Parallel importing is a form of unauthorized international trade in which importers bring goods into a territory and sell them without the authorization or license from the rights holder of the intellectual property.
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The imported goods are not fake and not counterfeit. Yet, it does not make their sale legal.
What is parallel importing?
Parallel importing is often called gray marketing.
Parallel importing or gray marketing are terms used to describe the sale of goods with intellectual property rights without the intellectual property owner’s permission in that market. The goods are sold through unauthorized channels, such as resellers.
The “parallel” part involves a distributor, wholesaler, or retailer who brings in a product and offers it for sale, usually at a reduced price.
The goods are “gray” because they are no longer part of the “white” market. In other words, they are genuine goods imported and offered for sale outside of authorized channels.
Parallel import sellers are often unauthorized resellers but may also be authorized sellers selling out of their territory.
Not that we have parallel imports explained, let’s find out if parallel importing is legal.
Is parallel importing legal?
Well, yes, but not always.
Parallel imports are branded goods legally manufactured by or under license of the brand owner. Therefore, parallel imports are genuine goods protected by intellectual property rights, such as patents, copyrights, or trademarks.
Parallel imports are sold into a market without the consent of the intellectual property owner in that market.
Whether parallel imports are legal depends on the first sale doctrine, also called the exhaustion of intellectual property rights.
The First Sale Doctrine says that any owner of an item has the right to resell it in an unchanged state.
According to this principle, once a product has been sold into a particular jurisdiction with the authorization of the brand, the brand has exhausted its rights and cannot maintain control over the re-sale of that product.
Now the buyer has the right to resell the goods even if the trademark, copyright or patent owner does not consent to the resale.
Although it offers narrow protection, the application of the doctrine means that parallel importing is generally legal, allowing sellers to exploit the situation and sell branded goods at a discount.
How is the first-sale doctrine applied?
There is no international law regarding parallel imports. Countries apply one of two types of exhaustion regimes: national or international.
What is national exhaustion? Under national exhaustion, the first-sale doctrine applies to goods already in the country. In this case, the brand has to sell its product in the country before other sellers can do so.
Many countries go by the international exhaustion principle. Under it, once your product is available anywhere in the world, you exhaust your right to control its distribution, regardless of territory. Anyone can buy it and import it for resale.
National courts decide on the scope of the first-sale doctrine and how exactly to apply and enforce it.
When is parallel importing illegal?
Parallel importing of goods may be unlawful in some situations and territories when they infringe on intellectual property rights or otherwise violate laws or regulations.
In the US, the first sale doctrine agrees with trademark law principles since the resale of a genuine product is generally not confusing for consumers. IP owners can object to the resale through the federal Lanham Act if they show:
- They own a valid trademark
- The defendant used the trademark in commerce without their consent
- The defendants’ use created a likelihood of consumer confusion.
In the EU, the import of goods from European Union member countries is seen as trade and not import. Case law at the European level and in member countries determined the instances when gray marketed goods are permitted or not. To determine if an infringement occurred the following is examined:
- Whether the trademark owners gave their consent to the first sale
- Where the goods were first put on the market
- Whether the use of the trademark by the unauthorized seller is fair
Trademarks and parallel importing explained
Intellectual property laws apply to parallel imports just like they do any goods. Parallel importers are not allowed to misuse a brand name or its trademarks.
To gain protection from the resale of their goods, trademark owners may show that the first sale doctrine does not apply to them. One way to do so is to prove a “material difference” between goods sold by authorized vs. unauthorized sellers.
Based on the trademark law principle of preventing consumer confusion, most US courts hold that when “material differences” exist between unauthorized and authorized goods, the sale and distribution of parallel imports are unlawful.
A material difference can be any difference a consumer may consider to be relevant when purchasing a product.
To prevent consumers from being misled or confused about the product in question, material differences may be subtle and are often not physical.
Courts have held that associated benefits, such as warranties and money-back-guarantees, are essential for what consumers expect from a manufacturer.
Variations in labeling, packaging, or quality control can also be sufficient if they are likely to affect purchasing decisions.
For example, courts in the US have said that consumer confusion can occur when unauthorized resellers offer the same products without the same benefits. A difference in warranty then becomes a material difference.
