Parallel Imports In India: Laws, Doctrine Of Exhaustion, And Market Impact

INTRODUCTION

'A Ltd.', a Japanese company manufacturing 'Sportspace', a well sought-after gaming console, has employed distributors 'B' in Japan and 'C' in India for the distribution of said console at an agreed price and a set profit margin, tailored by the manufacturer after taking into consideration the differing competition and the unique characteristics of both the markets.

Now, 'D', an individual seller in India, buys 'Sportspace' consoles directly from 'B' in Japan where the price is comparatively on the lower side and distributes in India without A Ltd.'s authorization, at a higher profit margin, thus effectively bypassing authorized distributer C's necessity and further undermining A Ltd.'s control over distribution and pricing strategies in the Indian market to a substantial extent.

Parallel import, or otherwise referred to as parallel trade or gray-market import, is thus the unauthorized importation and subsequent resale of authentic goods, otherwise granted with protection under intellectual property law in a particular jurisdiction which is different from the one where said parallel import is conducted.

In simple words, it is the exploitation by the reseller in a second market, of the exhaustion of a seller's rights over the product being resold over there, following the initial sale in the first market.

This article aims to traverse through the concept of parallel imports and to further delve into the legalities involved along with the economic implications attached to the aforesaid.

KEY INGREDIENTS OF PARALLEL IMPORTS

The following are the pre-requisites involved in the practice of parallel importation,

1. Authentic product: First and foremost, the object that is resold is a genuine good manufactured via authentic sources that hold the appropriate rights over its manufacture and other technicalities involved. The said good is neither a fake nor a counterfeited product.

In case the good under consideration is counterfeited or spurious, the same fails to fall under the purview of parallel trade.

2. Price Disparity: The pricing strategies of the manufacturer manufacturing would certainly differ from market to market, given the variations in taxes, tariffs, currency exchange rates and other factors rendering dissimilar markets to possess unlike characteristics.

Parallel importing of a good largely works on the principle of profiting off of the price discrepancies of two unique markets selling the same product.

3. Legitimate Initial Sale: the doctrine of exhaustion, as later explicated in the article, elucidates upon the loss of certain rights of owner over the good only after the initial sale has taken place. This necessitates that for the good to undergo parallel import, it has to primarily be sold by the owner itself to the legitimate distributer of the goods.
4. Unauthorized Distribution: after the initial sale, as per the doctrine of exhaustion, the purchaser under certain conditions becomes free to use and to resell the good without prior permission or authorization granted by the original owner of the good. This allows for unauthorized distribution and profit exploitation through parallel trade.
5. Jurisdictional Variations: The legality of parallel imports depends on the jurisdiction. Some countries allow it under the doctrine of international exhaustion, while others may follow national exhaustion principles and restrict parallel imports.
6. Regulatory Compliance: for parallel import to be legal, parallel importers must comply with the import regulations and laws of the target market, which may entail meeting specific labeling, packaging, and quality standards to avoid further legal issues with the owners and/or authorized distributors.

THE DOCTRINE OF EXHAUSTION

"...Whatever, therefore, may be the rule when patentees subdivide territorially their patents as to the exclusive right to make or to sell within a limited territory, we hold that in the class of machines or implements we have described, when they are once lawfully made and sold, there is no restriction on their use to be implied for the benefit of the patentee or his assignees or licensees." Adams v. Burke¹ was one of the first precedents to recognize the principle of exhaustion and thereby establishing the groundwork for the doctrine of parallel imports.

The doctrine of exhaustion elucidates that the owner of the intellectual property loses rights over its subsequent resale and any influence in the aforesaid, after having initially sold said intellectual property to a buyer who may then proceed to use this property at her disposal.

This, however, is subject to certain restrictions that present themselves in the form of jurisdictional limitations upon the resale of the product under consideration. Same are as follows:

1. International Exhaustion: as per this rule, a product once sold, acquires the rights to be resold anywhere in the world. The same promotes free trade and quality control by way of enhanced globalization.

However, the same entails increased competitive pricing and a requirement for enhanced and complex legal frameworks.

2. National Exhaustion: national exhaustion limits the rights of the reseller to sell the product under consideration outside of the country where it was initially purchased by the reseller.

This exhaustion helps the IP owner to exclusively retain the rights of sale, pricing and distribution of its product in a territorial jurisdiction different from the one where it was initially sold.

3. Regional Exhaustion: pertains to a specified region with regards the exhaustion of certain rights of the Intellectual Property owner. i.e., while the owner cannot control the importation and resale within said region, s/he can do so outside of it. Example of such a region may be the European Economic Area (EEA).

The doctrine of exhaustion thus directly influences the legality of a parallel import, by way of dictating the extent of the exhaustion of the intellectual property rights the owner of said intellectual property, particularly upon the resale and distribution of the same.

