Parallel Import to Russia: Legal Issues & Risks

Anna Ivanova, Attorney at BRACE Law Firm ©

August 31, 2023

Despite import substitution policies, the Russian Federation continues to depend significantly on imports under current conditions. Previously, to import goods into Russia for sale, the manufacturer's permission was required. For importing products without the right holder's permission, the importer could face multi-million ruble fines, and the imported goods could be destroyed.

However, after many foreign manufacturers refused to operate in Russia, the Government of the Russian Federation faced a choice: either endure a shortage of certain goods or authorize parallel import. [1]

Current legislation lacks a definition of the term "parallel import". At the same time, it is understood as the import of foreign goods without the right holder's permission. The import is called parallel because official sales through distributors occur alongside sales by independent importers.

In the context of the discussion on parallel import in Russia, the term "exhaustion of rights regime" may be applied. According to Article 1487 of the Civil Code of the Russian Federation (the "Civil Code"), the use of a trademark by other persons in relation to goods that were introduced into civil circulation in the Russian Federation directly by the right holder or with its consent does not constitute an infringement of the exclusive right to such trademark. Consequently, the principle of exhaustion of rights (first sale or introduction into circulation) means a limitation on the effect of the exclusive right to a trademark—i.e., the free circulation of goods — if they have already been legally introduced into civil circulation directly by the right holder or with its consent. The possibility of importing products regardless of the consent of the manufacturer or its official distributor (parallel import) largely depends on the type (regime) of exhaustion of rights established in the legal system of the state into which the products are imported — national, regional, or international.

National exhaustion of rights means that within the territory of a specific state, the exclusive right to a trademark placed by the right holder on a specific product, which is subject to legal protection in that state, is exhausted from the moment of the first introduction of the product into civil circulation directly by the right holder or with its consent within that state's territory.

Regional exhaustion of rights assumes the exhaustion by the right holder of the exclusive right to a trademark within the customs territory of several states. Under international exhaustion of rights, the exclusive right to a trademark is recognized as exhausted with respect to a specific product from the moment of its first introduction into civil circulation directly by the right holder or with its consent in any state. [2]

Thus, the term "parallel import" refers to goods produced and sold legally and subsequently to exported goods. Parallel import occurs when a genuine product of a specific trademark owner or its licensee, intended for sale in a specific country, is imported by a third party into a country for which it was not intended. [3]

This article examines the foundations of the legal regulation of parallel import in Russia.

Legal Regulation of Parallel Import in Russia

In accordance with the Treaty on the EAEU (Annex No. 26) and with the adoption and entry into force on January 1, 2018, of the new EAEU Customs Code, a regional principle of exhaustion of rights applies within the EAEU, whereas a national principle of exhaustion of rights applies in the Russian Federation (Article 1487 of the Civil Code). This assumes a ban on importing goods into Russia with trademarks placed on them without the right holders' permission. Under these conditions, a foreign right holder may unfairly use the exclusive right to a trademark and restrict the import of specific goods into the internal Eurasian market or implement a pricing policy involving price gouging in this market. To ensure uniformity in approaches to resolving conflicts between private and public interests in antimonopoly regulation and protection against unfair competition, and taking into account the clarifications of the Constitutional Court of the Russian Federation (Resolution No. 8-P dated February 13, 2018), it is necessary to use antimonopoly regulation mechanisms and civil law institutions to counter the abuse of rights in the interests of public interests in protecting competition, including state support for national commodity producers, in cases of bad faith behavior by foreign trademark holders, including their creation of a threat of monopoly in the commodity markets of the EAEU countries. [4]

At the same time, on March 29, 2022, the Russian Government authorized the import of certain products into the country without the manufacturer's consent. Specifically, Government Decree No. 506 dated March 29, 2022, On Goods (Groups of Goods) in Respect of Which Certain Provisions of the Civil Code of the Russian Federation on the Protection of Exclusive Rights to Results of Intellectual Activity Expressed in Such Goods and Means of Individualization with Which Such Goods are Marked Cannot be Applied (the "Government Decree No. 506") was adopted.

