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Select Committee on Trade and Industry Eighth Report

EIGHTH REPORT

The Trade and Industry Committee has agreed to the following Report:—

TRADE MARKS, FAKES AND CONSUMERS

I. INTRODUCTION

1. In the course of our recent inquiry into the pricing of motor cars we received a substantial amount of evidence on the practice of 'parallel' and 'grey' importing of cars, that is, the importation of cars outside the usual channels of distribution.[1] In view of the broader issues of public policy raised in this evidence; of the 16 July 1998 judgment by the European Court of Justice (ECJ) in the Silhouette case and its legal and commercial consequences; of the Government's setting out of an Intellectual Property Rights (IPR) Action Plan in the December 1998 Competitiveness White Paper; and of a number of well-publicised cases of multiple retailers offering branded goods purchased on the grey market, we decided in February 1999 to invite evidence on a range of IPR issues. We sought evidence on the impact of grey importing, including the consequences for consumers; supermarkets and look-alike products; and the problems of counterfeit goods and piracy, across a range of sectors.[2]

2. It was evident from the responses we received that the dominant issue of concern was the future of trading outside of the official distribution networks, and specifically the prospects for a regime of international exhaustion of trade mark rights. It is on this that we have concentrated in this report. The Committee heard oral evidence on 14 April 1999 from the British Brands Group, Tesco, the British Independent Motor Trade Association and the Association of Parallel Importers, and the Retail Motor Industry Federation; on 27 April 1999 from the Parallel Traders Association, the Association of the British Pharmaceutical Industry, A&G Imports Ltd and Shaneel Enterprises Ltd, and the British Phonographic Industry; on 11 May 1999 from the Trademarks Patents and Designs Federation, the Chartered Institute of Patent Agents, the Institute of Trade Mark Attorneys and the Association of Pharmaceutical Importers; and on 18 May 1999 from the Anti-Counterfeiting Group, Rishworth Chase, and Dr Kim Howells, Parliamentary Under-Secretary of State, Department of Trade and Industry. We also received some very helpful informal briefings from the Patent Office and the World Trade Organisation[3] and benefited from the advice of our Specialist Advisor Professor John N Adams, Professor of Intellectual Property at the University of Sheffield and Director of the Intellectual Property Institute. We are grateful to all those who submitted written and oral evidence.

3. To a surprising degree, the legal framework within which many of the key issues are decided is uncertain, is relatively diverse between different nations, and is constantly shifting as judicial decisions are reached on individual cases. We have had to be cautious in taking evidence to balance a due respect for the principle that matters awaiting judgment in the courts should not be prejudiced by public comment in Select Committees, while at the same time fulfilling our duty to the House to inquire fully and impartially into a matter of national importance. On the same day that we heard oral evidence from the Minister, there was an important judgment given by the High Court of England and Wales (see paragraphs 22-24). It is unsatisfactory that there should continue to be a state of apparently chronic uncertainty in so many crucial areas of national and European intellectual property law and practice. Some of the issues have been repeatedly ducked in European and national legislation. We recommend that the Government consider adding to the Intellectual Property Rights (IPR) Action Plan a commitment to provide a legal framework for IPR which offers all those involved a greater degree of legal certainty.

Definitions

INTELLECTUAL PROPERTY RIGHTS

4. Intellectual property can be described as protected information with commercial value. The principal rights, for present purposes, are conferred by trade marks, patents, copyright, and design rights. Protection of these rights is enshrined in national, European and international law.

