International Trademark
Exhaustion Applies if Foreign and Local Trademark Holders are Deemed Identical

　　Two rulings from the Supreme Court and the Intellectual Property Court (“IP Court”) rendered in January and April of 2020 respectively, collectively constitute a milestone for the way in which Taiwan adjudicates cases involving parallel importation and trademark exhaustion.

　　The statutory provision governing trademark exhaustion is stipulated in Article 36(2) of the Trademark Act which reads “[W]here goods have been put on the domestic or foreign market under a registered trademark by the proprietor or with his consent, the proprietor is not entitled to claim trademark rights on such goods […]” As a policy choice, Taiwan clearly adopts the doctrine of international exhaustion, a doctrine which leans more towards the public interest than the exclusivity of the trademark owner. Therefore, importation into Taiwan of a genuine product bearing an existing trademark in Taiwan does not infringe the trademark right of the holder in Taiwan if circulation of the trademarked goods is permitted by the trademark owner. In practice, Article 36(2) of the Trademark Act in its literal meaning only applies to situations where a trademark belongs to the same proprietor domestically and abroad at the time the first sale of goods happens anywhere in the world. However, if domestic and foreign right holders for the same trademark are different, it was not clear whether it would be appropriate applying Article 36(2), namely international exhaustion, to justify the parallel importation.

　　The “PHLIIP B” word mark associated with hair beauty and skin care products was registered both in Taiwan and in the United States but owned by different entities. The Taiwanese trademark holder was the exclusive sales agent who acquired an exclusive license from the American brand owner. At some point in time, another company was found to have imported genuine PHILIP B products and sold them online without having obtained prior consent from the Taiwanese trademark holder. In response, the Taiwanese trademark holder filed both the criminal complaint which served as the basis for the final ruling and the infringement action against the parallel importer based on the Trademark Act. Before 2020, the case had gone through both the trial and appellate levels (first and second instances) for the civil action and through the trial level (first instance) for criminal action, respectively. Up to then both civil and criminal courts uniformly ruled in favor of the Taiwanese trademark holder with the rationale that international trademark exhaustion did not apply in this case because Article 36(2) of the Trademark Act applies only when the domestic and foreign trademark proprietors are the same at the time of the first sale. When the first transaction of the trademarked products is completed domestically or abroad, the trademark owner or its licensee has obtained compensation or consideration from the transaction and therefore any subsequent retail or resale of the products will be deemed to have trademark owner’s implied license and therefore do not infringe upon the trademark right. As such the trademark right has been exhausted on its first sale of the trademarked products. Both courts reasoned that in this case, since the same trademark was owned by different entities in different countries, buying from the U.S. brand owner did not exhaust the Taiwanese trademark right but rather exhausted the U.S. trademark right only. For the right holder in Taiwan, there was no “first sale” as the right holder did not consent to the importation and circulation of the genuine products in the domestic marketplace, nor was any request for consent even made. Therefore, it was ruled that the importer had infringed the PHLIIP B trademark right in Taiwan by importing and selling products bearing the PHLIIP B mark.

　　In January of 2020, the Supreme Court made a final decision with respect to the civil action and reversed the lower court’s decision, instead ruling in favor of the parallel importer. The Supreme Court opined that in a scenario in which a trademark right owner licenses another to register the same trademark in a different jurisdiction, although trademark rights are territorial and different entities each possess their respective trademark rights, the exclusive right in nature should still be originated from the original owner of right. In other words, as long as there is a license or other forms of lawful relations between trademark holders from different countries, the consequences of trademark right exhaustion for the original mark should be extended to the same trademark in Taiwan. In this case, the local trademark holder acquired the license from the U.S. trademark registrant and registered the same mark in Taiwan with the U.S. registrant’s consent. The Supreme Court was of the opinion that the lower court did not put that fact into consideration, and therefore erred in its interpretation of Article 36(2) of the Trademark Act that international exhaustion only applies to scenarios where domestic and foreign trademark holders are the same.

　　In April, 2020, following the Supreme Court’s opinion, the IP Court in the second instance made a decision over the criminal action which reversed the trial court decision, this time favoring the importer, holding that the trademark PHILIP B was not infringed upon because the plaintiff (right holder) cannot claim a trademark right against a parallel importer. Therefore, the defendants were acquitted.

