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K. K. Three M v. Hit Union K. K., and K.K. Senken Shinbunsha


Supreme Court, 1st Petty Bench / Decided Feb. 27, 2003 / Case No. Hei 14/1100
(Trademark Law, Section 2-3, Section 25, Sections 36 and 38)

Gray market goods manufactured by a third party in accordance with the instructions of a legitimate trademark licensee outside of the scope of the trademark license agreement, constituted infringement of the counterpart trademark in the country where the gray market goods were imported.

FACT

Fred Perry Sportswear Ltd., a U.K. company, owned two Japanese trademark registrations: No. 650248 (registered on August 17, 1964) and No. 1404275 (registered on January 31, 1980) both designating general clothing goods ("subject trademarks"). The subject trademarks represented a world known brand of "FRED PERRY." Fred Perry Sportswear registered a family of the FRED PERRY trademarks in 110 countries all over the world including Singapore, Malaysia, Burnei Darussalam, Indonesia and China. They were substantially the same as the trademarks registered in Japan,

Respondent, Hit Union owned a 100% subsidiary in the U.K., Fred Perry (Holding) Ltd. (FPH). On November 29, 1995, FPH acquired from Fred Perry Sportswear the rights concerning the FRED PERRY trademarks all over the world except for Japan where Hit Union was an exclusive licensee. On January 25, 1996, Hit Union acquired from Fred Perry Sportswear the subject trademarks in Japan and registered itself as the trademark owner on May 27, 1996. Thus, Hit Union obtained substantial ownership and control regarding the FRED PERRY trademarks all over the world.

Petitioner, Three M imported into Japan sports wear with the print of FRED PERRY trademarks identical to the subject trademarks. Importation continued for the period from March through July 1996. Three M started selling the sports wear in June 1996 and onward. Imported sports wears were manufactured by a local manufacturer in China under the instructions of a Singapore company, Osia International Pte Ltd. (Osia). Osia had the local Chinese manufacturer make them, which were then purchased by Three M via another Singapore trading company, Villa Pte Ltd.

Osia was a legitimate licensee under a trademark license agreement with Fred Perry Sportswear. Osia was granted a license to use the FRED PERRY trademarks for three years from April 1, 1994. However, Fred Perry Sportswear assigned its title and interest relating to the license agreement to FPH as of November 29, 1995.

The trademark license agreement between Fred Perry Sportswear and Osia included, among other things, the following provisions.

a) Fred Perry Sportswear granted to Osia a license to manufacture, sell and distribute contracted goods in Singapore, Malaysia, Burnei Darussalam and Indonesia as well as a license to use the FRED PERRY trademarks for the contracted goods within the contracted territories. The agreement defined the licensed goods as clothing wears for sports and leisure manufactured in accordance with the specifications designated by Fred Perry Sportswear and ones bearing any of the FRED PERRY trademarks. (Articles 1 and 2)

b) Osia agreed that Osia should not enter into any arrangement for allowing a third party to manufacture, refine or package the contracted goods without a prior written consent of Fred Perry Sportswear (emphasis added). Osia agreed to provide Fred Perry Sportswear with complete factual information relating to the third party manufacturer if any arrangement was made for it. (Article 4) (emphasis added)

The imported goods in this case were in fact manufactured in China by a local manufacturer without Fred Perry Sportswear's consent. China was outside of the contracted territories under the license agreement. Osia's conduct to have the local manufacturer make the wears and placed FRED PERRY trademarks on the products, constituted a breach of the license agreement between Fred Perry Sportswear and Osia.

Hit Union put an announcement in an industrial newspaper stating that the wears imported into and sold in Japan by Three M were counterfeits. While filing a petition with the customs authority for the stop of the infringing goods under the Customs and Tariff Law, Hit Union filed a complaint with the Osaka District Court for injunctive relief against trademark infringement. Hit Union also sought monetary relief under the tort law (Civil Code, Section 709).

Three M counter-sued. For its claim, Three M asserted that the announcement on the industrial newspaper caused irrevocable harm to its business reputation. The two actions were consolidated.

The Osaka District Court set forth a three-part test and analyzed whether the imported goods in question met the requirements of the test. First, the test sought as to whether the source of the imported goods and that of genuine goods were substantially identical. Second, whether the use of the trademarks for the imported goods was lawful and legitimate. Third, whether the quality of imported goods adversely affected the trust and confidence of general consumers on the quality of the genuine goods.

The district court concluded that since the second requirement was not met in this case, the importation of goods by Three M infringed the subject trademarks in Japan. With this finding, the court awarded damages in the amount of approximately 24 million yen (approx. 200,000 US$). However, the court rejected the claim of injunctive relief sought by Hit Union, as the alleged importation had already terminated and no further harm was presumed. (Decided Dec. 21, 2000, Case No. Hei 09 (wa) 8480).

Three M appealed. On appeal, the High Court affirmed the lower court's decision. (Decided March 29, 2002, Case No. Hei 13 (ne) 425). Three M further appealed against the High Court's decision.

HOLDING

The Supreme Court dismissed the appeal of the Petitioner as follows.

Unauthorized importation of goods bearing trademarks identical to those registered in Japan ("foreign trademarks") constitutes trademark infringement, so far as such goods are identical or similar to any of the goods designated for the registered trademark in Japan. However, exceptions are available when:

1) The foreign trademarks were legitimately placed by a licensee who was granted a license under a trademark agreement with the owner of the licensed trademarks or its exclusive licensee.

2) The foreign trademarks indicate the same source as that of the registered trademarks in Japan; such fact can be presumed by the fact that the owner of the foreign trademarks is the same as the owner of the registered trademarks in Japan or otherwise he or she can be regarded as the identical person as the trademark owner in Japan legally or economically.

