First be clear about the concept of Parallel Import from Economist’s Perspective. It is not an illegal trade or counterfeit products but genuine, from original manufacturer or Intellectual Property Rights Owner!
In the context of Intellectual Property Rights (“IPR”) in either Patented goods or branded products with Trademarks, owners of the IPR would like to get a modest return on their investment and creativity. The pricing strategy is normally based on market segmentation and efficiency of the geographical distribution channels. It is not unusual to find that a patented product in country A is more expensive than the same product in country B. The pricing policy is based on either demand factors, propensity of the consumers to buy, costs of distribution and potential for higher profits in the early stages of launching a new product. The owners of IPRs would normally adopt exclusive licensing or distributorship in each country to avoid competition between the distributors and retailers of its own products. This exclusivity creates situation of monopoly and control of the market by the exclusive distributors. The novel and high demand products often encourage other traders to take advantage of the market demand by parallel importing from country B (with cheaper price) to country A and sell at a price lower than the exclusive distributor. This leads to internal competition for owners of IPRs. Typical examples are expensive patented drugs. In some countries like Singapore branded continental cars in which profit margin is significant also create a market for parallel importers.
This raises the question whether it is legal under the IP laws of a State and under Private International IP Laws. In Paris Convention, Article 5qua the protection of importation of patented products into the country of the patent is subject to the laws of that country. There is no specific provision for importation into another country of the Union except for counterfeit goods.
In TRIPS Agreement, Article 6 affords WTO members flexibility in determining whether to permit parallel importation of patented products, drugs etcetera. TRIPS Agreement explicitly provides that nothing in the agreement ―shall be used to address the issue of the exhaustion of intellectual property rights. This means that countries can choose whether to allow or forbid parallel imports.
TRIPS Article 6 Exhaustion
For the purpose of dispute settlement under this Agreement, subject to provisions of Article 3 (National Treatment) and Article 4 (Most Favoured Nation Treatment) nothing in this Agreement shall be used to address the issue of the exhaustion of intellectual property rights.
Besides Art 6 there are other Articles in TRIPS Agreement which deal with parallel trade and international exhaustion. Art 6 is the minimum standard. For example, Art 16 addresses Trademark IPRs.
IPR Exhaustion and parallel importation of patented products
Possible expropriation claims may also arise in cases in which parallel imports cause an IPR loss of value or diminish an IPR owners market share, which according to NAFTA jurisprudence constitute an investment.
According to the study (to be published in 2020 by Dr. Bryan Khan), from economic perspective, parallel imports is good for creating competitive markets, as it balances the prices of monopoly drugs to an equilibrium level. Dr. Bryan explains:
“This idea is very relevant for our understanding of exhaustion and parallel trade. The intuitive thought is that international exhaustion is pro-competitive. If an IPR is exhausted, then it can be subject to arbitrage. For example, one can purchase generic drugs in a low-price market (e.g. developing country) and re-sell them in a high-price market (e.g. developed country). This indeed creates competition in the high-price market (developed country) as the IP owner’s rights are exhausted, and they cannot stop the ‘parallel imports’ of the generic products. The price of the product in the high price market thus falls.”
Whereas , in preamble (c) of the TRIPS Agreement which is a Multilateral Trade Agreement states, “the provision of effective and appropriate means for the enforcement of trade-related intellectual property rights, taking into account differences in national legal systems; at footnote it qualifies “national” as: “An explanatory note in the WTO Agreement states the following: “In the case of a separate customs territory Member of the WTO, where an expression in this Agreement and the Multilateral Trade Agreement is qualified by the term, “national” such expression shall be read as pertaining to that customs territory, unless otherwise specified.” Thus, the principle of exhaustion and restrictions if any, on parallel imports of patented products and enforcement of IPRs is within the purview of the State legislation.
Therefore, the issue of parallel imports is to be dealt with on contractual basis between the Parties and under the licensing regime for importation of medicines and pharmaceutical products, it is not addressed within the Exhaustion Doctrine of TRIPS Agreement, as it is a national matter. National laws based on international exhaustion doctrine will allow parallel import unless the nature of goods fall in a restricted category of goods e.g. pharmaceuticals under Singapore Medicines Act require an import license first. The countries like European Union, do not permit parallel import within EEA unless it is first sold within the region of EEA i.e. regional exhaustion principle. (See EU Directive 2001/29)
In US, under the US Tariff Act the importation of goods with trademark of a US national is prohibited without the authorization of the Trademark owner; however, import through an overseas subsidiary of a US company into U.S. market is allowed. (K Mart Corp. v Cartier, Inc., 486 U.S. 281 (1988))
So, what can be the best strategy for an inventor or IPR owner? Well, ideally it would be best to sell at the same price across the global markets instead of gaining higher margins in some countries where monopolistic power is strong then selling at reduced prices where competition in alternatives is high. Such differences and excessive gains are short lived. Take the example of Mc Burger or Coke, the price of a Big Mac and a can of Coke will cost you same all over the world, except for minor differences due to currency conversion or bundled deals.
In short, Parallel imports are good for the market to reach equilibrium state sooner and also for the IPR owner as it keeps the counterfeiters at bay.
By: Jayems Dhingra,
Certified International Arbitrator, Adjudicator, Mediator and Management Consultant