The Rise of Grey Goods in Russia: Parallel Importation Approval and its Potential Impact

In response to the Russia-Ukraine conflict and the general community pushing sanctions, Russia has utilised the current attitude against it to reform its intellectual property policy stance, which includes a change to its stance on ‘grey’ goods, thereby allowing for parallel imports. 

The latest development sees the Russian prime minister declaring on 30 March 2022, that the country aims to legalise parallel imports to satisfy the demand for goods, as a direct result of countries around the world imposing sanctions on Russia and a withdrawal of several multinational companies from the Russian market. 

Parallel imports, often referred to as ‘grey market goods’, refers to branded goods that are imported into a market and sold in that market, without the trade mark proprietor’s consent. Although these products are not counterfeit, they are imported into a market against the trade mark proprietor’s intentions and without their consent.

Our firm’s intellectual property department has experienced first-hand the impact that parallel importation can have on our clients’ trade mark portfolios. South African case law indicates that the sale of goods bearing a proprietor’s trade mark, without any restriction as to how the goods may be dealt with after such sale, will be considered as authorisation by the trade mark proprietor for the resale of those goods, which includes parallel importation. This risk can be managed; however, the question is raised as to the efficacy of such risk management in light of Russia’s most recent declaration.

Parallel importing is a practice that is not directly or substantively regulated by the Trade Related Aspects of Intellectual Property Rights Agreement and there are arguments both in favour and against this practice, based on the interests of the proprietors of intellectual property rights and consumers. As a practical example, if a trade mark owner has a trade mark for a brand of shoes in South Africa and Portugal, the trade mark owner can control the price at which those shoes are sold at in both markets. If the sale of the shoes in Portugal is half the price that the shoes are being sold for in South Africa, a parallel importation could be created by a third party South African company buying the shoes in Portugal, importing the shoes into South Africa at a price that is lower than the price in South Africa and selling the shoes in the South African market, at a lower price. 

Although the regulation of parallel importation remains ‘grey’, there has broadly been two approaches followed by different countries, being the national and international exhaustion approach. In terms of international exhaustion, if a trade mark proprietor puts goods, in relation to which the trade mark is used, on the market anywhere in the world, or if this is done with the proprietor’s consent, then the trade mark rights of the proprietor is ‘internationally exhausted’ by that first sale and the trade mark proprietor cannot prevent the further resale of that product in any market, whether national or international. The International Trade Mark Association, however, supports national exhaustion, which implies that the exhaustion of trade mark rights is only applicable to sales in a national market and does not extend to international markets, meaning that trade mark rights are only exhausted for national sales. Therefore, sale of goods by a trade mark proprietor nationally will result in the right to control those goods being exhausted, resulting in further sales being out of the control of the trade mark owner (this being similar to the international exhaustion principle). However, any further resales that are made to an international market – even if this is after the first sale in a national market – can be prohibited by the trade mark proprietor, as rights related to the international market are not exhausted.

The practice of parallel importation follows the trajectory of international trade and supports the removal of trade barriers. It creates competition in the market and benefits the general consumer as it relates to purchase and price options. However, from the perspective of the intellectual property owner, parallel imports result in a loss of control, which extends to its reputation, marketing and revenue model, resulting in an inability to regulate its global and market specific strategies. It also negatively impacts legitimate resellers, who have obtained the goods from legitimate import channels. What this does is to shut legitimate resellers out of markets due to parallel imports, undercutting their offerings and, should these resellers close down as a result, their stock could be sold off in a manner that promotes further parallel importation, thus allowing the cycle to continue. Although this sounds positive for the consumer’s pockets, this is where the benefit begins and ends. Parallel imports can be harmful to consumers, due to such goods usually being sold without guarantees or warranties, with an inability for the consumer to secure refunds or replacements. It is also possible that the goods lack compliance with local compliance and regulatory requirements.

Closely tied to gray goods, the Russian judiciary on 3 March 2022 indicated a new stance related to trade marks and copyright. In a court ruling, the judiciary found in favour of a Russian entrepreneur’s infringing use of the ‘Peppa Pig’ trade mark held by the United Kingdom’s Entertainment One UK Limited, basing its ruling on the restrictive political and economic sanctions raised against Russia. Further to this, Rospatent has seen an increase of trade mark applications by Russian residents of well-known trade marks, such as MCDONALD’S and STARBUCKS, indicating a rise in trade mark squatting. Russia has, in addition, suggested nationalising deserted businesses by allowing Russian residents to continue these businesses, without consent of the true owners. 

Based on the above, there may be a time where gray goods, stemming from parallel imports and the production of counterfeit goods, from trade mark squatting overlaps, allowing counterfeit goods to trickle into the global market. At a fraction of the price, and depending on the quality of the goods, trade mark proprietors and resellers may be hit worse than before, especially as the remnants of the COVID pandemic’s impact still linger.

Where Russia initially implemented a non-parallel importation stance in support of trade mark proprietors, this 180 degree turn can only increase the backlash already being experienced by the political and larger investment community. What is of greater concern is the negative impact on consumers.

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