　　The IP Court reached its conclusion by considering precepts from many legal theories as well as legal precedent to build up its analytical foundation. The first theory examined was the “exhaustion doctrine,” which is also known as the “first sale doctrine.” Under this doctrine, when a patented article is sold, the patent holder’s exclusive rights over the use or sale of that patented article has lapsed, meaning that parallel importation is a perfectly legal activity. Exhaustion Theory aims to remove undue barriers over the circulation of products in order to facilitate the public’s interest in the free transfer of goods. Meanwhile, the local consumers enjoy the economic benefits of having more competitive prices for the same product.

　　The other theory considered is known as the “trademark purpose doctrine” Like the exhaustion doctrine, parallel importation is legitimate under the trademark purpose doctrine. The trademark purpose doctrine emphasizes that the statutory purpose of a trademark is to protect the indication of the genuine source of a particular good, as well as to assure product quality. If there is no likelihood of confusion as to the legitimate source (single purpose theory) or if there is neither likelihood of confusion nor differences in the product quality (dual purposes theory), the law does not prohibit parallel importation. Furthermore, under this theory, parallel importation does not infringe against the locally registered trademark when (1) the foreign brand owner and the local trademark holder who enforces trademark right are of the same identity, or if not identical but are bound commercially or contractually affiliated (such as license); or when (2) genuine products entering domestic market it does not compromise the local trademark’s essential function to indicate the source of origin, neither does it damage the quality assurance function of a trademark by misleading local consumers as to the quality of product with the given marks.

　　Moreover, in its April ruling, the IP Court cited the Supreme Court’s 1992 CHELSEA and 1993 CITGO decisions to further support its analysis. The Supreme Court in the CHELSEA decision ruled that parallel importation did not constitute infringement because the product with the same mark as a product sold by a local trademark licensee was similar in quality to the product sold by the local trademark licensee. The Court held that there was no likelihood of confusion, misleading, or fraud, also opining that local consumers would benefit from more competitive prices for the same product. When a trademark user’s business reputation and the consumers’ welfare are not damaged by parallel importation, parallel importation may actually prevent a domestic trademark user’s monopoly in the marketplace, something which does not go against the trademark law system. In CITGO, the court further stressed that an imported genuine product in its original packaging has not undergone additional processing, reformation or modification can be sold without causing harm to the trademark holder, its licensee or sub-licensee’s commercial reputation. Furthermore, parallel importation could even help prevent monopolization and encourage competitive pricing in the market.

　　The IP Court found that the two Supreme Court precedents were both based on the fact that the trademark right owner is the same home and abroad, which is contrary to the fact of the present case. In analyzing the April case, the IP Court slightly enlarged its interpretation for Article 36(2) of the Trademark Act, holding that the term “by the proprietor or with his consent” in that provision should be interpreted to “include the one that may be deemed identical to the trademark right holder.” As to the one “deemed identical,” the Court further opined that between the two entities there should be economic or legal relationship such as affiliated enterprises, or agencies, distributors, commissioned manufacturers and so on; and the trademark represents the same origin of goods.

　　Therefore the international exhaustion clause under an enlarged interpreted Article 36(2) shall apply when:

(1)the imported product bearing the same trademark and the trademark is labeled by (A) the local trademark holder, (B) one having consent from, or having commercial or legal relationship with the local rights holder, and the trademark indicating the same product origin; and

(2)the imported product circulated in both the foreign and domestic markets is made by (A) the local trademark holder, (B) one having consent from, or having commercial or legal relationship with the local right holder, and the trademark indicating the same product origin.

　　For the first part of the test, the imported hair beauty products were lawfully labeled with “PHILIP B” marks by the U.S. brand owner Philip B. For the second part of the test, the imported hair beauty products were sold and circulated in the U.S. by Philip B as well. The Taiwanese trademark holder was commercially related to Philip B because the company was the exclusive sales agent in Taiwan. Furthermore, the local rights holder imported and sold the same Philip B products without producing or promoting any of other series of its own. In its advertisement campaigns, the Taiwanese trademark holder constantly touted itself as the sole sales agent for Philip B in Taiwan and obviously did not establish an independent reputation of its own. The IP Court thus determined that the U.S. company Philip B and the Taiwanese trademark holder were deemed identical. As a result, the first sale in the U.S. exhausted the exclusive trademark right in Taiwan for any subsequent domestic sale of the same imported product. Parallel import of Philip B products did not constitute an infringement; the defendants are thus not guilty of violation of the Trademark Act. 

　　The enlarged application of international exhaustion will certainly impact exclusive sales agents and distributors in Taiwan even if they have acquired a local trademark right from the original brand owner.   

for any questions relating to this topic, please contact us at cjchen@tsailee.com.tw