The Trade Marks Act 1994 defines a trade mark as "any sign capable of being represented graphically which is capable of distinguishing goods or services of one undertaking from those of other undertakings. A trade mark may, in particular, consist of words (including personal names), designs, letters, numerals or the shape of goods or their packaging".[4] The DTI describe the purpose of a trade mark as to "assert and define the origin of goods, and protect the reputation of their producer and their investment in advertising and promoting brand".[5] There is some debate over where the balance lies in terms of trade marks benefiting the brand owner and informing consumers. Davies Arnold Cooper state "the central function of a trade mark is to indicate origin. A consumer having bought a product once, knows what to expect of that brand in terms of the goods themselves and their quality."[6] In the UK, in addition to the rights conferred by registration under the 1994 Act, marks are protected through the action of 'passing off' which protects the 'goodwill' attached to a brand.
A patent for an invention is granted by the state to the inventor, giving them the right for a limited period to stop others from making, using or selling the invention without their permission. When a patent is granted, the invention becomes the property of the inventor, which like any other form of property or business asset can be bought, sold, rented or hired.[7]
Copyright protects original literary, dramatic, musical and artistic works. These include journalism and literature, films and music, radio, television, records and videos, works of art, architectural and engineering plans and drawings, photographs, computer software and databases.
The Copyright, Designs and Patents Act 1998 amended section 1 of the Registered Designs Act 1949. In this Act, design means features of shape configuration, pattern or ornament applied to an article by any industrial process, being features which in the finished article appeal to, and are judged by, the eye.[8] The recent Directive on the legal protection of designs which will, in due course, be transposed into UK law takes 'design' to mean "the appearance of the whole or a part of a product resulting from the features of, in particular, the lines, contours, colours, shape, texture and/or materials of the product itself and/or its ornamentation".[9] As the Intellectual Property Institute put it "designs distinguish superior from indifferent articles, ranging from lampshades and teapots to ladies' jewellery, from wallpapers to exhaust pipes and machine tools".[10] In addition to registered designs, UK law protects designs for artistic works through the law of copyright,[11] and protects functional designs for such things as spare parts for cars through design right.[12]

5. The UK adheres to all the main conventions governing intellectual property. For present purposes these are: the Paris Convention on Industrial Property; the Berne Convention for the Protection of Literary and Artistic Works; the European Patent Convention; the Rome Convention on the Protection of Performers, Producers of Phonograms and Broadcasting Organisations; the Protocol to the Madrid Agreement on trade mark registration and the Patent Cooperation Treaty. The UK is also a member of the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPs Agreement) which formed part of the GATT Uruguay Round concluded on 15 December 1993 and signed 15 April 1994. All states which subscribe to the World Trade Organisation (WTO) become bound to a mutual recognition of intellectual property rights at a high level of protection. It reinforces and goes beyond the Conventions mentioned above.

'PARALLEL' AND 'GREY' TRADE

6. Throughout the evidence we received, the phrases 'parallel trade' and 'grey trade' are used somewhat indeterminately to describe goods brought into a country other than through the principal distribution systems. The DTI notes that "parallel or 'grey' imports are goods which have been marketed for the first time by the rights owner, or with his consent, outside the European Community and are then imported into the Community".[13] The City of London Law Society Intellectual Property Sub-Committee states that "parallel importation describes the practice of buying genuine branded goods in one country where they have been put on the market at a relatively low price and importing them to another country without the consent of the trade mark owner where they can be sold at a higher price".[14] The European Commission uses 'parallel' trade to refer to intra-EU trade, stating that "the Commission has always insisted on the freedom for intermediaries to respond to price differences between Member States and engage in parallel trade as central to its policy of ensuring that distribution arrangements have a market integration and not a market partitioning effect".[15] Mr Macgowan of the Retail Motor Industry Federation pointed out in oral evidence the distinction they make in the case of cars: "parallel imports, which in my book means vehicles which are normally available in Europe and may come to the United Kingdom from some other European country but meet all the European standards, versus 'grey' imports which are vehicles that are not normally routinely sold in the UK and that have come from outside the European Union and therefore fall outside the European specifications".[16]

7. Attempts to prevent parallel trade between EU states are contrary to the principles of the Treaty of Rome, although, as Davies Arnold Cooper put it, the insistence of brand owners that they would never try to shut down intra-EEA parallel trade "is not borne out by experience".[17] There were a number of cases in the 1980s of companies being fined by the European Commission for such anti-competitive behaviour. For example, in 1987 Konica was found guilty and fined ECU 75,000 for practices aimed at preventing the export of Konica colour films from the United Kingdom to other EC Member States and the resale of parallel imported Konica colour film on the German market.[18] In recent years, Volkswagen was fined ECU 102 million in January 1998 for systematically prohibiting its dealers in Italy from selling cars to foreign buyers, mainly from Germany and Austria. Further investigations into the new car market are currently underway.

