Parallel Import in Russia: Medicines & Medical Devices

 

January 31, 2023

 

Following the introduction of anti-Russian sanctions, many Western companies ceased supplying their brands to Russia. Russian manufacturers, suppliers, and consumers faced a shortage of necessary products. As a countermeasure, Russia adopted a package of regulations permitting the importation of original goods without the permission of the rights holder (parallel import).

In this article, we will examine what parallel import is, the changes in legislation and related judicial practice, and how it has affected the supply of medicinal products and medical devices.

What Is Parallel Import?

Parallel import is the importation of original goods bearing a trademark into the territory of a country without the consent of the rights holder. It is so named because the supply proceeds not through the rights holder or their official dealer, but in parallel through any seller who does not hold official status.

For clarity, we note that goods imported via parallel import are not counterfeit. They are produced by the official manufacturer and possess all necessary licenses and quality certificates.

Global practice recognizes three levels of exhaustion of the exclusive right to a trademark:

• International: The good is distributed without restrictions in any country. The good must be released into circulation for the first time by the rights holder or with the rights holder's consent. The international principle of exhaustion of rights operates in the USA, Canada, Japan, China, South Africa, India, and certain other countries.
• Regional: The good is released into circulation with the consent of the rights holder and distributed within the territory of a specific circle of countries participating in an international treaty. An example is the Treaty on the Eurasian Economic Union [1], under the terms of which, if goods were released into civil circulation in the territory of the Russian Federation or other EAEU member states by the rights holder or with their consent, they may subsequently freely circulate in the territory of all EAEU member states.
• National: The good is distributed within the territory of a country provided that it was released into circulation with the consent of the rights holder specifically in the territory of that country. Since 2002, the national principle of exhaustion of rights operated in Russia, with the exception of goods released into circulation in the EAEU territory.

History of the Issue of Parallel Import

Prior to 2002, it was possible to purchase and import into Russia any good not prohibited for free circulation. Since 2002, parallel import was banned. Only rights holders or third parties with the written consent of the rights holder could import goods protected by a trademark. Currently, this issue is regulated by Article 1487 of the Civil Code of the Russian Federation, according to which the use of a trademark by other persons in relation to goods that were released into civil circulation in the territory of the Russian Federation directly by the rights holder or with their consent does not constitute a violation of the exclusive right to the trademark.

Between 2018 and 2021, the issue of permitting parallel import began to be discussed again. For several years, the Federal Antimonopoly Service consistently advocated granting Russian importers the right to import original goods into Russia without the consent of the rights holder, and regarded the actions of rights holders preventing market access as a restriction of competition.

In particular, in one case, the FAS Russia commission considered complaints from Russian trade organizations regarding the actions of major global auto parts manufacturers KYB Corporation and Daimler A.G. They attempted to obtain permission to trade from the manufacturers of original automotive parts, but their requests were not considered. The Federal Antimonopoly Service decided that the policy of rights holders, who allow market access to some importers and obstruct others, enables official dealers to manipulate prices and assortment. Consequently, FAS Russia recognized the actions of the rights holders as unfair competition. The court refused to declare the FAS Russia warning invalid [2].

In 2018, the Constitutional Court of the Russian Federation considered a case on verifying the constitutionality of the provisions of Article 1487 of the Civil Code of the Russian Federation upon the application of a Company that imported and sold heat-sensitive paper for medical recording devices, the packaging of which bore the "SONY" trademark [3]. Previously, in arbitration proceedings, the claims of Sony Corporation against the Company for the protection of the exclusive right to the trademark were satisfied. The Company was prohibited from importing, selling, or otherwise introducing into civil circulation in the Russian Federation thermal paper of the "SONY" brand without the plaintiff's permission. The supplied goods were withdrawn from circulation and destroyed, and compensation for the violation of the exclusive right in the amount of 100,000 rubles was collected from the Company in favor of the plaintiff. Although the Constitutional Court of the Russian Federation confirmed the illegality of importing goods into Russia without the consent of the rights holder, a position was simultaneously formulated regarding the court's right to refuse, fully or partially, the application of consequences of import without the trademark owner's consent in cases of bad faith behavior. Examples of bad faith cited included price gouging and prohibiting sales to distributors due to the enforcement of sanctions against Russia.

When Was Parallel Import Permitted?