This document establishes that the Ministry of Industry and Trade of Russia, based on proposals from federal executive authorities, approves the list of goods (groups of goods) to which the provisions of Articles 1252, 1254, paragraph 5 of Article 1286.1, Articles 1301, 1311, 1406.1, subparagraph 1 of Article 1446, Articles 1472, 1515, and 1537 of the Civil Code do not apply, provided that such goods (groups of goods) were introduced into circulation outside the territory of Russia by right holders (patent holders) or with their consent. These articles regulate the protection of exclusive rights to various results of intellectual activity (works, trade secrets, inventions, utility models, etc.).

In addition to the aforementioned law, regarding parallel import, Part 3 was introduced into Article 18 of Federal Law No. 46-FZ dated March 8, 2022, On Amending Certain Legislative Acts of the Russian Federation by Federal Law No. 213-FZ dated June 28, 2022, On Amending Article 18 of the Federal Law on Amending Certain Legislative Acts of the Russian Federation. According to this provision, the use of results of intellectual activity expressed in goods (groups of goods) in respect of which certain provisions of the Civil Code on the protection of exclusive rights to results of intellectual activity expressed in such goods and means of individualization with which such goods are marked cannot be applied does not constitute an infringement of the exclusive right to results of intellectual activity or means of individualization.

Such a list of goods was approved by Ministry of Industry and Trade Order No. 1532 dated April 19, 2022, On Approval of the List of Goods (Groups of Goods) in Respect of Which the Provisions of Subparagraph 6 of Article 1359 and Article 1487 of the Civil Code of the Russian Federation do not Apply, Provided That Such Goods (Groups of Goods) were Introduced into Circulation Outside the Territory of the Russian Federation by Right Holders (Patent Holders) or with Their Consent (the "Ministry of Industry and Trade Order No. 1532").

This list of goods can be conventionally divided into three categories with the following examples provided on the official Sberbank.ru website in the SberBusiness section:

• The TN VED code is specified and brands are listed. For this category of goods, parallel import is permitted only for these brands. For example, for instant print photo film, TN VED code 3701 20 000 0 is specified, and brands FUJIFILM and KODAK are listed below it.
• The TN VED code is specified with the exclusion of certain brands. In this case, import into Russia is permitted for all products of the corresponding category except for the specified brands. For example, for the "skin care cosmetics" category of goods (code 3304), there is an exception for brands such as Christian Dior and Guerlain.
• The specification of only the TN VED code means that parallel import is permitted for all products without exception falling under the corresponding TN VED category. For example, all codes from Group 89 are specified without specific brands or exceptions. [5]

It is also important to note that this list has been subject to changes.

However, from November 4, 2023, the aforementioned list becomes ineffective, and a new List of goods (groups of goods) enters into force, approved by Ministry of Industry and Trade Order No. 2701 dated July 21, 2023 (the "Ministry of Industry and Trade Order No. 2701"), in respect of which the provisions of Articles 1252, 1254, paragraph 5 of Article 1286.1, Articles 1301, 1311, 1406.1, subparagraph 1 of Article 1446, Articles 1472, 1515, and 1537 of the Civil Code do not apply, provided that such goods (groups of goods) were introduced into circulation outside the territory of the Russian Federation by right holders (patent holders) or with their consent. In particular, the new list does not differ in structure from the previous one but now includes brands of certain batteries (e.g., Duracell and Panasonic), auto parts, and eyewear from brands Dolce & Gabbana, Hugo, and Christian Dior. It is also noted that several brands that decided to continue working in Russia have been excluded from this list. For example, Acuvue contact lenses.

It is important to note that the primary goal of introducing the parallel import mechanism in Russia is to prevent commodity shortages. As imported products are replaced by goods produced in Russia or in countries friendly to Russia, and as the situation with the supply of imported products stabilizes, there is reason to believe that the list of goods for parallel import will be reduced.

In addition to issues directly related to the import of goods into the territory of Russia under parallel import, disputes often arise in practice regarding the good-faith performance of contracts for goods whose supply is restricted. For example, in one arbitration case, the court deferred leasing payments for 9 months and extended the payment period by the duration of the deferral without accruing financial sanctions. Specifically, the court took into account the support by the sole founder of the lessor — an organization from an unfriendly country — for international sanctions in the form of suspending supplies and new projects in the Russian Federation, which constituted a de facto refusal to perform contractual obligations. Due to the termination of warranty service and the lack of spare parts, lessees cannot fully use the equipment or generate profit. In particular, the conclusion is made that "authorized parallel import does not mean the immediate establishment of logistics with foreign counterparties under sanctions conditions". [6]

Thus, the introduction of the parallel import mechanism impacts many sectors of the Russian economy.

