The Grey Market: The Legal Position in Black & White

What are parallel imports?

 

In simple terms, parallel imports (or grey market goods) are goods that are imported into and sold in a particular country, territory or market without the express permission of the brand owners in that country. For example, an oven that was intended to be sold in Country A but was imported into and sold in Country B by a third party without the brand owner’s express consent would be considered a parallel import. It is important to note that parallel imports are not counterfeit products as they ultimately originate from the same brand owner or its group of companies.

 

What are the impacts of parallel importation?

  • From a consumer’s perspective, it would mean that the prices for goods may be lower as a consequence of competition between parallel importers and local distributors. Further, consumers will also have access to more variants of a product, which may only be available in other countries or markets.
  • Despite the above positive impacts, consumers are taking a risk by purchasing parallel imported products as they may not comply with local standards, requirements or specifications. In some cases, the warranties for such goods may not be applicable locally.
  • The local distributors would be adversely impacted as they have to compete with parallel importers for sales, which is often on unequal footing as the importers are not bound by the distribution terms determined by the brand owner in the particular country.
  • The economic impact on the local distributors is further compounded as they have to bear the costs of advertising and marketing the products which the importers ride on to reap profits.
  • Notwithstanding that parallel imports ultimately contribute to the brand owners’ profits, it works as a double-edged sword against them as parallel imports may dilute their goodwill and reputation in terms of the loss of the brand’s exclusivity and the safety or other compatibility issues that may arise.

 

Are parallel imports permissible in Malaysia?

At the outset, it is worth mentioning that parallel imports do not necessarily transgress the brand owner’s rights under trademark law only but also any possible copyright, patent and industrial design rights it may have since much is dependent on the nature of the parallel imported products. That said, this article will only focus on the legality of parallel imports in light of Malaysian trademark laws given the dearth of precedents in the area of copyright, patent and industrial designs in this regard.

Notwithstanding that the new Trademarks Act 2019 (“TMA 2019”) has recently come into force, which replaces the Trade Marks Act 1976 (“TMA 1976”), neither Acts contain any express provisions pertaining to parallel imports. As such, it is necessary to rely on precedents decided under the TMA 1976 to construe the legal position on parallel imports.

As it stands, there are two conflicting lines of decisions by the courts. On the one hand, the courts – led by the Court of Appeal in Planete Enfants Sdn Bhd v Goh San Hwa and other appeals [2017] 1 MLJ 802 – have decided that parallel imports are not prohibited in Malaysia and that they do not infringe the registered mark. Over the years, parallel importers have sought refuge under Sections 40(1)(d) and (dd) of the TMA 1976 in legitimising their trade. Those provisions provide that parallel imports are permitted if the registered proprietor or user has:

  • legitimately applied the registered mark on the goods and such mark has not been subsequently obliterated (Section 40(1)(d)); or
  • expressly or impliedly consented to the use of the mark (section 40(1)(dd)).

In essence, when a brand owner manufactures and sells wholly or partly through subsidiary companies in different parts of the world products which bear the same trademark, the brand owner is deemed to have implicitly consented to the use of the registered mark on the parallel imported goods which have somehow found its way into Malaysia.

Conversely, the courts have relied on the notion of “exclusive rights” under Section 35(1) of the TMA 1976 in holding that only the registered proprietor has the exclusive right to use the trademark to the exclusion of all other parties including parallel importers. The stance that parallel imports are prohibited has been reaffirmed in the recent High Court decision of PT Garudafood Putra Putri Jaya TBK [2019] 11 MLJ 396, though it must be stressed that the said decision must be read with caution as it mainly concerned an ex-parte application for a trade description order by the registered proprietor.

Despite the contrarian views, it is argued that Section 40(1) ought to take precedence over Section 35(1) given that the former specifically spells out the acts not constituting infringement. Further, the saving to Section 40(1) provides that it is not subject to any other provision in the former TMA, which includes Section 35(1). In view of above, it can be said that parallel imports are permissible in Malaysia provided that is falls under either exception in Section 40(1)(d) or (dd).

 

What is the position under the new TMA?

The corresponding provision to Section 40(1) of the TMA 1976 is contained in Section 55 of the TMA 2019. Interestingly, unlike what had been done with Section 40(1)(dd), the legislators have decided against incorporating the defence under Section 40(1)(d) of the TMA 1976 into the TMA 2019. Under Section 55(3)(c) of the TMA 2019, it is not an act of infringement if the use of the mark has been expressly or impliedly consented by registered proprietor or user. Although the notion of “exclusive rights” can still be found in Section 48(1) of the TMA 2019, it should likewise not override the application of Section 55(3)(c) given the saving contained therein. In the absence of any cases decided under the TMA 2019 on this issue, only time will tell whether the absence of the corresponding provision to Section 40(1)(d) in the TMA 2019 will change the legal position of parallel imports in Malaysia.

 

Conclusion

 While it does appear that the present legislative and judicial landscape seem to favour parallel importers in Malaysia, all is not lost for concerned brand owners as they may resort to other peripheral legislations that relate to industry-specific product labelling or safety requirements to put a stop to parallel importation. Examples of such legislation include the Control of Drugs and Cosmetics Regulations 1984, Trade Descriptions (Certification and Marking of Halal) Order 2011, and Consumer Protection (Certificate of Conformance and Conformity Mark of Safety Standards) Regulations 2010. Although these legislations may be unconventional approaches to address the issue of parallel importation, the courts have been persuaded by such arguments in deciding against the parallel importers.