On March 29, 2022, the Government of Russia issued Decree No. 506 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 Apply (the "Decree No. 506"). This decree instructed the Ministry of Industry and Trade of the Russian Federation to approve a List of goods (groups of goods) to which the provisions of Subclause 6 of Article 1359 and Article 1487 of the Civil Code of the Russian Federation do not apply.

Since the adopted decree did not meet the interests of rights holders, attempts were made to challenge it as early as 2022. Thus, in one of the cases considered, a Chinese company applied to the Intellectual Property Court with a statement to recognize Decree No. 506 as invalid. In support of the stated requirements, it argued that the contested regulatory act violates provisions of acts having greater legal force, namely:

• provisions of the Constitution of the Russian Federation prohibiting the complete abolition of the rights of some persons before others; providing for the possibility of restricting rights and freedoms only by federal law;
• provisions of a number of laws prohibiting the Government of the Russian Federation from adopting acts contradicting federal laws.

The court indicated that the position of the foreign entity essentially amounts to challenging the powers of the Government of the Russian Federation to issue Decree No. 506, and therefore falls within the exclusive competence of the Constitutional Court of the Russian Federation. The court refused to accept the application for consideration [4]. In our view, given the foreign policy pursued by Western countries regarding the Russian Federation, the recognition of this decree as invalid, as well as its cancellation in the near future, appears extremely unlikely.

What Is Permitted for Parallel Import?

Pursuant to the Government decree, the Ministry of Industry and Trade of Russia, by Order No. 1532 dated April 19, 2022, approved the List of goods (groups of goods) that may be imported via parallel import provided they were released into circulation outside the territory of Russia by rights holders (patent holders) or with their consent [5] (the "Order No. 1532", the "List").

The List contains more than 50 product groups, including various goods: from children's toys, perfumery, and cosmetic products to complex machinery and equipment. When applying the List, one is guided by the TN VED code of the EAEU and/or trademarks belonging to rights holders registered in unfriendly countries. If the List specifies only the TN VED code without indicating a trademark, all goods with this code may be imported via parallel import. The following goods and TN VED groups of the EAEU can be cited as examples:

Group TN VED of the EAEU	Name of Good	Product Code and/or Means of Individualization
66	Umbrellas, sun umbrellas, walking sticks, seat-sticks, whips, riding-crops and parts thereof	169) 6601 170) 6602 00 000 0 171) 6603

If the List specifies both the TN VED code and the trademark, only goods with this code and these specific brands may be imported within the framework of parallel import. For example:

Group TN VED of the EAEU	Name of Good	Product Code and/or Means of Individualization
37	Photographic or cinematographic goods	43) 3701 20 000 0 FUJIFILM, KODAK 44) 3703 20 000 0 3703 90 000 0 brother, CANON, EPSON, HEWLETT PACKARD (HP), KYOCERA, RICOH, Xerox 45) 3707 90 900 0 brother, CANON, EPSON, HEWLETT PACKARD (HP), KYOCERA, RICOH, TOSHIBA, xerox

Changes have already been made to Order No. 1532 four times. From February 2, 2023, the List of goods permitted for parallel import will be expanded. In particular, the specified List will be supplemented with many brands of toys, games, and sports equipment, such as: Adidas, Manchester United, Real Madrid, Disney, DC Comics, and Marvel.

Regarding medicinal products, they were not included in Order No. 1532. Of other pharmaceutical products, the current version of the List indicates the following categories of goods:

Group TN VED of the EAEU	Name of Good	Product Code and/or Means of Individualization
30	Pharmaceutical products	21) 3002 12 000 9 Miltenyi Biotec 22) 3005 90 100 0 O.B., Carefree

Initially, the group "Pharmaceutical products" also included sanitary bags and first-aid kits with TN VED code 3006 50 0000. However, they were excluded from Order No. 1532 in August 2022.

Currently, pharmaceutical products are represented by feminine hygiene goods of the brands O.B. and Carefree. In August 2022, the Ministry of Industry and Trade of Russia included in this section reagents and consumables for cancer treatment equipment from the manufacturer Miltenyi Biotec, which is used for bone marrow transplantation. However, according to the heads of federal specialized medical centers applying these treatment methods, they still do not receive the necessary consumables despite their inclusion in the List of goods for parallel import, and patients have been transferred to alternative, less effective treatment methods [6].

