Parallel Imports (Gray Market Goods)

1. What are parallel imports/gray market goods?

The term “parallel imports” (or “gray market goods”) refers to genuine branded goods obtained from one market (i.e., a jurisdiction or economic area) that are subsequently imported into another market and sold there without the consent of the owner of the trademark.*

The goods are genuine goods (as distinct from counterfeit goods) in that they have been manufactured by, for, or under license from the trademark owner for the jurisdiction concerned. However, they may have been formulated or packaged and licensed only for that particular market, but then imported into a market not intended or authorized by the trademark owner.

* For purposes of this Fact Sheet, the “owner of the trademark” is taken to be the same person (or from within the same group of companies) in both the place of first sale and the place into which the articles in question are imported.

2. When is it illegal to import or sell gray market goods?

According to the concept of exhaustion, once IP rights holders sell a product in a particular market they cannot—subject to limited exceptions—prevent the resale of that product in that market. The IP rights covering the product have been “exhausted” by the first sale. The legality of importing or selling gray market goods in a given jurisdiction depends on the type of “exhaustion” regime in that jurisdiction.

There are essentially two types of exhaustion: national (or regional) and international. The debate as to which is preferable has been highly contentious.

• National (or Regional) Exhaustion: Under this type of exhaustion trademark rights are exhausted only in the jurisdiction or region where they are first put on the market. For example, there is a regional exhaustion regime in the EU. Therefore—and subject to limited exceptions—a pair of shoes first put on the market in Paris can be re-sold in Munich and the trademark owner cannot prevent that subsequent sale. On the other hand, an EU trademark owner can prevent the re-sale of a pair of shoes in Prague that were first put on the market in Argentina but then subsequently imported into the EU.
• International Exhaustion: With international exhaustion, a trademark owner cannot prevent the re-sale of their trademarked products in the jurisdiction or region that applies such a regime, regardless of where the product was first put on the market.

Some jurisdictions use a hybrid approach that modifies one of the two basic types of exhaustion. For example, the jurisdiction nominally applies the principle of international exhaustion but places some limits on the goods that may be imported.

3. What are the remedies if my goods are sold on the gray market?

Remedies for gray market goods are jurisdiction specific. First, check with local counsel to learn whether a remedy is available under local trademark law. For example, in some jurisdictions, such as Canada and New Zealand, trademark law allows for parallel importation, though other laws (e.g., copyright and labeling law) may provide a remedy. In contrast, in the United States both the Trademark Act (Lanham Act) and the Tariff Act provide remedies for gray market goods. Similarly, in Brazil the owner of a trademark can prevent third parties from importing any goods that infringe its rights by pursuing both criminal and civil measures.

It has been estimated that billions of dollars in revenue per year are lost to gray market diversion in the United States and worldwide, along with other possible damage, such as negative consumer experiences that harm the goodwill and reputation of a brand. There are also issues surrounding consumer protection, product integrity, service and warranties, and recall notifications. While reducing brand owner revenue, gray marketers can capitalize on surplus inventory, lower manufacturing costs, and lower distribution costs, and can take advantage of current economic conditions and beneficial currency exchange rates by facilitating the export of goods without the brand owner’s permission. Gray market diversion undercuts the prices charged by authorized domestic distributors through the sale of goods at lower price points. Research shows that consumers only minimally benefit from these lower price points, which mainly increase the profit on the side of the gray marketers.

4. How can a company mitigate the importation and sale of gray market goods?

There are a number of ways, such as those listed below, that a company can mitigate the importation and sale of gray market goods,. Any restrictions should be checked for compliance with antitrust laws.

• Review the company’s business supply chains, including licensee and distributor agreements, and create language to address parallel importation (e.g., insert provisions that prohibit the export of products to or from certain jurisdictions, etc.).
• For “high-end” goods in particular it may be possible to create a selective distribution regime that limits the ability of retailers and distributors to both acquire and re-sell products.
• Draft manufacturer’s warranties to limit the ability of purchasers of gray market goods to rely on those warranties unless they return the goods to the place of original purchase.
• Create a policing program. For example, collect information on the source of gray market activity through both internal and external resources (e.g., sales personnel, related entities located in other jurisdictions, vendors).
• Educate the company’s consumers about known parallel imports and the differences to look for in those imports (e.g., different packaging and lack of the original manufacturer’s warranty).
• Check with local counsel for other jurisdiction-specific ways to mitigate the importation and sale of gray market goods—for example, take steps to register trademarks and copyrights or consider basing claims on other statutes addressing health and safety requirements in products. Also, in the United States, the owner of a federal trademark registration may register its trademark with U.S. Customs and Border Protection (CBP) and report violations online. In addition, it can provide CBP with notice of any potential or known parallel imports.

Additional Resources

Reports

Parallel Imports Worldwide Report 2017

Board Resolutions

Burden of Proving Consent in Parallel Import Cases
Exhaustion of Trademark Rights and Parallel Importation

Amicus Briefs

Samsung Electronics Company Ltd. & Anr. v. Kapil Wadhwa & Ors.
Paranova A/S v Merck & Co., Inc, Merck, Sharp & Dohme B.V. and MSD (Norge) A/S
Glaxo Group Limited v. Dowelhurst Limited and Swingward Limited

Testimony and Submissions

Parallel Imports—Lever Rule

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