Parallel Import in Russia6 May 2019
It has been a year since the Constitutional Court delivered Resolution No. 8-П dated February 13, 2018 On the Case Related to Constitutionality of Clause 4 of Article 1252, Article 1487, and clauses 1, 2, and 4 of Article 1515 of the Civil Code of Russia Due to the Complaint Filed by PAG LLC (hereinafter referred to as “Resolution No. 8-П”), which became ground-breaking in parallel import.
As a reminder, case No. А21-7328/2014 upon a claim filed by Sony Corp. (Japan) against PAG (Russia) for infringement of its exclusive rights to the SONY trade mark when importing goods to Russia was considered by all court instances. The claims of Sony Corp. to prohibit import, seize, destroy the goods and to charge a compensation were basically satisfied by courts. But PAG turned to the Constitutional Court asking whether the provisions of the articles of the Civil Code quoted above and applied to this case complied with the Constitution.
In Resolution No. 8-П, the Constitutional Court recognized the applied provisions of the Civil Code of Russia as constitutional and confirmed that, according to the regional principle of exhaustion of rights effective in the Eurasian Economic Union, parallel import is prohibited in Russia. In addition, the Constitutional Court explained how means of protection of the exclusive rights in parallel import should be applied.
The court stated that, in order to maintain the balance of interests between the parties, different penalties should apply to importers of original and counterfeit goods. In particular, the compensation for importing the original goods to be awarded to the right holder should be less than the same for importing the counterfeit goods. In addition, the Constitutional Court ruled out the possibility to destroy the original goods, except for inadequate quality of the imported goods or in order to ensure safety, life of the people and their health, protection of the environment and items of cultural value.
Besides, the Constitutional Court held that, since the requirement to act in good faith and not to abuse the rights as set forth by the Constitution concerns all parties, the courts may dismiss the right holder’s claim in full or in part if they find that the right holder acts in bad faith: i.e. parallel import may be prohibited if it poses a threat to life and health of the people, or to any other public interests, or if the products are unreasonably overpriced.
Relying upon Resolution No. 8-П, PAG filed with the first instance court a petition for review of the original decision based on new facts. Having reviewed the case, the court delivered a new decision: prohibited to import the consignment of goods declared by PAG and, referring to Resolution No. 8-П, seized and destroyed those goods. The court stated that Sony Corp. had produced evidence of the inadequate quality of the goods: expiration of their shelf life as well as absence in the files of the case of any evidence that the importer had observed the appropriate storage conditions of the goods. The court also satisfied the claim for compensation for infringement of the exclusive rights owned by Sony Corp., but, following the explanations of the Constitutional Court and taking into account the fact that previously PAG had no such infringements, decreased the compensation from 100,000 down to 10,000 Russian roubles. It should be noted that the court considered also PAG’s argument on the claimant’s bad faith, but stated that the fact of filing a claim to protect the rights itself could not be deemed as the right holder’s misbehaviour (further the courts provided similar arguments in response to the defendants’ arguments on the claimants’ bad faith not supported with any evidence). On February 6, 2019, the court of appeal confirmed that PAG infringed the exclusive rights held by Sony Corp. and charged 10,000 Russian roubles from the defendant as a compensation.
The explanations given in Resolution No. 8-П, specifically those relating to seizure and destruction of illegal goods and amount of the compensation awarded to the right holders, are embodied in the court practice on cases relating to parallel import.
After Resolution No. 8-П has been delivered, the courts, when considering a claim for seizure and destruction of illegal goods, resolve an issue whether there are any grounds to satisfy such claim: inadequate quality of imported goods, the need to ensure safety, people’s life and health protection, protection of the environment and items of cultural value. However, taking into account that the duty to prove the facts of the case is imposed on the party that refers to such facts in support of his/her/its claims, the fact that there is one or more above-mentioned grounds, which are pointed out by the Constitutional Court should be proved by the claimant claiming seizure and destruction of goods.
So, during new proceedings of case No. А40-98047/2016 upon a claim filed by Koninklijke Philips N.V. against ANK Trading House, the court of appeal imposed the burden of proving inadequate quality of the goods on the right holder and dismissed the claim for seizure and destruction of the disputed goods (PHILIPS diagnostic system). The court stated that the claimant had not proved that the quality of the goods was inadequate and at the same time had not denied its originality. The court also stated that the claimant’s argument that there was no regular maintenance could not evidence low quality of the equipment, since it had not been operated yet.
In another case No. А40-215750/14 on import of car spare parts, the claimants managed to convince the court that it was necessary to seize and destroy spare parts imported by the defendant. The claimants submitted an expert opinion, where an expert found that the disputed spare parts could not be safely used as intended. The expert stated that it was impossible to definitely conclude whether the spare parts had become unfit for use during their storage or had been unfit when imported, since the expert examination determined the condition of the spare parts only as at the time of the expert examination. The court of appeal upheld the decision of the court of first instance in that part which concerned seizing and destroying the goods as well as charging a compensation. It should be noted that the court did not decrease the compensation awarded by the court of first instance.