Regarding medical devices, all goods registered as medical devices are excluded from the positions of the List by establishing caveats:

Group TN VED of the EAEU	Name of Good	Product Code and/or Means of Individualization
90	Optical, photographic, cinematographic, measuring, checking, precision, medical or surgical instruments and apparatus; parts and accessories thereof (except for goods registered as medical devices)	9031 NATIONAL INSTRUMENTS, OMRON, OPTOGAMA, PCB PIEZOTRONICS, PCH ENGINEERING, PI (Physik Instrumente), Polytec, PRIMALUCELAB, QHYCCD
39	Plastics and articles thereof (except for goods registered as medical devices)	57) ACURA, AE, ALFA ROMEO, ASTON MARTIN, AUDI, BASF, BENTLEY, BERAL

Similar caveats are made in other product groups:

Group TN VED of the EAEU	Name of Good	Product Code and/or Means of Individualization
39	Plastics and articles thereof (except for goods registered as medical devices)	57) ACURA, AE, ALFA ROMEO, ASTON MARTIN, AUDI, BASF, BENTLEY, BERAL

Thus, it is possible to import via parallel import only spare parts for medical equipment, as they are not registered as medical devices.

The Association of European Businesses (AEB) appealed to the Russian government with a request not to include medicines and medical devices in the list of goods permitted for parallel import into Russia [7]. In particular, the AEB Memorandum cited the following arguments against introducing parallel import:

• weakening control over the circulation of medicinal products may lead to the appearance of substandard products on the market;
• the manufacturer will not be able to bear responsibility for the quality, efficacy, and safety of the medicinal product at all stages of circulation, since the products will automatically be excluded from its control;
• due to the lack of clarity of control mechanisms by customs, there is an additional risk of mixing falsified and/or counterfeit products into the original goods.

A similar position was expressed in a Memorandum by the Working Group of Medical Device Manufacturers, indicating:

• the manufacturer will not be able to guarantee the quality, as well as maintenance, including warranty service, of medical devices supplied via parallel import;
• it will be impossible to properly exercise quality control, since the responsibility for monitoring and corrective actions lies with the manufacturer's authorized representative;
• it will become impossible to implement mandatory manufacturer modifications.

The Ministry of Industry and Trade of Russia also saw no need to permit the parallel import of medicinal products and medical devices. Thus, the head of the Ministry of Industry and Trade of Russia, Denis Manturov, noted in a speech at the "Biotechmed" forum that the share of domestic products in the Russian pharmaceutical market continues to grow. The reduction of the presence of foreign manufacturers in the Russian market creates opportunities for Russian ones, and the state is introducing additional support measures for this.

We also note that in order to prevent a possible shortage of medicinal products and medical devices in 2022, other temporary mechanisms were developed and are being applied. Thus, the Specifics of Circulation of Medicinal Products and the Specifics of Circulation of Medical Devices in Case of Occurrence of Shortage or Risk of Occurrence of Shortage were approved, providing for:

• accelerated registration of medicines and medical devices;
• simplified amendment of the registration dossier;
• the procedure and cases for the importation into the Russian Federation of unregistered medicinal products or medicinal products registered in the Russian Federation in packaging intended for circulation in foreign states.

Liability for Violations Regarding Parallel Import

Importation into the territory of Russia for subsequent sale of original goods without the consent of the rights holder entails liability: civil, administrative, and criminal.

In particular, Article 1515 of the Civil Code of the Russian Federation establishes that the rights holder is entitled to demand the withdrawal from circulation and destruction of counterfeit goods at the expense of the violator, as well as compensation for damages or payment of compensation in the amount of:

• from 10,000 to 5,000,000 rubles, determined at the discretion of the court based on the nature of the violation;
• twice the value of the goods on which the trademark is illegally placed, or twice the value of the right to use the trademark.

Article 14.10 of the Code of Administrative Offenses of the Russian Federation provides for administrative liability for the illegal use of means of individualization of goods (works, services). The maximum penalty for officials is a fine in the amount of 3 times the value of the goods that are the subject of the administrative offense, but not less than 50,000 rubles with confiscation of items containing illegal reproduction of the trademark and tools for committing the offense; for legal entities – in the amount of 5 times the value of the goods, but not less than 100,000 rubles with confiscation.

