INSIGHT: ‘Parallel Import'—The Gray Market Goods Exception in Vietnam

Parallel import, or grey market goods, is a genuine product containing intellectual property rights (IPR), imported for sale into a market without the IPR owners’ permission. IPR owners would not support the importation of such products for many reasons, including negative effects on their pricing strategy, quality control efforts, and public perception of the branded goods in the importing market.

Despite the apparent downsides for IPR owners, parallel import is widely allowed by many countries on grounds of the exhaustion rule, also known as the first-sale rule under U.S. law.

This rule exhausts IPR owners’ power to exercise their IPR over products once such products have been sold by the IPR owners or with their consent. The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) itself provides that it does not address the issue of exhaustion of IPR in a WTO dispute (Article 6, TRIPS Agreement).

Meanwhile, the EU¬Vietnam Free Trade Agreement (EVFTA), signed on June 30 and pending ratification, stipulates that: “Each Party shall be free to establish its own regime for the exhaustion of intellectual property rights subject to the relevant provisions of the TRIPS Agreement” (Article 12.4, EVFTA). For the present purposes, suffice it to say that Vietnam is at liberty to deal with IPR exhaustion in domestic legislation.

Under Vietnam’s trademark regulations, the right to import the trademarked goods is one of the exclusive rights of the IPR owner.

However, while IPR owners have the right to forbid others to exercise certain trademark rights, such as the right to affix the protected trademark on goods, they do not have the right to forbid others to “circulate, import and exploit utilities of products which were lawfully put on the market including overseas markets, except products put on the overseas markets not by the trademark owners or their licensees” (Article 125.2(b), Law on Intellectual Property).

In other words, as long as the parallel import has been legally put on the market, including foreign markets by the trademark owner or its license, the trademark owner cannot prohibit the circulation, importation, and exploitation of such goods.

That said, additional requirements regarding the importation must be fulfilled with various laws and regulations regarding importation in general. For instance, Vietnam’s labeling regulations require certain compulsory contents to be displayed on a product’s label/sub-label in the Vietnamese language.

Moreover, anti-smuggling regulations also govern the importation of goods including parallel import. Failure to comply with these regulations would result in administrative sanctions, albeit not on grounds of intellectual property infringement.

Exceptions Allowed

Vietnam’s patent regulations do not specifically allow parallel import containing the protected patent, yet provide for many exceptions under which the use of a patent-protected product, which includes the importation of such product, is allowed.

These exceptions include the following (Articles 145 and 146, Law on Intellectual Property):

• Using inventions in service for personal needs, for non-commercial purposes, or for purposes of evaluation, analysis, research, teaching, testing, trial production, and information collection to carry out procedures to apply for licenses for the production, importation or circulation of products;
• Using inventions for the sole purpose of maintaining the operation of foreign transport vehicles in transit or temporarily staying in the territory of Vietnam;
• Using inventions by persons with “prior use right” according to Article 134 of this law (Article 134 of the Law on Intellectual Property allows, subject to limitations, a person to continue using an invention, after the patent to that invention is granted to another person, within the scope and volume of his prior use or preparation to use without having to obtain permission from or paying compensations to the patent owner, if the former has, before the filing date or priority date (if any) of a patent, used or prepared necessary conditions to use such invention which is identical to but created independently from the protected invention);
• Using inventions by persons authorized by competent state authorities under compulsory licensing decisions.

It can be inferred from the above that under Vietnam’s intellectual property law, the exhaustion rule applies to a large extent to trademark, but to a lesser extent to patent.

While a trademarked product can be freely imported for trade once it has been sold by the trademark owner or its licensee, the importation of patent-protected products is allowed only in limited cases as prescribed above.

Parallel importers often attract consumers by selling at lower prices than those offered by the IPR owner’s official distribution channels. Moreover, different versions or editions of a genuine product designed for different markets, which enter a market through parallel importation, can accommodate a wider range of consumers’ needs and preferences. These are among the reasons that parallel importation is often viewed favorably by consumers.

Competitiveness Decreased

From the IPR owners’ perspective, parallel importation decreases the competitiveness of their official distributors. IPR owners’ will also have difficulties keeping in check the quality of their products and related service if such products are distributed outside the official distribution channel.

Moreover, parallel importation affects IPR owners’ efforts in the customization of products for different markets. A product may function properly in the market it is officially distributed, but may encounter incompatibility issues and technical errors in the market it enters through parallel importation. In such a case, consumers’ rights may be affected.

To address the pitfalls of parallel importation, distribution agreements often contain provisions forbidding distributors to sell products outside a designated territory. However, this method may pose certain compliance risks under competition regulations.

There is currently no internationally agreed approach to balancing the interests of IPR owners, importers and consumers. As envisioned in various international agreements mentioned above, the decision is left to individual countries, based on their own consideration on the balancing of interests.

For the foreseeable future, the parallel import exception is likely to be maintained in Vietnamese law. However, regulatory requirements on importation still offer a viable option for IPR owners to take actions against illicit imported goods in certain circumstances.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Tran Manh Hung is the director and managing partner of BMVN International LLC, a licensed law firm and IP agent, and is a member of Baker McKenzie. He has been ranked as the most Strongly Recommended IP Lawyer by Global3000, an IP Star by Managing IP, and has been featured as the leading lawyer by Vietnam Central Television.

Hoang Ngoc Quan is a legal assistant at BMVN International LLC Dispute Resolution and IP groups. Quan assists lawyers in preparing substantive legal analysis encompassing areas of laws such as IP, consumer protection, civil/commercial contracts, corporate compliance, corporate law and dispute resolution.