While parallel importation does not involve cutting edge law and has been adopted by the Australian legislature in its IP policy, from the perspective of brand owners and distributors, the practice continues to cause financial harm.
The detriment to brand owners and distributors includes free riding on advertising and marketing campaigns and referral by parallel importers of warranty claims to Australian subsidiaries or distributors. Although parallel importers usually sell goods at cheaper prices than exclusive distributors, consumers pay a hidden cost in the lack of after-sales service, repair facilities, spare parts access and sometimes even warranties. Similarly, where goods must be handled in a particular manner in order to retain freshness or efficacy, parallel imported goods may not have been handled in the required manner or sold within their recommended use-by date. Where parallel imported goods fail to meet consumer expectations, the parallel importer damages the reputation of the brand owner and the trade mark. This means that while they may believe they are getting a good deal, consumers may in fact be obtaining goods of inferior quality or goods not suitable for the Australian environment.
Australian lawyers continue to receive regular queries from their clients as to what steps, if any, can be taken to prevent the parallel importation of genuine goods into Australia.
When considering the tools available to curtail parallel importation, it must be borne in mind that it has been the policy of successive Australian Governments, of both Liberal and Labor persuasion, that parallel importation should be permitted. Following recommendations made by, among others, professor Allan Fels, who was at the time the chairman of the then-Prices Surveillance Authority, Australia's IP laws have been amended to reflect the Government's policy on parallel importation.
The historical position
The Patents Acts 1952 and 1990 and the Designs Acts 1906 and 2003 are both seen as not having conferred upon owners of patents or registered designs rights to prevent the parallel importation of genuine goods that they put onto the market in foreign jurisdictions. The statutory language simply did not leave open the possibility of using those laws as a means of preventing parallel importation.
On the other hand, the Trade Marks Act 1955 provided fertile ground for attempts to reduce parallel importation. In Atari Inc v Dick Smith Electronics (1980, 33 ALR 20), an interlocutory injunction was granted to the trade mark owner against a parallel importer on the basis that the parallel importation constituted the use of a trade mark in the course of trade. This was said to be in breach of the trade mark owner's rights to exclusive use of its trade mark, a right clearly granted by the legislation. However, just two years later, the same plaintiff failed against another parallel importer in Atari Inc v Fairstar Electronics (1982, 50 ALR 274), with the Federal Court holding that once goods have been released for commerce, a trade mark owner has exhausted its rights to control the goods to which the mark had been applied.
Brand owners and distributors then turned their attention to copyright law, relying on copyright infringement by parallel importers based on the unauthorised importation of, for example, literary and artistic copyright works in labels, packaging, instruction manuals and warranty cards that commonly accompany goods and without which it was generally very difficult if not impossible to sell the goods.
A successful example of the copyright strategy was R & A Bailey & Co v Boccaccio (1986, 4 NSWLR 701), where the foreign manufacturer of Baileys Original Irish Cream liqueur prevented parallel importation of the liqueur into Australia, relying on the artistic copyright in the labels on the goods.
The success of the copyright strategy did not last. In the late 1980s, following submissions made by a number of Australian alcohol importers, the then-Copyright Law Review Committee (CLRC) recommended that the Copyright Act 1968 should be amended so as to forbid copyright from being used to prevent parallel importation for goods that were not copyright works per se, such as the liqueur in the Baileys case. The Government accepted the CLRC's recommendations and the Copyright Act 1968 was amended to include sections 44C and 112C so that a copyright infringement claim could not be made for the importation of genuine accessories such as labels, packaging, instruction manuals and warranty cards.
Similarly, for trade mark law, the Government introduced section 123 into the Trade Marks Act 1995, which provides that it is not infringement of a trade mark to use the mark for goods, where the mark has been applied to the goods by or with the consent of the trade mark owner. However, section 123 did not deter enterprising lawyers from taking advantage of workarounds to prevent parallel importation, as will be discussed below.
Leaving to one side the parallel importation of books, computer programs and sound recordings, which have their own provisions, whether parallel importation of genuine goods can be prevented where a trade mark is involved remains an interesting and complex question. Despite clear Government policy to the contrary, a number of strategies continue to be available to curtail parallel importation, including:
- the assignment of the registered trade mark to the Australian distributor;
- a copyright claim based on infringement of artistic copyright subsisting in device trade marks and graphics on genuine goods;
- a trade mark infringement claim where the imported goods are genuine, but have been modified by the parallel importer, on the basis that the trade mark owner did not apply the mark to the goods as altered;
- a claim in tort, where the parallel importer's purchase from a distributor induces a breach of contract between the brand owner and the distributor; and
- claims for statutory misleading conduct and unlawful passing off.
We will consider these strategies in turn.
Assignment to a third party
In Transport Tyre Sales v Montana Tyres (1999, 93 FCR 421) one of the leading trade mark cases on parallel importation, the original trade mark owner, the Japanese manufacturer of the goods, assigned the trade marks in question to its Australian exclusive distributor. The distributor then claimed trade mark infringement against the parallel importer. The parallel importer could not rely on the section 123 defence described above, because the trade marks were not applied to the parallel imported goods by or with the consent of the trade mark owner – the exclusive distributor – but by a third party, the Japanese manufacturer. The parallel importer sought to challenge the assignment on the ground that it was recorded through fraud, false suggestion or misrepresentation because the manufacturer and the distributor had also entered into an option agreement to re-assign the trade marks to the manufacturer upon termination of the distributorship. That argument did not persuade a Full Court of the Federal Court, which held that the assignment was valid and the trade marks were in theory capable of being infringed. (In the circumstances, because the parallel importer had imported the goods into Australia before the assignment to the Australian distributor had been effected, there was no trade mark infringement due to the operation of section 123.)
