INTRODUCTION

  This paper provides a brief outline of the impact of trade mark law on parallel importation and counterfeit goods, and considers how the law is developing.

PARALLEL IMPORTATION

  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.

  Unless some form of state-originated protectionism exists (by way of tariff or other barrier), the only way of preventing parallel imports is by enforcing intellectual property rights.

  A trade mark confers a monopoly such that trade mark owners can prevent unauthorised use of their trade marks. "Use" of a trade mark is a very wide concept and many different dealings with goods may fall within its scope. The law therefore imposes restrictions on the situations in which trade mark rights can be exercised to avoid resellers being obliged to obtain the consent of the trade-mark proprietor to deal in branded goods which they have lawfully acquired.

  The doctrine of exhaustion provides that once a product has been placed on the market by the trade mark owner, or with his consent, trade mark protection in that product is deemed to have been exhausted and cannot be used to prevent further circulation of that product. This rule applies only to the particular batch of goods that the trade mark owner has placed on the market and does not extend to other batches of the same goods.

  The definition of consent by a trade mark owner is fundamental to any analysis of exhaustion, because without consent to the product being placed on the market, the products would be counterfeits rather than parallel imports. There are many areas of uncertainty surrounding consent which have not been satisfactorily addressed under national or community law. These include the circumstances in which an implied licence by the trade mark owner will be found, and the extent of its terms. Goods are sometimes placed on the market overseas by or with the consent of another company in the same group as the holder of the UK trade mark. It is not clear when this constitutes consent.

  It may appear that a brand owner can avoid exhaustion by giving express consent to the performance of limited activities involving branded goods in another country, subject to an express export restriction, but this can contravene competition law. In Javico v Yves St Laurent the ECJ held that an export prohibition would in principle fall foul of Article 85 of the Treaty of Rome if it can be shown that there is an effect on trade and competition within the EC. Further guidance is required for brand owners to know to what extent in practice territorial restrictions on the use of their trade marks are legal.

  The extent of protection conferred by a trade mark depends on the geographic area to which the principle of trade mark exhaustion applies. As a consequence of the UK's membership of the EU, placing goods on the market anywhere within the EEA will exhaust the rights in those goods, subject to Article 7(2) of EU Directive 89/104/EEC (see below).

  Historically, the law of some EU Member States contained a principle of international exhaustion. However the ECJ in Silhouette ruled that international exhaustion is incompatible with EU Directive 89/104/EEC. The UK is therefore unable to provide for international exhaustion without a change in EU law.

  The EU is currently considering changing the law to provide for international exhaustion following a backlash from parallel importers and some consumer groups. International exhaustion could be introduced by: (i) amending the Directive or some other unilateral action of the EU, or (ii) reciprocal/bilateral or multilateral agreements between the EU and other countries.

  Is international exhaustion compatible with the function of trade marks? As set out in the report on "The Economic Consequences of the Choice of Regime of Exhaustion in the area of Trade Marks"[19], there are two economic functions of trade marks:

(i)  assisting and protecting the consumer in identifying the source of products and hence improving their ability to judge quality;

(ii)  rewarding trade mark owners for their investment in product development and quality and the cost of branding a product by providing a valuable right to trade mark holders by limiting the rights of others to use the trade mark.

  Those in favour of international exhaustion consider the primary function to be to allow the consumer to identify the trade origin of a product. It is argued that parallel imports do not affect the ability of a trade mark to indicate the origin and quality of the product since parallel imports are imports of genuine trade marked goods. Using a trade mark to enable its owner to divide up the market and avoid price competition is anti-competitive and against the interests of consumers. Advocate General Jacob in Silhouette, and more recently in Sebago, had much sympathy with this view, but nonetheless felt that the EU Trade Mark Directive had prohibited international exhaustion.

  An alternative view is that the economic interests of consumers will ultimately suffer through diminished choice and consumer confusion if trade mark owners' rights are restricted by international exhaustion. Maintaining the status quo of EEA but not international exhaustion involves reaching a different balance between the two functions of a trade mark in a Community context to a world-wide context. This was justified in Silhouette with the argument that the Court's case-law on the function of trade marks was developed in the context of the Community, not the world market. Circumscribing the protection of trade-mark rights by defining their essential function was only considered necessary to prevent restrictions on trade between Member States.

  An important consideration is that parallel imports from outside the EEA may be different to goods sold under the same trade mark within the EEA. If this is because the trade mark owner has not placed adequate quality controls on licensees, it appears fair that the trade mark owner should bear the consequences. There are however many other reasons why the goods may differ. There may be deliberate differences to reflect different national tastes or different technical or safety requirements. Alternatively, the goods may have deteriorated in quality before reaching the consumer, or may have become outdated. Should parallel importation be allowed in these situations?

  In relation to EEA exhaustion Article 7(2) of the Trade Mark Directive provides that rights will not be exhausted if "there exist legitimate reasons for the proprietor to oppose further commercialisation of the goods, especially where the condition of the goods is changed or impaired after they have been put on the market." It is not presently clear which of the above situations fall within this exception. If international exhaustion is proposed it will become even more important that the ambiguity in Community law is addressed and these issues resolved.

  Under the current EU regime all types of goods are subject to the same law in relation to parallel importation. Although it is recognised that there are important economic differences between, for example, pharmaceuticals and clothing, compelling reasons would be required to justify differential legal treatment of parallel importation of different categories of goods.

  The principle of exhaustion also applies to other intellectual property rights. Some branded goods also attract copyright, patent or design right protection and so several rights may need to be considered simultaneously. The law in relation to parallel imports has developed separately in relation to each type of IPR. Such piecemeal development leads to uncertainty and inconsistency and a more consistent approach to parallel importation would be welcome.

COUNTERFEITING

  Counterfeits differ from parallel imports in that they are imitations of genuine branded goods designed to deceive the consumer. It is generally felt that the law does not yet sufficiently take into account the specificity and seriousness of the counterfeiting phenomenon. For this reason the EU commissioned and published a Green Paper entitled "Combating Counterfeiting and Piracy in the Single Market" to look for solutions to this problem. The thrust of the Green Paper is broadly supported.

  Many of the current legislation's weaknesses and inadequacies stem from the fact that intellectual property legislation is founded on the principle of territoriality, whereas counterfeiting is an international problem. Those wishing to obtain and enforce intellectual property rights must wrestle with different legislations and insufficiently harmonised concepts. Unification and harmonisation is desirable, for example through Community law setting down minimum conditions for national legislation. Efforts on a world-wide scale (WIPO and WTO) should also be supported.

  Counterfeiting is too often considered a "civil" affair, against which criminal sanctions may be only exceptionally provided. This is to forget that we are, in large part, confronted with professional criminals and with clandestine networks, against which civil measures are ineffective.

  The effective application of existing measures and procedures causes much concern to trade mark owners. For example, inadequate availability of authorities and the length of legal proceedings. Counterfeit goods often come into the UK by circuitous routes.

  Improving co-operation between authorities to deal with the various links in a counterfeiting chain would be desirable.

31 March 1999