Trends in Judicial Discretion in Chinese Courts for Parallel Import Cases

11 minute read
08 June 2021

Overview of Parallel Import Issues in China

With the development of globalised trade, the cross-border e-commerce trade has become a new growth point for the economic development for many countries. This new form of cross-border commodity flow has heavily impacted the traditional product distribution model that trademark rights holders and their authorised sellers rely upon.

Currently, cross-border e-commerce is developing rapidly. In 2019 for example, the size of Chinese cross-border online shoppers exceeded 150 million and, the scale of cross-border e-commerce transactions reached RMB 10.8 trillion. In the meantime, intellectual property disputes related to cross-border trade have emerged, posing new challenges to courts in various countries.

Parallel imports generally refer to the imports of non-counterfeit branded products from another market in which the products are placed by the right holder or with his/her consent, to the targeted market without the right holder or his/her exclusive licensee's consent. The rapid growth of parallel imports has intensified competition for interests between importers and brand licensees.

China is a member of the Paris Convention, an international treaty that does not explicitly prohibit parallel imports. At the same time, the Agreement on Trade-Related Aspects of Intellectual Property (TRIPS) also stipulates that such issues cannot be resolved through the World Trade Organisation (WTO) dispute settlement mechanism. Therefore, parallel imports are within the discretion of a country, and thus parallel imports are not only a legal issue, but also involve the trade policies and interests of various countries.

China's current laws, regulations and judicial interpretations do not explicitly provide for the regulations of parallel imports. Therefore, there is ambiguity among the public's perception of this trade practice.

At present, most of the cases involving parallel imports brought by right holders in China are majorly on the grounds of trademark infringement and unfair competition. Given that the legality of parallel imports is still controversial and there is no uniform standard of adjudication for parallel imports in Chinese courts, and therefore each parallel import cases requires a case-by-case analysis.

Two Recent Landmark Cases in Chinese Courts

Case 1: The OBO case

Case brief

OBO German (a Germany company) is the owner of the registered trademark "OBO" used on lightning protectors. The plaintiff OBO Shenzhen (a Chinese company), a wholly-owned subsidiary of OBO German, has the exclusive licensing right for the trademark ''OBO'' in mainland China.

In December 2017, a number of OBO branded products were found to be sold by the defendant Shifu (a Chinese company) and used on a large construction project. Therefore, OBO Shenzhen filed a suit for trademark infringement and unfair competition on the ground that Shifu was selling OBO products in mainland China without authorization.

Shifu argued that the OBO products were imported from a third party based in Singapore, and the Singaporean seller is an authorised distributor of OBO German. This seller also provided Shifu with certificates of origin which guaranteed that the OBO products sold are genuine products manufactured and sold by OBO German.

During the court proceeding, both OBO Shenzhen and Shifu confirmed that there is no difference in product quality or in the way the trademark is used between the imported OBO products sold by Shifu and the OBO products provided by OBO Shenzhen in mainland China.

Court's ruling

The court held that both trademark infringement and unfair competition cannot be established, and dismissed all the claims of the plaintiff.

The main reasons are as follows:

  1. The chain of evidence was sufficient to establish that the imported products were genuine products legally authorised for sale by the trademark owner OBO German, and were imported into China through legal customs clearance procedures;
  2. There is no obvious difference between the alleged infringing products and the products sold by OBO Shenzhen in China in terms of the way the trademark is used, the quality of products, and other aspects;
  3. During the sales and circulation of the imported OBO products in China, the features of the products and the trademark attached thereto were not altered, nor were the OBO products separated, altered, or damaged by the importer. The use of the trademark by Shifu did not impair the trademark identification and quality assurance function, and would not lead to confusion and misunderstanding by the general public; and
  4. Shifu did not violate any national public policy, law, or business ethics, or disrupt the order of market competition, or have any subjective malice and objective behavior to harm the legitimate rights and interests of consumers, or adopt any unfair competition such as obviously low price sales to cause substantial damage to OBO Shenzhen's interests.

Case 2: The "Corona" case

Case brief

The plaintiff Budweiser China, the licensee of the trademark "科罗娜" and "Coronita Extra" in China, uses the Chinese phrase of "科罗娜特级啤酒" as its trade name on its imported beer marked with "Coronita Extra".

