Constitutional Court thinks that parallels shouldn’t be seized and destroyed, unless they are dangerous to consumers or have inadequate quality. Therefore, most parallel goods will end up being released into the market!

Whilst deciding that the part of the Civil Code which provides for national (regional) exhaustion is alive and well, the further comments from the Constitutional Court have effectively cut off its supply of oxygen. It will be for first instance courts to take a view, in light of the Constitutional Court’s comments, on a case by case basis, but it is clear how the Constitutional Court wants this to play out. It is equally clear that few, if any, rights holders will be willing to invest in civil suits against parallel importers against this background.

The Constitutional Court decided that the case of Sony vs. PAG, LLC now needs to be re-tried by the court of first instance, who should decide in light of the guidance provided. And most likely that a new decision on the matter, aligned with the guidance of the Constitutional Court, will become the new cornerstone of court practice regarding parallels.

The Constitutional Court also sends a clear message to Russian lawmakers and reminds them that they can amend the existing legislation (viz the Civil Code) to stay in step. In its decision, the Court says that federal lawmakers have the necessary powers to amend existing legislation in order to “ensure access to the Russian market of goods (groups of goods) of adequate value, based on their importance for life and health of citizens, and other constitutionally significant public interests”. Another tip from the Constitutional Court to lawmakers is that they are able to legislate for the applicability and balance between principles of national exhaustion (set by the Civil Code) and regional exhaustion (set by the EAEU).

The situation remains unclear and not favourable for rights holders, but still gives a margin for manoeuvre to all involved parties. In the following months, the situation should become clearer, as we see judges and lawmakers react to the decision of the Constitutional Court. Although no one is yet certain where this is going, it feels, for now at least, as if the tide is turning against trade mark owners.