Parallel Imports

Alan Limbury

General Information

The Ruritanian market for luxury brand watches has long been susceptible to parallel imports, due to higher prices in Ruritania.

Parallel imports are non-counterfeited products that are imported without the permission of the owner of the intellectual property rights. This is problematic because manufacturers or distributors may set different prices for the same product in different markets. Parallel importers buy products in one country at a cheaper price than that at which they are sold in the country to which they then import them. Their profit is made by selling the products at a price between the prices in the two countries.

Some years ago, in an attempt to encourage lower prices for consumers of genuine goods, Ruritania amended its trademark laws so that where imported goods bear a genuine trademark corresponding to a Ruritanian registered trademark, and the owner of both trademarks is the same, the imports shall be deemed not to infringe the Ruritanian trademark. This prompted several international companies with Ruritanian distributors to assign their Ruritanian registered trademarks to the Ruritanian distributors, in an effort to maintain the prices of their products in that market by stopping parallel imports of their goods.

SAGO® watches were subjected to that strategy in Ruritania. Sago S.A. (“Sago”), of France, producer of the world-famous watches bearing that trademark, assigned its Ruritanian trademark to its Ruritanian distributor Poridge Limitada (“Poridge”). The terms of the assignment agreement required Poridge to take all necessary and desirable steps to maintain and protect the trademark and to prevent infringement, including infringement through parallel imports, as well as through counterfeit (i.e., non-genuine) products. Poridge is required by its distribution agreement with Sago to confine its sales of SAGO® watches to customers in Ruritania and thus avoid resupplying anyone outside the country, and to reimburse its retail customers their costs of carrying out warranty replacements and repairs.

Tapioka Inc. (“Tapioka”), based in Xanadia, where prices for genuine SAGO® watches are much lower than in Ruritania, has been exporting SAGO® watches directly to Ruritanian consumers who order by mail or online.

Poridge has brought legal proceedings against Tapioka in the Peoples’ Court of Ruritania, alleging that, in sending SAGO® watches to Ruritanian customers, Tapioka has infringed, and threatens to infringe, Poridge’s Ruritanian registered SAGO® trademark. Poridge claims damages of Runars 200 million (the Ruritanian equivalent of about €10 million) and a permanent injunction restraining further imports.

Tapioka has decided that, although it has no presence in Ruritania and is therefore not subject to the jurisdiction of the Ruritanian courts, its business in Ruritania is so important that the issue needs to be resolved. In particular, it wishes to avoid the risk that Poridge will sue individual consumers. Tapioka has accordingly engaged Ruritanian intellectual property lawyers and has filed a defence denying that its sales constitute infringement and alleging that the proceedings themselves amount to an abuse of market power by Poridge, in contravention of Ruritania’s competition laws.

Civil litigation in Ruritania has seen a culture change in recent years, and the courts expect parties to take all reasonable steps to settle their disputes before trial. Parties, whether on the winning or losing side, may be penalized by orders to pay the other side’s costs (including lawyers’ fees) if the court finds that they did not take such reasonable steps.

Accordingly, Tapioka requested mediation under the auspices of the ICC and Poridge agreed. The chief executives of both companies will participate (with full and unqualified authority from their respective Boards of Directors to reach a satisfactory agreement) together with their external lawyers. Parallel Imports | Role-Play by Alan Limbury | Confidential

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Parallel Imports

Alan Limbury

Confidential Information for Tapioka

Requesting Party

Your lawyer has advised that although there is an arguable defence that Tapioka has not done any act in the territory of Ruritania that would amount to infringement of the SAGO® trademark in Ruritania, some sales of Sago watches were on the basis that ownership of the watches would remain with Tapioka until delivery to the customer, and these might be seen as acts of infringement. Further, although it has not yet been pleaded by Poridge, it is possible that Tapioka could be found guilty under Ruritanian law of conspiring with or inducing the customers to infringe Poridge’s trademark, even though such acts took place outside Ruritania.

Further, your lawyer has advised that, for the competition law argument to succeed, it is necessary to show that Poridge has market power. Although Poridge probably has around 85% of the market for luxury brand watches, that may be far too narrow a definition of the market for the court to accept. If the market were defined to be all watches, Poridge may not have more than about 10%, not enough to confer market power. Another problem is that anyone may start a court proceeding, whether they have market power or not, so the idea that the act of bringing the court proceedings is itself an abuse of market power may not be easy to sustain, at least at the level of the court of first instance.