Budweiser China found that the defendant, Gulong (a Chinese company), used the mark "Coronita Extra" on the imported beer, and used the trade name in Chinese as "卡罗娜啤酒" in the customs declaration and inspection documents, and also added the Chinese phrase "卡罗娜啤酒" on the label of the beer alongside "Coronita Extra". Budweiser China claimed that such use of the mark "Coronita Extra" and "卡罗娜啤酒" by Gulong constituted trademark infringement.

Court's ruling

The court held that, as the imported products were genuine products manufactured by Budweiser, Gulong's importation through legal channels should be considered as a form of parallel import, and the use of the mark "Coronita Extra" on the imported beer did not sever the correspondence between the trademark and the trademark owner, therefore the trademark infringement should not be found.

However, Budweiser China used the Chinese "科罗娜" and English "Coronita Extra" trademarks together for a period during the sale of the products in China, therefore rendered the trademark "科罗娜" high popularity and close correspondence with the English trademark "Coronita Extra ".

The use of the Chinese phonetic mark "卡罗娜" by Gulong on the beer has sabotaged the correspondence between the Chinese trademark "科罗娜" and the English trademark "Coronita Extra", owned by Budweiser, weakened the source identification of the "科罗娜" trademark, and thus constituted the infringement of Budweiser's "科罗娜" trademark.

Summary of Judicial Opinions

To sum up, for parallel import cases, we need to analyse specific issues based on the specific facts of individual cases, rather than conclude in a general way whether the infringement is established.

We summarise the latest tendency of Chinese courts to rule on whether parallel imports constitute trademark infringement or unfair competition as follows:

Dispute over "original sales"

"Original sales" means that the imported product is legally sourced from overseas right holders and that no alterations have been made to the product or the attached mark.

For such cases, the general guideline of judgment is "non-infringement is the principle and infringement is the exceptional". In other words, where the imported products are genuine without altering, courts tend to use the "substantial difference" standard to find that the right holders are not entitled to prevent the importation and sale of "genuine" products from legitimate sources.

Dispute over "non-original sales"

"Non-original sales" means that the imported product is legally sourced from overseas right holders, however the act of selling after importation leads to differences in the product or the mark attached.

In such cases, the importer has made changes to the parallel imported products, or to one of the elements, such as grinding down the identification code, adding Chinese transliteration labels, repackaging, etc. The key to judging infringement is to determine whether such changes will lead to consumer confusion, or damage the goodwill of the trademark owner, and whether the correspondence between the trademark and the product is severed.

The infringement should be found if the act (carried out by the importer) leads to the above-mentioned consequences, and vice versa.

Dispute arising from the use of trademarks in the sale of parallel imported products

This type of case usually refers to when the seller of parallel imported products in circulation uses the trademark of the imported products (for advertising, promoting, etc.) during the sales process after entering the market in mainland China, and thus is sued for infringement.

In such cases, what needs to be determined is whether the seller's use of such trademark is fair use.

For the judgment of whether it is fair use, it is necessary to consider the elements such as the popularity of the trademark, the use of products, the consumer group, the sales channel, the trading habit, and the specific acts of the alleged infringement. Furthermore, the courts would also look at factors such as whether the purpose of use is justified, whether the need for use is necessary, whether the limit of use is appropriate, and whether the result of use does not constitute confusion.

Key Takeaways

For parallel importers

Parallel importers should be aware of the risk of infringement if they affix distinguishing marks to imported goods.

No infringement will be found if the importer or seller repackages the parallel imported goods to meet mandatory national regulations and the change in packaging does not have a harmful influence on the product property nor cause confusion or misidentification among consumers. If not, infringement will not be found.

For rights holders

In cross-border trade, owing that parallel imported goods are more suitable for consumers in a sense due to their price advantages or/and flexible choices. This will inevitably cause the reputation of the enterprise, and products built up by the right holder with a lot of investment, to be exploited by a third party without compensation, and its own market share will be squeezed affecting profits as a result.

In addition, parallel importers generally do not provide after-sales services for parallel imported products. As such, there are chances that the perception towards the products and the goodwill of the right holder would be affected due to the improper after-sales service.

In light of the above, it is advised that rights holders monitor the sales and advertising of parallel imported products and actively seek solutions such as administrative complaints and litigation from professionals when aware of possible infringements.

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