Russian court declares parallel imports legal

On December 1 2017 the Moscow Commercial Court declared that a warning notice issued by the Federal Anti-monopoly Service (FAS) against KYB Corporation was justifiable and would not be struck down. According to information published on its website in July 2017, the FAS had issued a warning notice to Daimler AG, Renault, KYB Corporation and YD-Diagnostics suggesting that these organisations were in breach of Russian anti-monopoly laws because they had unreasonably refused, when asked on a case-by-case basis, to consent to parallel imports of goods. 

KYB chose to attack the warning notice in the Moscow Commercial Court – a logical move because Russia is regarded as a national (regional) exhaustion of rights country. Under Part IV of the Civil Code, the introduction of goods into commerce in Russia without the trademark owner’s consent is considered trademark infringement. Until now, it was thought that only the brand owner and its licensees could legally import grey-market goods into Russia.

In deciding that the FAS warning letter would not be struck down, the court acknowledged the Civil Code provisions in question. However, it went to great lengths to exclude parallel import from its ambit.

In its detailed judgment, the court began by acknowledging the traditional interpretation of the legislation:

“This provision of the Civil Code… implies that when foreign-made goods are acquired in the territory of other states directly from the manufacturer or his representatives, it is necessary to have permission of the right holder (execution of a license contract) in order to obtain the right for importing and marketing such goods to/in the territory of the Russian Federation.

[KYB] points out that his actions constitute the [proper] exercise of the trademark owner’s rights, provided for by the RF Civil Code.”

The court then pointed out that, in its view, the real object of these provisions was to prohibit acts that were likely to cause confusion:

“According to Article 1484.2 and Article 1477.1 of the [Civil] Code, a trademark right is exercised for the individualization of goods of legal entities… in order to distinguish goods and services of one manufacturer from goods and services of another manufacturer.

Thus, Article 1484.3 of the RF Civil Code defines an infringement of the trademark right as use of the designations similar to said trademark without permission of the right holder in respect of goods for the individualization of which the trademark is registered, or homogeneous goods, if as a result of such use a likelihood of confusion may arise.”

The court then distinguished parallel imports and said that it was unactionable because no confusion or damage to the brand owner was caused:

“Under these circumstances, importation of such goods to the Russian Federation does not cause any confusion of the original right holder’s goods and goods imported by an independent business entity (‘parallel importer’), and does not comprise objective features of a threat to public interests, since these are goods of the same manufacturer (right holder), which are imported and offered for sale, without providing misrepresentations about the manufacturer or the right holder of the individualization means these goods are labeled by…

The provisions of Article 1515 of the RF Civil Code are meant to prevent importation of illegally acquired or manufactured goods labeled by the manufacturer's trademark, since they qualify as counterfeit those goods, labels, packaging of goods that are illegally labeled by the trademark or by confusingly similar designations.

However, as obvious from the submitted materials, the intent was to import the original goods of the right holder, legally acquired from one of the official dealers; therefore, it is reasonable to assume that the manufacturer's rights to receive monetary compensation for the goods are respected, and there is no threat to the brand reputation as a result of the actions for altering (decreasing the quality of goods).

In view of the foregoing, the actions of KYB Corporation for limiting importation by other parties of the goods legally acquired outside the territory of Russia from the right holder’s dealers, of legally manufactured automotive spare parts and components, legally labeled by the trademarks of foreign right holders, have the purpose to increase its profits by limiting the earnings of potential competitors and crowding them out from the market.”

Therefore, the court held that acts that are intended to curb parallel imports were a form of unfair competition:

“These actions conflict with the principles of integrity, reasonableness and fairness and, generally, are contrary to individual, collective and public rights and legitimate interests of the civil circulation participants; and therefore, comprise the elements of unfair competition.”

Although the court’s analysis seems logical, it failed to compare Articles 1484.2 and 1484.3, and the purpose of each. Article 1484.3, which formed the basis of the court’s opinion, covers only trademarks that are not identical to registered trademarks but could be deemed confusing. However, Article 1484.2 should apply when evaluating identical marks, not Article 1484.3.

Article 1484.2 deals with the exclusive right of the trademark owner to use the identical trademark; it provides the trademark owner with an exclusive right to deal with those goods, including the right to introduce such goods into Russian civil commerce. Confusion is not at the heart of Article 1484.2.  

The refusal to strike out the warning letter was likely the correct one, but the reasons given for the refusal were likely incorrect.

KYB appealed on January 12 2018.

Coincidentally, the Constitutional Court recently heard argument on the same issue from a constitutional perspective; a decision is expected soon.

Parallel imports have been a hot topic in Russia and the Eurasian Economic Union for some time. In 2017 legislators indicated that there was a move afoot to introduce industry exceptions for parallel imports in sectors such as automotive, pharmaceutical and medical devices. However, legislative change takes time and the best estimate suggests that it could take (at least) another 18 months, possibly two years or even longer to implement the industry exceptions approach.

If the KYB decision is upheld and the Constitutional Court decision supports it, parallel imports may become entirely legal in Russia.