Solving Parallel Imports the Right Way

It can drive you bonkers, as a brand manager you already know that.

There are noisy resellers offering products of your brand on eCommerce platforms in China with a lower price. Your first reaction is, ‘counterfeit’. The team further investigates, only to find that they are non-counterfeit products imported from another country without permission – a parallel import. The question is: is it lawful? Or assuming it is, what can we do to stop it?

What we call ‘parallel import’ lies in that place between being minimum super irritating and arguably unfair competition. The crazy-making part is we can’t just iron them out like we normally do with counterfeiters. But the threat is real, and it’s dangerous.

First Question – Is It Legal?

It has been and remains a most intractable problem for good reasons.

Right now in China, only the Patent Law (amended in 2008) makes direct provisions on ‘parallel import’. None of the other IP laws, including Trademark Law, Copyright Law and Anti-Unfair Competition Law (amended in 2017), have explicit policies on the issue.

And in Article 69 of Patent Law it says (and I paraphrase):

‘After a product … is sold as permitted by the patentee … importing that product by any person is NOT patent infringement.’

From a brand owner’s point of view, China’s IP legal grounds about parallel importation come in a dingy array, from being a large legal grey area for argument, to a ‘legitimate, innocent business activity’ dyed in the wool. Lacking a clear IP / legal basis against parallel importation in China, IP owners are placed in a challenging position where it is difficult to foresee the legal outcome.

When we looked through the litigation database delving for precedent cases, we did find a few judgments that parallel imported goods were infringing trademark rights, but only if they were ‘materially different’ from the authorised domestic ones, and such difference had damaged genuine reputation.

Materially different is the keyword. And as to interpreting what it really was, the courts were given a great width of discretionary powers. In previous court cases such interpretation can be summarised into three types:

· Critical Change. Any significant modification made on the imported products, which may harm genuine reputation. This typically includes false certification(s), distortion of quality ranking, or unreasonable re-packaging etc.

· False Information. Any misleading information attached on the imported goods, which may confuse the consumers and therefore weaken an honest distributor.

· Quality Decline. Any crucial deviation in terms of product quality.

That said, if the resellers do not ‘materially’ change the products in the above manners, the parallel importation does not constitute trademark infringement. It is legal.

What Options Are Open to Us?

There are several other options to be added into our toolkit before allowing these importers to run rampant.

Contract Improvement

The whole story we got here presents an orthodox, responsive, whac-a-mole mentality against risks. But at the end of the day, the racket parallel importers are running brings home to us the need for preventive actions.

Before finalising the sales contract with overseas distributors, if possible, remember to add clauses which regulate the territories that they can sell to, and specify liquidated damages.

If ambiguities are under control from the very beginning, then your distributors (from Europe for example) are more cautious selling to companies that will resell in China.

It doesn’t clear up the obstacles in one go, but it does enable brand managers to hash over the issue internally by tagging the source country and the distributors involved, before moving to the next step.

Information Improvement

Since the concept of material difference, however elusive it might seem, can be substantiated by ‘false information’, we may find a way to protect by increased accuracy on information.

For example, we can instruct overseas distributors to use wording ‘not for sale outside … (country / region)’ on the packaging and user manuals. It would make it harder to resell in China if there is no Chinese language. This at least builds an extra layer of impediment against parallel sales.

Another example is guarantees – they can be country specific too. Purchases of parallel products do not benefit from a guarantee. It is more useful combining with online tracking technologies that allow aftersales teams to stalk back to its product origin.

The 3C Certification

Contracts and documents can be patched to avoid future damages. If we still feel we have lost touch with the damage here and now, we can sometimes count on the China Compulsory Certification, aka the 3C Certification, as a stopgap effort.

The Mandatory Products Certification Management Regulations (2001) compiles a long list of product types that MUST apply for 3C certification. Only after your products get certified with 3C could they be allowed to enter the Chinese market.

If your product line happens to fall under the 3C radar, for example electronic devices, parallel importers have no choice but to go through the application process. Any imported products without 3C are wide open to the risk of administrative law enforcement actions carried out by the Market Supervision Administration (MSA). There will be a penalty.

As a right owner, we can send a Cease and Desist Letter warning of the violation and requesting it to stop, which, if not followed, could lead to punitive actions.

Of course, this 3C measure only fits in specific product ranges. On top of that, if your products are manufactured in China, then this tactic is not viable.

Allegation of Smuggling

Investigate whether what we assume a ‘parallel importer’ is in fact a ‘smuggler’. It has crossed the IP boundary, but we do what we can to sentinel our business. False declarations are not uncommon in imported products, and sometimes it’s worth checking up.  

By nature, parallel importers are profit seekers caring less about rules and formalities. If they are aware that snaking past the Customs undetected could generate higher income, chances are they might just do it. Once we confirm what they did has escalated them from a legitimate importer into a smuggler, we have a whole arsenal to outgun them.

Physical Difference

Do a test buy and examine whether the imported products are tangibly different than the genuine on the substance level. If yes, follow up closely with a civil litigation claiming trademark infringement. It lies in our power to urge the importers to cease infringement and claim damages because, generally speaking, the MSA would not be interested in handling parallel import cases due to complexity.

Hope to discuss with you more untapped resources in the IP industry. Until next time.

*Written by Saul Gong and Cindy Li at Rouse.

This article was first published on LinkedIn: https://www.linkedin.com/pulse/solving-parallel-import-right-way-saul-gong/