Parallel importation: Constitutional Court narrows scope of protection

On February 13 2018 the Constitutional Court declared that Russia should exercise a much softer stance towards parallel importers. In Re PAG LLC the court was asked to consider the constitutionality of Civil Code provisions which prohibit parallel imports into Russia.

PAG LLC was a parallel importer and was found liable for trademark infringement by reason of parallel importation. The Arbitration Court awarded traditional forms of relief for trademark infringement against PAG – namely:

• permanent injunction;
• delivery up for destruction; and
• compensation.

PAG filed a complaint with the Constitutional Court challenging the constitutionality of the operative provisions in the Civil Code.

PAG had contracted to supply heat-sensitive paper for medical recording devices to a public hospital. The company purchased original products from a Polish supplier and attempted to import the consignment into Russia. The brand owner, Sony Corporation, successfully sued for trademark infringement by reason of the unauthorised import of the legally acquired goods into Russia.

In its detailed decision, the Constitutional Court began by acknowledging that the Agreement on Trade-Related Aspects of Intellectual Property Rights does not impose on member countries a particular commitment as regards trademark exhaustion of rights. Further, the court acknowledged that the choice of a particular exhaustion of rights regime in Russia (ie, national, regional or international) lies in the exclusive authority of Russian legislature. The court further acknowledged that the Civil Code, when read in conjunction with Annex 26 of the Treaty of the Eurasian Economic Union, establishes a regional exhaustion regime for Russia and the Eurasian Economic Union:

“A regional principle of exhaustion of the exclusive trademark right has been established for the member states of the Eurasian Economic Union (EAEU). It means that the trademarked goods that have been put into circulation in the territory of Russia or any other EAEU member state directly by the right holder or with his consent may later freely circulate in the territory all EAEU member states;

[But] importation of trademarked goods into the EAEU territory is allowed only with the consent of the right holders.”

The court concluded that:

• a regional exhaustion of rights regime that creates a statutory ban on parallel importation does not contravene the Constitution; and
• the power to decide whether parallel importation should be illegal is within the discretion of the federal law makers.

However, the 16-member panel added a substantial qualifier: IP rights are not absolute. Therefore:

“Law enforcement, first of all courts, are obliged to apply provisions of the intellectual property legislation not only due to the conjunction with the main provisions of civil legislation, but also in the context of general legal principles of equality and justice, and shall take into account the requirements of proportionality and balance of competing rights and legitimate interests[,] private and public, arising from these principles.”

The court held that the exercise of registered trademark rights must also give due account to the rights and legitimate interests of other parties (eg, when considering the issue of admissibility of parallel imports). Trademark owners must come to the court only if they are acting in good faith as regards the exercise of their trademark rights.

The court affirmed that a trademark owner would be seen to be acting in bad faith if it:

• restricts the import of specific goods into Russia;
• engages in overpricing on the Russian market; or
• imposes a market restriction on the flow of goods in support of foreign government penalties.

Any such acts would be regarded as being especially objectionable if they restricted access to goods of vital necessity (eg, certain categories of medicine and life-support equipment).

In the context of an infringement claim based on parallel importation, the court made two important observations as regards enforceability and the remedies associated with infringement of those trademark rights.

The court held that the Russian courts can dismiss a trademark infringement claim against a parallel importer, in full or in part, in circumstances where the trademark holder's bad-faith conduct might endanger the lives and health of citizens or other significant public interests.

If a case of trademark infringement by reason of parallel importation can be established and the claim is not asserted under circumstances of bad faith, traditional remedies for infringement should nonetheless be toned down because counterfeiters and parallel importers should be treated differently. The court affirmed that the remedies and their amounts should be different for the import of grey and counterfeit goods because the amount of damage incurred by the trademark owner is different:

“When importing counterfeit goods labelled with a trademark, the trademark holder not only incurs losses in the form of lost profits that could have been received from the importation of legally produced goods, but also faces major reputational risks due to non-conformity of goods with the anticipated characteristics and consumers’ demands.

There is an obvious difference in the degree of threat to legitimate circulation of goods and the level of public danger for consumers using the goods that are actually counterfeit due to their fake origin versus legitimate goods being qualified as counterfeit solely due to their importation by an unauthorized importer.”

The court made the following additional points:

• Since the losses incurred by a trademark owner because of illegal parallel imports are less severe compared to imports of counterfeit goods, the courts can reduce the compensation amount to be collected from parallel importers.
• Remedies such as withdrawal from circulation (injunction) and destruction should be imposed only as an exception (eg, if their quality is deemed substandard, to ensure safety and to protect the lives and health of citizens, nature and cultural values).

Whether Russia should abolish national and regional exhaustion of rights altogether has been a hot topic for many years. The Constitutional Court’s decision has clarified the country’s existing policy perspective. While it seems that infringement by reason of parallel importation is a constitutionally sound cause of action, it can now be asserted only in limited cases with remedies that are inconsequential.