Parallel imports

What Are Parallel Imports?

Parallel imports refer to genuine, non-counterfeit products imported into a country without the authorization of the intellectual property owner (e.g., patent holder or trademark owner) in that country. These goods are legally manufactured and sold in another country, often at a lower price, and then purchased by independent third parties for resale in a higher-priced market. This phenomenon is a key aspect of international trade law and global business strategy. Parallel imports emerge due to price discrimination practices by manufacturers across different national markets, creating an incentive for arbitrage.

History and Origin

The concept of parallel imports is intrinsically linked to the evolution of intellectual property rights and their territorial nature. Historically, manufacturers set different prices for their products in various countries, often based on local market conditions, purchasing power, and regulatory environments. This practice of market segmentation created price differentials, leading to opportunities for entrepreneurs to buy goods where they were cheaper and resell them where they were more expensive.

The legality of parallel imports hinges on the "exhaustion of rights" doctrine, which determines when an intellectual property owner's control over a specific product ends after its initial sale. Different jurisdictions adopt varying approaches: national, regional, or international exhaustion.

A significant moment in the U.S. context was the Supreme Court's 2013 decision in Kirtsaeng v. John Wiley & Sons, Inc. This case involved a student importing textbooks purchased cheaply in Thailand and reselling them in the United States. The Supreme Court ruled that the "first sale" doctrine, which allows the owner of a copyrighted work to resell or dispose of that copy without the copyright holder's permission, applies to copies of copyrighted works lawfully made abroad. This decision legitimized many parallel importation business models for copyrighted materials in the U.S.⁶.

Globally, the World Trade Organization (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) addresses parallel imports, but it remains neutral on the issue of international exhaustion of intellectual property rights. Article 6 of the TRIPS Agreement explicitly states that nothing in the agreement "shall be used to address the issue of the exhaustion of intellectual property rights," giving WTO members the flexibility to determine their own rules on whether to permit parallel imports⁵.

In the European Union, the European Court of Justice (ECJ) has played a crucial role in shaping the understanding of trademark exhaustion within the European Economic Area (EEA), generally supporting regional exhaustion. This means that once a product bearing a trademark is put on the market in any EEA country by the trademark owner or with their consent, it can generally be imported and sold freely throughout the rest of the EEA without further consent from the trademark owner⁴.

Key Takeaways

• Parallel imports involve genuine products imported without the local intellectual property owner's consent, exploiting international price differences.
• Their legality depends on a country's "exhaustion of rights" doctrine (national, regional, or international).
• Parallel imports can foster competition and potentially lower consumer prices in the importing market.
• Manufacturers may oppose parallel imports to protect their distribution channels and pricing strategies.
• The issue of parallel imports often sparks debate between intellectual property rights holders and proponents of free trade and consumer welfare.

Interpreting Parallel Imports

The existence of parallel imports often indicates significant international price disparities for a product. These disparities can arise due to various factors, including differences in taxation, regulatory environments, local market demand, production costs, and marketing strategies. For consumers, parallel imports can be beneficial, offering access to legitimate products at lower prices. For businesses, the presence of parallel imports can force a re-evaluation of international pricing and supply chain management strategies.

The legal interpretation of parallel imports largely revolves around the "exhaustion doctrine" concerning intellectual property rights like copyright and patent. Under a "national exhaustion" regime, the intellectual property rights for a product are exhausted only after its first sale within that specific country. This allows intellectual property owners to prevent parallel imports. Conversely, "international exhaustion" means that once a product is sold anywhere in the world by the intellectual property owner, their rights over that specific item are exhausted globally, generally allowing parallel imports.

Hypothetical Example

Consider a hypothetical scenario involving a popular smartphone model, "TechPhone X," manufactured by "Global Tech Corp."

1. Price Disparity: Global Tech Corp. sells TechPhone X in Country A for ( $800 ) and in Country B for ( $500 ). The difference might be due to Country A having higher average incomes and a strong brand loyalty, allowing for a premium price, while Country B has intense competition and lower purchasing power.
2. Parallel Importer Action: An independent retailer, "Discount Gadgets," in Country A identifies this price difference. Discount Gadgets purchases a large quantity of TechPhone X units directly from authorized distributors or retailers in Country B at ( $500 ) per unit.
3. Importation: Discount Gadgets arranges for the shipment of these genuine TechPhone X units to Country A. They incur costs for shipping, customs duties, and local marketing. Let's assume these costs amount to ( $50 ) per unit.
4. Resale: Discount Gadgets then sells TechPhone X in Country A for ( $650 ).
5. Outcome:
   • Discount Gadgets' Profit: Discount Gadgets makes a profit of ( $650 - ($500 + $50) = $100 ) per unit.
   • Consumer Benefit: Consumers in Country A can now purchase TechPhone X for ( $650 ), significantly less than the ( $800 ) charged by Global Tech Corp.'s official channels, improving consumer surplus.
   • Global Tech Corp.'s Challenge: Global Tech Corp. faces competition from its own product sold at a lower price, potentially impacting its sales and profitability in Country A. The legality of Discount Gadgets' actions in Country A depends on Country A's stance on international exhaustion of intellectual property rights.