3) The trademark owner in Japan is in a position to directly (or indirectly) manage the quality of goods bearing the foreign trademarks.

If there are no substantial differences in quality from the genuine products, imported goods can be regarded as imports of genuine goods and there shall be no question of infringement in Japan. This is because the imports of genuine goods do not harm the trademark's principle function of source identification and quality guarantee.

Based on this rationale, the Supreme Court stated:

Osia was the licensee under the trademark license agreement in Singapore and three other countries. Osia had a local Chinese manufacturer make the goods in question without Licensor's consent. Placing the licensed trademarks on such locally manufactured goods was beyond the scope of the license and harmed the function of the trademark, i.e., the identification of source.

Limitations of manufacturing countries and outsourcing arrangements under the license agreement are extremely important for the trademark owner to ensure the quality of the licensed products and complete the function of quality guarantee. The imported goods in question were manufactured in violation of these limitations.... There was a likelihood that substantial differences existed between the goods imported by the Petitioner and products placed in the distribution by the Respondent. Such differences harmed the function of the intended quality guarantee.

Allowing the importation of such goods as being legitimate would harm the trust in business of the FRED PERRY brand which Fred Perry Sportswear and the Respondent had built up. General consumers regard the goods of parallel import as being genuine products of the trademark owner in terms of source and quality. Leaving such goods on the market would be against the trust of the general consumers.

Under the circumstances, the importation of goods by the Petitioner cannot be regarded as the parallel import of genuine products. Thus, arguments that the act of the Petitioner in this case lacks illegality are negated.

For customs clearance in Japan, importers are required to identify the place of manufacture of the importing goods. When a trademark licensee imports licensed products into Japan in place of the foreign trademark owner, the licensee should ascertain in advance whether he/she is entitled to manufacture licensed goods and place licensed trademarks thereon in the source country. Petitioner in this case failed in proving that it fulfilled such duty of care. Petitioner cannot overcome the presumption of negligence under the Trademark Law, Section 39.

The bench unanimously decided that the lower court's decision dismissing the appeal against the district court's decision and affirmation of Respondent's claim in part were appropriate.

COMMENTS

This is the first Supreme Court's decision concerning the legality of parallel import of genuine goods as it relates to trademark law. The Supreme Court's decision is important in two aspects. First, the Court has established a case law against a chain of trademark cases involving gray market goods bearing the Fred Perry trademarks. Second, the Court has articulated the theory for legality of gray market goods in case of parallel licensing.

Regarding the first aspect, the court faced the need of establishing conformity of law interpretation since decisions of the two major appellate courts, i.e., the Tokyo High Court and the Osaka High Court were divided far-apart in the cases involving the Fred Perry trademarks. Contrary to the finding of the Osaka High Court in this case, the Tokyo High Court held in another Fred Perry trademark case that the trademark owner's conduct of publishing on an industrial newspaper an announcement of counterfeits was unfair since parallel imports of goods of substantially identical quality from a legitimate licensee were free from trademark infringement. In the Tokyo High Court case, the source of goods was the same, i.e., Osia in Singapore.

Turning to the second aspect, the Court made it clear that imported goods would not be considered genuine goods unless they were subject to the terms and conditions of the license agreement. The Court clarified that legality of parallel imports is assured only when the imported goods are genuine goods manufactured by the trademark owner or its licensee to the extent they meet lawful requirements. Concerning the lower courts finding that importers had a duty of care to ascertain whether prospective imported goods were qualified as genuine goods, the Supreme Court supported such finding. The Supreme Court concluded that goods manufactured in breach of the license agreement lacked in qualification to meet requirements as genuine goods.

In Japan, case law established that the parallel import of genuine goods is free from infringement of relevant trademark registrations. The first case was the district court decision in NMC KK v. Schrilo Trading Co., Ltd., (Osaka District Court, 1970). In this case, Schrilo was an exclusive trademark licensee under the PARKER trademark. Schrilo filed with the Osaka Custom Office a petition under the Custom Tariff Law to bar the custom clearance of goods bearing the PARKER trademark. NMC, in attempting to import from Hong Kong Parker-made genuine fountain pens, filed the custom office for a permission of importation. Taking the Schrilo's prior petition into account, the custom office did not issue a permission of importation. NMC brought a suit to the court, claiming a declaration of invalidity of such custom office procedure. The court, finding no harm brought by the parallel import of genuine products against the business of the trademark owner, acknowledged the first time that such importation would be beneficial for nurturing fair competition, thereby enhancing the benefits of general consumers.

Case law was also made in the case of La Schmise Lacoste and Sankyo Seiko KK v. Shinshin Boeki KK (Tokyo District Court, Dec. 7, 1984). In this case, at issue was the parallel import of goods under the "parallel licensing" arrangements wherein the individual licensees agreed to geographically limit the manufacture and distribution of licensed goods. Imported goods were manufactured by another licensee in US. Sankyo Seiko, an exclusive licensee under the Lacoste trademark in Japan, attempted to exclude the importation into Japan by Shinshin Boeki of goods manufactured by the legitimate licensee. In this case, two questions were considered: whether the importation of licensed goods lack in the function of source identification; and whether such importation would confuse the consumers as to quality. The court found no negative influence by the importation and decided that the Defendant's act amounted to import of genuine goods, thus declaring no infringement of the Lacoste trademark (with the design of an alligator) in Japan.

The Supreme Court decision adds case law thereby to clarify the threshold to distinguish the legitimate parallel importation from illegal importation of gray market goods.

(By Jinzo Fujino, Published in the AIPPI Journal, July 2003, pp 288-292)

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