Russian Federation: Evolution Or Revolution? The Constitutional Court Of The Russian Federation Ruling On Parallel Imports

Last Updated: 12 April 2018
Article by Mathieu Fabre-Magnan and Marat Mouradov

The question of the legalization of parallel imports (i.e. the import by non-official distributors of goods from outside the Eurasian Economic Union, the "EAEU", without the right-holder's consent) has been the subject of a long-running debate between right-holders and the Federal Antimonopoly Service of the Russian Federation. On February 13, 2018, the Constitutional Court of the Russian Federation issued Ruling No. 8-P (the "Ruling"), which states that the national principle of exhaustion of exclusive rights to trademarks (in conjunction with the regional principle in the EAEU law) is not in contravention of the RF Constitution, but does not give to right-holders unconditional protection against parallel imports.

The Constitutional Court is the Russian judicial authority for constitutional oversight which has the power to interpret the Constitution.1 For a case to be considered by the Constitutional Court, there must be an uncertainty as to whether a law or another regulatory act is consistent with the Constitution2 A Russian company – LLC PAG – filed a claim with the Constitutional Court questioning whether the provisions of the RF Civil Code that establish the national principle of exhaustion of exclusive rights to trademarks, pursuant to which genuine goods imported without the consent of the right-holder could be treated as counterfeit, and the sanctions for violating those rights, were consistent with the Constitution.

The parallel importer had concluded a state procurement contract to supply a medical institution with special SONY paper for ultrasound scans. LLC PAG had acquired genuine SONY products from a Polish company and tried to import them into Russia without the right-holder's consent. There was no dispute that the goods were genuine. Nevertheless, when notified of the import without the consent of the right-holder by the customs authorities, Sony Corporation decided to bring a lawsuit before the Kaliningrad Oblast Arbitrazh Court. The claimant asked, in particular, for the prohibition of the importation, storage and disposal on Russian territory of those goods and to order their destruction at the defendant's expense. The court essentially agreed and also ordered the parallel importer to pay 100,000 rubles to Sony Corporation as compensation for the infringement of its exclusive rights to the trademark. LLC PAG appealed but the judgment was partially upheld by the higher courts3 and LLC PAG decided to bring the matter to the Constitutional Court.

After examining LLC PAG's claim, the Constitutional Court made the following findings:

  • It is within the federal legislator's discretion to institute a regime of exhaustion of exclusive rights. The national principle of exhaustion of rights does not contravene the Constitution, but it must be applied in conjunction with other civil statutory provisions and EAEU law.
  • The courts do have the power, in order to observe the principle of equality and fairness, the requirements of commensurateness (proportionality) and the balance of competing rights and lawful interests – private and public, to partly or wholly deny a claim by a trademark right-holder against a parallel importer if (a) the right-holder is found to be acting in bad faith and (b) there is a threat to the life and health of individuals or other public interest.

    According to the Constitutional Court, bad faith can take the form of the right-holder's restricting imports of specific goods into the Russian domestic market; the inflation of prices on the Russian market in comparison with other markets to a greater extent than is typical for normal economic activity, or the right-holder's trying to prevent imports pursuant to foreign sanctions against Russia. This latter form, in the Constitutional Court's view, can be particularly dangerous to the public interest.

  • The Constitutional Court emphasized that civil-law liability for importing genuine goods through parallel importation must be differentiated from liability for importing counterfeit goods.

    The level of compensation payable to a right-holder for an infringement of its right to a trademark should be set taking into account the fact that the losses caused to the right-holder by parallel imports of genuine products are typically not as great as where counterfeit goods are imported. Therefore, the Constitutional Court took the view that the courts should not allow the same level of compensation to be recovered by the right-holder, unless the right-holder has suffered losses that are comparable with losses from the use of the trademark on counterfeit products.

  • Finally, and perhaps most importantly, the Constitutional Court declared that there are no constitutional grounds for imposing liability in the form of having genuine goods brought in through parallel import removed from circulation and destroyed. From now on, genuine goods can only be taken out of circulation and destroyed if they are found to be of substandard quality and/or to ensure security or to protect human life and health, the environment or cultural values.

The Ruling is final, cannot be appealed and came into force immediately upon issuance. It has direct effect and does not need to be approved by other authorities or officials. The courts are not allowed, when hearing cases (including cases brought before the Ruling came into force), to use any interpretation diverging from the interpretation that the Constitutional Court gave in the Ruling.4

For this reason, in their future practice relating to parallel imports, the courts would have to scrutinize more thoroughly the good faith of right-holders applying to protect their rights to a trademark in the event of parallel import into Russia. Most likely, it will be possible to prove the right-holder's good faith based on the fact that the goods imported through parallel import are of substandard quality or pose a threat to security or human life and health. That said, it seems to us unlikely that the need for protection of a network of official distributors in Russia would constitute a sufficient argument for a court to establish the right-holder's good faith on its basis only.

The Ruling will probably be less relevant for producers of goods for which a mandatory system for tracking movements from producer to end consumer is implemented (such a system will be operating in Russia for pharmaceutical products for medical use from 2020 onwards5). However, for the manufacturers of other goods, especially those in respect to which it is hard to prove a threat to security or human life and health (e.g. clothing, luxury goods etc.), the Ruling might require the review of their distribution arrangements in relation to Russia.

Footnotes

1. Article 125(5) of the RF Constitution.

2. Article 36 of Federal Constitutional Law No. 1-FKZ of July 21, 1994 On the Constitutional Court of the Russian Federation.

3. See Ruling of the RF Supreme Court No. 307-ES16-1398 in Case No. A21-7328/2014 of May 30, 2016.

4. Article 79 of Federal Constitutional Law No. 1-FKZ of July 21, 1994 On the Constitutional Court of the Russian Federation.

5. Federal Law No. 425-FZ of December 28, 2017 On Amendments to the Federal Law On the Circulation of Pharmaceuticals.

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