The Permissible and the Forbidden in the Parallel Import – Following the Supreme Court Judgment in the TOMMY HILFIGER Case

 Roy Kobuvsky is a Partner at Shibolet & Co. law firm specializes in commercial litigation and distribution law.

In general, the term parallel import describes a situation of a local market in which there is an exclusive importer (who is also called the “authorized importer”) of foreign products, as well as other entities also importing the same products into the same market, however, unlike the exclusive importer, such entities have not received from the foreign manufacturer the right to import its products, and they purchase them from indirect sources (for example, via wholesalers to whom the manufacturer sells abroad).

Although it is often claimed that there are barriers preventing entry of parallel imports to the market in Israel, in practice, parallel import is a relatively widespread phenomenon in Israel, and parallel import can be seen in Israel in a number of sectors (for example, electronics and electrical goods, toiletries, cosmetics, clothing, vehicles and spare parts for vehicles, music, medicines, and others).

In general, the activity of parallel importers differs from the activity of exclusive importers in a variety of aspects, including with regard to their import formation, distribution methods, issues of warranty and service, sales promotion and more. Rarely do parallel importers maintain service laboratories or support centers, and rarely do they invest in building the brand’s name and in advertising and sales promotion. All this and more allow parallel importers to offer their merchandise at lower prices, thus encouraging competition.

In light of this, over the years, a series of cases have been brought before the courts in which authorized importers have attempted to make use of legal measures to block parallel imports of merchandise to Israel. Most of these claims were rejected, with the courts consistently favoring the interests of free competition and the freedom of occupation, while relying on the doctrine of “exhaustion”, putting these aspects above conflicting interests such as the commercial expectation of the exclusive distributor. Attempts to block parallel import on the grounds that it infringe the registered trademark were also generally rejected, effectively determining that as long as the import and distribution are of original merchandise, the trademark owner does not have the ability to prevent either. In effect, these rulings reflected the liberal attitude adopted by the courts in Israel, which abstained from placing barriers on competing marketing channels, and which sought to prevent abuse of a monopoly created by the granting of exclusive distribution rights (even if this is to the detriment of the rights of the exclusive importer).

Several weeks ago, the Supreme Court was again required to address the question of parallel import and related issues, this time in the matter of CA 7629/12 Souisa et al. vs. TOMMY HILFIGER et al. (reported in Nevo on 16.11.2014), and for the first time criteria were set down on what is permitted and what is prohibited in the question of parallel import.

The case in question is one in which the TOMMY HILFIGER GROUP, the owners of the TOMMY and TOMMY HILFIGER trademarks, filed suit against a parallel importer who imported and sold clothing products of the company, among others, claiming that different aspects of his marketing activity in relation to the aforesaid products were made in violation of TOMMY HILFIGER’s rights, including infringement of trademarks, since the parallel importer presented its business in a manner that implied it was associated with and/or operating under the aegis of TOMMY HILFIGER (among others, through the display of the trademarks in the business sign and through the operation of a website under a domain name that included the trademark TOMMY, and more).

The Supreme Court reiterated that the starting point is that parallel import is lawful and permissible in principle, and that there are those who will say that it is in fact vital in light of the characteristics of the Israeli market. At the same time, the court further expounded that the issue of parallel import is a complex one and that against the aforesaid arguments stands the concern that the parallel importer will be a “Free rider” enjoying the benefit of others’ work (namely, investment by the registered trademark owner, market penetration costs and the provision of support services for the products) and thus reap the fruits of an investment not of his making.

In this context the court examined which actions are allowed for those operating in the parallel imports arena and, more specifically, whether there is advertising and marketing activity that could be considered to trespass onto the territory of the holder of the registered trademark or cause him unfair damage. It was subsequently ruled that the restrictions applicable to the activity of a parallel importer arise from three sources – the laws of trademarks, the commercial torts law and unjust enrichment.

