The Case for re-introducing Global Trademark Exhaustion in EU legislation

Transcription

1 The Case for re-introducing Global Trademark Exhaustion in EU legislation Position Paper The European Parallel Importers Coalition (EPIC) Rue Posschier 2 B-1040 Brussels Tel : / Fax: / Epic_bru@skynet.be, gml@clintons.co.uk

2 Introduction The European Parallel Importers Coalition (EPIC) stands for the re-introduction of an international exhaustion regime relating to trademark law in the European Union. It seeks to overturn the effect of the European trademark legislation of 1989, which, together with the ECJ s ruling in the Silhouette case (July 1998), effectively prohibits traders and retailers from importing branded goods from outside the EEA without the brand holders consent. EPIC is a pan-european single-issue organisation set up in late 1998 bringing together importers and retailers active in every sector of consumer goods, ranging from cars to electronics, clothing to cosmetics, beverages to toiletries. Amongst its members are some of the largest retail groups in Europe. This document represents our position, rebuts the arguments of trademark owners and makes comments on the NERA study, commissioned by the Internal Market Directorate General of the European Commission, to report on the effects of international exhaustion versus Community exhaustion. In addition, this paper makes a few comments on the European Commission Working Document on this issue, published by the same DG in December The Current Situation Since the Court s ruling in the Silhouette case, the Council of Internal Market Ministers has discussed the issue on a number of occasions, without coming to a conclusion. Member States are divided on the matter and asked the European Commission to present a working document which could be the vehicle for more detailed discussions in a Council Working Group. This document was published in December 1999 and is being discussed by the European Parliament and Council of Ministers. The EPIC Position We believe that current EU trademark legislation is contrary to consumer interest, international law, and allows for an abuse of trademark law. It now goes far beyond what it was designed to protect, namely to assure the consumer of the quality and origin of the product sold. The result is that the European consumer has less choice, and trademark owners face no competition, giving them freedom to set prices at whatever level the market will absorb. Traditionally this has meant that EU prices are considerably higher than in, for instance, the United States and the Far East. In the past (whilst international exhaustion was in force) the ability to import goods from low priced markets kept a lid on the pricing policy of brand owners and kept a downward pressure on prices. Whilst one function of a trademark is to promote innovation and creativity by allowing the innovator to reap a benefit for the time, talent and effort put into the creation of a product bearing his trademark, EPIC believes that, as parallel imports cover only genuine goods that are essentially identical in style and quality to the goods sold by brand owners, trademark owners have already derived this benefit by virtue of their first sale, and therefore this function of trademark law has already been fulfilled.

3 The Brand Owners Arguments and EPIC Rebuttal Brand owner organisations such as the European Brands Association (AIM) have been using a number or arguments against global exhaustion of trademarks, which EPIC believes are fundamentally flawed. Below we have listed their arguments and our rebuttals. 1. Parallel imports confuse consumers and expose them to products that may be similar in appearance but which are significantly different in either quality, formulation, or style from the product distributed by the approved distributor. Selling such products that lead to consumer confusion is illegal regardless of whether an international or limited exhaustion regime is in force. The type of parallel trade advocated by EPIC is one that allows the consumer the opportunity to benefit from reduced prices on goods that are essentially identical, produced in the same factories, and sold under the same sales regimes as goods marketed in the EU by the trademark owner. International Exhaustion, in no way affects the primary function of trademarks, which is, to assure the customer of the quality and original of the product. 2. Parallel traders want to maximise their own profits by obtaining the highest price they can. Retailers only want to increase their profit margins; they do not pass on the savings to consumers when they buy goods cheaper on the parallel market. The proven fact is that the ability to parallel trade gives retailers the opportunity to set lower prices. Furthermore, the availability of parallel imported goods has a very tangible benefit for consumers. They put a downward pressure on the pricing policy exercised by the brand owners which, in the absence of parallel traded goods, would lead to higher prices for the consumer. There is no other alternative to controlling prices as inter-brand competition is practically non-existent. The very nature of trademark rights ensures that each product is unique, cannot be reproduced, and therefore cannot be considered as a substitute. Take the pressure of parallel imports away and brand owners would be free to charge whatever they want. 3. Parallel imports deny consumers the benefits of after sales service, guarantees and product information. The majority of branded goods subject to parallel imports do not require after sales service (perfumery, cosmetics, toiletries, clothing, soft and hard drinks etc.). After all, what after sales service does the consumer get when buying these goods in a duty free shop, on a plane, on a ship in another country, or via the Internet? In the case of motor cars, the British Independent Motor Traders Association has successfully proven that the after sales service provided by the parallel importer is in may cases equal if not superior to the franchised dealer. Moreover, this problem again is one created by the trademark owners who do not allow their franchised dealers to service imported vehicles.

