Cracking the code: parallel imports and trade mark infringement

United Kingdom

What happens when trademark rights and competition law collide? In a recent case in the Court of Appeal (Sportswear SpA v Stonestyle Limited) the Court of Appeal had to balance and consider the conflicting interests of brand owners and parallel traders.

The case considered the application of two fundamental (and potentially conflicting) legal principles:

  • First, under trade mark law, in an exception to the principle of free movement of goods across the European Economic Area (EEA), trade mark owners can object to parallel imports where the condition of the goods has been impaired or changed after they have been put on the market.
  • Second, under competition law, no company may enter into an agreement which may affect, or have as their purpose, the prevention, restriction or distortion of competition with the EEA.

Supply chain management

Brand owners must ensure that the desirability and premium image which surrounds their products is not diminished by the sale of inferior quality branded goods intended for overseas markets, and counterfeit items, which can constitute a risk to consumer health or safety.

To ensure control over the supply chain, many branded goods reach consumers through exclusive distribution arrangements in one or more of the various member states. In return for exclusivity in their applicable territories, distributors are restricted from onward sale to the “grey market” where goods are exported/imported between EEA states to take advantage of higher prices in more lucrative western European markets.

As well as strict measures of quality control and exclusive distribution arrangements, many brand owners invest in supply chain management technology to “track and trace” the movement of genuine goods within the market. This technology helps to identify counterfeits so that they can be traced and eliminated from the market.

However, a common allegation made by parallel traders is that an additional aim of such arrangements is to restrict and police the onward sale of goods to the grey market from their distributors.

Objections to importation

In Sportswear, the brand owner was the manufacturer of clothing branded with STONE ISLAND. Distribution of the brand owner’s goods in the UK was by an exclusive UK distributor, who was prevented from any onward sale to the parallel trade market.

The defendants in Stone Island also sold genuine STONE ISLAND goods in the UK, which had been purchased from authorised distributors. However, it was likely those distributors were in breach of their contract with the brand owner.

In order to prevent the brand owner identifying the source of their goods, the parallel importer had removed or defaced labelling and swing tags from the clothing which contained codes that would have enabled the proprietor to identify the source of those goods, and presumably cut off supply by enforcing the terms of the relevant distribution arrangements.

The brand owner sued for trade mark infringement, claiming that the “mutilation” of the goods by the removal and defacement of the codes and tags was damaging the brand’s reputation, and that their importation should be prevented.

In return, the importer claimed that the real motivation of the proceedings was to enforce territorial exclusivity and to discover the source of supply to prevent further parallel imports. In its defence, the importer claimed that the restrictions on sale imposed on the brand’s distributors were unlawful and anti-competitive.

Court of Appeal judgment

The brand owner obtained summary judgment by arguing that since there was not a sufficient link between the distribution agreements related to the source of the importer’s goods and the allegations of trade mark infringement, there was no arguable defence.

The Court of Appeal disagreed and held that there was an arguable defence under competition law. The intention of the distribution arrangements was a clear geographical separation for the products and prevent the distributors from selling into any other territories. It was at least arguable that if the restrictions on onward sale were in breach of competition law, the brand owner would not have a legitimate reason to complain of trademark infringement.

Finely balanced competition

Many organisations have been surprised by the Court of Appeal’s finding of an arguable defence in this case since it had been considered that the “Euro-defence” was something of a last ditch hope by importers to avoid trade mark infringement.

There are also significant public policy concerns if brand owners are discouraged from taking steps intended to assist with the identification of counterfeits, many of which raise public health and safety issues by failing to comply with necessary regulatory standards.

Parallel importers may well be emboldened at the possibility that potential breaches of competition law in distribution arrangements could constitute a defence to trade mark infringement. It is unlikely, however, that brand owners will be deterred from their IP enforcement programs at this stage. As always, the law (and policy behind it) must be finely balanced between the legitimate interests of a brand owner to ensure the quality and consistency of goods across their supply chain, and those importers who seek to rely on the principles of free trade to take advantage of price differentials across the EEA.



This article first appeared in the Food & drink bulletin in November 2006. Please click here to view the pdf in a new window.