Israel’s Supreme Court, which is the highest judicial authority in the country, has just issued (16th November 2014) a ground-breaking ruling on the question of parallel import in Israel.
To understand the context of the ruling, we will first provide a brief introduction to the “parallel import” topic.
“Parallel import” is a term used to describe the situation where a business which is NOT the official, authorized importer, imports genuine products into the country, and then sells them, in “competition” with the authorized importer. The parallel importer will offer these products at a lower price than the official importer, after purchasing them from a dealer in another country, where prices are lower.
Say, for instance, a particular brand of US jeans is imported into Israel, from the US, by the official importer, and then sold in Israel at $80 a pair. The parallel importer might purchase the same, genuine, jeans from a dealer in Poland, at a much lower cost than paid by the official importer, and then sell them in Israel at $50 a pair.
Clearly, the parallel importer is a constant source of irritation for the official importer, who is being under-cut. The official importer may also feel aggrieved that all of its investment in promoting and marketing the brand is now being exploited, for free, by the parallel importer.
The consumer, on the other hand, generally welcomes parallel import, as it facilitates the purchase of genuine, prestigious brands, at much lower costs.
In today’s “global village”, parallel import is extremely prevalent in developed markets.
The question arises – if the manufacturer of the goods has registered a trademark, can it then prevent parallel import by claiming that the parallel importer is using the trademark without the manufacturer’s permission, and is therefore infringing the mark? In other words, do the rights of the trademark owner extend as far as controlling all usage that is made of the registered mark, even in respect of genuine goods that were originally sold by the trademark owner?
One of the fundamental principles in this area is something called the “doctrine of exhaustion of rights”. Under this doctrine, it is held that the owner of a registered trademark “exhausts” its rights with the first sale of the goods.
If applied to the situation of parallel import, this would mean, going back to the example given above, that once the US manufacturer of the jeans has sold a container of these jeans, marked with the original, registered trademark, to its distributor in Poland, the manufacturer has exhausted its rights in relation to those specific items, provided the mark is not altered or removed. If the distributor in Poland then sells these jeans to a parallel importer in Israel, the trademark owner will not be able to sue the parallel importer in Israel for trademark infringement, as it can no longer control what is done with the original goods, after the first sale was made.
The legal systems in many countries grapple with the question of parallel import, and all take a somewhat different approach. In the EU, for example, parallel import is generally permitted where the goods were first sold anywhere in the EU. So a UK parallel importer could import the US jeans from Poland, and sell them in the UK. But parallel import is not permitted where the products were first sold anywhere outside the EU. This means that the same UK parallel importer would not be permitted to buy the jeans from a distributor in the US, who bought them from the manufacturer in the US.
So what was the legal position in Israel? For many years already, Israeli courts have held that parallel import, per se, is permitted, under the doctrine of exhaustion of rights. However, although this principle was established by the Supreme Court (whose rulings are binding precedent on all lower courts in Israel), and while the lower courts have given various rulings on the matter, over the course of time, a more detailed, in-depth analysis of the legal situation has not been undertaken by the Supreme Court. Until now.
The matter came before the Supreme Court in its capacity as the highest court of appeal in Israel, in the appeal of Suissa et al. v. Tommy Hilfiger Licensing USA, Inc. et al. The facts of the case, in a nutshell, are as follows. Suissa owns a business in Israel which at one time was called “The Tommy Hilfiger Importer’s Warehouse” (later, the words “Tommy Hilfiger” were removed from the name. This business parallel imported various genuine brands, including Tommy Hilfiger, and also made use of a domain name “www.tommy4less.co.il”. Its sales outlet featured the “Tommy Hilfiger” trademark, and also the colors that form part of the Tommy Hilfiger logo.
The manufacturer, Tommy Hilfiger, and its official importer in Israel, sued Suissa, alleging trademark infringement, trademark dilution, unjust enrichment, passing-off and various other grounds of action.
The Tel-Aviv district court ruled partially in favor of the plaintiff Tommy Hilfiger, holding that although parallel import, per se, remains permitted in Israel, the use made by Suissa of the trademark, and its colors, in its outlet, its marketing material and its domain name and website, exceed the bounds of what is acceptable.
On appeal, Israel’s supreme court has now partially overturned the district court’s ruling, and the balance has shifted back in favor of the parallel importer. In summary, the Supreme Court held that parallel import itself, per se, is permitted; that Suissa’s use of Tommy Hilfiger’s trademark, at its sales outlet and on its internet pages, is permitted; that Suissa’s use, at its sales outlet, of colors replicating those of the Tommy Hilfiger logo, is permitted; that the use of the domain name “www.tommy4less.co.il” is permitted, but that use of the specific name “The Tommy Hilfiger Importer’s Warehouse” is forbidden, on the grounds that this would mislead the consumer into thinking that Suissa is the official importer, and endorsed by Tommy Hilfiger.