Selling parallel imports to Ruritanian customers has been extremely profitable. Because Tapioka does not have to bear the cost of warranty claims and repairs, you have been able to sell directly to Ruritanian customers at prices as much as 25% below the best retail prices available on watches sourced from Poridge. This has produced profits of the order of Runars 50 million per year for the last five years. But these profits may not last for much longer, not merely on account of the court proceedings initiated by Poridge, which could run for over two years and cost at least Runars 50 million even if there is no appeal. Retailers in Ruritania have been cutting their prices in an effort to compete more effectively against you, and some retailers are now refusing to service or repair watches that do not have a SAGO® guarantee countersigned by Poridge. While you can understand retailers cutting prices, you feel that if Poridge is encouraging retailers to refuse to service a genuine SAGO® watch, simply because the guarantee is not countersigned by Poridge, then Poridge is actually in breach of the SAGO® distribution agreement. Furthermore, if you can find evidence that the practice of refusing service or repair is the work of Poridge, you lawyer has advised that this evidence would strengthen your legal case as this practice constitutes unfair competition.

You believe that there must still be some money to be made out of the Ruritanian market, and you are open to any possibilities that will enable you to continue to do so, even buying watches from Poridge and establishing a warehouse in Ruritania if necessary, so long as you are not discriminated against vis-à-vis Poridge’s other customers, for example in relation to reimbursement for replacement and repair warranty claims.

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Parallel Imports

Alan Limbury

Confidential Information for Poridge

Responding Party

Your lawyer has advised that even though Tapioka has submitted to the jurisdiction of the Ruritanian courts by filing a defence, it is by no means certain that it has engaged in any act within the territory of Ruritania that would amount to infringement of the Ruritanian trademark. Any infringement will depend on the terms of sale to Tapioka’s customers. If ownership remains with Tapioka until the goods have entered Ruritania, there would perhaps be an infringing act by Tapioka within the territory. On the other hand, if the ownership passes to the Ruritanian customer outside Ruritania, it is hard to see how Tapioka could infringe the Ruritanian trademark. Unfortunately, Poridge commenced the court proceedings without finding out exactly how the sales transactions were structured.

As for the allegation of abuse of market power, it is true that SAGO® watches enjoy over 85% of sales of luxury brand watches in Ruritania. However, your lawyer argues that the relevant market is all watches, not just luxury brand ones, in which case the relevant market share is only 10%, not enough to confer market power upon your company. Of course, market share is not the only consideration to be taken into account when determining market power, and since anyone can initiate court proceedings, it is hard to see how the act of bringing these proceedings can amount to an abuse of market power even if the narrower market definition were appropriate.

The case thus raises some complicated legal issues and the idea of having to spend significant amounts of money to resolve them is not an attractive prospect. Your lawyer estimates that the case could run for over two years and cost at least Runars 50 million even if there is no appeal. However, so long as Tapioka continues to send parallel imports into Ruritania, you have no alternative but to litigate, since the terms of the trademark assignment agreement require you to do so.

Another important factor is that many of your retail customers have complained about the competition from Tapioka, whose prices are as much as 25% below their best prices on watches sourced from Poridge. One reason why Tapioka can offer such low prices is that it does not have to bear the cost of warranty claims and repairs. In fact, Tapioka’s customers have been bringing their watches to Ruritanian retailers and expect them to carry out repairs under warranty in respect of watches that do not emanate from Poridge. You have quietly encouraged the retailers for the time being to refuse to service or repair any watch, even those with the SAGO® guarantee, unless that guarantee is countersigned by Poridge. The response from the retailers has been mixed: some have complied with your request while others have not. This situation cannot continue for long, because such arrangements could affect the reputation of the SAGO® brand, possibly infringe the distribution agreement and may even amount to a restrictive practice under the competition laws. Certainly Sago S.A. will not be happy when it finds out about retailers’ refusal to service or repair its watches. Further, you are concerned that your wholesale and retail customers might turn to other luxury watch brands if you do not find a way of stopping these parallel imports.

So long as you act vigorously to protect the SAGO® trademark and sell only to wholesalers or retailers with premises in Ruritania, Poridge will retain the distributorship, which has been very profitable and promises to continue to be so. Finding a way to stop the parallel imports and the price competition from Tapioka is essential.

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Parallel Imports

Colin J Wall

Case Analysis

This is an unusual role-play in this book in the sense that most of the confidential facts centre on the respective legal arguments, as opposed to the parties’ interests. As Ruritania is a fictitious country it is necessary to give a summary of the relevant intellectual property and trademark laws that form the basis of the claim, and the competition laws that will be used in any counterclaim.

As in many real jurisdictions Ruritanian courts expect parties who wish to litigate to try to settle their dispute by mediation prior to embarking on litigation. If they fail to do so, a party may be penalized in costs orders, whether or not they win or lose. So in this role-play the decision to mediate is not entirely voluntary.

