Court rules in favour of international trademark exhaustion

In Kapil Wadhwa v Samsung Electronics Co Ltd (FAO (OS) 93/2012) the Division Bench of the Delhi High Court recognised the principle of international exhaustion of trademarks under the Trademarks Act 1999.

A suit for trademark infringement and passing off was instituted by Samsung Electronics Company Ltd and its exclusive licensee in India, Samsung India, against Kapil Wadhwa and others, alleging that the act of importing of Samsung products into India by the defendants amounted to infringement of the registered trademark SAMSUNG. Samsung also alleged that imported goods were materially altered and not targeted at the Indian markets.

The single judge of the Delhi High Court restrained the defendants from importing, exporting and dealing in Samsung printers and cartridges/toners bearing the SAMSUNG trademark on the grounds that the act recognises the principle of national exhaustion. On appeal by the defendants, the appellate court overruled the lower court's order by recognising the principle of international exhaustion.

In order to understand the reasoning behind this landmark decision, the doctrine of exhaustion must be examined.

Principle of exhaustion in relation to intellectual property
The fundamental idea behind the doctrine of exhaustion is that once an economic return has accrued to the rights holder from the first sale of the goods bearing a trademark by placing them on the market, the rights holder has exhausted all rights in relation to those goods. The international market regime recognises three geographical forms of the doctrine of exhaustion:

• National (country specific).
• Regional (community specific, eg, the European Union).
• International (global exhaustion).

The act does not define the geographical form of exhaustion insofar as trademarks are concerned.

Parallel imports allow a third person to exploit the principle of exhaustion legally to import trademarked goods from one country to another for sale in parallel with other goods being sold by the rights holder. Parallel imports are genuine products which are acquired from the trademark owner by lawful means.

Unauthorised import of goods amounts to infringement 
The court concurred that a registered trademark is infringed by a person who, without any authorisation, affixes the mark to its goods or packaging and exposes them for sale by putting them on the market for import or export under the trademark.The court also held that an import of even genuine products contrary to the act would amount to infringement.

Principle of exhaustion in regard to Section 30(3) 
Section 30(3), which was the core point of discussion, provides that it is permissible for a third person who has lawfully acquired goods bearing a registered trademark to offer those goods for sale in the market without amounting to infringement if:

• The registered trademark has been assigned to another party by the mark owner after such lawful acquisition (Clause (a) of Section 30(3)).
• The proprietor has allowed the goods to be put on the market (Clause (b) of Section 30(3)).

The court held that it would be unfair to hold that unless goods are imported into India with the consent of the mark owner, the act of importation is not permitted under Section 30(3). There was also considerable discussion of the term "the market" as used in Section 30(3).

The court held that the two situations stated in Section 30(3)(a) and (b) are "distinct and operate in mutually exclusive areas". It held that considering "the market" in Section 30(3)(a) to be the international market would lead to confusion and conflict between the mark owner and the assignee since the assignee would be aware of the goods placed on the market by the mark owner and any further dealings in those goods would have no effect on the assignee’s rights.

Limiting applicability of principle of exhaustion 
Section 30(4) allows the proprietor to prevent further dealings involving the goods if it has legitimate reasons to object to such dealings or where the condition of goods has been altered or impaired after being placed on the market.

While deciding on the appeal, the court held that factors such as differences in advertising and promotional efforts, packaging, quality control, pricing and presentation were legitimate reasons for the proprietor to restrict the scope of the principle of exhaustion. The court found this to be favourable towards the principle of international exhaustion since the above factors could arise only in circumstances where goods were imported from the country of manufacture or where they were put on the market for sale and then imported into India.

Principle of exhaustion and Indian legislative intent
It was also held that the absence of any obvious specification and the presence of the term "the market" in Section 30(3) of the act cannot be deduced to restrict the legislative intent to confine the market to the domestic market. If that had been the legislative intention, it would have been indicated.

The court considered the Statement of Objects and Reasons attached to the Trademarks Bill 1999 as a significant external aid in comprehending the legislative intent behind the principle of exhaustion in India. Clause 30 of the statement makes an express reference to the phrase "in any geographical area", which, according to the court, clearly envisages the legislative intent to recognise the principle of international exhaustion.

Decision
The court overruled the single judge's order but imposed certain conditions on the defendants to avoid a negative impact on Samsung’s reputation and goodwill, including having a prominent display in their showroom regarding the importation of the products and that any warranty or after-sale service offered in connection with the imported products was not authorised by Samsung.

Questions unanswered
In the absence of any legal precedent regarding parallel imports and the exhaustion of trademark rights in India, the appeal court's decision is of landmark significance. However, certain questions remain unanswered.

It is established fact that any unauthorised use of a registered trademark by a third person amounts to infringement. The right to seek protection against such unauthorised use is the statutory right of the registered proprietor. Under Section 2(1)(u) of the act, "registered" means "registered under this Act". For the purpose of Section 29 (infringement), "use" shall include import and export of goods under the registered trademark.

Hence, the rights available to a proprietor are governed by the principle of territoriality – that is, the exclusive rights available to the proprietor in relation to the use and protection of its registered trademark are based in the territory covered by the statute. In this case, the Indian Trademark Act extends to the whole of India (as laid down in Section 1).

Applying this interpretation to the opening wording of Section 30(3), it could be implied that the lawful acquisition of goods to which the registered trademark has been applied is made by a third person within the territory where the use and applicability of the registered trademark is restricted and governed (ie, the domestic market). Therefore, the sale of goods in the market refers to the domestic market.

While determining the scope of "the market" under Section 30(3), the court emphasised the fact that the act mentions only the term "the market", without defining it, and ignored the wording in Section 30(3) which mentions goods bearing a "registered trade mark". This may be relevant in order to comprehend the scope of the term "the market" as intended by the statute.

Further, with the intention of strictly enforcing border protection measures relating to IP rights in India, the central government passed the Intellectual Property Rights (Imported Goods) Enforcement Rules 2007, which explicitly define "goods infringing intellectual property rights" under Clause 2(a) to mean:

"any goods which are made, reproduced, put into circulation or otherwise used in breach of the intellectual property laws in India or outside India and without the consent of the right holder or a person duly authorised to do so by the right holder."

These rules empower the customs authorities, at the request of the rights holder, to prohibit and/or suspend the trading and disposal of allegedly infringing goods in India. 

The judgment is also silent regarding the interests of permitted users and exclusive licensees in relation to use of a registered trademark in India in case of allowance of parallel imports, even though the court laid down how adoption of the principle of national exhaustion would be unfavourable to consumer interests.

Overall, there appears to be an air of ambiguity on the issue of exhaustion of rights in relation to trademarks. Thus, legislative intervention is needed to clear the air and identify the specific intention behind the nature and extent of exhaustion of trademark rights in India. Such intervention would also be justified to pre-empt the conflicts that may arise in the Indian commercial sector between rights holders and importers.