The Commercial Court of Moscow had a different opinion during proceedings on case No. А40-193572/2017 upon a claim filed by Diageo Ireland against Interbev. The court did not accept the claimant’s arguments on the inadequate quality of the disputed goods (beer) due to expiration of their shelf life during the period the case was considered, basing its position on the fact that the quality of the goods should have been checked at the time of declaring them by the defendant. As a result, the court dismissed the claim to seize and destroy the goods. However, the court of appeal disagreed with such conclusion and, referring to Resolution No. 8-П, stated that the goods, which shelf life had expired, could not be recognized as being of good quality and should be seized and destroyed to ensure safety, people’s life and health protection.
In some cases the courts do not impose the burden of proving the inadequate quality of the goods on the claimant.
Thus, the Commercial Court of Primorsky Region applied Resolution No. 8-П and considered the issue of quality of the disputed goods in case No. А51-10443/2018 on import of the spare parts in an interesting way. The court imposed the burden of proving that the disputed goods had been legally purchased from the right holder or with its consent on the defendant and stated that the goods imported by the defendant could not be truly deemed as being of good quality due to the absence of the information on the origin of those goods and the absence of the certificates confirming quality and safety of the goods, for which reason they could threaten life and health of the Russian consumer in case of their entry to the market, further sale and operation. Satisfying the claimant’s claims, the court concluded that it was necessary to destroy the disputed goods. The parties did not appeal against the decision.
In the dispute between Volkswagen Aktiengesellschaft and the spare parts supplier (TMR Import), the IP Court reversed the judicial acts of the inferior courts and remanded the case for new proceedings to the court of first instance, stating that, in order to correctly resolve the claim for seizure and destruction, the court should find whether the trade marks had been legally used on the goods and, if yes, whether there were grounds for seizure and destruction of the original goods as provided for by Resolution No. 8-П (Case No. А41-55568/2017). The Commercial Court of Moscow Region, having considered the case, satisfied the claimants’ claims for seizure and destruction of the goods, having deemed that the defendant had not proved the originality of the disputed goods, which had raised the court’s doubts, since the documents previously submitted by the defendant to the files of the case gave reason to believe the contrary.
Let us consider how the courts apply the explanations of the Constitutional Court, when satisfying the claim for charging a compensation for illegal use of the trade mark
In Resolution No. 8-П, the Constitutional Court of Russia stated that a compensation for import of the original goods should be less than that for import of the counterfeit goods, and the IP Court regularly points out that the inferior courts should take into account the explanations of the Constitutional Court, when determining the amount of compensation. It should be noted that, even before the Resolution No. 8-П had been delivered, the courts often decreased the compensation claimed by the claimants, which was primarily due to the fact that there were no accurate methods for its determination.
In some cases, when determining the compensation amount, the issue of allocating the burden of proof arises again. So, for example, in case No. А56-73772/16, the court of appeal, when checking compliance of the decision delivered by the court of first instance with the Resolution of the Constitutional Court No. 8-П as directed by the IP Court, did not find any grounds to decrease the compensation, explaining its position by the fact that the defendant had not proved that the trade mark had been legally used on the disputed goods. As at the date of this publication, the period for appealing against the resolution delivered by the court of appeal has not expired yet.
In the above-mentioned case No. А40-215750/14, the court of appeal did not decrease the compensation awarded by the court of first instance, stating that the conclusions of the court of first instance did not contradict Resolution No. 8-П, and the court lawfully satisfied the claim for charging the compensation requested by the claimants, taking into account the finding of the fact that the defendant had distributed the goods and there was no bad faith in the claimant’s actions.
In other cases, the courts, following the explanations of the Constitutional Court, decreased the compensation requested by the right holders.
So, for example, delivering the decision dated January 31, 2019 on case А41-55012/2018, the Commercial Court of Moscow Region referred to the fact that the compensation charged for import of the original goods could not be the same as the compensation for import of the sham products as well as to the fact that the defendant had committed the offence for the first time and it decreased the compensation from the double value of the goods, which had been already sold by the defendant, down to the one-time value. At the same time, the amount of the compensation awarded was calculated for each of two trade marks used on the goods.
In case No. А41-52309/2017, during the first round, the court decreased the compensation requested by the claimant ten times: from 500,000 down to 50,000 Russian roubles. The IP Rights Court remanded the case for new proceedings, stating that the courts had not taken into account the legal positions provided in Resolution No. 8-П. During new proceedings, the claimant specified its stated claims and decreased the claimed compensation down to 50,000 Russian roubles. However, the court of first instance decreased the compensation again, down to the minimum (10,000 Russian roubles).
Taking into account the trend to decreasing the claimed compensation (and further proportionately allocating the legal expenses between the parties), the right holders now often specify the asserted claims and ask the court themselves to set the minimum compensation — 10,000 Russian roubles (cases Nos. А52-4078/2017, А40-45121/2017).