50 Shades of Grey (market trading)

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50 Shades of Grey (market trading)

15 Nov 2017

Here, intellectual property partner Claire Meyers discusses the risks associated with dealing in parallel/grey market goods.

Broadly speaking, a trade mark owner is entitled to prevent a third party from using his trade mark without his consent.  However, once branded goods have been placed on the market in the EEA by the trade mark owner, or with his consent, save for limited exceptions, he cannot prevent the onward sale of those goods (his rights are said to have been “exhausted”).

Secondary markets for goods, where goods are purchased from resellers other than the trade mark owner or his authorised distributor, are clearly an important part of the economy, often enabling the purchaser to buy goods at a lower price than buying directly from the trade mark owner’s authorised distribution network, and allowing purchasers to buy goods which may have since been delisted by the trade mark owner.

Issues arise where branded goods are brought into the EEA from outside markets (where they can often be purchased at a lower price).  This is known as parallel imports or grey market trading.

Where an entity offers goods for sale in the EEA, which have not previously been put on the market in the EEA by the trade mark owner, or with his consent, it is potentially liable for trade mark infringement.  By way of example, where a trade mark owner has released goods for sale in China, the importation of those goods into the EEA (and any further dealings in those goods within the EEA) would be an infringement of the trade mark owner’s rights.

The Problem

It was generally accepted that the criminal trade mark sanctions set out in the Trade Marks Act 1994 were targeted at counterfeit goods and those dealing in such counterfeit goods.  However, following a recent Supreme Court decision (R v M & Ors [2017]), the scope of the criminal sanctions has been held to include grey market goods.  As a result, in addition to civil liability, those dealing in grey market goods could also face criminal sanctions, including an unlimited fine and up to 10 years imprisonment.

There is an obvious risk here that a trader selling goods, which are indeed genuine goods in the sense that they have been manufactured on behalf of the brand owner, could commit a criminal offence (as well as civil liability) where those goods are not intended for sale within Europe.

Criminal and civil sanctions are avoided in their entirety if the goods are not infringing (for example because the trade mark owner has actually consented to the goods being placed on the market in the EEA).  However, what if the brand owner has not given such consent?  What steps can be taken to limit exposure to these criminal and civil sanctions?

On the whole, it is not difficult to identify counterfeit goods.  However, infringing grey market goods are not as easy to identify.  Brand owners will frequently use the grey market to dispose of surplus stock and, as such, it is not uncommon for grey market goods to be legitimately placed on the market in the EEA by the brand owner.  However, the same goods could be circulating in the EEA without the brand owner’s consent, for example where they have been manufactured out of licence or where the brand owner has only consented to the goods being sold in a territory outside the EEA.

Whilst some goods may be clearly marked or their intended market identifiable by cross-referencing the serial number, in many instances it may be impossible to identify which market the branded goods were destined for.  Often the goods to be sold inside and outside the EEA look identical and it is not uncommon for trade mark owners to deliberately conceal the intended market for the goods (for example by refusing to identify the product history of the goods).

What To Do

The tests for criminal and civil liability are not identical.  In particular, it is a defence to the criminal offence to show belief on reasonable grounds that the use was not an infringement of the trade mark.  It will be a question of fact in each case whether there were “reasonable grounds” for believing there was no trade mark infringement.  Whilst there is no single step that can be taken to demonstrate grounds for a “reasonable belief”, cumulatively the following factors should assist:

  • Is the reseller a reputable business, itself located within the EEA?
  • Consider the price paid for the goods: is the price within the usual range for these goods within the EEA or is it unusually low?

For example, if the grey market goods in question are usually discounted by 25% and a consignment is being offered at a 75% discount, a greater than usual investigation into the provenance of the goods should be carried out.

In every case, we recommend that enquiries are made of the supplier as to the provenance of the goods.  Provided care is taken in dealings, proper enquiries made and there is satisfaction to a reasonable degree that the goods are available for resale in the EEA, the risk of a criminal case succeeding is reduced.

Whilst these enquiries may reveal evidence that the brand owner consented to the goods being placed on the EEA (either expressly or impliedly), if ultimately the goods were not for resale in the EEA, a civil action can still be brought, where innocence is not a defence.  Unlike criminal sanctions, the normal sanctions here are damages, injunction, delivery up and costs.

As such, provision can be made to try and mitigate the risk.  For example, if it is commercially possible, have a contractual indemnity in place with the supplier.  It is also well known that some brand owners deliberately release surplus stock into the grey market.  Any evidence of this is valuable.

For advice on specific transactions, please contact Claire Meyers (clairemeyers@kuits.com), or any member of the IP team on 0161 832 3434.

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