Chinese IP Law Updates
March 16, 2020

Analysis of Relevant Issues of Trademark infringement in Parallel Imports

Author: Jennifer Hu

With the deepening of economic globalization, the liquidity of commodity trade in the global scope is further enhanced, which promotes the development of cross-border e-commerce. Under the technical support of cross-border e-commerce platforms, parallel imports became widely popularized, and the problems regarding trademark infringement raised by parallel imports are also concerned by relevant stakeholders.

There is continued debate over whether parallel imports constitute trademark infringement theoretically and practically since the current trademark law and relevant judicial interpretation does not have clear provisions on this topic. In this paper, the author will firstly provide a brief analysis of the constitutive elements and the substance of the dispute of parallel import and then summarizes several typical cases of trademark infringement in parallel import. Based on the analysis and induction of the courts’ reasoning part in those cases, the author summarizes the judgment standard of Chinese courts on whether parallel import constitutes trademark infringement.

  • What are Parallel Imports?

Parallel Imports have the following legal characteristics:

1) Parallel Imports occur in transnational trade, involving trademark owners, authorized dealers, parallel importers, and other legal subjects.
2) The imported products are genuine products purchased legitimately. They are neither counterfeits nor smuggled products.
3) The trademark owner in China is the same entity as in the exporting country.
4) The parallel importers are not authorized distributors by the trademark owner.

  • Universal Exhaustion Principle VS Regional Exhaustion Principle

In essence, the debate regarding parallel imports is the question of whether the “universal exhaustion principle” applies or the “regional exhaustion principle” applies with regards to trademark rights protection.

Experts who support parallel imports adopt the “universal exhaustion principle” as their theoretical foundation, that is, the first time a trademark is put into use among the market, the trademark owner has exhausted its rights globally. The trademark owner has obtained the benefits that it is entitled to from the first sale and shall not be granted to control over the sold products.

The supporters of the “regional exhaustion principle”, on the other hand, believe that trademark right is limited within a given territory. Registering a trademark in one country does not guarantee that the trademark owner automatically obtains the trademark right in another country. Accordingly, the exhaustion of the right of the trademark right in a country through the first sale does not mean the exhaustion of the right in other countries.

The essence of the conflict between the afore-mentioned theories is to what extent shall we protect the trademark rights enjoyed by a trademark owner without violating the property right enjoyed by the owner who purchased the products. This is a fundamental contradiction between two different legal interests and a value trade-off between intellectual property protection and free-market competition.

  • Rules for determining trademark infringement in parallel imports

The current Trademark Law does not stipulate whether parallel import constitutes trademark infringement. From the previous judicial cases, China’s attitude towards parallel imports is that they do not constitute trademark infringement technically, but each case should be analyzed individually by determining whether it has damaged the basic functions of a trademark. If so, it may constitute trademark infringement.

1) Parallel importation activities that undermine trademark identification functions and cause consumer confusion to constitute trademark infringement;
(Case): “Juedui Vodka Case”

In determining whether a parallel import activity damages the functions of a trademark, the justice values and goal of legislation shall be put into consideration. As identifying the source of a good or service is the most fundamental function of a trademark, consumers would be undoubtedly misleading and confused if that function was damaged by parallel imports, and therefore such an act shall be regulated by trademark law.

For instance, in (2013) Su Zhong Zhi Min Chu Zi No. 0175 “Juedui Vodka” case, plaintiff Juedui Co., Ltd., and Perot Ricard Co., Ltd. sued against the defendant, Suzhou Longxinyuan Winery for its parallel import behavior. In this case, the defendant Longxinyuan Winery imported “Juedui vodka” commodities, added a Chinese logo without authorization from the plaintiff and wore off the product identification code for resale. The plaintiff holds that the behavior of the defendant infringed upon the registered trademark right of the “Juedui Vodka” series which is enjoyed by Juedui company, affected consumers’ cognition of the trademark and commodities, and caused the impairment of the value of the trademark.

The court decided that the vodka products sold by the defendant, although not fake, are not authorized to label with the “Juedui” Chinese mark. The use of “Juedui” Chinese mark on products violated Article 57 of Trademark Law, which is “Using a trademark that is similar to a registered trademark on the same goods, or using a trademark that is identical with or similar to the registered trademark on similar goods without licensing of the registrant of the registered trademark, which is likely to cause confusion.” Moreover, Longxinyuan Winery rubbed out the product identification code, which indicated that it intended to hide the source of products, which damaged the integrity of the goods and resulted in the loss of key information of products. It not only damaged the identification function of the trademark but also hindered the tracking and management of the products of the trademark owners. In summary, the defendant infringed on the trademark right enjoyed by the plaintiff.

Finally, the court ordered Longxinyuan Winery to immediately stop infringing on the right to exclusive use of registered trademarks and unfair competition and to compensate for the plaintiff’s economic loss at the reasonable cost of 100,000 RMB.

2) The parallel importation of goods that have harmed the quality assurance function and reputation function of the trademark constituting trademark infringement;
(Case): “Michelin Case”

Apart from the basic function of identifying the exclusive origin of commodities and services, the trademark also plays an important role in marketing: (1) it indicates that all commodities/services with the same trademark are of a certain quality; (2) the sufficient goodwill and reputation attached to a trademark enabled it to be used as an effective advertising tool. The case of “Michelin Tires” described below was determined by the court to constitute trademark infringement because it destroyed the market functions of the trademark.

In (2009) Chang Zhong Min Chu Zi No. 0073 “Michelin tires” case, the plaintiff, Michelin company, claimed that the defendant, without authorization, operated and sold Michelin tires in China that infringed the plaintiff’s right to exclusive use of a registered trademark. The plaintiff confirmed that the tires were genuinely purchased from its Japanese factory, but they had not been certified with 3C. The plaintiff’s Michelin tires sold in China are all 3C certified. The two defendants argued that the products they sold were genuine products made by the plaintiff in its Japanese factory, purchased in a legitimate way and did not infringe the plaintiff’s trademark rights.

The intermediate people’s court of Changsha held that “to judge whether the sales behavior of the two defendants violated the plaintiff’s right to exclusive use of a registered trademark, to determine whether the behavior of the two defendants damaged the interests of the plaintiff’s right to exclusive use of a registered trademark is the premise… Defendants marked the plaintiff’s trademark without the consent of the plaintiff in our country on tires that did not certify with 3C. Although the sales behavior in and of itself is not authorized by the plaintiff, the resulting traffic accidents or other civil disputes, its legal consequences and negative evaluation of the product will be contributed to the plaintiff through the label on the product “MICHELIN”. At the same time, for tire products that must be certified, the tires that enter the market without the 3C mark with the “MICHELIN” brand will damage the reputation of the plaintiff’s trademark, and the plaintiff can protect his rights as the trademark owner…”

As the sale of such products in China has been illegal, and there may be safety risks, it has damaged the function of the plaintiff’s trademark in guaranteeing the quality of the goods and the credibility of the commodity provider and has caused actual damage to the plaintiff’s right to exclusive use of the registered trademark. The two defendants have violated the plaintiff’s trademark right by such sales activity.

In this regard, the court ordered two defendants to immediately stop the sale of infringing products and to compensate the plaintiff with its economic loss of 5,000 RMB.