IP and trade in Asia-Pacific: Changing the shades of grey

For many brands, Asia-Pacific can be a land of opportunity. At $12.1 trillion and $4.87 trillion respectively, China and Japan have the second and third largest GDPs on the planet; the only country ahead of them is the US. Meanwhile, at $1.38 trillion, Australia has the 13th largest GDP.

In 2017, the World Bank reported an uplift in China’s economic growth—the first since 2010—with the main driving force being global trade. Three of world’s ten largest companies, according to Fortune 500, are located in China, while one, Toyota, is based in Japan.

"The grey market distorts a brand’s worldwide revenue stream and increases the distance between brands and their customers." Ai-Leen Lim, AWA Asia

However, although these Asia-Pacific economies are performing well, brands need to be wary of the grey market, ie, where goods offered for sale have not been obtained by an official supplier.

“The grey market may cause brand owners to reconsider their retail prices in the local markets as a way to decrease parallel import demand,” says Charmaine Kwong, a Hong-Kong based associate at Hogan Lovells.

Last year, the CEO of beer manufacturer Heineken blamed the parallel market for a decline in sales in China, while in July this year jewellery manufacturer Pandora announced a retail price reduction in China in an attempt to limit grey market trade.

“Profits in the local market (especially their authorised distributors’ profits) may be encroached upon by the grey market due to the price difference between authorised products and parallel imports,” explains Kwong.

While it is clear that the grey market can have a detrimental impact on a brand’s profits, it can also have a negative impact on its reputation, says Kwong.

For example, products sold overseas may be of a different quality or constitution depending on the markets’ local regulations. If the purchased product doesn’t meet the quality that is expected of it, the brand could end up bearing the blame for it.

“Parallel imports are sometimes transported across the world differently (eg, in different temperatures, storage conditions, etc) causing deterioration in the quality of the goods,” explains Kwong.

“These grey market products with unguaranteed quality therefore threaten brand owners’ reputation in the local market.”

Price matters

In some instances, the grey market can have an even bigger side-effect on companies and their strategies.

Wayne Condon, principal at Australia-based law firm Biopharmalex, says that consumers do not always understand the reason for price differentials between branded goods and those imported through the grey market.

“If the grey importing problem is significant enough, the brand owner may lose the incentive to sell branded goods in Australia at all,” he says.

“Loss of goodwill can also occur when the grey imported products differ in grade, quality, size, flavour, weight and warranty support to the branded product in Australia,” he adds.

To have any real prospect of limiting grey imports, brand owners need to have expert IP legal assistance, says Condon, but there are methods they can use to prevent parallel importation in Australia.

“Brand owners can ensure that the contractual arrangements with overseas distributors of their products are drafted so as to minimise the chance of branded products sold in overseas markets being sold cheaply into Australia, although this is not a universal panacea,” says Condon.

Ai-Leen Lim, CEO and principal counsel for AWA Asia, adds that foreign brand owners should be concerned about the grey market in China because they want to be seen as cooperating with the Chinese government on tax and customs issues.

She agrees that it can have a negative impact on the relationship between a brand and its customers.

“The grey market also distorts a brand’s worldwide revenue stream and increases the distance between brands and their customers,” she says.

“This can lead to issues with innovation and marketing because knowledge of the end consumer is lost through the grey market.”

Trademark strength

It may be a difficult fight but, Kwong says, one way that brand owners can overcome the grey market in China and Hong Kong is by relying on their trademarks.

“Brand owners may wish to differentiate their products with different marks (such as devising market-specific designs), mark the words ‘sample’ on free samples, and register Chinese-language trademarks and use them on products sold locally,” she explains.

Kwong adds that brand owners can also monitor whether local regulatory requirements have been complied with, such as bilingual labelling requirements in Hong Kong, and take action against parallel imports which do not meet these requirements.

This tactic may be effective in China, but it does not necessarily have the same impact on a global level.

Kwong says that this is more difficult in Japan because combating parallel imports by using trademark rights is prohibited under the Anti-Monopoly Act.

“Brands may, however, request parallel importers to stop using the brands’ unique logo marks in online shopping sites or advertisements if they are used without authorisation.”

In a further attempt to curb the grey market, some parallel importers have extensive sampling procedures to ensure that the products they import into Japan are genuine goods, says Kwong.

“To combat the grey market, brand owners may wish to increase the level of detail on packaging or mark serial numbers on the goods (such as on the inner lid of a bottle of cream) to make the sampling process more complicated for importers.”

Lim agrees that product authentication is an effective way to lessen the damage that the grey market can cause to a brand.

“This empowers consumers to verify that a product is authentic and eligible for warranty protection,” she says.

“It can alert consumers if it’s not a genuine product, give details on returns and even redirect them to an authorised brand dealer in-country. For the brand owners, it also helps them to keep track of and identify grey market dealers and channels.”

"The act will make it easier for grey goods to rely on defences to allegations of trademark infringement brought by the local Australian brand owner." Wayne condon, Biopharmalex

While Lim admits that it may be difficult to stop grey market products from an IP infringement perspective, she says that there are a number of different approaches worth considering for brand owners.

For example, she says, checking whether any changes have been made to packaging (if it has been altered, IP infringement may be an option); obtaining trademark registrations; encouraging brand owners and local businesses to help identify grey market goods; and tracing the course of the imported products can all help to identify the grey market.

With more people switching to e-commerce to do their shopping, the grey market has been provided with a 21st century platform: the internet.

According to China’s General Customs, the volume of the import and export of retail sales via cross-border e-commerce platforms in 2017 was up to RMB 90.2 billion ($12.9 billion) in Hong Kong and China, says Kwong. This is an 80.6% increase compared with 2016.

“Consumers are now open to the catalogues of products available in overseas markets with a few clicks of the mouse,” says Kwong. “They inform themselves of the price, availability and other specifics of a product which may not be available in their home country. Parallel product importers can also conveniently note and find exclusive products for import and sales in the local markets which are in demand.”

Tax pressure

Lim says China has attempted to crack down on the grey market at its source through a number of means over the past few years.

"Some parallel importers have extensive sampling procedures to ensure that the products they import into Japan are genuine." Charmaine Kwong, Hogan Lovells

For example, higher taxes are imposed on goods that are brought into the country from abroad, according to Lim.

“At the same time, there has been a lowering of taxes on goods imported through legitimate channels. In addition, there are increased penalties for those caught falsifying customs declarations on importation of foreign branded products.”

These strategies can help lessen the impact of the grey market, but it can be seen as an uphill battle.

In Australia, for example, the Intellectual Property Laws Amendment (Productivity Commission Response Part 1 and Other Measures) Bill 2018, which became law in August, may open a window for the grey market.

“Among other things, the act will make it easier for grey goods to rely on defences to allegations of trademark infringement brought by the local Australian brand owner,” says Condon.

“The new provisions allow importers a defence to trademark infringement if they made reasonable enquiries to ensure the trademark has been applied to imported goods with the trademark owner’s consent.”

Kwong adds that parallel imports are difficult to eliminate. “The strongest cause of action brand owners may have is under trademark infringement, where goods are sold in a deteriorated state, or packaging is damaged, or trademarks are defaced,” she says.

Brand owners should keep a record of goodwill and use their trademark on products in case it is necessary to initiate legal proceedings, advises Kwong.

“The more common action is to issue cease-and-desist letters asking parallel importers to stop selling these goods in the local market, but brand owners should draft these letters carefully to prevent liability in making groundless threats.”

While the grey market may be an obstacle for brand owners wishing to target Asia-Pacific, the strategies they adopt in response can be black and white.

Fact file