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Intellectual Property

Grey Markets: The Enigma in IPR Law

Anusha Maurya

Grey market goods in general parlance refer to goods sold out of parallel imports or arbitrage. These goods are diverted from an authorized distribution channel to an unauthorized seller or outside the lawfully permitted distribution channel. Due to the Covid-19 pandemic, transactions in these markets nowadays are on an upsurge. Unauthorized mode of acquiring and selling these grey goods compels us to question the legality of these goods and allied remedies which a consumer can claim in case a defect arises in such goods.

This article concisely lays down the questions beleaguering the legality of the grey market goods and highlights the conflict of these goods with the collective rights of the IPR holders and the consumers involved in transactions of such grey goods. This article will also provide an insight into the current legal position of the grey market in Indian legal system and the contradicting opinions of the Indian courts regarding the validity of these goods in Indian local markets.

How do Grey Markets Work?

Grey market is often confused with the term ‘black market,’ but there lies a vast difference between the two terminologies. The Black market refers to the illegal trading of goods within a country. Black market goods generally are counterfeit, whereas, in Grey market trading, authenticated goods are lawfully purchased in one nation and then lawfully imported in another nation where they are then sold without the authorization of the IPR holder.

Goods sold in grey markets often compete with the authorised goods channel, and due to their low prices, grey goods are ordinarily preferred by the consumers. In a nation like India, where people are least concerned about warranty and guarantee of the goods, these markets have outshined the legally authorised channels and posed a great threat to the distributors and intellectual property rights (“IPR”) holders. Some jurisdictions across the world have declared such markets as illegal. However, some support such sale on the ground of being beneficial for the consumers and for enhancing the competitiveness in the market, even though, it is unequivocal that grey markets jeopardize the interest of IPR holders which is the most controversial thing about these markets and thus, makes this topic interesting from a legal perspective.

For better understanding, let’s take the example of one of the biggest grey markets in Asia, i.e. of the grey market of iPhone in China. In 2014, when the tech giant, Apple Inc. came out with the iPhone 6s, it was set to launch in ten nations, excluding the Chinese Mainland. The benefit of this exclusion was taken by the grey market vendors who bought these iPhone handsets at USD 2,500 from Hong Kong and sold them in the grey market of Chinese mainland at USD 5,000, which gave them a whopping profit of USD 2,500 per handset. As a result, a huge chance of profitability was lost by the tech giant in the Chinese market, post the official launch.

The Legality of Grey Markets Across the World

The legality of grey market goods is a subjective issue and differs across jurisdictions. Many nations find these parallel goods legal, whereas some nations criminalize the same for being in contravention with the interest of IPR holders and their other domestic laws. 

The Supreme Court (“SC”) of the UK, in its 2017 judgment of R v. M, where the defendants  were indicted for, inter alia, offences of unauthorised use of trademarks, contrary to section 92(1)(b) and (c) of the Trademarks Act, 1994. The allegations surrounding the issue were that the defendants were engaged in the bulk importation and subsequent sale of branded goods having authentic trademarks without the consent of the trademark owner. The question involved in this case was whether the defendants committed a criminal offence by an unauthorised use of trademark? In answering this moot question, the biggest hurdle before the court pertained to the imposition of liability on someone when the person has not been granted trademark rights in the first place.

Hon’ble Court, after considering the various interpretations of the provision, clarified the dubiousness surrounding grey markets in the UK and found grey markets to be in contravention with §92(1) of the 1994 Act. In this case, the main contention raised by the claimant was that, since §92 of the Act finds applicability only on ‘true counterfeits’ and grey goods are ‘authorised goods.’ Therefore, the grey market cannot be called to be in contravention of §92 of the Act. But the Court interpreted the legal provisions, keeping in mind the interest of the IPR holders and the intention of the drafters of the legislation, and thus, held grey markets to be illegal.

In the USA, dealing with grey market goods is perfectly legal, but it is subject to Title 19, §133.23 of the US Federal Code. Tersely speaking, this section penalizes only ‘true counterfeit’ of the goods and does not impose per se restriction on imports of genuine goods, if two conditions are fulfilled by the importers of grey goods. These conditions include

  1. Trademark must be registered with U.S. Customs and Border Protection through the Intellectual Property Rights e-Recordation systems; and
  2. U.S. trademark and the foreign trademark must be owned by two different entities (persons or companies).