LEGAL FRAMEWORK IN INDIA VIS-À-VIS PARALLEL IMPORTS

"61. Undisputedly, preceding the TRIPS Agreement, when the international community debated, and what we colloquially speak of as the Uruguay Discussions, the Indian position was to permit parallel imports. Communications from India at the Uruguay Round of the General Agreement on Tariffs and Trade dated July 10, 1989 on 'Standards and Principles Concerning the Availability, Scope & Use of Trade Related Intellectual Property Rights' clearly brings out that India favoured the Doctrine of Exhaustion of Rights linked to parallel imports. It is not in dispute that Article 6 of the TRIPS Agreement has left it to the discretion of the member States to either adopt or not to adopt any Principle of Exhaustion of Rights linked to parallel imports."²

The Indian legal framework for parallel imports primarily revolves around trademark law, patent law, competition law and the international treaties governing the principles of parallel import on a global scale. The key components dictating parallel imports in India are as follows:

1. Trademark Law: While Section 29 of the Trademarks Act, 1999 defines trademark infringement, Section 30 of the Act provides for the exceptions to the infringement, including lawful acquisition and resale of goods bearing a registered trademark.
2. Patent Law: Section 107A(b) of the Patents Act, 1970 exempts the importation of patented products by any person from a person duly authorized under the law to produce and sell or distribute the product, from being considered an infringement of patent rights.
3. Competition Law: the Competition Act, 2002 regulates anti-competitive agreements, abuse of dominance, and anti-competitive mergers or acquisitions that may impact parallel imports.

Furthermore, the Competition Commission of India (CCI) is responsible for investigating into and penalizing anti-competitive practices, inter alia, the ones related to parallel imports that harm competition and/ or consumer interests.

4. Doctrine of Exhaustion: the interpretation of the exhaustion doctrine in India plays a key role in determining the legality of parallel imports. The same has been used time and again in precedents to ascertain various technicalities such as the type of exhaustion to be considered while dealing with parallel imports in India.
5. Precedents: The landmark judgment of Kapil Wadhwa v. Samsung Electronics Co. Ltd. 2, has significantly clarified the position of the Indian legislation with regards the doctrine of exhaustion as being the Principle of International Exhaustion of rights and the 'market' contemplated by Section 30(3) of the Trade Marks Act, 1999 being the international market.
6. Regulatory Authorities:

Customs Authorities: enforcement of border measures for the prevention of the importation of counterfeit or infringing goods, including parallel imports that violate intellectual property rights is performed by customs authorities as per the laws regulating parallel import in India.

Intellectual Property Appellate Board (IPAB): the appeals and disputes related to intellectual property rights, including cases involving parallel imports are seen to by the IPAB.

7. International Agreements: India's obligations under international agreements such as the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and the Uruguay Round of the General Agreement on Tariffs and Trade influence its approach to parallel imports and exhaustion principles and supplement the interpretations regarding parallel imports as and when the need arises.
8. Enforcement Mechanisms: Legal mechanisms and remedies are available to trademark and patent owners to enforce their rights against parallel imports, including litigation, injunctions, and damages that can be enforced by way of approaching competent authorities

THE CHALLENGES INVOLVED

1. Consumer Impact: While parallel imports provide access to varied price ranges for the same product, the same may hamper with other factors attached to the authorized sale, such as customer care, quality control, warranty and so on.
2. Trademark and Patent Implications: Parallel imports raise certain legal points with regards to the brand dilution of trademark owners as well as the dilution in control of the monopolies the patent holders exercise in a market.

While the latter may not adversely impact the customers, both the problems raise serious concerns for the holders of the intellectual property rights that may be exploited via parallel importation. Trademark owners may experience dilution of brand reputation, while patent owners might worry about unauthorized importation adversely impacting their market control.

3. Adverse effects upon the established distribution channels: the distribution via a parallel import takes place through unauthorized channels of distribution. What this implies is that the pre-existing authorized channels now not only have to be on the look-out for set profit margins and ethical conduction of trade, but also face rivalry in the market.

CONCLUSION

The practice of parallel imports is a pivotal influencer in the global economy as well as the domestic. Not only does regulated parallel trade provide a healthy competition in the markets, but also offers genuine products to consumers who may otherwise not be able to afford the same in a potential monopoly. All the same, parallel imports do raise significant challenges for the intellectual property owners, the authorized distributors and the regulatory bodies concerned.

The doctrine of exhaustion forms a crucial aspect in the legal groundwork of parallel imports, with nations around the world choosing their to either follow the Principle of International Exhaustion as seen in India, or National Exhaustion as seen in countries such as Brazil and Turkey, or to opt for a regional exhaustion as has been done by The European Union and United Kingdom.

India's approach to parallel imports, guided by its trademark and patent laws, competition regulations, and international agreements, illustrates the complexity of balancing consumer interests with the rights of Intellectual Property holders. The landmark case of Kapil Wadhwa (supra) highlights India's inclination towards the principle of international exhaustion, promoting free trade while safeguarding against potential abuses of Intellectual Property rights.

In cessation, parallel import sits at the junction of international and domestic law and economy, with its subtleties influencing consumers, sellers and intellectual property owners alike. As markets continue to globalize, the requirement of a balanced approach that fosters competition all the while respecting intellectual property rights and protecting consumer interests would only expand. By intricately navigating these complexities, policymakers and legislators alike must ensure that parallel imports contribute to a dynamic and equitable global marketspace.

Footnotes

1 Adams v. Burke, 84U.S. 453 (1873)

2 Kapil Wadhwa v. Samsung Electronics Co. Ltd., 2012 SCC OnLine Del 5172

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.