Criminal liability for such actions arises under Article 180 of the Criminal Code of the Russian Federation in the event of their repeated commission or if major damage exceeding 250,000 rubles is caused.

On June 28, 2022, Federal Law No. 213-FZ On Amendments to Article 18 of the Federal Law On Amendments to Certain Legislative Acts of the Russian Federation (the "Law No. 213-FZ") was adopted. The specified law established that the use of results of intellectual activity and means of their individualization in relation to goods included in Order No. 1532 does not constitute a violation of the exclusive right.

At the same time, not all violations of exclusive rights can be justified by parallel import and avoid liability. Let us consider examples from judicial practice.

1. Goods are not included in the List of goods permitted for parallel import.

A foreign company, the rights holder of the trademark "ROBOCAR POLI", filed a lawsuit in the arbitration court against a Company to recover compensation for the violation of the exclusive right to trademarks in the amount of 70,000 rubles. During the consideration of the case, it was established that the Company sold toys depicting characters from "ROBOCAR POLI". The court indicated that the toys traded by the Company without the consent of the rights holder were not included in Order No. 1532. The claim was satisfied in full [8].

A similar decision was made by the Intellectual Property Court regarding a claim by the foreign rights holder Janssen Kosmetik GmbH against a Company to ban the use of a designation identical to the trademark in advertising and announcements [9].

2. The violation was committed prior to the adoption of regulatory documents legalizing parallel import.

A rights holder applied to the arbitration court with a claim to recover from an individual entrepreneur compensation for the violation of the exclusive right to trademarks in the amount of 60,000 rubles in total for three trademarks. As established by the court, during a test purchase, the fact of sale by the entrepreneur of counterfeit goods with designations confusingly similar to the trademarks registered by the Rights Holder was revealed. Exclusive rights to distribute this good in the territory of the Russian Federation were not transferred to the defendant.

The defendant's references to the fact that the provisions of Law No. 213-FZ exempt him from liability for violating the plaintiff's exclusive rights were rejected by the court. The court stated: the violations were committed in November 2021, that is, long before the entry into force of Order No. 1532, and Order No. 1532 itself does not contain an indication of extension to previously arisen relations. The court recovered from the entrepreneur compensation for the violation of the exclusive right to the trademark in the amount of 30,000 rubles and court expenses [10].

3. The introduction of restrictive measures against Russia does not suspend the court case and does not exempt from liability.

Police officers revealed the fact of storage and offering for sale of products marked with "Chanel" trademarks: teenage breeches in the amount of three units at a price of 320 rubles per unit and sunglasses in the amount of one pair at a price of 100 rubles.

The entrepreneur was held administratively liable under Part 2 of Article 14.10 of the CAO RF in the form of a fine in the amount of 25,000 rubles 00 kopecks. Also, following a claim by the rights holder, the arbitration court recovered damages for the illegal use of the trademark in the amount of 221,000 rubles from the entrepreneur. During the consideration of the cassation appeal, the entrepreneur asked to suspend the consideration of the case until the restrictive measures introduced against unfriendly countries were lifted. Subsequently, he clarified the requirements: to ask to refuse the rights holder in satisfying the claim. He cited that the plaintiff is located in the territory of a foreign state that has joined the sanctions, in connection with which these actions of the plaintiff should be regarded as an abuse of right, and this is an independent ground for refusal to satisfy the claim. The court did not agree with the entrepreneur's arguments and refused to satisfy the cassation appeal [11].

4. Parallel import does not exempt from liability for counterfeit goods.

An individual entrepreneur declared for importation into Russia a batch of logic games "Fidget Cube" of Chinese manufacture. The customs authority conducted a customs inspection, during which the presence of the marking "Rubik's Cube" on individual product packages was revealed. The rights holder of this trademark according to the FIPS Register is the company "RUBIK'S BRAND LIMITED", Great Britain. The entrepreneur is not its authorized importer. At the same time, according to the expert's conclusion, the examined sample of the good does not meet the requirements applied to original products: the design and appearance of the sample differ from the original products, and low quality of manufacturing and materials was revealed.

