In a previous article we discussed how manufacturers of various products often sell their products at different prices in different countries, in order to take advantage of the different market conditions that exist around the world. We also learnt how a distributor could import and repackage goods from one EU country into another, provided it complied with five key rules, details of which are repeated below.

In this article, we learn how the rules for those distributors wanting to import and sell goods from outside into the EU (sometimes called "grey imports") differ radically from the rules relating to imports from another EC country.

Distributors have for a long time capitalised on the disparate price differentials which exist around the world. They do this by purchasing cheap games consoles in one country before repackaging them and selling them below market price in another country, usually at a reasonable profit. As this practice of "parallel importation" interferes with the manufacturers' carefully formulated pricing policies, it is not surprising that the manufacturers often go out of their way to keep their markets partitioned by making life difficult for both parallel and grey importers.

As we learnt in Part 1, one favoured method of making life difficult for the entrepreneurs is to threaten them with legal proceedings for trade mark infringement. In parallel importation (ie. contained within the EU), this issue typically arises because the parallel importer needs to open up boxed consoles to replace certain components, such as the power lead, in order to make the products suitable for consumers in the new intended country of sale. The process of opening and closing boxed consoles amounts to ‘repackaging' in legal terms and it is this which can lead to potential trade mark infringement on the part of the importer.

How to avoid trade mark infringement within the EU

Readers will recollect from Part 1 that an importer of goods from one EU country to another can escape the allegation of trade mark infringement if it complies with the following conditions:

1. The repackaging must not affect the original condition of the consoles.

2. The new packaging must clearly state who was responsible for repackaging the consoles as well as the name of the manufacturer.

3. If the importer adds any additional items to the consoles (such as power plugs or RFU adaptors) then it must make it very clear that the manufacturer is not responsible for these items.

4. The importer must give the trade mark owner advance notice of its plans to put the repackaged consoles on sale, at least 15 working days before the repackaged products are put on the market.

5. The repackaging itself must actually be necessary in order for the importer to successfully market the consoles.

Importing consoles from outside the EEA

(a) No exhaustion of rights

If an importer intends to bring consoles into the UK from outside the EU (or European Economic Area ("EEA")1), then simply following the five rules on repackaging will not provide a sufficient defence to a claim of trade mark infringement. In this situation, different legal principles come into play.

EC law has a principle known as ‘exhaustion of rights', which applies to a trade mark owner which has put its goods on the market in one EEA Member State. If a manufacturer puts its games consoles on sale in Germany, then under EC law that manufacturer will have ‘exhausted' its ability to use its trade mark rights to prevent parallel importers from reselling the consoles in other EEA Member States, as long as the importers comply with the five rules above.

The European Court of Justice ("ECJ") has, however, made it clear that there is no corresponding principle of ‘international exhaustion' of rights under EC law. (By ‘international' the court means here a movement of goods from outside to inside the EEA). Furthermore, the ECJ has ruled that no EU Member State can introduce national legislation providing for the international exhaustion of trade mark rights, as this would allow grey importers to import goods from outside the EEA into that Member State and from there into the rest of the EEA. This would effectively allow the international exhaustion of rights on the whole of the EEA indirectly.

So if, for example, Italy attempted to enact laws which allowed Italian grey importers to import products which had been put on sale in Taiwan, regardless of any EU or Italian trade mark rights of the manufacturer, then those laws would be held by the ECJ to be contrary to EC law, which takes precedence over Italian law.

(b) The issue of consent

The issue of the international exhaustion of rights has been considered by the ECJ and the British courts on several occasions, particularly in the cases of Silhouette (1998), Sebago (1999), Davidoff (2001), Levi Strauss (2002) and Quicksilver (2004). The following principles have emerged from these cases.

If a manufacturer puts its consoles on sale outside the EEA, the only way in which that manufacturer could be said to have exhausted its trade mark rights within the EEA in relation to any importer of those consoles from outside the EEA is if the manufacturer had ‘consented' to those consoles being resold in the EEA.

It is up to the grey importer to prove that such consent has been unequivocally given by the trade mark owner. Consent can be inferred by the particular facts and circumstances in which the manufacturer has put the consoles on the market - but it is important to note that consent will not be implied where the manufacturer has simply remained silent on the issue.

Suppose that a manufacturer was selling its consoles to a distributor in Mexico, and that the distribution agreement between the parties was silent on the issue of whether the manufacturer consented to the consoles being resold into the EEA. In such a case, consent would not be implied and any grey importer who buys consoles from that Mexican distributor for ultimate sale in the EEA will find it very difficult to rely on the ‘consent' defence in a trade mark infringement lawsuit brought against it by the manufacturer.

Of course, if the distribution agreement happened to contain an express provision stating that the manufacturer did consent to the consoles being resold in EEA territories then the grey importer would be in a much better position, assuming that it is able to produce a copy of this agreement in any potential court case. However, console manufacturers are highly unlikely to give this kind of express consent in their contracts, as they will no doubt be well aware that this would damage their ability to partition markets.

The test for consent is therefore a tough one, and it seems that the only reliable ways for a grey importer to prove that express consent has unequivocally been given are (i) to ask the manufacturer to grant its express consent in return for a fee, or (ii) to ask the distributor for a copy of its distribution agreement with the manufacturer if this happened to contain an express consent provision.

It is crucial that the consent is obtained from the owner of the trade mark itself. In this article, we have assumed that the manufacturer owns the trade mark in question, but in practice this may not always be the case. The grey importer must therefore carefully investigate the ownership of any relevant trade marks. In addition, there may be complex chains of distribution at work, and it is important that the grey importer does not rely on any consents given by distributors alone. While a distributor may have a licence to use a trade mark for selling consoles in certain territories, the question of whether that distributor consents to the consoles being resold in the EEA is irrelevant. What matters is the consent of the trade mark owner, and this can only be given by the trade mark owner itself.

Conclusion

Any grey importer who is considering importing games consoles into the EEA from a country outside the EEA and in which the consoles have already been put on the market must ensure that it is able to prove, one way or the other, that the trade mark owner has given its express and unequivocal consent to those consoles being resold in the EEA. If the importer is aware that the manufacturer actively objects to the consoles being marketed in the EEA, then it should not proceed with its plans. Likewise, if the importer is unaware of the manufacturer's stance, then it would be ill-advised to proceed.

The grey importer who ignores the issue of the manufacturer's consent, like the parallel importer who ignores the five rules on repackaging, runs the very real risk of being on the wrong end of a lengthy and costly trade mark infringement lawsuit.

1. The EEA comprises all of the EU Member States together with Iceland, Liechtenstein and Norway.