Proposed changes to impact Parallel Importation: Subsidiaries and distributors beware!

Parallel imports (or grey imports) is the importing of genuine goods by an unauthorised person to then sell against the local distributor or subsidiary. Impacting the authorised seller, this gives the unauthorised importer a free ride on marketing and it also has the potential to impact safety, reputation, exclusive deals, safety and margin. On the other hand, allowing parallel imports benefits consumers with lower prices.

In response to recommendations proposed by the Productivity Commission on intellectual property laws, the Federal Government recently released the draft Intellectual Property Laws Amendment (Productivity Commission response Part 1 and other measures) Bill (Draft Bill), to amend parallel importation provisions of the Trade Marks Act 1995 (Cth) (Act).  It is likely that these changes will come into force.

The proposed changes aim to make it easier for persons to engage in parallel importation. The acceptance of these changes will require businesses to reconsider their manufacturing, distribution and marketing strategies concerning its products and their intellectual property portfolios.

What is parallel importation?

Parallel importation, also known as grey or direct importation, refers to the selling of genuine products by an unauthorised party directly to consumers or businesses in Australia, outside of a manufacturer’s official distribution channels.  This can be done despite registered trade marks being affixed to the goods, when affixed by or with the authorisation of the trade mark owner.

A business may be engaging in parallel importation when:

  • it purchases products from a supplier other than the manufacturer or its authorised distributor/subsidiary;
  • the specific product, or the particular model or range, was not intended to be sold into the Australian market;
  • it imports the goods purchased overseas to Australia, and sells in competition with the authorised distributor/subsidiary.

Commercially, the product needs to be cheaper in the overseas market, but with different pricing policies, buying from discount wholesalers or from liquidation sales, this is often the case.

Product quality and price can vary across different countries and regions. This is dependent on a number of factors, including the marketing strategy of the trade mark owner, discrepancies in manufacturing and safety standards, and variances in consumer expectations.  It is common for the same product range to use different components across regions to satisfy these factors.

A parallel importer profits by selling the imported goods at cheaper prices than the stock available to local authorised distributors. To the rights holder’s detriment, consumers usually attribute product faults and issues to the rights holder or the authorised distributor, not the importer.  The unauthorised importer also gets a free ride on the marketing and brand reputation of the authorised seller.

How are businesses currently protected from parallel importers?

Section 123 of the Act provides that a person does not infringe a trade mark if it has been applied to goods by, or with the consent of, the registered owner. This allows parallel importers to avoid infringement and continue their business where they import goods with marks applied by or with the authority of the registered owner.

Macpherson Kelley often advises businesses on strategies to protect themselves from parallel imports.  One way is to separate the trade mark owner, so the same entity does not own the Australian and overseas trade marks.  An option is for the local subsidiary, licensee or distributor to be the owner, with a condition to return the trade mark at the end of the relationship.

What are the proposed changes to the law?

The proposed changes repeal section 123 and replace it with section 122A. The new provision clarifies the circumstances where parallel importing may occur without infringement. These circumstances are:

  • where the goods with the mark are similar to the trade marked goods;
  • where the goods have been previously put on market in Australia or any other country (without the need for any actual sales to have taken place);
  • where it was reasonable to assume the trade mark was applied to the goods by the:
  • registered owner;
  • authorised user (such as a licensee);
  • person who has significant influence over how the registered owner or authorised user uses the mark; or
  • an associated entity of any of the above persons.

What are the implications of the proposed changes?

The changes are likely to prevent registered trade mark owners from preventing parallel importation through the separation of ownership of its marks or assigning to licensees or authorised distributors.

It also means the registered owner’s rights are ‘exhausted’ after the initial use of the trade mark on products introduced to the market. Any subsequent use of the trade mark in relation to those products (i.e. where a person imports and sells products manufactured in the US in Australia) will not infringe the trade mark, provided that it was reasonable to assume the mark was applied by and subsequently used by parties sharing an appropriate relationship.

Depending on the relationships and circumstances, there may still be avenues for the local licensee, distributor or subsidiary to limit the import or to otherwise protect its reputation and distribution strategies.

Macpherson Kelley has extensive intellectual property experience dealing with parallel importation issues. Please contact Paul Kirton or our Commercial team for more information.

This article was written by Jason Han, Graduate Lawyer – Commercial.