By Jiao Hongbin, Liu Yuxin King and Wood Mallesons’ IP group

Recently, Guangzhou IP Court ruled on its first trademark infringement and unfair competition case regarding parallel import, in which it found such acts should neither constitute trademark infringement nor unfair competition.

Parallel import generally refers to “to import products that are legitimately manufactured abroad without the consent of the IP rights owner”. Judicially speaking, China does not have definite opinions on the legitimacy of such acts. In this recent case, both Guangzhou Nansha District People’s Court and Guangzhou IP Court decided that under the condition that the parallel imported products are genuine products legitimately manufactured abroad, parallel import shall neither be considered as trademark infringement nor unfair competition. A summary of the reasoning part of the two instances of courts are as follows:

First Instance Judgment

  • Trademark Infringement

The function of a trademark is to identify source of origin by distinguishing different goods/services and to guarantee quality by delivering the message to consumers that goods/services bearing the same trademark have the same quality. As long as the parallel imported products are the same with the authorized products sold in domestic China with respect to trademark condition and property of the products and the parallel importer has neither parted, changed or damaged the products nor the trademark attached to it, it could be concluded that the sale of the parallel imported products does not sever the connection between the products and its trademark owner. Therefore, the function of identification of the trademark is not disrupted. With regard to guarantee of quality, it should be considered whether the parallel imported products and the domestic products have the same quality. The criteria for such judgement should be if they have substantial differences in terms of trademark conditions, property and quality of the products and could be mutually replaced. Last but least, from the perspective of exhaustion of rights, if the parallel imported products sourced from the trademark owner, since the trademark owner has already gained commercial values from its “first sale” of the products, it shall not be entitled to prevent others from “second sale”.

  • Unfair Competition

The factual grounds raised by the plaintiff for the unfair competition claim is the same as trademark infringement. As Anti-Unfair Competition Law only serves as a supplement to specific IP laws, under the condition that the Trademark Law is applicable to the subject dispute, there is no need to apply the Anti-Unfair Competition Law. Furthermore, the purpose of Anti-Unfair Competition Law is to coordinate and balance the interests of the public, the business operators as well as consumers, rather than to maximize the interests of either party. Therefore, the court should follow the concept of prudent intervention when applying the above laws so as to encourage fair competition and promote healthy development of the market.

Second Instance Judgment

  • Trademark Infringement

From the perspective of trademark protection, what the law protects for a trademark is the fixed and definite connection between the trademark and the business entity, rather than the mark itself. Parallel import neither harm the function of identification and quality assurance of the trademark, nor the goodwill attached to the trademark.

From the perspective of consumer protection, the fundamental goal of a trademark is to establish and reinforce a particular relation between products and consumers. Under the circumstance that the trademark attached to the parallel imported products are genuine, clear and sourced from the trademark owner, and that the quality of the products can be assured, consumer interests normally will not be harmed. On the contrary, this will in the long run benefit consumers by enriching their choices and stimulating market vitality.

From the perspective of promoting the development of market economy, the protection endowed by the Trademark Law to trademark rights is to create a market economy order with fair competition by combatting infringement rather than to grant monopoly to the rights owner to impede free competition. On the condition that the rights owner already profits from its sales, parallel import only exerts limited damages to the rights owner. In this regard, it is not appropriate to give the trademark owner more monopolistic benefits in the subsequent circulation of products.

However, Guangzhou IP Court particularly pointed out that the principle of “exhaustion of rights” are not prevailing academic opinions and consensus has not yet been reached on this issue. Neither the Trademark Law nor judicial interpretations specifically adopt such principle and therefore, it is not appropriate to cite it as the basis of judicial judgment.

  • Unfair Competition

Guangzhou IP Court also believes that parallel import does not violate the general principle of good faith and the recognized business ethics. It reasons this issue from the perspective of the reason for parallel import, the reasonable duty of care of the parallel importer, the legitimacy of the parallel importer, the protection of consumer interests and the damages incurred to the domestic rights owner, and concludes that parallel import shall not be viewed as unfair competition.

In the end, however, Guangzhou IP Court specifically commented that the alleged infringing product in this case is a typical parallel imported product with the same quality and right source of the domestic product. In the meanwhile, the parallel importer has a high degree of attention in this case, the transaction behavior is relatively standardized, the transaction process is clear and well-founded, and it actively avoids legal risks through contractual agreements and other means. However, the qualitative problem of parallel import infringement cannot be generalized by case. The facts of the case should be carefully examined to identify the product quality and the identity of the source and the legitimacy of the behavior. If there is any act of replacing, covering the trademark, changing the quality of the product, or snatching the business opportunities of others by unfair means etc., such behaviors shall still be regulated by the relevant provisions of the Trademark Law and the Anti-Unfair Competition Law.