BECOME CINDERELLA AT ONE DOLLAR?: GREY MARKET IMPORTS PLAY FAIRY GOD MOTHER

The Economic Times reported that French cosmetics and toiletries giant L’Oreal had filed an injunction suit against the discount retailer MyDollarStore, alleging that the latter had infringed its intellectual property rights (IPR) and illegally imported its goods into the Indian market. The report further stated that the two parties are in talks which could lead to an out-of-court settlement.

The report pointed out that in such cases the issue for the MNCs is that these allegedly ‘illegal imports’ of top global brands result in loss of business opportunity, unfair competition and product cannibalization. L'Oreal, in particular, reportedly takes utmost care of its right to market and distribute its brands in India. A L’Oreal was quoted as saying that the company was concerned about protecting the properties of its brands, which included quality and consumer perception. “We distribute the brand in a way that ensures a certain value around it. An unplanned distribution creates confusion or leads to an unpleasant consumer experience which may work against our brand,” the source said. Thus, imports and marketing of the top brands by discount stores takes away from the value around the brand (read profit margins).

The report goes on to state that several MNCs have invoked the Intellectual Property Rights (Imported Goods) Enforcement Rules, 2007 to stop retailers from importing their foreign brands. Companies like Hindustan Unilever, L’Oreal, Lancome Perfumes, Oakley, Nivea and Mico have already registered several brands under notification No.47/2007 of the IPR Act with the Customs.

For starters, the notification is under the Customs Act. Also, Economic Times informs us of the existence of an IPR Act, which caught me unawares. More importantly the report fails to mention the possibility of the imports by MyDollarStore being legal as ‘parallel imports’. The report only states that MyDollarStore imports sizeable consignments of top consumer brands and their variants from markets like Taiwan, Thailand, Gulf and the US. However, the presumption that runs through the article is that the imports are illegal and infringe the IP rights of L’Oreal.

Parallel imports (also called “grey market imports”) are goods brought into a country without the authorisation of the patent, trademark or copyright holder after those goods were placed legitimately into circulation elsewhere. For example, suppose an authorised dealer of compact disks in India, produced under license to EMI, sells them locally at a whole-sale price below the retail price in Japan. The dealer or a third-party parallel trader could ship the disks to Japan and make a profit, net of tariffs and shipping and distribution costs. Such goods are legitimate copies, not pirated copies or `knockoffs'. Thus, parallel imports are identical to legitimate products except that they may be packaged differently and may not carry the original manufacturer's warranty. (See S. Venu, ‘Should parallel imports be regulated at all?’ available at <http://www.thehindubusinessline.com/2004/02/07/stories/2004020700030900.htm>) At this point, it would be pertinent to note that there are various kinds of exhaustion, like international exhaustion, regional exhaustion and national exhaustion. For an elaborate discussion on the same refer to S. Basheer et al., ‘Exhausting Patent Rights in India: Parallel Imports and TRIPS Compliance’, available at <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1286823&download=yes>)

As regards the Indian legal regime, we follow the principle of international exhaustion. In order to explain the application of the doctrine in the Indian context, lets take the example of importing legally purchased goods from Bangladesh to India. In case of international exhaustion, import from Bangaldesh to India would be legally permissible and the parallel importer would engage in price arbitrage and exploit the price difference between the exporting country (Bangladesh) and the importing country (India), resulting in price reduction in the importing country. This reduction would adversely affect the original manufacturer who might be selling the same product at a higher price in the importing market. (See, S. Basheer et al., ‘Exhausting Patent Rights in India: Parallel Imports and TRIPS Compliance’) Thus, as per this doctrine, once a protected good has been placed in any market of the world by the patentee or with his consent, the principle of exhaustion kicks in and that product can be imported into India without infringing the rights the patentee holds in India. This basically means that the patent holder looses all control over that article for all markets of the world once it is placed by him or with his authorization in any one market of the world.

This, is in contrast to national exhaustion, where the patent holder looses his control over the product only for the purposes of that national market, and he can control the importation, sale etc. of that product beyond the boundary of that national market. For instance, going back to our example, assume Bangladesh follows the principle of national exhaustion. In such a situation the doctrine of exhaustion won’t kick in till the product is placed in the Bangladeshi markets by or with the consent of the patent holder. Thus, goods can’t be imported from another country to be sold at a cheaper price as the purchase and resale is limited to the territorial limits of the country.

While we generally follow the principle of international exhaustion, parallel import rules would depend upon the kind of intellectual property in question and the statute in question. Thus, rules for patents may be quite different than rules for trademarks etc. With these details in mind, we come to Section 107A (b) of the Indian Patent Act, 1970, which exempts “importation of patented products by any person from a person who is duly authorized under the law to produce and sell or distribute the product” from liability for infringement. (For further details on interpretation and ambiguities of the section refer to S. Basheer et al., ‘Exhausting Patent Rights in India: Parallel Imports and TRIPS Compliance’)

In the realm of Design laws, the doctrine of international exhaustion by way of implied consent applies. Thus, under the Designs Act, a proprietor’s right in a registered design will be deemed to be exhausted when the product to which the registered design is applied is first put on the market by or with the consent of the registered proprietor, absent express notice of restraints on resale permissible in the Act. Sections 22(1) and 42 of the Indian Designs Act, 2000 address this area of controversy.

For our purposes the most important set of laws in relation to parallel imports is the law relating to parallel imports in the area of trademarks. As regards trademarks, Section 29 of the Trademark Act provides for grounds of infringement of trademark. Sections 30 of the Act enunciates the limits on the effect of a registered trademark and subsection 30(3) places parallel importation of trademarked goods as one such limitation on the scope of legal usage of the trademark. Moreover, the fact that the Indian law follows the principle of international exhaustion was recognized by the Delhi High Court in Xerox Corporation v. Puneet Suri (CS(OS) No. 2285/2006; Unreported Order dated 20.02.2007.) In this case, the plaintiff owned the trademark ‘Xerox’ and claimed that the defendant’s act of importing and selling second hand Xerox machines constituted trademark infringement. The defendants argued that their acts were covered under Section 30(3), which recognized the principle of international exhaustion. Justice Kaul of the Delhi High Court agreed with the defendants, holding that the ‘import of [second hand] Xerox machines that have proper documentation’ is permissible under the Trademarks Act, provided that ‘there is no change or impairment in the machine.’ (See, S. Basheer et al., ‘Exhausting Patent Rights in India: Parallel Imports and TRIPS Compliance’)

These provisions have been cited to show the ambit of protection grey market imports enjoy under Indian law. Thus, the question is whether the imports made by MyDollarStore fall within the category of such grey market imports. If they do then, the Intellectual Property Rights (Imported Goods) Enforcement Rules, 2007 would not apply to the imports, as the rules are clearly only applicable to import of infringing goods. Moreover, it is pertinent to note that the rules cannot be interpreted so as to contradict the express provision in the various Intellectual Property laws, which recognize and uphold the legality of parallel imports in India.