The basic dispute between the parties is relatively straightforward. Is Tapioka already infringing and will continue to infringe Poridge’s Ruritanian-registered SAGO® trademark? Poridge under the terms of its assignment agreement with Sago is required to take all necessary and desirable steps to maintain and protect Sago’s trademark, including infringement through parallel imports. There is therefore an added compulsion that Poridge must challenge Tapioka’s action in sending parallel imports into Ruritania.

One of the reasons why Tapioka is able to sell genuine Sago watches in Ruritania at a price about 25% lower than Ruritanian retailers (besides the fact that prices for Sago watches are lower in Tapioka’s home country of Xanadia) is that Tapioka does not provide warranty claims and repairs. Under Poridge’s agreement with Sago, it is required to provide these services through its retailers. However, it has been quietly encouraging Ruritanian retailers not to provide the warranty and repair service, unless the watch guarantee is endorsed by both Sago and Poridge. This strategy has met with mixed success and is only viable for the short-term as the action is in contravention of Poridge’s agreement with Sago. It is unlikely that Poridge will reveal its actions in the mediation, notwithstanding the confidentiality of the process. While mediation might be confidential in Ruritania, we are not told if it is confidential in Xanadia.

As usual there are mixed messages coming from the lawyers regarding the legal positions on the claim and counterclaim and a risk that each party might lose the litigation. Litigation is not an attractive alternative to mediation in any event, as it is likely to take two years to complete and cost each party Runars 50 million, the equivalent of €2,500,000. If the decision at first instance is appealed there would be further costs and delays. Both parties also want to resolve this matter quickly. So notwithstanding the detailed legal arguments, it would make sense in the mediation to put those arguments to one side and concentrate on business solutions. These are not immediately apparent and so that gives the representatives of both parties the opportunity to come up with creative ideas, which will allow Tapioka to continue to do some business in Ruritania and allow Porridge to stop Tapioka’s parallel imports. Any mediated solution to this problem would also certainly involve working out a satisfactory arrangement whereby all Sago watches sold in Ruritania, from whatever source of supply, would be subject to Sago’s warranty and repair services carried out by local retailers.

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Parallel Imports

Greg Bond

Commentary for Training

Creative Solutions?

This case involves two companies selling the same product who have no contract with each other. The legal issues are complex and litigation would probably be long and costly, with uncertain and potentially damaging outcomes possible for either party. It is fortunate for the parties that the state of Ruritania has decided to promote mediation in civil claims, so that they have no choice but to give mediation a try. If mediation does not provide a satisfactory settlement, the case will be referred back to the courts. The companies and their representatives here have significant responsibility in making the mediation process work. Perhaps they have never been involved in mediation before, and are now mediating merely thanks to the procedural culture of Ruritania? If so, the mediator has an opportunity to explain the mediation process.

Reading the General and Confidential Information, it is not easy to see ready-made solutions here. Unlike many of the role-plays in this book, the prospect of the two companies working together is not immediately clear. They have never worked together before and so have no previous relationship of trust to revive and build on. They are natural competitors, selling the same product through different channels in the same market and one of them has a distribution agreement with the producer of the watches to protect and maintain. Neither has an immediate interest in losing market share. Resolving this will involve some creative ideas, which is where mediation can help — by focusing discussion on solutions and insisting that a number of options are mentioned before any are prematurely evaluated or dismissed. It is often the option no one considered before or with which one party completely surprises the other that can lead to a good result. The mediator’s role is to keep reminding the parties to stay open-minded when creating options, to try to suspend judgement, and to work on developing ideas rather than closing them down. For this to work, the lawyers must have had their say, particularly in this case where there are complicated legal arguments concerning intellectual property rights and competition law. Then the mediator can encourage the parties to consider options more freely, while reassuring them that they can always return to the legal discourse if that proves to be necessary.

The role-play facts do give a few hints as to where options might derive from. Tapioka’s sales are likely to drop due to retailers cutting prices, and Tapioka is open to engagement in the market in other ways — these could be explored. It might also be an option for Tapioka simply to withdraw from this market, given that sales are falling and litigation is threatened. Both companies have different focuses and expertise in terms of distribution channels, the one selling directly by mail order and online, the other through retailers. Perhaps there is some way these respective strengths can be utilized mutually to both parties’ benefit? Poridge needs to ensure that its retailers continue to service watches, so as to protect its distribution agreement — perhaps there is a way to gain Tapioka’s cooperation here? However creative the options for settlement may be, in this case there is more than just a chance that these two competitors will not settle.

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