The Lighthouse that Dispelled the Mirage – Delhi High Courts authoritative ruling on parallel importation
Columns

The Lighthouse that Dispelled the Mirage – Delhi High Courts authoritative ruling on parallel importation

Bar & Bench

Bar & Bench will bring to you a regular column on Intellectual Property laws by Fidus Law Chambers, a boutique IP firm conceptualized by Shwetasree Majumder, a specialist Intellectual Property attorney and a 2002 alumnus of the National Law School, Bangalore. The first column from Fidus is on the latest judgment by the Division Bench of the Delhi High Court on parallel importation.

By Eashan Ghosh

Introduction

To call the October 3, 2012 judgement of the Division Bench of the Delhi High Court in FAO(OS) No. 93/2012 Kapil Wadhwa & Ors v. Samsung Electronics Company Limited & Anr hard-hitting would be an understatement – in an opinion about a third the length of the 156-page order of the Single Judge that it sets aside in part, the Division Bench reaches an authoritative finding of international exhaustion of trademark rights under Section 30 of the Trade Marks Act, 1999, comprehensively appreciates the commercial ramifications of the issues involved, refers to international precedent on the subject, gives a 667-word section of the Act the dictionary treatment and, in an opinion delivered a mere 26 days after reserving orders, still finds time and space to cast the entire judgement as an extended allegory involving ships, captains, lighthouses and mirages.

This last bit is particularly commendable (I refer here to the time taken, not the running allegory, though a case could easily be made for that as well) and attributable to the Division Bench’s prompt handling of a massively complex set of factual and legal issues with far-reaching industry implications – indeed, the interim between the first order by the Single Judge injuncting Wadhwa (the Defendant/Appellant) ex parte and the final order by the Division Bench throwing Samsung’s temporary injunction issue out of the Delhi High Court was exactly 17 months.

Background

The principle involved in the case is the exhaustion of rights doctrine which states that intellectual property rights of the rightsholder are exhausted at first sale. The legal history of exhaustion of rights displays the uniquely familiar tendency of trademark law to gravitate towards the fringes – little turns on what constitutes first sale or what exhaustion is or even what rights are exhausted. Instead, a majority of the controversy is invariably about the geographical limits the law places on further re-sale by a non-proprietor.

The Appellants’ operations in this case involved parallel importation – the purchase of Samsung printers after their first sale in another country, importing them and selling them in India as is. In some cases, the models and specifications of the Samsung printers sold by the Appellants were at minor variance with those sold by Samsung in India. Samsung’s objection was of trademark infringement, on account of the use of the Samsung trademark on the products being imported and sold by the Appellants without their authorisation. The reading of the factual setup by the Division Bench is interesting in that it notes that even the products sold by Samsung in India are imported and not manufactured and therefore distilling Samsung’s factual objection to one of “a difference in the features of the compatible products”.

The simple question before the Division Bench was whether a reading of Sections 29 and 30 of the Trademarks Act, 1999 supports international exhaustion of rights (first sale anywhere in the world exhausts the trademark rights of the proprietor and therefore means the Appellants’ business is legal) or national exhaustion of rights (trademark rights of the proprietor are only exhausted on first sale in India and therefore Samsung could validly object to the Appellants’ sale of Samsung printers in India).

The basic framework, one which is recognised by the Single Judge and the Division Bench and one with which there can hardly be a disagreement, is that Sections 29(1) and 29(6)(c) taken together render the act of import or export simpliciter of a product bearing a trademark by a person not authorised by the trademark proprietor infringement under the Act.

Interpretive attention therefore turns to Section 30 which lists situations in which use of a trademark by a non-proprietor is not infringement. Of relevance to this case are Section 30(3) [which permits sale/other dealing by a non-proprietor where the goods have been ‘lawfully acquired’ by the non-proprietor (a) where the trademark has been assigned by the proprietor after such acquisition or (b) after being or ‘put on the market’ by the proprietor] and Section 30(4) [which permits sale/further dealing by a non-proprietor if the proprietor does not have legitimate reasons, such as change or impairment of the goods ‘after they have been put on the market’, to oppose such sale/further dealing].

