Building expertise since 1986 GREY IMPORTS K EnforcingEnforcing outsideoutside thethe trademarktrademark

IN SUMMARY boxbox – The rules on grey imports in emerging markets are highly varied K – Creative enforcement strategies can Effective options for grey help address the challenge and imports in emerging markets improve brand protection By Lisa Peets, Victoria Hanley and Siobhán Fisher of

AUTHORS Covington & Burling LLP

Lisa Peets (left) leads the European IP oday’s global economy offers brand governing grey imports in emerging Practice at Covington & Burling. Her owners increasing access to so- markets, coupled with the lack of expeditious practice focuses on called “emerging” markets. This and effective judicial processes, necessitates a and information , and T embraces both legislative advocacy and new openness also means that national customised approach to the problem. This IP enforcement. borders rarely impede the unauthorised article first explores the challenges of grey movement of goods – including grey goods – trademark enforcement in four Victoria Hanley (middle) is an associate in emerging markets. As a result, brand developing regions – emerging EU markets, in Covington & Burling’s Brussels office. owners may find themselves with brand non-EU CEE markets, and – Her practice covers European Union intellectual property, communications protection issues in far-flung markets, and then outlines possible approaches to and , and focuses on including those in which they have not yet address these challenges. policy reform and legislative advocacy. contemplated commercial operations. Emerging markets may be culturally and Emerging markets in the European Union Siobhán Fisher (right) works with the legally diverse, but they are almost European courts at the highest level have European IP Practice at Covington & universally disposed to fostering grey confirmed that brand owners may rely on Burling. Her practice focuses on intellectual property, and centers on IP business practices – practices that erode a trademark rights to prevent the sale of grey enforcement, lobbying and IP policy rights owner’s control over their brand and imports from outside the European reform in Central and Eastern , damage the brand’s integrity. Enforcement Economic Area (EEA) (comprising the 27 Russia and the CIS. options for grey imports and product EU Member States along with non-EU diversion vary significantly from market to markets Iceland, and Lichtenstein). market, but the consistent themes are that Once a good has been put on the market in the civil court systems move slowly, IP cases the EEA with the brand owner’s consent, are not prioritised, and the threat of civil (or however, the right is “exhausted” and the even criminal) enforcement may not carry good can travel freely across national the same weight as in developed markets. borders. The varied nature of the legal regimes This rule flows from the 1989 Trade www.ipworld.com Trademark World #220 | September 2009 | 45 K GREY IMPORTS Building trademark expertise since 1986

