Gowling WLG (International) Inc - Russia
The continuing economic crisis and the drop in disposable income have motivated Russians to seek cheaper alternatives for consumer goods. This has led to an increase in the circulation of counterfeit goods.
The continuing economic crisis and the drop in disposable income have motivated Russians to seek cheaper alternatives for consumer goods. By necessity, they have become less discerning as to sources of origin and quality. This has led to an increase in the circulation of counterfeit goods.
According to a recent report from Moscow’s Higher School of Economics (HSE), the total amount of illicit trafficking in the main consumer markets exceeds 9% of the total retail trade volume in Russia and amounts to more than Rb2.5 trillion (approximately $42 billion). The share of counterfeits in different economic sectors varies from 5% to 30%, with the most vulnerable sectors being apparel (including sportswear), footwear, alcohol and non-alcoholic beverages, tobacco, perfumery and cosmetics, food and replacement car parts.
Russia is a civil law country and its legal system is based on codified procedural and substantive laws. The relevant national legislation provides for criminal, administrative and civil liability for counterfeiting. The core provisions are primarily set out in:
- Part IV of the Civil Code (230-FZ, December 18 2006);
- the Criminal Code (63-FZ, June 13 1996);
- the Code of Administrative Offences (195-FZ, December 30 2001); and
- the Law on the Protection of Competition (135-FZ, July 26 2006).
The provisions pertaining to the enforcement of IP rights at the border are set out in:
- the Customs Code of the Customs Union, which sets out the customs control procedures;
- the Federal Law on Customs Regulations, which sets out the available measures for the protection of intellectual property; and
- the Administrative Regulations, which establish the procedure for the maintenance of the Customs Register of Intellectual Property.
In addition, major international IP treaties are an integral part of the Russian legal system, including:
- the Agreement on Trade-Related Aspects of Intellectual Property Rights;
- the Paris Convention;
- the Madrid Agreement and the Protocol to the Madrid Agreement;
- the Berne Convention;
- the Rome Convention; and
- the Phonograms Convention.
Eurasian Customs Union
The Eurasian Customs Union (ECU) was established by the Eurasian Economic Union Treaty on January 1 2015. It is an economic union of five member states: Belarus, Kazakhstan, Russia, Armenia and Kyrgyzstan. Its objective is to form a unified customs territory with free internal trade; for example, it is intended that goods imported into one member state can then freely circulate within the entire ECU.
Since the launch of the ECU, its members have been working to harmonise and unify their IP laws and regulations. The following initiatives are currently underway:
- adoption of a new Customs Code of the Eurasian Economic Union to replace the current Customs Code of the Customs Union. The new code is intended to further harmonise customs regulations and procedures;
- creation of a single customs register for IP assets, which will replace member states’ national IP registers and significantly enhance the efficiency of customs recordals. The creation of the register is provided for in the Agreement on a Single Customs Register of IP Assets of the Customs Union of the Member States (May 21 2010), which became effective on June 3 2011. However, the register itself has not yet been created and implementation may take more time;
- introduction of a Eurasian Union trademark, the Common Economic Space trademark, whereby applicants from member states will be able to register a single trademark providing legal protection across all member states as an alternative to separate national trademark registrations. This was promised for 2018, but that timing appears to be unlikely; and
- reconciliation of the Agreement on Copyrights and Associated Rights Collective Management Procedure, which establishes a unified procedure for the collection, distribution and payment of royalties to rights holders for reproduction of works and sets the principles for collective rights management in the member states.
The Law on Customs Regulations, taken in concurrence with the Customs Code of the Customs Union and the Administrative Regulations, provides mechanisms to prevent the illegal entry of counterfeit goods into Russia. To implement routine customs inspections, a rights holder may apply to record its rights on the Customs IP Register (CIPR), which is maintained by the Federal Customs Service. These rights can be:
- registered trademarks;
- objects of copyright and neighbouring rights; or
- recognised geographic designations.
For its mark to be included on the CIPR, the rights holder should provide:
- the full corporate details, address and corporate status of the rights holder and its representative;
- a power of attorney in the name of its representative, if any;
- a list of valid trademarks in Russia and their registration certificates;
- information about other parties that are authorised to use the trademarks;
- sufficient information to allow Customs to identify the goods;
- information on cases of trademark infringement;
- the term requested for the recordal, which cannot exceed the life of the trademark or in any event two years and can be renewed;
- a document confirming that the rights holder will reimburse any damages suffered as a result of an unlawful customs suspension; and
- a bank guarantee or liability insurance for the amount of Rb500,000 ($8,000).
Customs recently imposed a further obligation on rights holders that request customs recordal: to justify the need for recordal, they must show that at least some counterfeit goods have in fact been introduced into civil circulation in Russia. Evidence that counterfeit goods have been imported, sold or advertised in Russia is required. Presumably, this new requirement is to demonstrate that import of counterfeit goods is a real and current problem for brand owners.
