Parallel Import into Japan Carry a Duty of Care
By Jinzo Fujino*
Breach of a trademark license agreement adversely affects the defense of parallel importation of genuine trademark goods in Japan.
Parallel imports of genuine goods are generally free from infringement of relevant intellectual property rights in Japan. Case law and legislation has already paved the way for genuine goods to be legitimately imported into Japan by parallel importers. For example, parallel imports of "patented goods" do not infringe relevant domestic patents under the 1997 Supreme Court's decision in the BBS case. In the BBS case the Court agreed with the lower court's ruling of legality of parallel importation and upheld the application of the exhaustion doctrine to the patent at issue.
There have also been arguments concerning the legitimacy of defense of parallel importation under the Copyright Law. However, such arguments were put to an end when the Copyright Law was amended in 1999. The present Copyright Law sets forth that the exclusive right of the copyright owner does not extend to genuine or licensed goods which have been sold to a third party outside Japan.
The Trademark Law is not exceptional. The parallel importation of genuine "trademark goods" has so far been supported by many court decisions. The leading case was the Parker case in 1970 in which the district court established a three-part test to determine whether imported goods were genuine. Recently, the three-part test was reviewed by the Supreme Court in the Fred Perry case where the Court upheld the lower courts' approach in favor of parallel importation of genuine trademark goods. It is notable, however, that the Supreme Court introduced an additional requirement to the "genuineness" part of the test on importing goods, namely, "a duty of care." The new "duty of care" requirement may pose an additional burden on parallel importers, thereby causing in effect to limit the total volume of parallel importation.
Since the 1970 decision in the Parker case, parallel imports of genuine trademark goods have been considered free from trademark infringement in Japan. In the Parker case, imported products were authentic fountain pens manufactured by the trademark owner. Acting on a petition for injunction by the exclusive licensee, however, the Customs Office refrained from issuing the necessary permission of importation to the parallel importer. The parallel importer challenged the validity of the petition by the exclusive licensee.
On complaint, the district court, finding no substantial harm against the functions of the registered trademarks (namely, "source identification" and "quality guarantee"), ruled that parallel import of genuine goods were free from infringement of the Parker trademarks registered in Japan, thus invalidating the order of injunction by the Customs Office. In determining whether imported goods were genuine, the Court set a test comprised of three parts: 1) whether the source of the parallel import goods and that of the trademark owners' goods are identical; 2) whether the trademark on the parallel import was legitimately and appropriately used; and 3) whether the parallel import goods did not harm the established reputation of the trademark owner quality-wise.
The district court decision in the Lacoste case, expanded the scope of genuine goods to include products manufactured by a legitimate licensee. In this case, imported were products manufactured by a licensee under the "parallel licensing" arrangements under which the individual licensees agreed to limit the geographical site of manufacture and distribution of the licensed products. Applying the rationale established by the Parker case, the court ruled that products manufactured by a legitimate licensee were tantamount to genuine goods to the extent they were subject to quality control under the licensing arrangements.
In the recent Fred Perry case, the Supreme Court in essence affirmed the rationale of the three part test developed by the Parker case and the Lacoste case.
[Fred Perry Case]
Fred Perry Sportswear Ltd. (FPS), a U.K. company, owned two Japanese trademark registrations both designating general clothing goods. The trademarks represented world famous brands of "FRED PERRY." FPS registered a family of the FRED PERRY trademarks in 110 countries including Singapore, Malaysia, Brunei Darussalam, Indonesia and China. They were substantially the same as the trademarks registered in Japan.
Respondent, Hit Union owned a 100% subsidiary, Fred Perry (Holding) Ltd. (FPH) in the U.K. In November 1995, FPH acquired from FPS the rights concerning the FRED PERRY trademarks worldwide except for Japan where Hit Union was the exclusive licensee. But in January 1996, Hit Union acquired from FPS the Japanese trademarks in question and entered itself as the trademark owner into the Trademark Registry. In May 1996, Hit Union obtained substantial ownership and control regarding the FRED PERRY trademarks all over the world, including Japan.
Petitioner, Three M imported into Japan certain sportswear designed with prints of FRED PERRY marks which were substantially identical to the trademarks registered in Japan. Importation continued for the period from March through July 1996. Three M started selling such sportswear from June 1996 in Japan. The imported sports wears were manufactured by a local manufacturer in China under the instructions of a Singapore company, Osia International Pte Ltd. (Osia) which was a licensee under a trademark license agreement with FPS. Osia had the local Chinese manufacturer make them, which were subsequently purchased by Three M. Osia's license to use the FRED PERRY trademarks was valid for three years from April 1, 1994.