The ‘Or’ Fallacy and Section 30(3)

The re-examination by the Division Bench, at the first instance, is directed at the characterisation of Section 30(3) by the Single Judge as a defensive provision which gives no rights to a non-proprietor. This, according to the Division Bench, is incorrect since it amounts to reading the consent of the proprietor into the ‘lawfully acquired’ criterion in Section 30(3). A second error by the Single Judge, in the view of the Division Bench, is in reading Section 30(3) to save Section 30(3)(a) and not treating Sections 30(3)(a) and (b) as separable conditions even though the word used between them is ‘or’. Since this point of departure by the Single Judge is incorrect, the Division Bench holds that the extension of the Single Judge’s interpretation to state that Section 30(3)(a) envisages a proprietor, an acquiring non-proprietor and an assignee all being present in the same market – while internally consistent – is also non sequitur.  In the words of the Division Bench (paragraph 40):

The learned Single Judge has opined that havoc would be created… [B]ut where is the havoc? Merely because the assignee of a trademark cannot prevent the further sale of goods which were lawfully acquired prior to the assignment, is not a situation of a havoc . The reason is that it would be presumed that the assignee knew that the assignor has already placed, under the trademark, certain goods in the market and that the right of the assignee would not be to prevent further dealing in the goods already placed on the market. Thus, whether the goods are placed in the international market or in the domestic market and thereafter the assignment takes place is not a relevant consideration while interpreting sub-section (3) of Section 30…

The Division Bench thereafter takes issue with the Single Judge’s interpretation of ‘lawfully acquired’ under Section 30(3), noting that there is no warrant for the presumption that, for acquisition to be lawful, it must take place in the country where the trademark is registered. Instead, displaying a stellar sense of perspective on the true purpose of trademark law in this context, the Division Bench holds that trademark law is only meant to control the use of registered trademarks and not regulate the sale and purchase of goods. Thus, the legality of the acquisition is to be construed according to the law of the country where the sale and purchase occurs.

The International Exhaustion Finding

In the process of taking a categorical view on India’s statutory position on exhaustion of trademark rights, the Division Bench studies the language of exhaustion of rights statutes in seven other jurisdictions – the European Union, the United Kingdom, Australia, Brazil, Turkey, Singapore and Hong Kong. On the basis of the language used by these statutes, these jurisdictions are re-arranged in a gradient to reflect national (words such as ‘the internal market’ or ‘market in Turkey’), regional (‘market in the community’, ‘market in the European Economic Area’) and international exhaustion (‘put on the market anywhere in the world’, ‘whether in Singapore or outside Singapore’). Thus, where the intention of legislatures has been to confine ‘the market’ to the domestic market, such words have expressly been used and the neutral expression ‘the market’, without anything further, does not suggest national exhaustion as the only logical conclusion.

This analysis of the Division Bench goes one step further – into the domain of the English dictionary – to conclude that ‘the market’ (where ‘the’ is used as a definite article, as opposed to the way in which ‘any’ in the expression ‘any market’ is used as a pronoun) (paragraphs 54-55):

“…is not used to specify a particular market but is used only to demarcate an economic area or space as distinguished from other spaces, whether public or private. Therefore, it cannot be concluded that merely because‘any market’ in Section 30(2)(b) means the global market, it must logically be inferred that reference to ‘the market’ refers to the domestic market.”

The final, decisive authority for the pro-international exhaustion position emerges from the Statement of Objects and Reasons (embodied by Clause 30 of the Arrangement of Clauses of the Trade Marks Bill, 1999, which correspond to Sections 30(3) and (4) of the Act) and use the words ‘any geographical area’ to explain the expression ‘the market’ in Section 30. The Division Bench notes that the Statement of Objects and Reasons stands on a higher pedestal than other external aids to construction and that it would be “difficult, in such a situation, to ignore such a strongly expressed statement”. The Division Bench also name-checks India’s official communiqué and position paper at a 1989 meeting of the pre-TRIPs Uruguay Round and the Rajya Sabha Standing Committee Report on the Copyright (Amendment) Bill, 2010, both of which reflect the pro-international exhaustion position.