When a registered IP right is recorded with Customs, it will monitor the importation of goods that bear or include that intellectual property right. If a customs inspection reveals that goods may be counterfeit, then the goods are detained for 10 days and the rights holder is informed of the situation. The rights holder may examine the goods (eg, take samples and photographs) and inform Customs if the goods are counterfeit. If they prove to be counterfeit, the rights holder must either apply to Customs for action or initiate its own civil proceedings before the goods are released.
The current situation with the ECU creates enforcement complications. There is a ‘hole in the dam’ effect, in that the number of country-by-country recordals among the member states’ individual customs registers varies significantly; for example, there are more than 3,300 recordals in Russia, but only 200 in Belarus and around 400 in Kazakhstan. The current situation involving an operating customs union without counterpart recordals in each member country means that counterfeits may enter the union through the borders of some member countries more easily than through those of others. For the time being, it is recommended to separately file applications for registration of national trademarks and counterpart customs recordals in each member country of the Customs Union.
Under Article 1484 (1) of Part IV of the Civil Code, rights holders have the exclusive right to use their registered trademarks in Russia. This includes the right to introduce a branded product into the market in Russia. Until recently, the article entitled rights holders to file civil litigation claims against parallel importers. Authentic goods imported by third parties without the rights holder’s authorisation were found by the courts to be counterfeit and therefore could be destroyed.
On February 13 2018 the Constitutional Court declared that Russia should take a much more tolerant stance towards parallel importers. Rights holders are now expected to act in good faith (ie, not restrict the import of authentic goods by third parties if such activities lead to overpricing or restrict the flow of goods). Rights holders would be seen as being especially objectionable if they were to restrict the access to goods of vital necessity (eg, life-saving medicines and life-support equipment).
The Constitutional Court made two important observations regarding enforceability and the penalties for infringement claims based on parallel importation. Courts are now entitled to dismiss a trademark infringement claim against a parallel importer in full or in part, if the bad-faith conduct of a trademark owner might endanger the life and health of citizens or other significant public interests. If a case of trademark infringement by reason of parallel importation can be made, the traditional penalties for such an infringement should be reduced. The fines for importing ‘grey’ and counterfeit goods should not be the same, except when losses from the import of grey goods are comparable with the losses from the import of counterfeits.
Thus, infringement by reason of parallel importation remains a constitutionally sound cause of action, but it can now only be asserted in very limited cases with penalties that are quite inconsequential.
According to Article 180 of the Criminal Code, the illegal use of a trademark, if committed repeatedly or if causing substantial damage (exceeding Rb250,000 (approximately $4,000)), is punishable by a fine of Rb100,000 to Rb300,000 ($1,500 to $4,800) or imprisonment for up to two years. In practice, the police often require evidence of substantial damage before initiating an investigation.
The Code of Administrative Offences sets out administrative penalties and procedures for trademark infringement. Article 14.10 of the Code of Administrative Offences provides liability for the illegal use or manufacture of trademarks, service marks and designations of origin. Fines may be imposed on counterfeiters. According to this article, any illegal use of a foreign trademark may lead to an administrative fine of Rb5,000 to Rb10,000 ($80 to $158), in addition to confiscation of the items bearing the illegal trademark and the materials and equipment used for their manufacture. The fine increases to Rb10,000 to Rb50,000 ($158 to $790) for public officials and Rb50,000 to Rb200,000 ($800 to $3,355) for legal entities.
The manufacture for the purpose of sale of goods bearing an illegal trademark is punishable by a fine for individuals of double the value of the confiscated goods and seizure of the equipment and materials used to manufacture them. This fine increases to three times the value of the goods for public officials and five times the value of the goods for legal entities.
Police officers most often initiate proceedings under Article 14.10 on receipt of a rights holder’s petition. These cases can also be initiated by customs officers and officers of the Federal Service on Surveillance for Consumer Rights Protection. These public officials then collect the necessary evidence of infringement and bring the case before the court.
Article 14.6 of the Law on the Protection of Competition prohibits unfair competition aimed at creating confusion. It provides the legal means to enjoin the unauthorised import of counterfeit products. Article 14.6 prohibits competitors from engaging in activities that are likely to cause confusion with those of the rights holder; this includes use of a designation that is identical or confusingly similar to the relevant trademark. ‘Use’ includes placing the relevant mark on goods, labels or packages and other uses in respect of goods that are sold or put into civil circulation, as well as online use. The same article also prohibits imitation of trade dress.
The Anti-monopoly Service prosecutes unfair competition cases. Its rulings can be appealed to the courts.