The appeal itself was decided on the specific facts and circumstances of the case, which are perhaps less of interest here. Of more general interest are the principles which the Supreme Court established as binding precedent for all future cases of parallel import.
Parallel Import is Permitted – The existing principle, whereby parallel import in Israel is permitted, per se, was restated. The court noted that Israel is a small country, with insufficient internal competition between suppliers, and a heavy reliance on imports, so parallel import fulfills a necessary function.
Sale of Genuine Articles is Not Infringement – Under the exhaustion of rights doctrine, the sale of genuine products, marked with the genuine trademarks of the manufacturer, does not give rise to any claim of trademark infringement. The "genuine use" defense is not relevant here, since there is no cause of action for infringement, and thus no need to argue any defense.
Marketing under the Trademark – Where the parallel importer wishes to use the registered trademark in order to market the genuine products, for example, by using the trademark in a domain name, or in its website, or on signs at its sales outlet, or such like, such use will be permitted if it falls within the bounds of the "genuine use" defense. The court mentioned three main conditions for application of this defense: (i) use of the trademark is necessary in order to identify the products – the court found that this condition will always be met in the case of parallel import; (ii) use of the trademark does not extend beyond what is necessary for such identification purposes – again, the court found that marketing of genuine products under the genuine trademark will generally meet this condition; and (iii) the particular manner of use of the trademark, by the parallel importer, does not create the impression that the activity is endorsed by the manufacturer. This third condition is key. The court noted that each situation must be considered on its own merits. Particular weight would be given to the question of what is the reasonable expectation of the consumer, with respect to the specific product being imported, as to after sale service. For instance, for a product where the consumer would attach material importance to after sale service, such as a car, the danger of creating an impression of endorsement would be much higher. Conversely, for a toy, or a piece of clothing, the consumer would have little to no expectation of after sales service by the manufacturer, and so would be unlikely to view use of the trademark as being suggestive of endorsement by the manufacturer.
The court held that the above principles would apply also to use of a domain name featuring the registered trademark, and use of the trademark in the parallel importer's website.
No Dilution – Parallel import does not give rise to any cause of action under the "dilution" doctrine. It is impossible to conceive how the trademark could be diluted, when used on the genuine goods which the manufacturer itself marked with the trademark.
No Passing-Off – Nor does parallel import give rise to any cause of action under the tort of passing-off, unless the manner of use of the trademark by the parallel importer would confuse the public into thinking that the parallel importer is the authorized importer.
No Unjust Enrichment – The "unjust enrichment" cause of action is another civil tort, in some ways similar to the "unfair competition" tort of some other jurisdictions. However, the court ruled that sale and marketing of genuine products under the genuine trademark, by a parallel importer, would not give rise to a claim of unjust enrichment, unless aggravating circumstances exist. For example, if the official importer has just completed an extensive and expensive advertising campaign, and the parallel importer leverages its own activity on the coat-tails of that campaign, then this might be enough to give rise to a claim of unjust enrichment.
Application – In applying the above principles to the case under appeal, the Supreme Court ruled that the parallel importer is not permitted to use the name “The Tommy Hilfiger Importer’s Warehouse”, because that name would create an impression of endorsement by the manufacturer, and therefore not meet the third condition of the genuine use defense. That name would also give rise to a claim of passing-off.
However, use by the parallel importer, at its sales outlet and on its website, of the colors that form part of the Tommy Hilfiger logo, is permitted. The parallel importer is likewise not obliged to state, with every use of the trademark, that it is a parallel importer – it is enough that its sales outlet and home page contain one sign/banner attesting to this fact. The court noted that the various claims made by the manufacturer and the official importer, that the parallel importer's activity creates a "cheap" impression that is harmful to them and to the brand, actually weaken their claim, since the differences between the parallel importer's activities and those of the official importer would be very clear to the consumer, thereby lessening the danger of an impression of endorsement. For this reason, the court held that if the parallel importer had used a domain comprised solely of the registered trademark, such as "TommyHilfiger.co.il”, that would probably not have been permitted, but its use of “www.tommy4less.co.il” is a clear indication that it is not the manufacturer or its official importer, and therefore such use is to be permitted.
Conclusion – The Supreme Court provided welcome guidelines as to the scope of permitted use of a trademark registered to the manufacturer, by a parallel importer. Alongside a restatement of the existing principle by which parallel import is permitted in Israel, and genuine goods can always be sold when marked with the registered trademark of the manufacturer, the court nevertheless noted that the parallel importer does not have a free pass to conduct all of its marketing and advertising activity under the trademark. Such use must not be of a kind which would create the impression that the activity is endorsed by the manufacturer, or that the parallel importer is the official importer.
Reif & Reif specializes in intellectual property law, including representation in cases based on claims against parallel import. Please feel free to contact us if you would like to discuss this matter further.