Marks Harmonization Directive (“the imposes a blanket restriction to enforcing state of play in Croatia and international Directive”). With limited exceptions, in order trademark rights on brand owners who have exhaustion in Serbia, for example, it is to promote the free movement of goods and put their product on the market anywhere in inadvisable to rely on a one-size-fits-all services within the common European the world, effectively permitting grey strategy. What is consistently crucial to take market, Article 7(1) of the Directive prohibits imports entry into the EEA via Romania. into account is how the relevant local brand owners from invoking to Even in the new EU Member States whose authority views grey imports and their prevent the distribution of goods that have national law adheres to the EU principle of willingness to take enforcement measures. already been put on the market in the regional exhaustion, national authorities may European Community with their consent. not consider grey goods as harmful and Russia Until last year, however, it was an open hence may be reluctant prevent their Grey market imports seemingly flourish in question as to whether this regional importation. In Estonia, for example, on Russia, and even careful vetting of partners exhaustion of rights applied only to the 27 paper the legal regime conforms to EU and robust distribution agreements may EU Markets, or whether EEA markets were principles; in practice, however, law leave a brand owner facing product diversion bound by a regional exhaustion rule as well; enforcement agencies are generally unwilling problems. Recent changes to the trademark as a result, Norway served as a legal route to take action. Some Member States consider enforcement regime have only served to for parallel imports to enter the EEA. grey goods to be a consumer friendly price further complicate enforcement options for The European Court of Justice (ECJ) and control regulator, as is the case in Bulgaria. brand owners. the EFTA court, which together with the Hopefully, as European regulators forge In practice, historically, Russian customs EFTA Surveillance Authority is responsible ahead with efforts for closer cooperation, it authorities and courts have treated grey for ensuring that Norway, Iceland and should only be a matter of time before the imports as an administrative offence. More Lichtenstein respect their obligations under practices in emerging Europe fall in step with recently, however, courts have moved away the EEA Agreement, have now aligned their the practices in older Member States. from this view. The Code on Administrative diverging views on the interpretation of Furthermore, pending changes in EU Offences requires that goods must be Article 7(1). In the 1997 Mag Instruments legislation may provide brand owners with “unlawfully” marked with a trademark to case, the EFTA court ruled that Article 7(1) additional tools to fight grey market give rise to an infringement; because grey permits the EEA markets to introduce or activities. EU Regulation 1383/2003 (the goods are original (rather than fraudulent), maintain the principle of international “Regulation”) enables right-holders, with the courts have concluded that the marks are not exhaustion – thereby sanctioning Norway’s help of national customs authorities, to unlawfully affixed to the goods per se, and principle of international exhaustion and prevent counterfeit goods from crossing the thus there is no administrative cause of providing an entry point into the EU’s external border; the Regulation does action. Unhelpfully, the long-awaited Community for grey imports. Just over six not, however, provide brand owners with a Resolution of the Russian Supreme Court months later, the ECJ, in the Silhouette case, cause of action in relation to genuine and Arbitration Court reinforces this view, ruled the contrary, concluding that national products, or grey goods. In a move to further despite earlier drafts of the Resolution laws providing for the international harmonise the customs actions that can be having indicated that grey imports are exhaustion of rights are contrary to Article taken by brand owners, the European administrative offences. 7(1). This was subsequently confirmed by the Commission is currently considering Prior to these decisions and the ECJ in the 1999 Sebago case, which extending the scope of the Regulation to Resolution, the Russian customs authority established that Member States’ national laws cover grey imports from outside the was empowered and generally willing to cannot provide for the international Community, which ideally would further align seize grey goods if a brand owner had exhaustion of trademark rights. Nearly a divergent practices among Member States. registered its marks in Russia and filed decade later, in the 2008 L’Oréal case, the seizure requests with the Federal Customs EFTA Court finally aligned its view with Emerging European markets outside the EU Register. The new view embodied in the that of the ECJ and confirmed that there is A number of the EU’s bordering countries in Resolution, that grey goods de facto cannot no justification to interpret Article 7(1) Central and Eastern Europe (“CEE”) are be counterfeit, throws this practice into differently in EEA law and EC law. As a already candidates (Croatia, the former limbo and it remains to be seen whether the result, Norway can no longer be considered Yugoslav Republic of Macedonia and Turkey) customs authority will be rendered impotent to be a legal gateway for grey imports to or potential candidates (Albania, Bosnia and with respect to the seizure of grey goods. enter into the EU. Herzegovina, Kosovo, Montenegro and Brand owners may take solace in the fact This string of cases also makes it doubly Serbia) for future accession to the EU. The that the same reasoning is unlikely to be clear that regional exhaustion and trademark ongoing negotiations over the intellectual applied to civil trademark enforcement. rights should be the guiding principle property chapter of the accession agreements Based on the general interpretation of the throughout the entire EEA and that its should ultimately result in candidates’ national Civil Code, which states that placing a mark Contracting Parties (which include the now laws conforming to EU principles of on goods for the purpose of import into 27 EU Member States) are precluded from exhaustion. However, for the time being brand Russia is the exclusive right of the owner of following the principle of international owners seeking to protect their brand have to the marks, the import of original (grey) exhaustion. In practice, however, this is not go to great lengths to fathom their options goods without the consent of the brand the case in some of the newer Member from a patchwork of extremely divergent owner should remain actionable as civil States. Illustrating the chasm between theory regimes in these markets. With national trademark infringement – with all its and practice, Romanian trademark law exhaustion of trademark rights being the legal attendant pros and cons.

46 | Trademark World #220 | September 2009 www.ipworld.com Building trademark expertise since 1986 GREY IMPORTS K

