When things are not always black & white: grey goods
12/02/2007

What is parallel importation?

Trade mark proprietors often make use of authorised distributors in the countries in which they wish to sell and market their products. These distributors, who have knowledge and experience of the local market, usually have exclusive importation and distribution rights for the trade mark owner's goods and services, which guarantees the trade mark owner access to the required market. In return, the distributor assumes certain obligations such as marketing, after-sale service, performance in terms of any warranties on the products and protection of the goodwill acquired in the product bearing these trade marks by ensuring consumer protection and satisfaction.

Parallel importation arises when goods made under the authority of the trade mark proprietor, ie genuine, authorised goods, are diverted from their original destination to another country without the authorisation of the trade mark owner in that country, usually to take advantage of different price structuring and without guaranteeing support or service for the goods.

However, a trade mark owner selling authorised goods bearing his trade mark in one country implicitly authorises the purchaser to resell them under that trade mark. Where that purchaser buys the authorised goods and then exports them to a country where the trade mark owner already has a sole distributor, trade in these goods cannot be prevented because of the principle of exhaustion of rights. These goods are called "grey goods" or "parallel imports". As the goods were made by the trade mark owner or with its authority, the goods themselves can never be considered illegal or illegitimate.

Does parallel importation affect you?

The sale of parallel imports can sometimes have a positive effect because these goods are often cheaper than identical items sold locally. However, they are often sold without the consumer having any right to skilled after-sale service. A serious problem arises where consumers are misled by parallel importers providing false information regarding the source of the product, its quality and the nature and extent of any warranty provided by the trade mark owner. Where the parallel importer wrongly purports to issue guarantees or furnish after-sale service on behalf of or approved by the trade mark owner, he may be committing an offence. However, the normal consumer has had little recourse against the importers.

Even where established retailers are involved, retailers of grey products will generally not disclose to consumers the products are not guaranteed by authorised dealers appointed by the trade mark owner nor do they disclose that they have none of the obligations of authorised dealers. There has not been any obligation on the seller to disclose his relationship with the trade mark owner nor indicate the nature of any after-sales service. While some parallel importers may offer their own guarantees or services, these are not authorised by the trade mark owner and may, in fact, cancel any warranties on the products normally provided by the trade mark owner.

International perspective

European Community

The European Community ("EC") has attempted to prevent parallel importation by issuing Counsel Directive 89/104, which serves to prevent trade marks being employed as the means to divide markets along the territorial lines of the EC. Trade marks may not be used to prevent parallel importation between countries of the EC.

Article 7(1) of the Directive provides that a trade mark owner is not entitled to prohibit the use of his trade mark in relation to goods which have been put on the market in the EC by the owner or with his consent. In other words, if the authorized goods are placed on the market in one country within the EC with the trade mark owner's permission and these goods then cross territorial lines within the EC without the consent of the trade mark owner, the owner is not entitled to prevent this. The principle has been extended, by virtue of the Agreement on the European Economic Area ("EEA"), to the territory of the EEA, now consisting of the European Community on the one hand and Iceland, Liechtenstein and Norway on the other hand.

Article 7(1) has also been interpreted as meaning that the trade mark owner may prevent the goods entering the EEA from outside the EEA, even if the goods were made with the trade mark owner's authority. So, if goods are made with the trade mark owner's authority in South Africa, the trade mark owner may prevent these goods being diverted into the EEA without the trade mark owner's permission, even though the goods are technically authorised goods.

United States of America

The United States of America ("USA") follows the rule that, if goods are produced for sale outside the USA, with the USA trade mark owner's consent and these goods are then imported into the USA, the goods will only infringe the owner's rights if the "foreign" goods materially differ from the authorised goods normally sold in the USA. What constitutes a "material difference" varies from product to product and the issue is whether or not the trade mark owner has consented to the importation of the goods and has control over the characteristics of the goods associated with the trade mark in the USA. In Bourdeau Bros vs Int'l Trade Comm 2006 U.S App. LEXIS 7767 (Fed.Cir.Mar.30,2006), it was observed that the burden of proof rests on the trade mark owner to show that substantially all of its goods sold in the USA conform to the established standard of the goods for the USA market and that it did not authorise the sale of the foreign goods in the USA through its own authorised dealers.

What action can you take in South Africa?

Where a trade mark owner sells his goods under his trade mark, he is deemed to have foreseen and authorised the resale of these goods under this mark. Section 34(2)(d) of the Trade Marks Act of 1993 specifically states that a registered trade mark is not infringed by the importation into or the distribution, sale or offering for sale in the Republic of goods to which the trade mark has been applied by or with the consent of the proprietor. It was confirmed in Protective Mining & Industrial Equipment Systems (Pty) Limited vs Audiolens (Cape) (Pty) Limited 1987 (2) SA 961 (A) that use of a trade mark will only amount to an infringement where there is use on "non-genuine" goods.