The Problem of Applying the Condition "With the Right Holder's Consent" in Parallel Import

Goods supplied under parallel import have the same quality certificates and licenses and are officially declared at customs. Their import does not imply any specific features for the importer regarding the payment of customs duties or accounting for the goods.

At the same time, the importer may face increased interest in such a supply from the bank where its settlement account is opened. Since banks must monitor payments to counter money laundering (anti-money laundering), they may request explanations from the importer upon discovering a suspicious payment.

To prove the reality of the transaction, all available documents for the transaction may be presented. For example, the contract with the foreign supplier, the supplier's contract with the manufacturer or an extract from the contract, the supplier's certificate of state registration (certificate of incorporation), an extract from the trade register, and other documents. [7]

Some experts express the opinion that parallel import is closely linked to so-called "grey markets", meaning trade in goods that, although marked with genuine trademarks, are sold through unauthorized distribution channels. Unlike black markets, where counterfeit (or even stolen) goods are sold illegally, grey markets are usually considered legal since the goods in such markets (parallel import) are genuine brand-name products diverted from authorized channels. The existence of efficient global logistics networks and a thriving electronic business make grey markets and their parallel import very common throughout the world.

However, it is extremely important to distinguish the legal institution of parallel import from the supply of counterfeit products to Russia. Under parallel import, only original goods are supplied.

Furthermore, in addition to the aforementioned risks of banking problems, parallel import is often accompanied by issues with logistics, delivery times, warranty service, and product compatibility. The situation may be complicated by a projected significant decline in global trade volumes overall. Thus, according to economists at the World Trade Organization, import demand will decrease, and the contraction of global supply chains may intensify inflationary pressures. [8]

Often, parallel import causes problems for the right holder related to planning supply volumes, pricing in a specific territory, and, as a consequence, the loss of part of the income. For example, an importer may purchase an original product in some third country, import it into the territory of Russia, and sell it at a price lower than that established by the official distributor. This problem is gaining increasing relevance due to the growing number of offers for the sale of imported goods. [9]

Indeed, many experts note that prices for certain goods may decrease due to parallel import: many manufacturers set higher individual markups for Russia than for other countries (Turkey, India, PRC). If Russian importers buy goods there more cheaply, they can be sold at lower prices on the Russian market.

However, in addition to pricing policy, it is important to eliminate uncertainty among consumers regarding the source/quality of products and to protect the economic interests of trademark owners. Only if parallel imported products differ substantially from those sold directly can the trademark owner file a claim, including for counterfeiting and falsification.

Thus, the positive impact of parallel import is that it reduces prices and provides consumers with goods at lower prices. Parallel import does not allow trademark owners to exercise their exclusive right to partition markets and, therefore, effectively promotes free trade, provided the doctrine of exhaustion of rights is observed in a specific country. Its negative impact is that distribution mechanisms and the manufacturer's ability to control the quality of trademarked goods are limited. Parallel import is also often used as a tool for obtaining income through the use of the trademark owner's business reputation, which may lead to an infringement claim by the owner.

Furthermore, as noted in the literature, "a ban on parallel import does not promote the development of healthy competition in the market. It can also negatively affect the development of high-tech and innovative domestic industries and prevent small businesses from developing". [10]

Compliance with the rights of trademark owners is monitored by the antimonopoly service. For example, the Office of the Federal Antimonopoly Service for the Republic of Tatarstan discovered a violation of competition protection laws by a legal entity, manifested in the illegal use of trademarks — specifically, welding materials (electrodes) of the Monolith and Plasma brands — by placing them on the Internet and offering products at prices significantly lower than those established by the right holder. The supervisory authority noted that no confirmation that the organization had legally acquired the goods, including through parallel import, was presented in the case materials. As a result, the organization was held liable under Part 1 of Article 14.6 of the CAO RF for overcharging for products, goods, or services for which prices (tariffs, rates, etc.) are state-regulated. Such a violation entails an administrative fine of 5,000 rubles for citizens; 50,000 rubles or disqualification for up to three years for officials; and for legal entities, twice the amount of excess revenue received from the sale of the product (work, service) resulting from the illegal overcharging of state-regulated prices (tariffs, rates, etc.) for the entire period during which the offense was committed, but not more than 1 year. [11]