The customs authority applied to the arbitration court with a claim to hold the entrepreneur administratively liable under Article 14.10 of the CAO RF. The entrepreneur's arguments regarding the existence of grounds for applying Law No. 213-FZ were rejected by the appellate court, since the disputed goods are not products produced by the rights holder or other persons with the permission of the rights holder. By the court decision, the entrepreneur was held administratively liable under Part 1 of Article 14.10 of the CAO RF. A punishment in the form of a fine in the amount of 10,000 rubles was imposed, and the items of the administrative offense in the amount of 9,998 pieces were sent for destruction [12].

Pros and Cons of Parallel Import

Summing up, we will express an opinion on the advantages and disadvantages of legalizing parallel import.

Undoubtedly, the legalization of parallel import has its pluses for both the country's economy and citizens. In our view, the advantages of parallel import are:

• preservation and support of the market under the conditions of imposed sanctions, preservation of production facilities and industries dependent on imported goods;
• growth of competition, which will lead to containing prices for branded goods due to competition between official representatives of the rights holder and independent importers;
• possible expansion of the assortment of imported goods.

But, certainly, there are also significant minuses. These include:

• increased risk of importing substandard goods or counterfeit products under the guise of original ones;
• difficulties in after-sales support and maintenance of goods;
• reduction of foreign investments in the domestic economy.

Regarding the parallel import of medicinal products and medical devices, the possibility of its legalization raises even more serious concerns, since it involves people's lives and health. In the first place is the danger of an increase in low-quality or counterfeit products. If the manufacturer is removed from the quality control system, tracking the quality of medicinal products will be problematic. After all, currently, the manufacturer plays a key role in the quality system, starting from clinical trials to quality monitoring during its circulation. The question of to whom to address quality claims will also arise sharply.

Regarding medical devices, parallel import is, of course, possible. However, as shown by practice regarding consumables for cancer treatment from the manufacturer "Miltenyi Biotec", inclusion in the List does not mean ensuring supply. The risk of similar problems arising as with permitting the parallel import of medicinal products is also not excluded: weakening of quality control, difficulties in subsequent maintenance and filing quality claims.

Furthermore, permitting the importation of foreign medicinal products and medical devices via parallel import runs counter to the import substitution policy pursued in recent years and may negate the successes already achieved in this area.

At the same time, it can be concluded that regarding medicinal products and medical devices, the state is currently pursuing a different policy aimed at developing and relocating production sites to the territory of the Russian Federation, which seems quite justified in the long term.

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References

[1] Signed in Astana on May 29, 2014.

[2] Decision of the Arbitration Court of Moscow dated December 13, 2017, in case No. A40-159212/17.

[3] Resolution of the Constitutional Court of the Russian Federation No. 8-P dated February 13, 2018 "In the case of verification of the constitutionality of the provisions of Item 4 of Article 1252, Article 1487 and Items 1, 2 and 4 of Article 1515 of the Civil Code of the Russian Federation in connection with the complaint of the Limited Liability Company PAG".

[4] Determination of the Intellectual Property Court dated April 22, 2022, in case No. SIP-371/2022.

[5] Order of the Ministry of Industry and Trade of Russia No. 1532 dated April 19, 2022 "On Approval of the List of Goods (Groups of Goods) in Respect of Which the Provisions of Subclause 6 of Article 1359 and Article 1487 of the Civil Code of the Russian Federation Do Not Apply Provided the Said Goods (Groups of Goods) Are Introduced into Circulation Outside the Territory of the Russian Federation by Rights Holders (Patent Holders), and Also with Their Consent".

[6] "Rogachev Center transferred patients receiving CAR-T therapy to other types of treatment" // Medvestnik May 23, 2022.

[7] Memorandum of the Association of European Businesses on parallel import // Website of the Association of European Businesses on parallel import.

[8] Resolution of the Thirteenth Arbitration Appeal Court dated June 09, 2022 No. 13AP-11586/2022, No. 13AP-11588/2022 in case No. A56-109836/2021.

[9] Resolution of the Intellectual Property Court dated October 19, 2022 No. S01-1299/2022 in case No. A40-222245/2021.

[10] Resolution of the Thirteenth Arbitration Appeal Court dated November 21, 2022 No. 13AP-33024/2022 in case No. A21-4427/2022.

[11] Determination of the Intellectual Property Court dated May 26, 2022 No. S01-439/2022 in case No. A13-13172/2021.

[12] Resolution of the Third Arbitration Appeal Court dated October 20, 2022, in case No. A33-14168/2022.

January 31, 2023