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Australian distributors likely to face stronger competition from parallel imports

Australia is set to fully embrace the doctrine of “international exhaustion” when it comes to parallel imports. While this is intended to benefit consumers, Australian distributors face an increased risk of competition from parallel imports. Distributors should review the terms of their arrangements with foreign suppliers, and consider renegotiating terms if necessary, in view of upcoming changes.

What is happening?

The Australian Government supports the Productivity Commission’s recent recommendation to ensure that parallel imports do not constitute trade mark infringement where the genuine marked goods have been brought to market elsewhere. IP Australia’s draft legislation, released on 23 October 2017, confirms that the doctrine of “international exhaustion” is the preferred approach.

The draft legislation proposes that any marked product that is put on the market anywhere in the world can lawfully be imported and sold in Australia, provided that it was reasonable for the parallel importer to assume that the trade mark was applied with the owner’s consent. This extends to consent by related entities within a corporate group, authorised users and other associated entities. In other words, if the product is “genuine” (as opposed to infringing or “counterfeit”), trade mark law cannot be used to stop the importation and sale of that product into Australia.

The problem for Australian distributors

A common problem faced by Australian distributors is that they invest heavily in marketing and promotional activity for the relevant goods. Once marketing, regulatory, wages and other costs are incurred the price of those goods is not as competitive as those goods brought to market elsewhere. This allows third parties to acquire those goods overseas and sell them in Australia in competition with the local distributor. Without incurring the associated marketing costs, the parallel importer is well placed to compete with the local distributor on price.

Further, local distributors are often forced to field enquires from disgruntled consumers seeking repairs or servicing of these parallel imported goods, which they often do simply to avoid any reputational damage. This causes tension between the local distributor and foreign brand owner.

While this problem is not new, the wording of Section 123 of the Trade Marks Act 1995 has allowed savvy practitioners to implement trade mark licensing and assignment strategies to stop parallel imports. In a nutshell, this is done by characterising the parallel imports as “unlicensed/infringing” goods, because the Australian trade mark owner has not consented to the application of the registered trade mark to those particular goods for sale in Australia. The effectiveness of this strategy has been confirmed by the Full Federal Court of Australia.

If the law is changed to embrace “international exhaustion” as revealed in the exposure draft, this could lead to increased competition from parallel imports. To the extent that licensing strategies have been effective in reducing competition from parallel imports, this will no longer be the case.

What should Australian distributors do?

The World Bank ranks Australia as the 3rd best country when it comes to enforcing contracts. Therefore, distributors should review the terms of any distribution agreement with the manufacturer. These contractual arrangements will be the best option in addressing the issue of parallel imports, because ultimately it is the brand owner that sets up the distribution arrangement. If the contract says that the manufacturer will take certain steps to minimise the risk of competition from parallel imports (or that certain favourable terms will apply in the event of such competition), these terms may be enforceable.

Distributors should also consider whether contractual terms need to be renegotiated in view of upcoming changes. For example, if the agreement was initially negotiated on the basis that different corporate owners of trade marks in Australia and elsewhere would reduce the risk of competition from parallel imports, those assurances may no longer apply.

As a local distributor (particularly an “exclusive” distributor) consider the following:

  • What steps will the manufacturer/supplier take to minimise competition from parallel imports? Are they contractually obliged to take all reasonable measures to prevent the parallel importation of products into Australia?
  • Is the manufacturer/supplier prevented from selling products to third parties that it knows (or ought reasonably to know) are likely to on-sell those products into Australia?
  • Are the marketing and promotional obligations too onerous? Should the manufacturer be providing more financial support given the likely increase in competition?
  • Are other distributors in the network prevented from selling outside their territory, or selling to third parties likely to sell outside their territory?
  • Are goods sold in foreign markets clearly labelled as intended for that market only?
  • What are the repair and servicing obligations in the event you are required to service parallel imported goods? What are the implications of the consumer guarantees?
  • Are the financial terms and sales targets appropriate in view of the likelihood of increased competition from parallel imports?
  • What other support can you obtain from the manufacturer/supplier to ensure the integrity of the trade mark owner’s brand is maintained in the Australian market?

For completeness, if the parallel imported goods are materially different to those sold in Australia, the Australian Consumer Law and/or the law of passing off may provide an adequate remedy. However, the costs of pursuing such an action could be considerable, particularly if there is no support from the manufacturer/supplier, which may have no interest in those proceedings.

Conclusion

The relationship between foreign brand owner and local distributor is often a delicate balancing act of competing interests. However, this should not necessarily be the case because what is beneficial for the brand is likely to benefit foreign manufacturers/suppliers and distributors/licensees alike.

In view of the impending changes to the law to expressly allow parallel importation of genuine marked goods, Australian distributors should revisit the terms on which they do business with their foreign suppliers to ensure the interests of both parties are protected. Exclusive distributors, in particular, should consider renegotiating terms to ensure they can continue to compete with confidence in the new regulatory environment.

FAL Lawyers can assist in all aspects of the distribution chain, including reviewing, drafting and negotiating relevant agreements. Please contact us for a confidential discussion.

Sean McGuire, Senior Associate sean.mcguire@fal-lawyers.com.au

2 November 2017