One can also cite a case in which the Constitutional Court of the Russian Federation provided corresponding comments regarding the legality of purchasing original goods and the resulting infringement of exclusive trademark rights. Specifically, an organization entered into a state contract to supply a batch of special SONY paper for ultrasound machines to a medical facility. The product was purchased from a Polish company. However, during customs clearance, the product was seized by the Arbitration Court of the Kaliningrad Region, which granted a claim by the trademark right holder, Sony Corporation, for the protection of exclusive rights (Case No. A21-7328/2014). However, the Constitutional Court essentially confirmed the legality of parallel import and noted the following in its resolution: "it is not intended to apply the same level (severity of consequences) of civil liability measures for the import into the territory of the Russian Federation of a batch of goods on which a trademark was placed by the right holder or with its consent without the right holder's permission as for the import of counterfeit goods (on which the trademark was placed by someone other than the right holder or without its consent), unless the circumstances of the specific case entail losses for the right holder comparable to the losses from introducing counterfeit goods into circulation; goods on which the trademark was placed by the right holder itself or with its consent, imported into the territory of the Russian Federation without the right holder's consent, may be seized from circulation and destroyed as a consequence of infringing the exclusive right to a trademark only in the event of their improper quality and (or) to ensure safety, protect human life and health, and protect nature and cultural values." [12]

Another remarkable decision is a claim filed by ROI VISUAL Co., Ltd against a toy retailer, alleging infringement of its rights to trademarks and works, including the "Robocar Poli" toy. The court established that the fact of infringement of the plaintiff's rights to the trademark and works of fine art through the sale of counterfeit goods was confirmed by the totality of evidence presented in the case materials, including a sales receipt dated June 10, 2021, containing the seller's name and INN, a disk with video footage of the purchase, and the goods themselves. Thus, in such cases, purchases of counterfeit goods with documentation of the facts are actively used as evidence. [13]

One also cannot ignore the fact that courts actively oppose the abuse of rights by bad-faith companies in cases where it is revealed that the infringement of exclusive trademark rights was committed prior to the implementation of the parallel import legal framework under Government Decree No. 506. [14]

Consequently, each specific case of importing goods may be evaluated by the court, FAS Russia, and its territorial bodies individually, depending on the actual confirmation of the legality of the import and the application of the parallel import mechanism. At the same time, parallel import does not permit the "pardon" of previously committed offenses in the sphere of protecting the rights of trademark holders and other intellectual property objects, nor does it imply the possibility of importing counterfeit products. It is also equally important to track changes to the list of goods subject to parallel import to avoid liability for importing them into Russia if they are excluded from the list.

Another sign of unhealthy competition in parallel import is that to import original goods under sanctions into Russia, existing Russian companies are forced to turn to so-called "trading houses" located in other states that purchase original products from the supplier — the trademark owner.

Next, we examine the main obstacles that may arise in the fight against parallel import.

Methods of Combating Parallel Import: How to Fight Parallel Import?

One method of opposing parallel import involved a situation where a Chinese company expressed disagreement with the adoption of Government Decree No. 506, arguing that its norms violated the provisions of the Constitution of the Russian Federation establishing Russia as a state governed by the rule of law, prohibited the total cancellation of the rights of some persons in favor of others, and required that rights and freedoms be restricted only by federal law. The applicant also stated that the contested Government Decree No. 506 violated existing rules for delegating legislative powers to state authorities whose primary competence does not include amending or supplementing laws, as well as provisions of several laws prohibiting the Russian Government from adopting acts that contradict federal laws. However, these arguments were not accepted by the Intellectual Property Court. [15]

Another means of combating parallel import is the use of the Customs Registry of Intellectual Property Objects (TROIS). According to Part 3 of Article 334 of Federal Law No. 289-FZ dated August 3, 2018, On Customs Regulation in the Russian Federation and on Amending Certain Legislative Acts of the Russian Federation, objects of copyright and related rights, trademarks (service marks), and appellations of origin and geographical indications are included in TROIS based on a decision by FAS Russia.

