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JURIST's Switzerland Correspondent is Cyrill P. Rigamonti, Esq., Dr.iur., University of Zurich Faculty of Law.
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Parallel Imports in Switzerland

[Zurich; Special to JURIST] In Switzerland, Federal Supreme Court decisions about important intellectual property issues are rather rare, probably because such questions do not arise due to the fact that Switzerland is too small a market to result in a sufficient number of intellectual property conflicts which are not settled at earlier procedural stages. The field of parallel imports of goods, which are protected by intellectual property rights, however, is an exception to this rule. In a series of leading cases handed down in recent years by the Federal Supreme Court, the Court has resolved the parallel imports issue with respect to trademark, copyright, and patent law. This report provides an overview of the regulation of parallel imports of goods protected by Swiss intellectual property rights.

What are "Parallel Imports"?

In some industries, the global distribution of goods is accomplished through systems of distributors carefully selected by the producers of these goods. The distributors are generally exclusively authorized to distribute the respective goods within a certain territory. The selective distribution system enables the producer of the distributed goods to control the distribution, to minimize intra-brand competition, and to charge different prices in different territories. If the prices vary too much between different territories, however, there may be competitors outside the selective distribution system trying to exploit the price differences by buying the goods from an authorized distributor in a "cheap" territory and subsequently selling them to consumers residing in an "expensive" territory at a price slightly beneath the price charged by the authorized distributor in said "expensive" territory. This business practice relies on so-called "parallel imports". In other words, the goods acquired from authorized dealers responsible for distribution in a "cheap" country are imported into an "expensive" country and compete with the goods distributed by authorized dealers in the "expensive" country. As a result, intra-brand competition in the import market will increase and, most probably, prices will decrease. Understandably, neither the producer of the goods nor its authorized distributors are in favor of encouraging this type of competition, which results in a loss of profits in many of their major markets.

No Statutory Solution in Switzerland

In order to protect the integrity of selective distribution systems, producers may rely on contractual measures and unfair competition laws, but most often they will also attempt to invoke intellectual property rights for the same purpose. In terms of intellectual property law, the question of whether parallel imports are allowed or prohibited generally depends on whether the applicable intellectual property laws prescribe national or international exhaustion of the intellectual property right associated with the imported goods. In the case of national exhaustion, the holder of an intellectual property right would be able to prohibit the import of goods protected by intellectual property and sold by authorized distributors outside the territory. If, however, the principle of international exhaustion were to apply, the right holder would no longer be able to prevent the parallel import of protected goods acquired from an authorized dealer outside the territory, because the intellectual property right would be "exhausted" at the time the products are first sold with the consent of the right holder. Since, in Switzerland, neither the Copyright Act, the Trademark Act, nor the Patent Act determined whether parallel imports of goods protected by intellectual property were allowed or prohibited, the Federal Supreme Court stepped in and decided this question by issuing three opinions relating to trademark, copyright, and patent law.

Trademark Law (Chanel SA v. EPA AG, BGE 122 III 469)

The first case was handed down by the Federal Supreme Court on October 23, 1996. The owner of the trademark "Chanel" and the authorized distributors of Chanel products sued EPA AG, which sold Chanel products acquired on parallel markets, because it was not an authorized Chanel distributor. The court of first instance, in this case the Geneva Court of Justice, dismissed the claim, and the plaintiffs appealed to the Federal Supreme Court, which affirmed the court of first instance's decision. In particular, the Court held that both under the prior and under the new trademark law (which entered into force in 1993) parallel imports are allowed, provided that there is no likelihood of confusion with respect to the origin of the trademarked goods.

In reaching its decision, the Federal Supreme Court carefully reviewed all the arguments relevant to the question and diligently interpreted the applicable rules of the Trademark Act in view of its history, its purpose, and its foundation in international treaties. A careful reading of the decision reveals, however, that the Federal Supreme Court did not hold that parallel imports could never be prohibited based on trademark law. It merely held that trademarked products sold outside a selective distribution system could be imported without any violation of the trademark laws, as long as the imported goods bearing the trademark could not be distinguished from the goods sold through the authorized selective distribution system. In other words, the Court's decision did not turn on the distinction between national and international exhaustion. Instead, the Court based its opinion on the concept that - in the absence of any likelihood of confusion about the origin or quality of the goods - parallel imports do not even raise genuine issues of trademark law

Copyright Law (Imprafot AG v. Nintendo Co., BGE 124 III 321)

In copyright law, the Federal Supreme Court issued its leading case on parallel imports on July 20, 1998. The defendant, Imprafot AG, had bought the videogame "Donkey Kong Land" (Game Boy) from Nintendo of America Inc. and had sold it in Switzerland. Nintendo Co., the owner of the copyright in the videogame, and Waldmeier AG, Nintendo's authorized exclusive distributor in Switzerland, sued Imprafot AG for copyright infringement. The plaintiffs obtained a preliminary injunction followed by an ordinary decision by the court of first instance (i.e., the Commercial Court of the Canton of Aargau) prohibiting Imprafot AG from importing said videogame. Imprafot AG subsequently appealed to the Federal Supreme Court, which reversed the decision rendered by the court of first instance. In doing so, the Court held that parallel imports of goods protected by copyright and disseminated abroad with the consent of the copyright holder may not be prohibited based on copyright law, even if the authorized foreign distributor, under its contract with the copyright holder, is not entitled to distribute the products in Switzerland.