4 4. Parallel imports may reduce the ability to detect and prevent counterfeit imports. This argument has never been either factually or logically proven. In any case the inability of the relevant customs authorities to deal with this problem is hardly a reason to disallow a perfectly legitimate trade. Parallel imports are not the same as counterfeit goods they are the genuine articles but traded outside the companies own channels. Artificial barriers should not be used to limit the availability of cheaper imports for the European consumer - Commissioner Monti 24 February Efficiency is best obtained through some form of price differentiation. Differential pricing simply reflects the fact that different proportions of the sunk cost (R&D, marketing, etc.) are being recouped from unit sale, in different markets. Effectively this means that the EU consumer is called upon to subsidise the rest of the world where prices are lower! Efficient this may be for Trademark holders, but not for the EU consumer. 6. If firms exit from the lower margin markets - to prevent parallel trade - price in EEA markets may even rise because fixed costs can no longer be spread over a larger volume of sales. In reality prices on branded goods bear no relation whatsoever to costs. Brand owner s charge, what the market will bear, in other words, what the brand owner can get away with. The NZIER (New Zealand s survey into the effect of parallel imports) found, whilst making a survey of UK manufacturers, that nearly 82% of firms that provided goods overseas cited, the main reason for price differential between countries, being due to what the market will bear. 7. Lower returns to the trademark holder would over time inhibit investment in new brands,... or reduce the quality of goods... This would be contrary to the long-term interest of consumers in tending to reduce quality and choice. Why should the EU consumer finance this extra incentive? The most important markets for brands are the USA and Japan; both these markets have international exhaustion policies. Furthermore, historically parallel imports have been allowed throughout the world before the current EU legislation, the principle of global exhaustion ruled and there was no lack of investment in new brands nor was there any lowering of quality. This clearly indicates that the existing benefits, enjoyed by the Brand owners, are quite adequate and would not affect the quality or branding of new products. Further, no evidence has been produced to support an argument that following the change to Community exhaustion the level of investment by the brand owner went up. 8. In principle the USA has national exhaustion. In the USA the owner can stop imports if there are material differences in the goods. There is no doubt that the USA has an international exhaustion regime (called the first sale principle ). This has been reconfirmed by the US Supreme Court in a copyright action, Quality King Distributors Inc. v L anza Research International Inc. decided 9 March The fact that Brand owners can still stop import of goods that are materially different proves that International Exhaustion does not lead to a lowering of quality standards.

5 EPICS response to the NERA Study On 8 February 1999 the London-based National Economic Research Associates (NERA) presented a study, commissioned by the European Commission, on the economic consequences of the choice of a regime of exhaustion in the area of trademarks. EPIC was very surprised to read NERA s conclusion that reintroducing international exhaustion would have a very limited impact on consumers and prices. Unfortunately, none of EPIC s arguments and positions, as listed above, was properly addressed. In addition, a number of important questions should be answered: Does the study objectively take into account all sides of the argument? NERA failed to conduct a balanced study of all stakeholders involved in the international exhaustion debate. Surprisingly, the research found that the effect on retailers and on consumers was largely seen as neutral, or there were divergent views, even among consumer organisations. How did NERA come to these conclusions? As far as we know none of the major retailers in the EU were interviewed. In contradiction to the conclusions, BEUC (Bureau European des Unions de Consommateurs) and its members fully support a return to international exhaustion. This being the case, which consumer organisations did NERA interview? Did NERA use proven methodology when calculating the economic impact of international exhaustion? The report states that reintroducing international exhaustion would have a very limited impact on consumers and prices. To arrive at this unsound conclusion NERA calculated the percentage of total volume of sales in each market segment represented by parallel imports. As this percentage is very small NERA naively concluded that their contribution is minimal. Furthermore, this totally ignores the impact that this small percentage has on overall pricing thus affecting not only prices of imported goods but the general volume of sales. A study conducted by New Zealand based researchers on the same subject quantified parallel imports in the UK to constitute 0.2% of GNP and to be up to 0.5% of CNP within the EU. However, to determine the benefits to the consumer, these independent researchers used an economic framework called the net welfare gain, whose parameters are clearly set out in their report. They concluded that international exhaustion results in a net welfare benefit for the consumer. By comparison NERA dismisses its benefits as neutral.

6 EPIC comments on the European Commission Working Document In December 1999 the services of the European Commission published a Working Document for discussion in the Council Working Group. The document is presented as a neutral description of the trademark exhaustion issue and lists a number of options to deal with the problem. The Commission does not recommend any course of action. EPIC was disappointed by this document for a number of reasons. The main reason is that we feel that the document tends to concentrate on the supposedly negative consequences of a change to international exhaustion for brand owners rather than on the clear advantages for Europe s consumers. In addition, the Commission over-emphasises the political and procedural difficulties that would arise if it were to present legislative proposals for a change to international exhaustion. As Commissioner Monti stated to the Internal Market Council on 24 February 1999 this should not be used as an excuse for not looking at the positive effects that a change could bring for European consumers. Rather than worrying about the need for unanimity in the Council of Ministers for a change to the Trademark Regulation, the European Commission should take its responsibility as the sole initiator of new EU legislation if it feels that a change is warranted. Finally, EPIC believes that the Commission, rather than publishing a working paper for Member State intellectual property experts, should have presented a formal Communication, which could have served as an instrument for comprehensive consultation of all interested parties, Europe s consumers and of the democratically elected European Parliament. We would finally conclude by stating that we take on board Commissioner Monti s concerns over employment and whether this would be effected by a change to international exhaustion, but would argue that in the main, the goods which the brand owner and parallel trader sell are produced by the brand owner in the same factories under the same conditions and accordingly there would be no adverse effect on employment. EPIC January 2001