Tactics and challenges in acting against parallel imports

In China, the general rule is that parallel imports will not infringe a brand owner's registered trademark rights. Nonetheless, parallel imports often create concerns for rights holders, especially when these products are sold on a larger scale in retail shops claiming a relationship with their brands. While many cases focus on the defendant's use of trademarks on signboards and shop windows, others still involve rights holders' attempts to take action based also on the parallel import goods themselves. A recent court case presented some interesting issues in relation to the burden of proof in this type of case.

The case

In April 2013, the Shanghai Second Intermediate People's Court issued a first instance judgment in a trademark infringement and unfair competition action brought by Victoria's Secret Stores Brand Management (Victoria's Secret) against Shanghai Jintian Clothing Co., Ltd. (Jintian). Victoria's Secret alleged that Jintian had infringed its registered trademark and engaged in unfair competition by selling Victoria's Secret branded goods and using Victoria's Secret's enterprise name. It also alleged that Jintian had falsely claimed to be Victoria's Secret's general distributor in China, setting up retail shops or appointing franchisees.

Jintian argued, in defence, that the goods it was selling were parallel imports (i.e. genuine goods) and that it was not, therefore, infringing Victoria Secret's trademarks. Proving whether or not the goods were genuine became one of the key issues in the case.

In support of its defence, Jintian submitted evidence that included confirmation letters from Victoria's Secret's parent company, Limited Brands. These included authorisation documents, bills of lading, customs duty receipts and other documents relating to the purchase and importation of Victoria's Secret products. Although Victoria's Secret and its affiliated companies did not accept the defendant's explanation, they were not able to prove that Jintian's evidence was false. Jintian was, therefore, successful in persuading the Court that it had paid a total of $5.1 million for legitimate products from legitimate overseas sources. Ultimately, the Court held that Jintian was not liable for trademark infringement, but only for false advertising as a result of having presented itself as Victoria's Secret's distributor. The plaintiff's other claims were dismissed.

Careful claims

If, as the Court suggested, Victoria's Secret had known that the goods in question were parallel imports, the plaintiff was walking a very fine line in bringing a trademark infringement action. The plaintiff's claims needed to be drawn very carefully, leaving it for the defendant to prove, if it could, that the goods in question were genuine goods. Based on the Court's judgment, it seems that the success of the defence depended on the defendant being able to prove:

• the source of the disputed goods;

• that the source was an authorised distributor or provider of genuine goods; and

• that the goods had been legitimately purchased and imported.

If a defendant in this situation were unable to prove that the goods in question had been acquired from a legitimate source, it might be held liable for infringement. Given the strict evidentiary requirements imposed by Chinese courts, it will not always be easy for defendants to provide the necessary proof.

In most straightforward trademark infringement cases, the trademark owner will provide its own statement as evidence to show that the mark has been used without authorisation. A more novel use of this kind of evidence can come in cases where the plaintiff's claims of trademark infringement, unauthorised sales, and other unauthorised trademark use do not address the issue of whether the goods in question are counterfeit or not. This type of case is most likely to be brought where the nature of the defendant's infringement is more subtle and involves other conduct like false advertising or other forms of free riding on the rights holder's reputation. Another related issue is how far the courts will go in requiring the plaintiff to specify whether the goods are counterfeit when the defendant presents a parallel imports defence but fails to produce sufficient evidence of the source of the goods.

Plaintiffs are entitled to craft their own claims and there is no clear legal requirement for them to indicate that the defendant's goods are counterfeit in a lawsuit. While a strong defence is available if there is evidence that the goods are genuine and were acquired from a legitimate source, rights holders might still prevail over a poorly prepared defendant.