Trademark right holders rely on such differences, and some create warranties that become voided if you purchase from unauthorized dealers.
To counter warranty issues, resellers can choose to notify buyers of the voided warranty and explicitly offer an alternative warranty so there is no confusion.
Another example is products with different standards or specifications for different markets, such as smartphones made for China and brought into the US. Such differences would most likely constitute a material difference.
Material differences may also arise through differences in packaging, support and documentation.
The first sale doctrine may also not apply when unauthorized sellers resell trademarked products that do not abide by the same quality controls.
Some examples are manufacturer quality measures such as prohibiting third-party fulfillment without his approval, applying storage controls at marketplace warehouse, and prohibiting the resale of products that have been returned or repackaged.
Whether a warranty, quality control, customer support or other differences, if they are related to the value of the product or brand and lacking from the parallel imports, they can make parallel importing unlawful.
Copyrights and parallel importing explained
Copyrights protect works from being copied. No one can use someone else’s logo, product descriptions, photographs or other promotional materials without permission. In the U.S. they can be removed under the Digital Millennium Copyright Act (DMCA).
As for the resale of copyrighted works like books and movies, in most cases, no copyright license is necessary to resell lawfully obtained copyrighted works or products. To give an easy example, under the first sale doctrine, the lawful owner of a particular copy of a book can resell it.
How does parallel importing occur?
Parallel importing happens in various scenarios and usually involves one of the following:
- Authorized distributors selling outside of the list of retailers and resellers.
- Goods purchased in stores somewhere around the world, sometimes with hundreds of items bought at clearance prices, and later offered on online marketplaces such as Amazon or eBay.
- Manufacturers with too much stock and less demand sell the surplus stock to outside distributors.
- Manufacturers or factories who produce for the IP rights owner make extra products to sell to outside distributors without informing him.
- Distributors who are compelled by manufacturers and distribution agreements to purchase more than they can sell, resell the goods to others.
What are examples of parallel imports?
Parallel import may involve any goods, but high-end branded goods such as jewelry, electronics, watches, designer clothing, and pharmaceuticals are more vulnerable than others.
For example, the parallel import market for consumer electronics is huge. Cameras are another example. The same is true for watches. They are often bought from local distributors and sold overseas, often on online channels, including social media.
How does eCommerce affect parallel importing?
E-commerce platforms and marketplaces have made parallel importing easier than ever. The online space is easy to access and has low entry barriers. New channels of sale and distribution enable unauthorized sellers to purchase genuine goods online.
Marketplaces (such as Amazon.com, eBay, and Alibaba.com) and social media platforms offer sellers direct access to consumers.
As a result, distribution networks, authorized dealers and exclusive territories are no longer guaranteed.
Let’s say an authorized distributor wants to expand into territories where he has no authorization. Not a problem. All he needs to do is open an online store and sell the goods there without the manufacturer knowing about it.
Do online marketplaces have parallel imports for sale?
Looking at online marketplaces, we see an explosion of parallel imports. Sellers go for parallel imports because they can sell for a competitive price without breaking the law.
Authorized dealers bound by agreements and minimum prices often find themselves undercut by parallel importers, who are free of such restrictions.
Parallel importing can be said to be in line with the agenda of various entities, from social media platforms to marketplaces and sometimes even governments who attempt to reduce prices and improve customer service.
How can I fight parallel importing?
Laws and remedies for gray market goods are country specific and should always be examined in the relevant territory.
As explained here, legal options to combat parallel importing are available for specific cases of brand violation or in certain industries, such as prescription drugs and tobacco.
Since parallel importing is mostly legal, it may seem impossible to fight, but brands can take strategic actions to effectively counter it.
Manufacturers can strengthen their authorized dealers or cut prices together to take out the incentive of parallel importing. Another way may be to set one price for all territories.
In some cases, creating differentiation in packaging or name may prove effective in the battle against parallel importing.
Wiser Market brand protection from parallel importing activity
While the above strategies help mitigate the problem, they do not completely eliminate it.
An online brand protection company can help you further fight against parallel import sellers, find their sources and take countermeasures in order to ensure that your brand is protected.
Wiser Market takes a proactive approach, tracking the sources of parallel import sellers and taking action such as removing listings of parallel importers in order to ensure that your brand is protected.
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