The trademark license agreement between FPS and Osia included, among other things, the following provisions.
a) FPS granted to Osia a license to manufacture, sell and distribute contracted goods in Singapore, Malaysia, Brunei 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 FPS and ones bearing any of the FRED PERRY trademarks.(Articles 1 and 2)
b) Osia agreed that Osia shall not enter into any arrangement to allow a third party to manufacture, refine or package the contracted goods without the prior written consent of FPS. Osia agreed to provide FPS with complete factual information relating to any third party manufacturer, if it should enter into any arrangement thereon. (Article 4)
[Claims and Judgments]
In this case, imported goods were in fact manufactured in China by a local manufacturer without FPS's consent. China was outside of the contracted territories where the manufacture of licensed goods was allowed. Osia's conduct to have the local manufacturer make the wears and put the FRED PERRY trademarks on such products, constituted a breach of the license agreement between FPS and Osia.
Hit Union put an announcement in an industrial newspaper stating that the sports wears imported into and sold in Japan by Three M were counterfeits. While filing a petition with the Customs Office to block the entry of infringing goods into Japan under the Customs and Tariff Law, Hit Union filed in 1997 a complaint with the Osaka District Court for injunctive relief against trademark infringement. Hit Union also sought monetary relief under the tort law. Three M counter-sued, asserting that the announcement by Hit Union in the industrial newspaper caused irrevocable harm to its business reputation.
The two actions were consolidated and heard by the Osaka District Court. The court applied the three-parts test to analyze whether the imported goods were genuine, and thus entitled to be free from trademark infringement. The court concluded that since the second requirement of the three parts test (i.e., whether the trademark on the imported goods was legitimately and appropriately placed) was not met in this case, the imported goods in question constituted infringement of the Fred Perry trademarks registered in Japan.
Three M appealed, but the appeal court rejected the appeal, affirming the district court's ruling. Three M further appealed to the Supreme Court. The Supreme Court accepted to review the appeal from Three M.
In affirming the lower courts' rulings, the Supreme Court clarified that if there were no substantial differences in quality, imported goods should be regarded as being genuine and there should be no question of infringement. For its clarification, the court relied on the established rationale that parallel import of genuine trademark goods caused no substantial harm against the function of registered trademarks, namely, source identification and quality guarantee.
In conclusion, the Court found that the "genuineness" requirement were not met in this case because of the contractual breach by Osia.
The Supreme Court's decision is important in two aspects. First, the three-part test which was developed by lower courts in determining whether certain parallel import is legitimate, has now been authorized by the Supreme Court. Second, and perhaps more importantly, the parallel importers have been imposed an additional duty of care before they start parallel importation.
Regarding the first aspect, the Supreme Court had to address the issue of inconformity of law interpretation found in the decisions of appellate courts. In a related case involving a different importer (Tokyo case), the Tokyo High Court held that the parallel importation of licensed FRED PERRY products did not constitute any trademark infringement.
Turning to the second aspect, the Supreme Court made it clear that imported goods would not be considered genuine in the context of parallel importation 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 by meeting the three-parts test. However, the Court added a new burden on the part of parallel importers; namely, parallel importers are expected to exercise reasonable care to ascertain whether the prospective imported goods have been manufactured in compliance with the license agreement.
For Customs clearance, parallel importers would be required to identify the site of manufacture of the importing goods. When licensed products are imported into Japan, their importers will have to ascertain in advance whether the licensed goods that they attempt to import are in compliance with the license agreement. These procedures may act to retard the increase of volume of parallel importation.
(*Mr. Fujino is a Manager of the IP Research Institute at NGB Corporation, Tokyo. This article was published in the journal of the Licensing Executives Society, les Nouvelles, December 2003)
1. For more details on the BBS case, see Jinzo Fujino "Parallel Import of Patented Goods" in les Nouvelles, March 1998, pp. 8-9.
2..Copyright Law, Article 26 bis, Para. 2-4.
3. NMC KK v. Schrilo Trading Co., Ltd., Osaka District Court
4. K K Three M v. Hit Union K K, and KK Senken Shinbunsha, Supreme Court, decided Feb. 27, 2003
5. Upon the decision of the Parker Case, the Customs Office announced its policy that Customs would treat the parallel importation of genuine trademark goods to be legitimate and not consider to be falling under the control of the Custom Tariff Law. This is now standard policy for Customs.
6. La Schmise Lacoste and Sankyo Seiko KK v. Shinshin Boeki KK. Tokyo District Court, Dec. 7, 1984.
7. Regarding the Fred Perry trademarks, the two major appellate courts in Japan rendered completely opposite judgments. Apparently, the Supreme Court faced the need to address inconformity of law on parallel imports of genuine trademark goods. The decision in the Tokyo case is discussed in the following section.
8. One notable difference, though, was that a single breach in limitation of the site for manufacture was heard by the court in the Tokyo case. There was no issue of the breach of the "have made" stipulations.
9. For more details on the Fred Perry case in English, see Jinzo Fujino "AIPPI Case Reporter" AIPPI Journal, July 2003, pp 288-292.