The last issue addressed by the Division Bench – and the only substantive issue on which the Single Judge’s injunction has been confirmed – is the use of meta-tags by the Appellants which direct to Samsung’s own webpages to describe the specifications of their product. The Division Bench summarily dismisses the Appellants’ exhaustion (of words) argument on this point, imploring them to find ways of describing the products sold by them without reference to Samsung’s online content.

The Policy Questions

It is interesting that the Division Bench, in addressing Samsung’s arguments on the benefits of national exhaustion, expresses the view that national exhaustion may not necessarily encourage industry – as in the present case, a manufacturer abroad may simply get its trademark registered in a country and import goods manufactured by it in a foreign country. Consequently, dual pricing may cause injury to the consumer, as was exhibited here by the fact that the functional equivalents of the products imported and sold by the Appellants were upto 50% cheaper than Samsung’s India prices.

This stance is interesting because, other than these comments, the Division Bench maintains a studied disavowal of policy-based interpretations of Section 30, noting that not only is it outside the judicial mandate to decide policy but, even at a prima facie glance (which is all it can and should be) at the consequences on economic stakeholders, neither international nor national trademark exhaustion as a policy offers India unqualified benefits.

Thus, traditional oppositions to parallel importation such as allegations of facilitation of intellectual property infringement and counterfeiting/piracy are hard to sustain against compelling evidence that the Appellants’ business was entirely within the genuine products market and was a faithful representation to the consumer of the specifics advertised. As the Division Bench notes, it was never Samsung’s case that the Appellants were changing or impairing the products sold by Samsung in other countries; in fact, the differences in this case were between products sold by Samsung in India and Samsung abroad, which is not caught by Section 30(4).

However, the Division Bench does note that a possible harm could accrue to Samsung on account of an inferior consumer experience as a result of allowing parallel imports and consequent, if attenuated, damage to Samsung’s reputation in the market. On this issue, the Division Bench draws a praiseworthy balance between competing interests by giving directions to importers to prominently display in their stores an undertaking that no warranties/after-sale services are offered by the trademark proprietor (allowing, of course, for importers to offer warranties/after-sale service in their individual capacity, where they so wish).

Consequences

The Division Bench verdict comes as a real shot in the arm for the computer hardware and peripherals trading industry in general – not only for the traders, for whom this is an affirmation of the legality of their profession and therefore gives them the immeasurable benefit of sustaining their livelihood but also for their consumers, who will benefit from a free market which diversifies choice and increases price competition in genuine products.

The decision should also inject some much-needed clarity into connected legal areas, which have been increasingly uncertain in the absence of precisely the kind of authoritative statement provided by the Division Bench. The most prominent of these include Para 6 of the Intellectual Property Rights (Imported Goods) Enforcement Rules, 2007 and a follow-up Customs Notification 51/2010-Cus (NT) which say little on whether parallel imports are legal but have created much confusion over their legality while the present case was being heard. Indeed, the reigning confusion prompted the Central Board of Excise and Customs to put out a Circular 13/2012-Cus dated May 8, 2012 which did no more than reiterate the language of the relevant sections in the patent, copyright and trademark statutes. Such confusion – or ‘mirages’, in the words of the Division Bench – will now hopefully be a thing of the past.

Eashan Ghosh graduated with Distinction from the Bachelor of Civil Law (B.C.L.) programme at the University of Oxford in 2011 and was a multiple gold medallist on the B.A. LL.B. (Hons.) programme at the National Law School of India University (NLSIU), Bangalore. He is currently an Associate with Fidus Law Chambers and was a part of the team that represented the Appellants in the matter before the Division Bench of the Delhi High Court.

Bar and Bench - Indian Legal news
www.barandbench.com