Contrary to its decision in the Chanel trademark case, the Federal Supreme Court based its decision on the distinction between national and international exhaustion of copyright, because Section 12 of the Swiss Copyright Act embodies what in the U.S. is known as the "first sale doctrine": once a copy of a work subject to copyright protection has been disposed of with the consent of the copyright owner, those copies may be further distributed without the approval of the copyright owner, because the copyright has been exhausted. The question the Court faced was whether Section 12 of the Copyright Act was limited to national exhaustion or whether it included international exhaustion of the copyright. The Court ultimately opted for the international exhaustion approach and, therefore, made it clear that there is no basis in copyright law to prohibit parallel imports.

In reaching its decision, the Court explicitly stated that the principle of international exhaustion could not be defeated by contractually limiting the distribution right of a foreign distributor to certain territories excluding Switzerland, because these limitations are of a contractual nature and cannot be invoked against third parties. In other words, the Federal Supreme Court rejected the "implied license" approach sometimes applied in U.S. intellectual property law. Furthermore, the Court clarified that parallel imports may constitute unfair competition and violate the Federal Unfair Competition Act, if the importer actively instigates a foreign distributor to breach its contract with the copyright holder. In sum, neither copyright law nor contract law protects producers and authorized distributors of copyrighted goods against parallel imports, but they may - under certain circumstances - rely on unfair competition law to achieve the same goal.

Patent Law (Kodak SA v. Jumbo Markt AG, BGE 126 III 129)

In its December 7, 1999 decision, the Federal Supreme Court dealt with the issue of parallel imports from a patent law perspective. The plaintiff, Kodak SA, was the owner of European patent no. EP 0 028 099 and received the products to be distributed from its parent company, Eastman Kodak Co., which is located in the U.S. The plaintiff was exclusively authorized to distribute the patented goods in Switzerland. The defendant, Jumbo Markt AG, however, procured the same patented goods in the U.K. (where they were disseminated with the consent of the authorized distributor) and sold them in Switzerland. Kodak SA filed a suit against Jumbo Markt AG with the Commercial Court of the Canton of Zurich as the court of first instance, essentially asking for an injunction prohibiting the defendant from selling patented products which were not distributed by the plaintiff. The Commercial Court dismissed the claim, however, and held that the principle of international exhaustion - in view of the Federal Supreme Court precedent cited above - also applied to patent law. Kodak SA appealed to the Federal Supreme Court, which reversed the Commercial Court's decision and decided in favor of the plaintiff.

Contrary to its decision in the copyright case reported above, the Federal Supreme Court concluded that, in patent law, the principle of international exhaustion does not apply and that, as a consequence, the holder of a patent right may prohibit parallel imports of patented goods based solely on patent law. In reaching its decision, the Federal Supreme Court first noted that the question of whether parallel imports are allowed under Swiss patent law is not answered by any domestic or international law applicable in Switzerland. As a result, the Federal Supreme Court had to fill this gap by putting itself in the position of the legislature (in accordance with the methodology called for by Section 1 of the Civil Code). After lengthy comparative considerations and a weighing of the interests involved, the Court found that Swiss patent law calls for the principle of national exhaustion, given the fact that the differences between trademark and copyright law on one hand and patent law on the other hand do not mandate a uniform answer to the question of exhaustion in intellectual property law.

However, the Federal Supreme Court also noted that an abuse of the import monopoly by virtue of patent law may trigger the application of antitrust rules. It should be noted that this opinion was based on an exceptionally thorough review of comparative law. More specifically, the Federal Supreme Court considered the statutory sources and case law of Germany, France, Austria, Italy, and the European Union. In spite of the fact that there appears to be no country which applies the doctrine of international exhaustion, the decision was widely criticized, mainly because of its apparent inconsistency with the leading trademark and copyright cases reported above.

What about other Areas of Intellectual Property?

In the remaining areas of intellectual property law, such as design law, the law of plant varieties, and the law of layout-designs (topographies) of integrated circuits, it is still unclear whether parallel imports are allowed or prohibited. However, given the similarities between the fields of design law and the law of topographies and the field of copyright law on the other hand, it is likely that, in these areas, the Federal Supreme Court would follow its copyright decision and allow parallel imports. The law governing the protection of plant varieties, however, is more closely connected to patent law, which makes it probable that, in these cases, the Federal Supreme Court would follow a patent law approach and prohibit parallel imports.

Conclusion

In sum, the Federal Supreme Court has clarified the issue of parallel imports in trademark, copyright, and patent law. However, the solution is not uniform in that the Court chose three different approaches. This was possible, inter alia, because the TRIPS Agreement (to which Switzerland is a signatory) does not address the issue of parallel imports, as it is explicitly stated in Article 6 that "nothing in this Agreement shall be used to address the issue of the exhaustion of intellectual property rights." Without any internationally binding rule, however, it is and will remain possible for countries to put policy over consistency by adjusting their laws to the needs of their respective national industries, especially if there is a strong national industry to be protected against parallel imports, such as Switzerland's pharmaceutical industry.

Dr. Cyrill P. Rigamonti, Esq.
JURIST Switzerland Correspondent
January 25, 2002

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