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Exhaustion of rights and parallel imports

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What are parallel imports?

Parallel imports are one of the most scintillating and perplexing aspect of international trade. Parallel imports refer to the goods that sold without the proper authority of the owner. This is why it is referred as gray market goods as it doesn’t have the proper authority. However, this doesn’t mean that the goods are fake. There production and selling is legal but not in the jurisdiction the owner might have intended and they are also sold at a lower price.

They are regulated under both IP and competition laws. Trademark comes into picture as rights of trader or manufacturer are affected by this. Trademark is essentially there to protect the reputation and goodwill of the traders and to improve their commercial reputation. In addition to indicating the source of trademarked items or services, trademarks also identify the territorial rights of the trademarked products or services.When parallel importation leads to a misrepresentation of the origins, reputation, or quality of trademarked goods, a dispute occurs.

For instance, Brands may sell the same goods in the United States and India, but at different prices.A parallel import occurs when a company purchases a brand’s good in India and sells it in the United States, or vice versa.The first sale doctrine determines whether parallel imports are legal.

The legality behind Parallel imports

As per the first sale doctrine, once a product is sold for the first time, a brand’s right to distribute it is given up or exhausted.After then, the buyer has the option to resell the item.When and where can a buyer, on the other hand, resale items?Two ideas emerge from the first sale doctrine: national exhaustion and international exhaustion.

The first sale doctrine only applies to commodities in one country under national exhaustion.That means Adidas must sell its new product in nation X before any other country X’s merchant can.It makes no difference whether Adidas releases it in countries Y and Z. Adidas has not relinquished its ability to restrict distribution in country X if that country has national exhaustion regulations.However, if country X has international exhaustion rules, Adidas relinquishes its ability to regulate the distribution in that country when the new product is released in any other country.

Disadvantages of Parallel imports

A company that offers a parallel imported item is not an authorized dealer.This also implies they won’t be able to provide a manufacturer’s warranty.In some circumstances, like as books or toiletries, this may not be a significant issue for the consumer.However, this can be a problem with electronics, watches, and software.Updates or maintenance is usually required for these devices. A seller might give a third-party warranty in this scenario.However, if something goes wrong, the consumer has no recourse with the actual manufacturer.

What is the Doctrine of Exhaustion?

The doctrine of exhaustion states that after a lawful transaction of sale has occurred, the owner of a given good loses power over additional sales of his commodities. To put it differently, If trademarked goods are first put on the market by the owner or with his consent, and then genuinely purchased, the trademark owner or even anyone obtaining his title from him will not be able to prevent further sale of such goods, because the exclusive right to sell goods bearing the mark is ‘exhausted’ by the first sale.

Laws in India related to Parallel Imports and Exhaustion of Rights

Parallel importation in India is integrally tied to the Trade Marks Act, 1999’s notion of exhaustion of rights.The principle of rights exhaustion is codified in Article 6 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which stipulates that “nothing in this Agreement shall be utilized to resolve the issue of intellectual property rights exhaustion.”Therefore, each country has the right to prohibit or allow parallel imports within its legal framework.

Two main issues that are often discussed in the context of parallelism and trademarks in India are whether parallel imports constitute an infringement under Article 29 of the Trademark Act and whether the principle of international exhaustion under Article 30 of the Trademark Act is recognized by India.

The new sub clauses, i.e (3) & (4) of section 30, acknowledges the idea of the trademark owner’s ‘exhaustion of rights’. Sub-clauses (3) and (4) of TM Act, 1999, deals with the exhaustion of rights following the initial sale of goods. A superficial reading of the same would lead one to believe that the legislature’s goal was to recognize solely domestic weariness.

The Division Bench in Kapil Wadhwa v Samsung Electronics[1] held that, The term “market” is used in the Trade Marks Act to express the notion of international exhaustion. The act’s sections 29 and 30 refer to the worldwide market, not the domestic market.In terms of trademarks, the only limitation imposed by the court on parallel import is that the imported items must state that they were imported and that after-sales service and warranty are given by the importer rather than the right holder.

Conclusion

Parallel importation has legal as well as economic consequences. In terms of economics, it encourages the availability of trademarked goods at varying prices, preventing the formation of a commercial monopoly. In a parallel import-free market, a monopolizing strategy would result in higher prices for items sold by the trademark owner or authorized dealer.In the lack of cheaper alternatives, people would be forced to buy items at the monopolist’s price. This is likely to have a negative impact on the market as a whole, as well as supply and demand.Legally, it is critical to avoid consumer deception and uncertainty about the source or quality of items, as well as to safeguard trademark owners’ economic interests. A trademark owner can only sue if the parallel imported products are fundamentally different from those offered directly, including  passing off, misrepresentation, and infringement.

As a result, parallel importation has a positive effect in that it lowers costs and gives lower-cost goods to customers.The manufacturer’s distribution arrangements and capacity to monitor the quality of trademarked items are hampered as a result of the negative impact.However, on a more practical level, the end user, the consumer, has the final say and is the ultimate benefactor of parallel commerce.Similarly, while purchasing drugs, consumers should take extreme caution and buy from reputable distributors, pharmacies, or hospitals.


[1]2013 (53) PTC 112 (Del.) (DB)

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Contributed by:– Nidhi Jha, Legal intern at LLL

 Doctrine of ExhaustionExhaustion of rightsparallel importsThe legality behind Parallel imports

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