As a result, an initial strategy for many brand owners is to consider a trade mark assignment to their Australian subsidiary or distributor. Where the assignee is an Australian subsidiary, there is a greater chance that an Australian court would apply section 123 by considering the corporate group as one legal entity. On the other hand, where the assignee is an independent local distributor, the Transport Tyre case suggests that section 123 does not provide a good defence for parallel importers.
Device marks and graphics
In QS Holdings v Paul's Retail (2011, 92 IPR 460) the Federal Court held that a parallel importer infringed the brand owner's copyright where the imported goods were apparel items bearing device marks and graphics. The artistic copyright subsisting in the trade marks and graphics formed the basis of the copyright claims. This means that it remains possible to prevent parallel importation of genuine goods bearing copyright works under sections 37 and 38 of the Copyright Act 1968. Whether a copyright claim can be made in relation to copyright works appearing on labels and other accessories is more controversial given the amendment to copyright law on genuine accessories, as described above.
Trade mark infringement
Parallel imported goods, such as electrical goods, are often altered to allow the goods intended for overseas markets to function in the Australian operating environment, for example Australia's 240V electrical standard. In these cases, there are strong grounds for the trade mark owner to run a vanilla claim for trade mark infringement. When met by a section 123 defence by the parallel importer, the trade mark owner is entitled to respond that the parallel imported goods are materially different from the genuine goods to which the trade mark was originally applied by or with the consent of the trade mark owner.
Also in recent times, many goods have been parallel imported into Australia with their lot or serial numbers removed, to prevent the brand owners from ascertaining the origin of the imports. We have seen the practice occur in relation to, among other parallel imported goods, tobacco products, alcohol products, cosmetics and perfumes. In such cases, given the importance of such lot numbers which allow the producers – or importers – to trace products that may need to be recalled, there is a strong case to be made that the products have been materially altered. This type of argument was accepted in the US courts in Zino Davidoff SA v CVS Corporation (Case 07-2872-cv, June 19 2006).
Breach of contract
The international distribution of many goods is commonly organised under contractual relationships between brand owners and distributors. Those contracts often place restraints on distributors against the sale of branded goods to a third party whom the distributor knows or reasonably suspects will resell the goods outside the distribution territory.
In cases, where a parallel importer manages to obtain, perhaps through a clearance sale, branded goods from such a distributor, it can be argued that the parallel importer is inducing, by its offer to purchase, the distributor to breach its distribution contract with the brand owner.
Of course, to induce such a breach of contract, the parallel importer must be notified of the contractual restraint that it is inducing the distributor to break (Delphic Wholesalers v Elco Food and Calogeropoulos & Sons (1987) 8 IPR 545, 550) preferably in writing. That would give rise to an action in tort against the parallel importer for inducing a breach of contract, as well as providing the basis for preliminary discovery by the parallel importer of all documents that would enable the brand owner to identify which distributor sold the goods to the parallel importer.
Misleading conduct and passing off
Where branded goods are adapted for the Australian market and are distributed by a brand owner's subsidiary or distributor, the sale of parallel imported goods may amount to statutory misleading conduct in contravention of the Australian Consumer Law and unlawful passing off, such as in Pioneer Electronics Australia v Lee (2000, 108 FCR 216, –). Consumers may be misled into believing that the parallel imported goods are sold by or with the approval of the brand owner or that the parallel imported goods are equivalent in quality or characteristics to the authorised goods. A similar argument was used in Colgate-Palmolive Ltd v Markwell Finance Ltd (1989, RPC 497) although that was a trade mark infringement and not a misleading conduct case. The use of disclaimers on packaging, a common practice among parallel importers, may not be sufficient to disabuse consumers from these false representations.
The above discussion outlines five popular strategies that brand owners and distributors can adopt in order to curtail parallel importation of genuine goods into Australia.
There has been mounting pressure from brand owners and distributors for the Australian Government to review its policy on parallel importation. The original policy was implemented without any empirical study to determine whether or not cheaper prices afforded by parallel importation outweighed the detriment suffered by Australian businesses and consumers as a result of parallel importation. Given the growing number of brand owners and distributors seeking legal protections against parallel importation, such a study may well be overdue.
Stephen is the national practice group leader of Corrs’ Intellectual Property & Technology Group, is experienced in all aspects of IP law and is widely consulted for his expertise in patent and trade mark litigation, also having experience in anti-counterfeiting.
Stephen acts for a wide range of clients, such as luxury goods manufacturers, clothing, footwear and textile producers, electronics and communication companies, film industry members, machinery manufacturers, pharmaceutical producers, watch makers and wine producers, protecting all aspects of their IP portfolios against misuse.
Regarded as a leader in his field, Stephen has been nominated as Australia’s foremost trade mark lawyer, and is among the top 25 Trade Mark experts in the world as nominated by the Expert Guides to the World’s Leading Lawyers – Best of the Best 2007 and again in Best of the Best 2009.
Wen Wu is a lawyer in the Corrs’ Intellectual Property and Technology Group, specialising in IP, regulatory and marketing law. He has experience in IP litigation including copyright, patent and trade mark matters across a range of industries, including pharmaceutical, consumer goods and government. Wen has also advised on regulatory and marketing law issues, including compliance, misleading advertising and social media.