The pharmaceutical industry is particularly vulnerable to counterfeiting, given the market demand for low-cost medicines and the ease with which the physical appearance of drugs can be replicated. Before legislative amendments came into force on December 31 2014, the circulation of counterfeit medicines and medical devices was treated no differently from the circulation of counterfeit luxury goods (eg, purses and scarves). The primary penalty was seizure of the counterfeit goods and a nominal fine. However, the following prohibitions and penalties aimed at combating pharmaceutical counterfeiting were introduced in the 2014 amendments to the Criminal Code:
- production of medicines or medical devices without a state licence (Article 235.1) – punishable by three to five years in prison and a fine of Rb500,000 to Rb2 million ($8,000 to $31,600);
- production, circulation or import of falsified, inferior or unregistered medicines or medical devices and circulation of unregistered falsified active additives containing pharmaceutical substances exceeding a value of Rb100,000 (Article 245.1) – punishable by three to five years in prison and a fine of Rb500,000 to Rb2 million; and
- forgery of documents relating to medicines or medical devices (Article 327.2) – punishable by up to three years in prison and a fine of Rb500,000 to Rb1 million ($7,900 to $15,800).
In addition to criminal and administrative remedies, rights holders may pursue a civil action in which the claim can include an injunction, delivery up for destruction and monetary compensation.
According to Article 1515, the rights holder may claim:
- compensation of Rb10,000 to Rb5 million ($160 to $80,000), at the court’s discretion;
- double the price of the goods that were illegally trademarked; or
- double the price of a licensed right to use a trademark based on the price usually charged for its lawful use.
As of June 1 2016, a cease and desist letter must be sent to potential infringers before filing suit. Prospective plaintiffs must present evidence to the court that the warning letter was actually communicated to the defendant; otherwise, the case will not proceed. The 30-day rule applies to all court actions except those where only an injunction, and no other relief, is sought; in that case, no advance notice is required. In the case of prospective non-use cancellation actions, the advance notice required is 60 days.
Preliminary injunctions are provided for under the law, but seldom granted. The Procedural Code stipulates that preliminary injunctions may be granted *ex parte* at a judge’s discretion at any stage of the court proceedings if failure to take such a measure could:
- cause complications to or prevent enforcement of the court decision; or
- cause substantial harm to the applicant.
The preliminary injunction measures must be adequate to the demands made (ie, directly related to the subject of the dispute, proportionate and necessary to secure enforcement of the court decision or to prevent harm to the applicant).
A preliminary injunction application need not contain all the evidence required to support the main claim, but evidence of ownership and infringement is required. Evidence must also be provided that the preliminary injunction is the only way to prevent potential irreparable harm caused by the IP infringement. This is a difficult test to satisfy.
On July 3 2013 a specialised IP Court was established in Russia. This welcome development has tremendously improved transparency and predictability as regards the protection of IP rights in Russia. The IP Court hears IP infringement cases as a court of second appeal (cassation). It is also a first-instance court for reviewing patent and trademark validity decisions of the Russian Patent Office.
Despite the difficult economic situation, the Russian online retail market has shown growth in both real terms and value. For instance, sales on Ozone.ru – one of the most established Russian online retailers – grew by 20% in the first seven months of 2016. Foreign retailers’ online sales in Russia have also grown significantly, from approximately $3.4 billion in 2015 to almost $4.3 billion in 2016. According to the HSE research report, the share of online sales of counterfeits – particularly clothing, footwear, perfumery and cosmetics – increased to 8% in 2016 alone.
No special laws regulate online counterfeiting in Russia; as such, it is regulated by the same legislation that applies to counterfeiting in brick-and-mortar retail sales.
Russian courts are the only venues for hearing domain name disputes in the national domains ‘.ru’, ‘.su’ and ‘.рф’; there are no domain name dispute resolution agencies.
The courts apply the following criteria to decide whether the domain name holder acted in bad faith in using a domain name that is identical or confusingly similar to a registered trademark:
- The domain name is identical or confusingly similar to another party’s trademark;
- The domain name holder has no rights to or legitimate interests in the domain name; and
- The domain name was registered and used in bad faith.
Internet service provider liability
Article 1253.1 of the Civil Code exempts internet service providers from liability associated with the transmission of information if:
- the provider did not initiate the transmission and did not select the recipient;
- the provider does not modify the material after its receipt, except for modifications that are necessary for the technological process of transmission; and
- the provider did not know and could not have known about the infringement.
Service providers that provide hosting services will not be liable when:
- the provider did not know and could not have known about the infringement; and
- on receipt of written notification of infringement, the provider acts expeditiously to remove the infringing material.
Government agencies and police forces are generally not sufficiently equipped to win the fight against counterfeiters single handed, particularly in challenging economic times. Accordingly, rights holders must also be vigilant and proactive. The following measures and strategies may be useful:
- Appoint local representatives – in order for a customs recordal to be effective, rights holders should appoint a local representative to coordinate daily inquiries from Customs and engage experts when needed to confirm that detained goods are counterfeit; the expert can provide Customs with a supporting opinion to justify a seizure.
- Register core marks as trademarks – the core marks of brand owners should be registered in Russia and if possible in all ECU member states.
- Make customs recordals in all ECU member states – where possible, enter recordals on all customs registers of ECU member states.
- Exercise market vigilance – predetermine the acceptable scope of activity and where to draw the line; then stay on top of the market, which is in a constant state of flux. In addition, predetermine with preferred counsel fixed costs for typical enforcement steps and promptly put them in motion when needed.
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