Malaysia jurisdiction report: The pros and cons of parallel imports
Usually, parallel importers purchase goods that are being sold at a relatively lower price intended for and from country A and subsequently sell them in country B. The goods are being sold at a price that is higher than in country A but lower than the price fixed by the authorised distributor or licensee in country B due to factors such as fluctuations in currencies, different market strategy, trade policy and distribution costs. Consumers benefit from parallel imports as they are able to purchase genuine goods at a lower price and have more choice where a different version or variant of a product can be obtained in the local market.
However, parallel imports may be disadvantageous to the local authorised distributor. The authorised distributor is the one who has been incurring substantial costs on marketing, advertising, providing after-sales service and introducing this brand into the local market, especially when consumers are not yet aware of this new brand. On the other hand, parallel importers simply import the goods and sell them in the local market at a relatively lower price, thereby undercutting the authorised distributor.
Parallel importers have little or no incentive in maintaining the goodwill of a mark. More often than not, they are reluctant to spend time and money to market and advertise the mark or to ensure the quality of the goods. The quality of warranty and after-sales services are compromised considering the fact that trademark proprietors or their licensees may not support goods that were purchased through parallel importing channels.
It is also important to note that some imported goods (eg, electronic devices, vehicles and their replacement parts) may not be suitable for use in a particular country as they were specifically designed for use in another country due to factors such as different voltage supply and weather.
The legal position
Malaysian laws generally do not prohibit parallel importation. Section 40(1)(d) of the Trade Marks Act 1976 ‘legalises’ parallel importation to a certain extent. This section is closely related to the principle of exhaustion of IP rights. Once a particular good has been sold by the registered proprietor of a trademark or his registered user, his trademark rights are said to be exhausted, whereby he loses all rights to control subsequent dealings with the goods (eg, reselling to third parties).
Parallel importation is not an act of passing off because there is no misrepresentation surrounding the origin of the goods. However, there may be passing off if the imported goods are of a different quality even though they originated from the trademark proprietor.
The court in York Pacific Holdings v U-Re Auto (1998) affirms this position. In this case, the goods sold by the defendant were rejected by the plaintiff at the source for failing to meet the quality standards of the plaintiff. Such inferior goods were sold not as factory rejects but instead as the original goods. Therefore, misrepresentation was established.
The issue of parallel importation was also discussed in Kenwood Electronics & Anor v Profile Spec & 2 Ors (2007). The exclusive distributor alleged that the parallel importer had practised deception on the public by issuing its own warranty cards when it was not authorised to render after-sales service for the products. The court disagreed with the allegation and stated that the erasure of the original serial number and replacement with the parallel importer’s own serial numbers had made it easy for the public to identify that the warranty was not provided by the original manufacturer or the distributor. Thus, the public would not be confused.
Overall, parallel imports do benefit consumers and serve to stimulate competition. However, consumers have to be vigilant so as not to be deceived by counterfeit or inferior goods.
Chin Khang Juin is a legal executive at Henry Goh. He can be contacted at: khangjuin@henrygoh.com
