The Connection Between Parallel Imports and Authentic Goods

Parallel imports refer to the practice where certain distributors sell products beyond their designated territories. This often involves a distributor in one region marketing products intended for their local market into the distribution areas of other distributors representing the same brand in different regions. Such situations typically arise from disorganized pricing structures, ineffective management of product channels, suboptimal agent selection by merchants, or unrealistic task assignments.

At the heart of parallel imports is the fact that the seller has not received authorization to sell in a particular area. While some parallel import activities may stem from legitimate market needs—such as introducing products to underserved markets—these importers may not always have ill intentions. However, many distributors engaging in parallel imports do so with a clear commercial strategy aimed at maximizing their economic benefits, which can suggest a more intentional approach.

Parallel imports, initiated by distributors and involving sales across regions, can pose challenges to the producer’s profit-maximization objectives and may lead to conflicts of interest between producers and distributors, resulting in channel disputes. To maintain regional pricing management systems, suppliers often take action against detrimental parallel import activities, which may lead to cases being escalated to market regulatory authorities or courts.

It is essential to recognize that the goods sold by parallel import distributors are still the supplier’s products; they are simply marketed outside the established sales management channels to achieve greater economic gain, thereby challenging the supplier’s regional pricing system. Nevertheless, these products are not counterfeit; they are, in fact, authentic items.

The Legal Nature of Parallel Import Activities

Third-party sellers, provided they hold the necessary business licenses and do not sell infringing goods or engage in below-cost selling, are entitled to distribute products at varying prices across different regions due to differences in regional consumption. While parallel imports can offer economic advantages for distributors and enable consumers to purchase genuine products at lower prices, they may also pose significant challenges for producers.

It is important to note that selling parallel imports is not illegal; the regional sales agreements between suppliers and distributors do not automatically bind third parties (parallel sellers). Market regulatory authorities cannot impose penalties on the sale of legally sourced goods, and courts will not hold sellers of such goods accountable. Suppliers and regional distributors lack the authority to prevent others from selling products that have been legally sourced.

From the perspective of Anti-Monopoly Law, if certain legal conditions are met, regional sales or price protection agreements between suppliers and distributors may restrict competition and could be interpreted as monopolistic behavior. For instance, in a case concerning property damage compensation, the court determined that prohibiting out-of-town distributors from selling products contradicted the principle of free circulation of goods in a market economy, suggesting that such agreements may violate the Anti-Monopoly Law of the People’s Republic of China.

In summary, if distributors sell goods outside their designated sales area while their regional sales agreement remains in effect, they may be considered in breach of contract with the supplier, which could result in potential civil legal liability.

Examining Parallel Import Behavior and Trademark Infringement

In daily conversations, the terms “parallel imports,” “gray market goods,” “counterfeit items,” and “knockoffs” are frequently misunderstood. This confusion arises for two primary reasons: first, some distributors may misrepresent counterfeit or substandard products as parallel imports, or they may mix authentic items with fakes; second, they might take measures such as removing trademarks or altering packaging to obscure their identity from suppliers. This behavior deviates from the true definition of parallel imports, prompting the question: does the concept of “parallel import” infringe on trademark rights?

To explore this question, I examined various litigation cases related to “parallel imports” and “trademark infringement,” including civil, administrative, and criminal cases. The relationship between parallel imports and trademark infringement is intricate, and whether an infringement occurs depends on the specific nature of the parallel import activities.

(a) Generally, Parallel Import Activities Do Not Infringe Trademark Rights

In most cases, sellers of parallel imports do not infringe on trademark rights. When goods are sold with the trademark owner’s consent, their trademark rights are considered “exhausted,” meaning the trademark owner cannot prevent the physical owner from reselling those goods. This principle of trademark exhaustion is a cornerstone of trademark law, allowing others to resell or distribute trademarked goods to the public without needing the trademark owner’s permission, including in advertising.

Therefore, when trademark owners assert infringement solely based on “unauthorized sales,” it contradicts the principle of trademark exhaustion, and courts should not uphold such claims.

(b) Selling Parallel Goods May Constitute Trademark Infringement

The determination of whether selling parallel goods infringes on trademark rights largely hinges on the use of the trademark and whether it leads to consumer confusion or impacts the trademark’s reputation. Selling parallel goods outside the legitimate scope of trademark use can constitute infringement. A notable case involving “GUCCI” demonstrated that while the defendants sold authentic “GUCCI” products, their prominent use of the trademark in store signage exceeded legitimate use and infringed on trademark rights.

This case illustrates that selling genuine products without permission does not inherently infringe on trademark rights; however, unauthorized sellers must use trademarks within a reasonable scope to avoid infringement. Suppliers who cannot prevent parallel trading through administrative means may request the removal of store signage from parallel traders.

It is essential to distinguish between unauthorized sellers and authorized distributors. If unauthorized sellers prominently display trademarks, it may create consumer confusion regarding the relationship between the store operators and suppliers, potentially damaging the trademark owner’s reputation.

Furthermore, altering trademarks, changing packaging, or removing anti-counterfeiting codes constitutes trademark infringement. Such actions, even when selling genuine products, fall outside the reasonable scope of legitimate trademark use and can sever the connection between the trademark and the goods, harming the trademark owner’s goodwill.

In summary, the assessment of whether trademark use is reasonable or constitutes infringement should be based on whether it causes consumer confusion regarding the source of goods. Any actions leading to such confusion are considered an infringement of trademark rights.

(c) Selling Counterfeit and Inferior Goods as “Parallel Trading” is Illegal and Criminal

Selling counterfeit and inferior goods under the pretense of “parallel trading” infringes on trademark rights and may involve criminal activity. Sellers often profit by marketing “three-no” products (lacking production licenses, quality inspection certificates, or after-sales service) or inferior goods as genuine products. Such practices can harm suppliers, consumers, and market integrity, leading to unfair competition.

Additionally, passing off counterfeit goods as a registered trademark may constitute the crime of counterfeiting a registered trademark or selling goods bearing a counterfeit registered trademark, as outlined in China’s Criminal Law.

Conclusion

While parallel trading itself does not infringe on trademark rights, inappropriate selling behaviors may lead to infringement. When parallel trading involves counterfeit goods, it not only infringes on trademark rights but may also result in criminal liability in serious cases.