8. In this report, for ease of reference we refer to goods imported into the UK from outside of the European Economic Area (EEA) as 'grey' imports and those that are imported from within the EEA as 'parallel' imports.[19] We have some sympathy with the view expressed that the name 'grey' trading may be thought to carry an implicit reference to the 'black' market.[20] We use such terminology purely for ease of definition.

The doctrine of Exhaustion

9. The doctrine of exhaustion provides that once a product has been placed on the market by the trade mark owners, or with their consent, trade mark protection is deemed to have been exhausted and cannot be used to prevent further resale or circulation of that product. Most of the current debate focusses on trade mark exhaustion; the concept can, however, apply to other types of intellectual property. One crucial issue surrounding exhaustion revolves around how narrowly or widely the 'market' is to be defined: whether exhaustion should be applied geographically within the EEA or internationally. 'International' exhaustion signifies that placing a trade marked product on any single national market is taken as exhausting the owners' rights to restrain its circulation elsewhere. During our visit to the WTO, we were informed that the negotiations for TRIPS had specifically excluded the concept of 'international exhaustion', as it was believed that its inclusion would jeopardise the entire Agreement. Article 6 lays down that nothing in the Agreement should be used to address the issue of the exhaustion of intellectual property rights. It was suggested in evidence to the Committee that TRIPS "may provide for international exhaustion of rights in any event".[21] Mr Weston of the Chartered Institute of Patent Agents (CIPA) stated that "TRIPS does not prohibit worldwide exhaustion of rights".[22] In the deliberate absence of any accepted rule of international exhaustion, countries are free (providing there are no other constraints) to decide how to apply the doctrine of exhaustion. The Silhouette judgment has, however, impacted on this freedom for countries within the European Economic Area.

10. The other crucial issue is what constitutes 'consent'. Mr Keep of A&G Imports told us one of the problems they face as parallel importers is that "it is very hard for us to prove when consent was given to sell those goods. That is going to be the major issue for everyone to analyse".[23] The City of London Law Society Intellectual Property Sub-Committee stated "the definition of consent by a trade mark owner is fundamental to any analysis of exhaustion".[24] In the absence of an internationally agreed norm, the issue of whether actual or implied 'consent' has been given to the placing of a trade marked product on the market has to be decided afresh on the facts of each individual case.

1 Trade and Industry Committee, First Report, 1998-99 Vehicle Pricing, HC64 Back

2 Trade and Industry Committee Press notice, Trading, Trade Marks and Competition. PN6 98/99 Back

3 The Committee visited the World Trade Organisation and the World Intellectual Property Organisation in Geneva in March 1999. Back

4 Trade Marks Act 1994, Part 1, 1(1) Back

5 Ev, p145, paragraph 2.2 Back

6 Ev, p219 Back

7 The Patent Office website (http://www.patent.gov.uk) Back

8 Section 1 (1) Designs Act 1949 as amended by section 265 Copyright, Designs and Patents Act 1988 Back

9 Directive 98/71/EC of the European Parliament and of the Council of 13 October 1998 on the legal protection of designs, Article 1. Back

10 http://www.aslib.co.uk/ipi/index.html Back

11 Although only for twenty years from the end of the year of first marketing Back

12 There are exclusions for features dictated solely by function, and features dependent on the appearance of another article of which the article is intended to stand part. Copyright, Designs and Patents Act, section 213 Back