Resolution of the Russian Constitutional Court on parallel import

Pepeliaev Group advises of the results of the Russian Constitutional Court's consideration of a case relating to the claim filed by PAG LLC to have articles 1252(4), 1487 and 1515 (1,2 and 4) of the Russian Civil Code (the ‘Civil Code) checked in terms of whether they are constitutional.

In resolution No. 8-P dated 13 February 2018 the Russian Constitutional Court (the ‘Constitutional Court’) assessed whether the provisions of the Civil Code are in line with the Constitution with respect to the prohibition on goods labelled with a trademark being imported into Russia without the rightholder’s consent.

The main conclusions of the Resolution can be reduced to the following provisions.

Firstly, the prohibition on parallel import has been recognised to be in line with the Russian Constitution (the ‘Constitution’). The legislature has the power to choose the regime of exhaustion of an exclusive right. The regime can also be established by an international treaty. Since at present the legislature chooses the regional principle of exhaustion (i.e. the free import of goods from EAEU countries provided that labelled goods have been lawfully introduced into circulation in such countries) and the national principle of exhaustion (for other countries), the legislature's prohibition on third parties importing labelled goods has been recognised to be in line with Russian legislation. Therefore, the provisions of articles 1252, 1487, 1515 of the Civil Code have been recognised to be in line with the Constitution.

Secondly, products that have been subject to parallel import are counterfeit. These products should not be confused with such a type of counterfeit goods as forged products (which bear trademarks that have been applied without the rightholder’s consent).

Therefore, thirdly, the measures of civil liability applicable in a case of the parallel import of goods into Russia should not be the same in their extent (their consequences should not be as severe as those of) the measures applicable when forged goods are imported if, under the circumstances of a specific case, this does not entail losses for the rightholder that are comparable with the losses from forged goods being introduced into circulation Such a measure of liability as the seizure and disposal of products must not be applied with respect to goods that have been subject to parallel import, unless such goods are of improper quality and/or the specified measures are required for the purposes of ensuring the safety of and protecting human life and health, the environment and items of cultural value. The legislature may establish other measures of liability for parallel import that will be less severe than the measures of liability established for importing other counterfeit goods and introducing them into circulation.

Fourthly, if the court identifies that the rightholder is acting in bad faith, the court may refuse to apply the measures of liability for a violation of an exclusive right in the form of products labelled with a trademark being imported without the rightholder’s consent.

The Constitutional Court has specified the following circumstances as criteria for bad faith:

• the rightholder limits the import into the Russian domestic market of specific goods or implements a pricing policy that consists of overstating prices on the Russian market as compared with other markets to a greater extent than is typical for ordinary business activity and to satisfy the rightholder's reasonable economic interest;
• a Russian consumer has limited access to the relevant goods, primarily to goods which are of vital importance for the domestic market (for example, individual categories of medicines and life-support equipment for the public);
• if the rightholder does not allow goods that were released abroad with the rightholder’s consent to be imported, this poses a threat to the safety of the individuals’ lives and health and undermines the protection of the environment and items of cultural value and of other interests that are of social importance and are protected by the Constitution;
• the restricted import of goods as a result of the rightholder of a trademark complying with the sanctions regime against Russia and its business entities.

What to think about and what to do

In spite of the fact that the Constitutional Court has recognised that the national and regional principles of exhaustion of an exclusive right are lawful, we believe that market players may face certain difficulties, as the courts will have to develop more detailed criteria for the bad faith of rightholders and the legislature may refuse to choose measures of liability for parallel importers or may choose measures which will make the prohibition of parallel import virtually impossible to implement.

The adopted Resolution is likely to impact most of all on official distributors of rightholders in Russia.

Moreover, the adoption of the Resolution is most likely to cause changes to be made to the approaches used by the Russian Federal Antimonopoly Service (the ‘FAS of Russia’) when considering cases relating to the abuse of a dominant position by rightholders (dominant entities), in particular in the form of a refusal that is not economically or technologically grounded to enter into a contract or in the form of avoiding an agreement with individual buyers.

To minimise the likelihood of difficulties, we advise as follows:

• companies’ policies need to be reconsidered in view of the criteria for bad faith established by the Constitutional Court, and in particular the prohibition on parallel import must not be used for the purposes of supporting prices for goods on the Russian market which are unjustifiably higher than the prices on the markets of other countries;
• the grounds for a refusal to enter into a contract with a buyer need to be thoroughly worked out, and in particular the circumstances must be taken into account that may testify to the rightholder’s bad faith in accordance with the Resolution for the purpose of minimising the likelihood that such refusal will be recognised as ungrounded and that it will be classified as an antimonopoly offence;
• the position on the prohibition of the export of products without the rightholders’ consent must be carefully formed so that adverse consequences are avoided (the rightholder’s conduct being recognised as bad faith conduct, reimbursement of the importer’s legal costs and no further possibility to impose a prohibition);
• if disposal of the goods is demanded, select the situations in which imported goods may not correspond to the established rules with regard to the consumers’ lives and health, safety protection, protection of environment, etc.

Help from your advisers

Pepeliaev Group's lawyers will readily provide the necessary legal support on all issues relating to the development of a strategy regarding parallel import under the new conditions and on all issues relating to representation in courts, before customs authorities and before bodies of the FAS of Russia.