Parallel trade and attrition: What you need to know as a business owner

Parallel trade offers entrepreneurs opportunities, but also has legal pitfalls. The doctrine of exhaustion plays a major role here. What exactly does this imply, and how can you as an entrepreneur avoid the risk of conflicts in parallel trade? In this article, we explain and provide practical tips.

What is parallel trade?

Parallel trade, also known as parallel import or side import, involves importing and selling branded products outside the official distribution channels, without the explicit consent of the trademark owner.

Example:

Suppose you are an entrepreneur dealing in luxury perfumes. You discover that a well-known perfume is offered considerably cheaper in France than in the Netherlands. You decide to purchase a large residual batch at a low price from a middleman and then sell it to Dutch consumers through your webshop, at a more competitive price than the official Dutch sellers.

You may sense that both the trademark owner and the official distributors are probably not happy about this. As a result, the brand owner has no control over how the parallel trader advertises or distributes the products. The official distributor faces direct competition from a parallel trader offering the same products at a lower price. But can the trademark owner take action against the parallel trader in such a case?

Rights of the trademark owner

A trademark owner has the exclusive right to use its trademark and prohibit others from using it. This exclusive right includes importing and further marketing products bearing the trademark owner’s mark. However, there is an important exception to this: “exhaustion.”

What is exhaustion?

The trademark owner cannot prohibit parallel imports if there is exhaustion. This principle means that the trademark owner loses his right to stop further marketing of the product once the product has been placed on the market with his consent within the European Economic Area (EEA). The EEA includes the countries of the EU, plus Norway, Iceland and Liechtenstein.

Returning to the example mentioned earlier. If the residual batch of perfumes was put on the market in France with the consent of the trademark owner, the trademark owner cannot stop further resale within the EEA and must allow the parallel trader to offer the perfumes at a lower price.

Exhaustion does not apply to products placed on the market outside the EEA with the consent of the trademark owner. Importing such products to the European market without the consent of the trademark owner is considered trademark infringement and may have legal consequences.

Other packaging, ‘repackaging’ ?

Please note that there is an exception to the exception. Namely, the trademark owner can still act against parallel trade if there is a “legitimate reason”. This is particularly the case when the condition of the products has changed or deteriorated, e.g. through repackaging, relabeling. In addition, damage to the trademark’s reputation may also qualify as legitimate reasons, for example, if the products are traded in a way that damages the trademark image. In such cases, the trademark owner retains the right to oppose further marketing of the products.

Importing counterfeit products is always an infringement

The exception of exhaustion does not apply when importing counterfeit products. By definition, counterfeit products have been placed on the market without the consent of the trademark owner, whether within or outside the EEA. Therefore, the marketing of counterfeit products always constitutes an infringement of trademark rights.

What if you are sued for unauthorized parallel imports?

If a trademark owner sues you for alleged trademark infringement, you will have to be able to prove that the product was put on the market within the EEA with the consent of the trademark owner. This is because in legal proceedings, the burden of proof lies primarily with the entrepreneur claiming exhaustion.

This is often not an easy task, as it requires you to have insight into the entire flow of goods in order to be able to prove where the products you imported originally came from. Therefore, it is wise to carefully research the seller and the origin of the products prior to importing.

In addition, it is essential to keep thorough records. Write down product codes for each batch and carefully preserve all purchase invoices, delivery documents and other relevant documentation. These documents can be crucial in the event of a legal claim to support your claim of exhaustion.

Questions?

Do you have questions as a result of this article or other questions regarding trademark law? Please contact one of our attorneys by email, phone or fill out the contact form for a no-obligation initial consultation. We are happy to think along with you.