On the trademark aspect, it was ruled that although the parallel import and sale of imported merchandise (which is original), are not considered infringements of the registered trademark, the parallel importer must prove that the use of the protected trademark for marketing purposes does not create the probability that a reasonable consumer might get the impression that the activity is one that enjoys the backing of the trademark owner, where examination of the means the parallel importer must take in this regard is dependent on circumstances. Thus, in the case of the sale of a vehicle (or any other product), in which the matter of the importer’s warranty (or service) is of great importance, the distributer will be required to emphasize prominently that it is not acting under the aegis of the manufacturer (the owner of the trademark), and spell out the significance of this (for example, who is responsible for servicing during the warranty period). This differs from the situation of a seller of cheap toys originating from parallel import, which are products that the consumer does not expect to buy necessarily from the trademark owner and where, in general, the matter of a warranty is less significant. Therefore, such sellers shall bear a lesser duty when it comes to clarifying that they are not acting under the aegis of the registered trademark owner.

On the aspect of unfair commercial practices, it was ruled that the prohibitions in law on unfair commercial practices (passing off, false representation, and unfairly impeding access to a business) also apply to the parallel importer, where the law is to be applied according to the characteristics of the parallel import. In this context it was clarified that where identical merchandise is distributed in the same market by two distributors in parallel (the authorized importer and the parallel importer), the link (as opposed to the aegis) between the parallel imported products and the owner of the mark is not misleading.

On the aspect of unjust enrichment, it was ruled that a cause of action could arise for the trademark owner or the authorized importer where the marketing efforts of the parallel importer take advantage of the marketing efforts and investments of the registered trademark owner. However, since the marketing of parallel import products is based on the reputation attached to the products, such phenomena is not sufficient to constitute unjust enrichment, and it is necessary to prove that the actions of the parallel importer contain “an additional element” (such as where the parallel import follows an advertising campaign intended to enable the “penetration” of a new brand into the Israeli market).

The court further ruled that the cause of trademark dilution (damage to the brand’s reputation) is not relevant in the context of parallel import. This is because products originating in parallel import are products that the trademark owner himself thought appropriate to mark and identify with the trademark and in so doing testified that they were deserving of the reputation it enjoyed. This reputation is closely attached to the product and from the moment of its sale, the manufacturer has exhausted its rights in them.

In view of the principles set out above, the Supreme Court ruled in the circumstances of the specific case, that despite the fact that the parallel import of TOMMY HILFIGER products does not involve a breach of trademark law, and is therefore permitted, a flaw was found in the fact that the appellants used for marketing purposes the composition of words “TOMMY HILFIGER,” and that by boasting this name they could have attracted buyers to their business, who came in the belief that this was the authorized importer – i.e. to potentially mislead with regard to aegis.

The Court further ruled that although the use made by entities selling authentic goods of the trademark proprietor, with a trademark under the domain name under which they operate, could constitute trademark infringement, in the current case, with respect to the domain name used by the parallel importer –, there is no infringement, as there is nothing in the name of the domain to mislead. On the contrary, the domain name indicates that TOMMY HILFIGER products can be bought on it at prices presented as being lower, a fortiori that the site does not enjoy the aegis of the trademark owner (which in general operates under a domain name that is identical to its trademark). Taking into consideration that TOMMY HILFIGER invests heavily in branding its products as a luxury brand, the fear of misleading the consumer that the foreign manufacturer sponsors the site is eroded (in marked contrast to the domain name, the use of which under the circumstances most certainly would have been deemed as a consumer misleading).

In light of all the above, the Court ruled, inter alia, that the parallel importer must make clear in its advertising that it is not operating under the aegis of TOMMY HILFIGER, and that it must state so with reasonable prominence in its publications, in an active and ongoing manner, and at reasonable frequency, either by way of a statement that it is operating as a parallel importer or otherwise. It was further ruled that the parallel importer should indicate the lack of aegis of the trademark owner in a prominent sign at the entrance of the business, as well as with reasonable prominence on the home page of the website of the business, and again on the “About us” page of the website.

In conclusion, it is still too early to predict how this ruling will be implemented in the field. However, it seems that it is already possible to state that the confidence that parallel importers felt in everything regarding their use of trademarks of foreign manufacturers will no longer be as before.