China enforcement efforts involving customs do so. Training programmes and awareness In China, the legal situation in relation to authorities. Ironically, even the perverse and campaigns thus also need to focus on policy grey market goods remains unclear. A unexpected can thwart trademark remedies makers. Arguments in support of reducing literal reading of Chinese Trademark Law when a brand owner seeks to protect its the grey market are likely to carry more suggests that parallel imports are marks – the positive benefits of pursuing an weight in front of government officials prohibited. If accurate, a brand owner has action in emerging markets can be when focused on political motivations such recourse to a broad range of remedies completely undone if the seized goods are as increased consumer protection or including seizure, administrative fines, civil subsequently sold by the government. increased tax revenues as opposed to the compensation and criminal prosecution. protection of rights holders; and However, there is a commonly held view Alternative enforcement • Finally, public reports of successful amongst the legal profession that the In light of the legal and enforcement enforcement efforts undertaken by the function of a trademark is to avoid challenges outlined above, brand owners brand holder may be a good deterrent for confusion as to the source of a good to seeking to develop a broad, effective strategy those who may be tempted to divert brand which the trademark is applied and that, for combating grey goods in emerging owners products away from their intended consequently, there should be no cause of markets are well advised to look beyond distribution channels. Brand owners should action under the Chinese Trademark Law traditional trademark enforcement strategies. not be reluctant to widely publicise their for the importation of grey market goods. Part of this strategy should include measures enforcement activities at a national and Chinese case law does support a brand designed to prevent product diversion in the regional level. owner’s ability to rely on trademark law to first instance; where such diversion has already stop parallel imports. In 1999, for example, occurred, legal remedies outside of trademark When prevention fails to stop problems, the Guangzhou Intermediate People’s Court may provide opportunities for enforcement. alternative enforcement avenues can held that trademark rights were infringed Effective preventative measures take complement trademark enforcement when “Lux” soap was imported from several forms: remedies, or provide a viable option when Thailand into China without the brand • First, a brand owner must vet its IP legislation does not address grey market owner’s consent. As China is not a common manufacturers and distribution channel imports. Among these avenues, audits of law jurisdiction, however, this decision does with care. Unscrupulous business practices distributors and brokers can be a relatively not afford brand owners much security as may be commonplace in emerging markets, inexpensive and expeditious enforcement this otherwise-valuable case law will not and brand owners can unwittingly become tool. The national laws in some emerging bind other courts. involved with unsavory or disreputable markets may even facilitate a brand owner’s The Chinese Trademark Office is expected companies. Thus, it is especially important request to audit goods carrying its mark. to introduce a new trademark law before the to place a great deal of emphasis on Consumer protection legislation may also end of 2010, updating the current (2001) law. building a reliable network of local present an enforcement option when the It remains to be seen whether the new law partners. Brand owners should also enter grey goods involved implicate health and will resolve the question of whether and how into localised and safety, or where consumer regulations trademark law can be relied upon to tackle distribution agreements containing familiar dictate localised handbooks, instructions, grey market activities. and locally enforceable remedies; safety information or technical conformity • Second, to ensure that enforcement certificates – the absence or deficiency of Trademark enforcement actions are pursued most efficiently, the which may offer the brand owner a back When local legislation offers criminal or brand holder should craft a strategy for door to stop grey goods. And tax administrative trademark enforcement training for local police, prosecutors, and regulations may present an enforcement mechanisms, the brand owner may leverage customs officials. It is unlikely that efforts vehicle that engenders a sympathetic the less costly and often more expeditious to stop grey imports will garner support response from law enforcement officials, nature of such enforcement (in contrast to from local law enforcement absent shifting the enforcement focus to lost tax civil trademark enforcement). Nonetheless, significant education. Many law revenue due to below market sales prices even if trademark enforcement mechanisms enforcement officials find the legal issues of grey goods. exist, be they criminal or civil, a brand confusing; and some consider grey owner should consider the practical imports to be counterintuitive (the Conclusion implications of trademark enforcement product is genuine, so how can it be The trademark enforcement landscape in action; often what is written in the law does illegal?) and believe the harm to the brand emerging markets is varied in its options and not work quite as well in practice. owner is dubious. Furthermore, effectiveness to address grey market imports. For example, customs authorities may have irrespective of the letter of the law, some Therefore, irrespective of the extent to which the power to seize grey goods in some prosecutors may be reluctant to act in trademark law offers brand owners recourse markets, but a brand owner should only cases where there is no obvious health and to prevent their brand being eroded by grey request the seizure of grey goods if it has the safety risk to the consumer or they do not market activities, creative enforcement resources to follow up. A brand owner would perceive there to be any social harm; strategies are a must in emerging markets. be better off not to request the seizures than • Third, even the best planned and Alternative enforcement activities are a to do so and not follow up, as the latter may orchestrated training programmes will not valuable complement to more traditional be perceived as implicit authorisation of grey succeed in effecting the desired policy methods and produce measurable imports and will certainly undermine future change unless there is the political will to improvements in brand protection. K www.ipworld.com Trademark World #220 | September 2009 | 47