The registered proprietor has therefore exhausted his right to control trade in the goods once he sells his authorised product.

However, if the parallel importer alters the goods so that the goods are not sold in the same condition as they were when the trade mark was applied to the goods, these goods may not fall within the exception of Section 34(2)(d). The Appellate Division (Supreme Court of Appeal) decision in Television Radio Centre vs Sony Kabushiki Kaisha t/a Sony Corporation 1987 (2) SA 994 (A) confirmed that, if the parallel importer has made material changes to the original product so that the product is actually no longer a genuine product, such as internal changes to allow a television set to work in South Africa when it is encoded for the Far East, this would be considered trade mark infringement and action could be taken against the parallel importer. What constitutes a "material change" will depend on the nature of the goods, the purpose and extent of the alteration and the reasonable expectations of consumers.

Trade mark owners have had some success in stopping parallel importation by assigning the copyright in copyright works appearing on packaging (including user manuals) of their genuine products to their South African distributors. It was held in Frank & Hirsch (Pty) Limited vs Roopanand Brothers (Pty) Limited 1993 (4) SA 279 (A), that, if the copyright is assigned and the manufacturer trades in his goods in that packaging in South Africa without permission from his distributor, trade in those goods may be stopped. An assignment of the copyright would allow the South African distributor to pursue a parallel importer who is made aware of the assignment for bringing in goods in packaging that infringes his copyright, even though the goods themselves are technically authorised by the trade mark owner. The relief available relates to the packaging and not in the goods themselves. This type of action is only effective if the South African distributor can show that the parallel importer knew he was dealing in infringing copies. In practice, the importer is often informed by addressing a letter to the importer notifying him of the copyright.

Foreign owners of copyright have generally shied away from assigning their rights territorially. While assignment of copyright is effective for certain types of copyright works, it does not work in practice for all types of goods. The assignment also results in piecemeal ownership of copyright in different territories, which may have other legal implications.

A new solution

The Department of Trade and Industry has recently published a Notice in the Government Gazette relating to the practice of parallel importation in terms of The Consumer Affairs (Unfair Business Practises) Act 71 of 1998, which is an enabling piece of legislation that confers on the Minister of Trade & Industry powers to take corrective action to stop "unfair business practises".

This Notice came into effect on 9 February 2007. The Notice has defined a business practice in this context to mean:

"The business practice whereby branded products imported without the trade mark owner's authority are advertised, promoted and/or offered for sale to end users and where end users have not been alerted by the seller that it:

• is not designated by or on behalf of the trade mark owner as an authorised distributor of the branded product, and
• that the authorised South African distributor is under no obligation to honour the manufacturer's warranties/guarantees and/or after-sales support."

An unauthorised branded product is defined as a branded imported product imported without the express authorisation given by or on behalf of the owner of the trade mark and includes any tangible object or product promoted or offered in the ordinary course of business for sale or supply to "end users", who are any persons who purchase a product for his/her own use and not for resale, such as consumers.

The effect of the Notice is that the sale of grey products without notifying the consumer that the seller is not authorised to distribute the products and the authorised South African distributor is not obliged to honour the trade mark owner's warranties and after-sales service on that product is an unfair business practice. The unlawful conduct is punishable by a fine not exceeding R200 000 or imprisonment for a period not exceeding 5 years or both.

The Notice requires that sellers of unauthorised branded products must include in all advertising and promotion (such as in-store promotions, brochures and websites) the following wording:

"The authorised South African distributor of this product is under no

obligation to honour the manufacture's guarantees/warranties or to provide after-sales service".

This wording must be in a conspicuous size and presumably applied in a prominent place to allow consumers to read it easily.

However, the Minister has indicated that he will grant an exemption from any of the requirements set out in the Notice on a recommendation from the Committee established under the Act. Any person who sells grey products may apply for an exemption to the requirements to the Chief Director of the Committee.

Implementation

This is a positive step in the ongoing battle against grey products sold in South Africa without guarantees or back up. While the Notice does not prevent grey products being imported into South Africa, it does place restrictions on the method and manner of sale and the distribution of grey products. Consumers must be informed that the products are not authorised, even though they originate from an authorised manufacturer.

The Notice came into force on 9 February 2007. It is likely that the Department of Trade & Industry will be forming a team to oversee the implementation of this Notice, so that complaints can be lodged and the appropriate action taken on behalf of concerned consumers, authorised distributors and any other persons who are in any way affected by parallel importation.

Angela van den Berg
Adams & Adams
angela-v@adamsadams.co.za