The SC of the US, in a recent judgment of Impression Product Inc. v. Lexmark International Inc. (2017), upheld the legality of the grey market goods. In this case, the SC, relying on the Doctrine of Exhaustion (or commonly called ‘First Sale Doctrine’), ruled that once the item is sold, it’s no longer within the control of the patentee and becomes the exclusive and private property of the purchaser, who can use that purchased item in whatsoever manner the purchaser wants. Under US laws, once the patentee exhausts exclusive rights over the sold goods, it is deemed by law that the innovation has been awarded, and there exists no reason to continue the exclusive control of the patentee over those goods.

By this landmark decision, SC has narrowed down the scope of rights available to an IPR holder and made grey goods ‘private and individual property’ of the buyer (grey trader), which can be alienated in whatsoever manner desired by the owner of the goods, thereby legalizing grey market trading across the USA.

Similarly, Russia  has also decided to legalize the grey market for a certain class of goods, which will be subjected to certain restrictions imposed by the Federal Assembly. Such changes will be included through an amendment in the domestic laws, which will be enforced from 1 January 2021. Likewise, Japan, China, Singapore and many Middle East Nations  (except few nations) are some of the jurisdictions which permit gray market operations.

The Legality of Grey Markets in India

India has always been a stalwart of international exhaustion. Parallel imports have been permitted under §30(3) of Indian Trade Marks Act, 1999 and §107A (b) of Indian Patents Act, 1970, but nebulousness remains under §14(a)(ii) of the Copyright Act, 1957. The Delhi High Court (“HC”) in Penguin Books Ltd. v. M/S India Book Distributors (1984), while interpreting §14(a)(ii) of the Copyright Act, held that by selling Penguin publication books in India by importing authorised copy of books from the USA without the authorization of the IPR holder, the defendant has caused secondary infringement of the IPR of the plaintiff. Later, this section was amended in 1994, which validated parallel imports in literary, dramatic, and musical works other than computer programmes. Post the 1994 amendment, HCs were called upon various times to analyse the legality of the parallel imports, but interestingly, there is no static clarity to date concerning parallel imports under Copyright Law.

With regard to the Trademarks Act, 1999, the validity of §30(3) was contested before Delhi HC in Kapil Wadhwa & Ors. v. Samsung Electronics Co. Ltd. & Anr. (2012), where the Court acknowledged the fact that India propagates the idea of international exhaustion of IPR and therefore, set aside the decision of a single judge bench, upholding the legality of parallel imports. Simultaneously, to save the interest of the consumers, the Court ordered appellants to display in their showrooms, a disclaimer that the Samsung products sold by defendants are imported into India and Samsung (Korea) does not warrant the quality of the goods nor provides any after-sales service for the goods. This order was found unjust to the defendants. Hence, an appeal was filed in the SC of India and the case currently is sub judice.

This judgment, in essence, recognized the validity of §30(3) of the Trademarks Act and permitted parallel imports carried on by the defendants with certain conditions, but still, the legal question involving parallel imports stood unsettled within Indian boundaries.

Similarly, at present, there is considerable ambiguity pertaining to the interpretation of §107A(b) of the Indian Patents Act, 1970. Therefore, more or less, the fate of parallel imports made under Indian intellectual property law regime till date remains ambiguous & vacillating with no concrete law concerning these grey market goods, which makes it almost impossible to ascertain the legality of these grey market goods. 

Conclusion

Various jurisdictions around the world have set different criteria concerning grey markets and opted different means to regulate such alternate markets. However, in India, the situation concerning the legality of the grey goods is still bleak and needs to be clarified by the Indian Courts. Law concerning parallel imports and IPR in India is still premature and developing. There is no consensus amid the interpreting bodies due to the inherent ambiguity in the provisions relating to parallel imports.

Grey market on the very outset might look tempting to the consumers, as all the grey goods are generally authenticated products with lower prices. Still, deep down, it comes with various legal repercussions like a buyer of grey goods cannot move the consumer court for claiming any defect in the goods and neither can the consumer claim any warranty or guarantee of the product since the legality of goods is still not established in India. The grey market discourages IPR holders and authenticated distributors as the benefit of arbitrage is surreptitiously derived by these unauthorized sellers rather than the people who deserve it. Along with the short-term loss of profitability, other long-term adverse impacts also exist, like loss of consumer credibility in the product due to poor service by these unauthorized sellers or refusal of the wholesome benefit of the product purchase due to sale being an unauthorized sale. Thus, in my opinion, for increasing confidence in the market and for saving the rights of the IPR holders, it is necessary that proper protection is offered, provided that such benefits to the manufacturer are subject to the public policy.

The author is a student of Dr. Ram Manohar Lohiya National Law University, Lucknow.

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