This example illustrates how parallel imports can leverage price discrepancies across different global markets, benefiting retailers and consumers but posing challenges for intellectual property owners and their pricing strategies.

Practical Applications

Parallel imports manifest across a wide array of industries and have significant implications for market dynamics and competition.

• Pharmaceuticals: This sector frequently sees parallel imports due to vast price differences for identical drugs across countries, often driven by government-negotiated prices or differing patent expiration timelines. Parallel importing of pharmaceuticals aims to reduce healthcare costs in high-price markets. The World Health Organization (WHO) highlights the role of parallel imports as a flexibility mechanism under the TRIPS Agreement to promote access to medicines³.
• Luxury Goods: High-end brands often employ strict geographical pricing strategies, making their products significantly more expensive in certain regions. Parallel importers capitalize on this by sourcing goods from markets where they are cheaper and selling them at a discount in premium markets.
• Electronics and Software: Price variations for electronics, such as cameras, gaming consoles, or software licenses, can lead to parallel imports, especially for products with a global demand but localized pricing.
• Automotive Parts: Original Equipment Manufacturer (OEM) parts can be sourced from countries where they are sold at lower prices and then imported for resale, affecting the official dealership networks and pricing for auto repairs.
• Books and Media: As seen in the Kirtsaeng case, textbooks and other copyrighted materials are also subject to parallel imports, particularly when international editions are priced significantly lower than those in developed markets.

The application of parallel imports impacts trade flows, intellectual property strategies, and market efficiency worldwide. An academic paper on the economic effects of parallel imports highlights their diverse treatment across countries, noting that European Union competition law strongly prohibits restrictions on parallel imports to promote free trade and market integration².

Limitations and Criticisms

While parallel imports can offer benefits such as lower consumer prices and increased market competition, they also face several limitations and criticisms, primarily from intellectual property owners and authorized distributors.

One major concern is the potential for brand dilution and damage to a brand's exclusive image or quality perception. When goods are sold through unauthorized channels, the brand owner loses control over pricing, marketing, and the customer experience, which can undermine carefully crafted brand strategies.

Manufacturers also argue that parallel imports discourage innovation and investment in research and development (R&D). They contend that if they cannot differentiate prices across markets, their ability to recoup R&D costs in higher-priced, more profitable markets is diminished, potentially reducing incentives to create new products. This perspective suggests that robust intellectual property protection, including the ability to control distribution across territories, is essential for fostering innovation.

Another criticism centers on warranty and after-sales service. Products purchased through parallel import channels may not carry the manufacturer's official warranty or may not be eligible for service in the importing country, leading to consumer dissatisfaction. This can also create complexities for authorized service centers.

Furthermore, parallel imports can complicate regulatory compliance. For example, certain products (like pharmaceuticals or electronics) might have specific national safety standards, labeling requirements, or certifications. Parallel imported goods might not fully comply with these local regulations, potentially posing risks to consumers or legal challenges for the importer.

Finally, the practice can lead to "free-riding" on the authorized distributor's marketing and sales efforts. Parallel importers benefit from the brand awareness and demand created by the authorized network without incurring similar marketing expenses, which can strain the relationships between manufacturers and their official partners. The OECD has discussed the complex welfare effects of bans on parallel imports, noting that theoretical economic reasoning alone cannot fully determine these effects and that a complete assessment must consider various factors, including the impact on intellectual property rights holders and consumer welfare¹.

Parallel Imports vs. Gray Market Goods

The terms "parallel imports" and "gray market goods" are often used interchangeably, and indeed, parallel imports are a specific type of gray market transaction. However, it's important to understand the broader context of gray market goods to clarify their relationship.

In essence, all parallel imports are gray market goods, but not all gray market goods are parallel imports. A product sold in the gray market could have been diverted within the same country (e.g., a wholesaler selling to an unauthorized retailer) rather than being imported from abroad. The defining characteristic of parallel imports is the cross-border nature of the unauthorized trade of legitimate products.

FAQs

Are parallel imports legal?

The legality of parallel imports varies significantly by country and depends on the specific intellectual property rights involved (e.g., patent, trademark, copyright) and the country's "exhaustion of rights" doctrine. Some countries allow parallel imports under a principle of international exhaustion, while others restrict them under national or regional exhaustion doctrines.

Why do parallel imports exist?

Parallel imports exist primarily because manufacturers often sell the same genuine products at different prices in different countries, engaging in price discrimination to maximize profits in each market. These price differences create profitable opportunities for independent traders to buy goods in low-price markets and resell them in high-price markets.

Do parallel imports hurt consumers?

Generally, parallel imports are seen as beneficial for consumers because they increase competition and can lead to lower prices for legitimate products. However, consumers might face issues with product warranties, after-sales service, or localized features/packaging if purchasing parallel imported goods, as these may not align with what is offered by official distributors in their country.

What is the difference between parallel imports and counterfeit goods?

A crucial distinction is that parallel imports are genuine products, manufactured by or with the consent of the original intellectual property owner. They are legitimate products that simply bypass authorized distribution channels. Counterfeit goods, on the other hand, are fake or unauthorized reproductions that infringe on intellectual property rights, often designed to deceive consumers into believing they are genuine.