In accordance with the Administrative Regulations of the Federal Customs Service, approved by FCS Order No. 131 dated January 28, 2019, an application to include an intellectual property object in the Registry is filed on behalf of a right holder. If an organization not listed in TROIS imports the goods, customs sends an inquiry and detains the goods for 10 days from the date the information is sent to the owner. If necessary, a request can be made to increase this period by another 10 days. It is during these 20 days that the right holder can apply for interim measures to detain the goods at customs. [16]

Thus, including a trademark in TROIS ensures control by the customs service over the import of counterfeit goods.

Furthermore, obstructing parallel import is possible by the manufacturer requesting an end-user certificate from intermediaries. Such a document is most frequently requested when ordering large volumes of products. Because of this, a significant problem arises during procurement for large Russian companies (banks, state structures). [17]

It is possible that in the future, the rules for selling goods under parallel import may be supplemented, considering that various ideas are being expressed in the expert community, including the need to inform consumers that a product is not being sold by an official distributor and that difficulties may arise with such a product later. Considering that the average consumer does not possess specialized knowledge about the procedure and conditions for selling goods, such a measure would clearly not be redundant and would allow them to make an informed decision when purchasing products on the market. [18]

Thus, the legal institution of parallel import introduced in Russia currently plays a significant role in continuing the supply of necessary foreign-made goods. However, it is also important to prevent the supply of counterfeit products and cases of infringement of the intellectual property rights of manufacturers and/or trademark holders.

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References

1. Velikorossov V.V., Chaykovskaya L.A., Filin S.A. Modern Transnational Corporations and Their Taxation in Transfer Pricing. International Accounting. 2019. Vol. 22. Iss. 9. pp. 993–1007.
2. Resolution of the Constitutional Court of the Russian Federation No. 8-P dated February 13, 2018, On the Case Concerning the Review of the Constitutionality of the Provisions of Paragraph 4 of Article 1252, Article 1487, and Paragraphs 1, 2, and 4 of Article 1515 of the Civil Code of the Russian Federation in Connection with the Complaint of PAG LLC.
3. Chaykovskaya L.A., Filin S.A. Parallel Import in Sanctions Conditions: Accounting and Taxation Peculiarities. International Accounting. 2023. No. 1. p. 94.
4. GOST R 58223-2018 National Standard of the Russian Federation. Intellectual Property. Antimonopoly Regulation and Protection Against Unfair Competition.
5. Parallel Import. Official website of PJSC Sberbank.
6. Resolution of the Arbitration Court of the North Caucasus District No. F08-13508/2022 dated January 27, 2023, in Case No. A32-13267/2022.
7. What is Parallel Import and What are its Consequences for the Importer. Glavnaya Kniga. 2022. No. 21. p. 60.
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9. Exclusive Right to a Trademark in Parallel Import. December 2, 2021. MOZHNO Law Firm.
10. Chaykovskaya L.A., Filin S.A. Parallel Import in Sanctions Conditions: Accounting and Taxation Peculiarities. International Accounting. 2023. No. 1. pp. 90–111.
11. Decision of the Office of the Federal Antimonopoly Service for the Republic of Tatarstan No. VCh-08/9361 dated July 26, 2022, in Case No. 016/01/14.6-1794/2021.
12. Resolution of the Constitutional Court of the Russian Federation No. 8-P dated February 13, 2018, On the Case Concerning the Review of the Constitutionality of the Provisions of Paragraph 4 of Article 1252, Article 1487, and Paragraphs 1, 2, and 4 of Article 1515 of the Civil Code of the Russian Federation in Connection with the Complaint of PAG LLC.
13. Resolution of the Thirteenth Arbitration Court of Appeals No. 13AP-11586/2022, 13AP-11588/2022 dated June 9, 2022.
14. Resolution of the Ninth Arbitration Court of Appeals No. 09AP-15570/2022 dated April 15, 2022.
15. Ruling of the Intellectual Property Court dated April 22, 2022, in Case No. SIP-371/2022.
16. Parallel Import: How to Protect a Right Holder in Case of "Grey" Import. Legal Academy.
17. "Getting Used to It": What Parallel Import of Electronics Has Led To. Viktoriya Saitova. October 15, 2022. RBC.
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