An International Trade Dispute with Trademark Parallel Import Involved

By Lear Gong

The author recently handled a lawsuit involving trademark parallel import. The case itself was not complicated: a famous American bedding design company (“US Company”) holds trademark A in both China and Japan. The US Company licensed a Shanghai home furnishing company (“Shanghai Company”) to manufacture and sell products marked with trademark A within the territory of mainland China. A Japanese home furnishing company (“Japanese Company”) offered to import trademark A furniture from China to Japan, but demanded a written license from US Company. With the promise from the Shanghai Company, the parties concluded a sales contract, but the clause on the Shanghai Company’s duty to get a license from US Company was not clear. From the time the contract was concluded until the products were delivered, the Japanese Company always urged the Shanghai Company to present it the certificate of license issued by the US Company, but the Shanghai Company did not reply or present the certificate. The Japanese Company moved to terminate the sales contract based on failure to perform. The Shanghai Company then filed a lawsuit against the Japanese Company demanding that it continue performance of the sales contract.

Neither party disputed execution of the contract but heatedly argued the vague license clause in court. The clause read that “the seller shall have the license to sell the branded product to the buyer.” Shanghai Company maintained that this clause meant that the Japanese Company would purchase furniture from the party with the right to manufacture and sell brand A within China, and the Shanghai Company is the rightful party to manufacture and sell brand A in mainland China. Neither the execution of the sales contract nor the purchase of brand A furniture by the Japanese Company from the Shanghai Company has any defects. Moreover, all the trademark rights affiliated with brand A furniture were exhausted with the transfer of the property, and therefore no trademark right of the US Company would be infringed by sale in Japan, and retail by the Japanese Company in Japan is a parallel import and complies with Japanese law. For these reasons, the Shanghai Company argued that performance of the contract should continue. On the other hand, the Japanese Company argued that the purpose of the contract was to purchase the product in Shanghai and then resell it in Japan. Because the US Company had already registered the brand’s trademark in Japan, however, the Japanese Company claimed the sale in Japan would infringe the registered trademark right owned by the US Company. Therefore, it argued that the article meant that the seller shall authorize the buyer to be able to sell the branded product in Japan.

Because neither side disputed that brand A furniture would ultimately be sold in Japan, when the court was investigating the real meaning of the contract term it had to determine whether sale of A Brand products under the Shanghai Company’s position would harm the legal rights of the trademark holder in Japan.
For this dispute, we have to first understand how Japanese law deals with parallel imports.
In the case of Fred Perry, in 2000, the licensed party was manufacturing Fred Perry product in Singapore, Indonesia, and Malaysia according to the license agreement. Yet, even with no license from the right owner, it also manufactured such products in China and exported them to Japan. That led to the lawsuit filed by Fred Perry’s licensee in Japan. After the hearing in local court in Tokyo, it was judged that even though there was breach of the agreement, no infringement had occurred. Furthermore, the quality of the made-in-China products was no different than those made in Singapore and Malaysia, so the origin of the product had not suffered in actual damage. The trademark holder could pursue relief through other avenues because of the breach of the agreement, but it could not hinder the circulation and transaction of the products because it would harm the interests of businessman and consumers. The high court in Tokyo upheld the decision. The trademark licensed party then brought other litigation in the Osaka local court, which made a very different judgment and set a very different standard with its judgment: 1) the trademark right of the imported products was granted by the foreign trademark holder (or the user with the license); 2) the foreign and Japanese trademark right holder are the same subject or can be viewed as the same subject under, so the origin of the trademark can be regarded as the same; 3) the Japanese trademark holder had the right to supervise the quality of the imported product by direct or indirect ways to ensure the quality of the imported product and the product covered by the Japanese product were not different. Therefore, the Osaka court adjudicated that there was a breach of the agreement because China was not within the licensed territory, and the manufacture place concerns the quality of the product. Based on these reasons, the court found parallel import infringement. The Supreme Court of Japan upheld the judgment and also emphasized that a material damage to the origin function of the trademark could be found when the rights holder or user was lacking the ability to supervise quality.

From this we can see that, in principle, Japan bears no objection to the trademark parallel import, but as time has gone forward, we have seen more detailed interpretation on the issues concerning the parallel import when valuing different claims from the interested parties.

With the deliberation on the case, we find that the plaintiff’s stress on the exhaustion of the right in China to the right holder is mainly coming from its incapability to submit right certificate. And it can be further got that because the license territory of the Shanghai Company is within China, no license could be otherwise granted or proved. The Shanghai Company’s non-authorized agreement with the Japanese Company and the product sale afterwards could probably be challenged by the US Company. And, according to the decision in the Fred Perry case, due to the fact that no license was granted to sell outside of China, the US Company could have no way to supervise the quality of the product, which could thereafter jeopardize the origin function of the trademark. Therefore, Japanese Company shall be judged to take the infringement liability. However, because of the vague meaning of “the seller shall have the license to sell branded product to buyer” in the agreement, even if infringement were found, no liability for breach of the agreement shall be borne by the Shanghai Company.

After the preceding analysis, it seems that the defendant could naturally win the case, yet it cannot be neglected that there is no consensus on the parallel import in Japan, and China is not a case law country. Not to mention the quotation of Japanese cases would unquestionably not be the laws referred in the case. At the same time, I also cannot be sure whether all of the established Japanese cases on parallel import have been listed here. What may be more concern is that both the plaintiff and defendant are not the right owner, and the case discussed herein is actually not a case of IPR infringement. Therefore, because both China and Japan have acceded to United Nations Convention on Contracts of International Sales of Goods, the court may cite article 42, which states that “all the products delivered by the seller shall not be the ones argued by any third parties basing on industrial rights or other IP rights.” That is to emphasize, objectively, the import of the products in the case may lead to the claim of a third party and bring inconvenience to the Japanese Company. So, we finally saw the refusal of the plaintiff’s claims. For the infringement judgment, there are no clues to follow in Chinese judgments, and as described above, Japanese cases have been decided based on their individual facts.


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