Introduction

Manufacturers will often sell their products at different prices in different countries, in order to capitalise on the diverse market conditions that exist around the world. For example, a pharmaceutical manufacturer may sell a particular drug to rich American consumers at $20 per bottle while offering it to comparatively poorer consumers in Zimbabwe for $5 per bottle. The reasons for this are not hard to understand. Relatively richer Americans are willing and able to pay the higher price, so there is no economic reason for the manufacturer to sell the drug to Americans at a lower price. However, the fact that hardly any Zimbabweans could afford the higher price provides a very good economic reason for the manufacturer to market the drug at a lower price in Zimbabwe. It is better for the manufacturer to have some customers in Zimbabwe rather than none at all, even if it means slimmer profit margins than in the US.

Manufacturers of games consoles will often engage in similar market partitioning. They, like their cousins in the pharmaceutical business, are acutely aware of the varied market conditions that exist in different countries, and they are naturally keen to exploit these differences to their advantage. PS2 trade price in the UK is currently (as at 23/11/04) £82.21 plus VAT, however many units are available at prices between €105- €115 + applicable VAT in the EU zone for bulk orders, which translates to £73.49- £80.49 plus applicable VAT at current exchange rates. So there appears to be more flexibility on price in Europe for trade purchases and little incentive for the prospective British customer to make a special trip to the Continent to pick up a cheaper console there, since the official retail price for one unit is £104.99 (inc VAT) in the UK and €159.99 (inc VAT) in the EU (equivalent currently to £112.03)

Some enterprising companies have, however, spotted a gap in the market, particularly when exchange rates fluctuate or supply shortages arise in one or more countries. If you can buy cheaper French games consoles and ship them over to the UK, you may be able to sell them at a cheaper than market price in Britain while still retaining a reasonable profit margin. Economists and lawyers refer to this practice as "parallel importation".

Whether they are in the business of making Playstations or antiretroviral drugs, manufacturers have a clear incentive to suppress parallel importation, because it acts as a powerful force which pulls the prices down in their more expensive markets, squeezing the margins on products which they sell directly to consumers in those markets.

Unsurprisingly, manufacturers will use any means at their disposal to thwart parallel importers and to keep markets partitioned. One powerful weapon in the manufacturers' armoury is the use (or the threat) of a trade mark infringement lawsuit, as Tesco found to its detriment in 1999 and as more than one distributor of gaming consoles is discovering in 2004.

The Tesco case

Tesco had been importing Sony Playstations from France and selling them in the UK. As the Playstations were intended for the French market, they had French-style power plugs and SCART plugs for connection to TVs. To make the consoles suitable for the British market, Tesco had to open up the boxes to fit British-style power plugs and to add radio frequency modulator (RFM) units, as some older British TV sets do not have SCART sockets. Tesco then added a label to the box of each imported console which said "This product has been opened to fit an adaptor to enable it to be used in UK three pin power sockets and to include an optional RFU adaptor repacked for Tesco stores UK".

Sony took legal action against Tesco, alleging trade mark infringement. The RFM units that Tesco had added to its repackaged consoles bore the words "Sony Playstation", which Sony argued was a blatant infringement of its registered trade mark.

The court examined the question of whether Tesco's labels had made it clear that Sony was not responsible for the additional items which had been added to the Playstation boxes. Under European Community (EC) case law, this could have provided Tesco with a defence to the allegation of trade mark infringement. The court took the view that Tesco's labels were not sufficient to dispel the impression that Sony was responsible for the additional items. Furthermore, the court described Tesco's use of the Playstation trade mark on the RFM units as "the clearest possible breach of trade mark rights".

The court ordered an injunction to prevent Tesco from selling the offending repackaged consoles unless Tesco attached more explicit labels which clearly stated that the RFM units were not made or approved by Sony.

How to avoid Tesco's mistakes

Under EC law, European companies and citizens have the right freely to move goods from one EC country to another. This right is not completely unqualified, but in certain circumstances it can trump the rights of trade mark owners. This is because the right to engage in parallel importation is seen as an important element of the common market, which is at the heart of the whole European project. Market partitioning is heavily frowned upon by the bureaurocrats in Brussels.

Certain provisions of EC law and UK law ensure that trade mark owners cannot use their trade mark rights to prevent parallel importation without a ‘legitimate reason'. Such a legitimate reason might be that the products have been damaged or rendered unsafe by the importer.

In a series of cases relating to parallel importation of pharmaceutical drugs, the European Court of Justice (ECJ) has spelt out what a parallel importer has to do in order to avoid being successfully sued for trade mark infringement. In the context of repackaging games consoles for sale in the UK, a parallel importer must ensure that it sticks to the following legal requirements.

1. The repackaging must not affect the original condition of the consoles. The importer must be careful not to inflict any damage on the consoles through the process of importing and repackaging. In addition, the repackaged boxes must not be damaged, untidy or of poor quality, as this could damage the reputation of the trade mark owner.

2. The new packaging must clearly state who repackaged the consoles as well as the name of the manufacturer. It is no good putting this in the small print - this statement must be in a sufficiently large typeface that a person with normal eyesight would be likely to notice it. However, there is no requirement for the importer to state that the repackaging was carried out without the manufacturer's authorisation.

3. If the importer adds any extra items to the consoles (such as power plugs or RFU adaptors) then it must make it absolutely clear that the manufacturer is not responsible for these items. The extra items must also be entirely safe to use with the consoles, and must comply with any relevant British Standards.

4. The importer must give the trade mark owner advance notice of its intention to put the repackaged consoles on sale. Such notice must be given at least 15 working days before the repackaged products are put on the market. The trade mark owner then has the right to ask the importer for a specimen repackaged console, which the importer must provide.

5. The repackaging itself must actually be necessary in order for the importer to successfully market the consoles. There must be a genuine reason for the repackaging, such as the need to insert extra components into the boxes.

As long as the parallel importer follows these rules, it should be safe from any potential trade mark infringement proceedings that might be threatened by the manufacturer.

It is, however, important to note that different rules will apply to a so-called "grey importer" who is importing consoles from outside the EU and then repackaging them for sale within the EU. More on that another time..

What could happen to importers who don't follow the rules

If an importer breaks any of the rules set out above, it runs the risk of being successfully sued for trade mark infringement. The consequences of this could be as follows.

1. The importer may be ordered to pay the trade mark owner a substantial sum in damages. Alternatively the importer could be ordered to hand over the profits it has made from its parallel importation to the trade mark owner.

2. The manufacturer may obtain an injunction to prevent the importer from selling the consoles in question.

3. The court could order the importer to hand over its stocks of repackaged consoles to the manufacturer.

4. As with any lawsuit, if the importer has been successfully sued it will most probably have to pay the manufacturer's legal costs, which could be significant.

In short, if you don't stick to the rules established by the ECJ, it could prove very costly for you.