Superior Court of Appeals recognises principle of national exhaustion

The Superior Court of Appeals has issued an important decision on the issue of parallel importation in Brazil (December 18 2012).

In the current context of intense economic integration and circulation of merchandise, parallel importation has become a matter of the utmost significance. Essentially, parallel importation consists in introducing original products into a certain market without the consent of the manufacturer or the owner of the IP rights.

Some uncertainties exist as to the lawfulness of this practice, chiefly concerning the exhaustion of the trademark owner’s rights - that is, whether the principle of regional, national or international exhaustion should apply.

This question is treated by each legal system in accordance with the policy adopted by each country, as prescribed in Article 6 of the Agreement on Trade-Related Aspects of Intellectual Property Rights:

“Exhaustion: For the purposes of dispute settlement under this Agreement, subject to the provisions of Articles 3 and 4, nothing in this Agreement shall be used to address the issue of the exhaustion of intellectual property rights.”

In Brazil, the Industrial Property Law specifically provides that the principle of national exhaustion of trademark rights applies:

“Article 132 – The owner of a trademark may not:

(...)

III – prevent the free circulation of products placed in the internal market by himself or by another with his consent.”

In other words, once the trademark owner (or its licensee) has introduced its product into the Brazilian market, it can no longer prevent the free circulation of the product.

The Brazilian courts have already had some opportunities to address this issue. The decisions of the superior courts which have had the greatest repercussions are:

• the CENTRUM case (Superior Court of Justice (STJ), Special Appeal No 609.047/SP, October 20 2009); and
• the DIAGEO case (Superior Court of Justice (STJ), Special Appeal No 1.249.718/CE, December 18 2012).

Yet, notwithstanding the clarity of the law, parallel importation is still a controversial issue in Brazil.

In the CENTRUM case, American Home Products Corporation, the manufacturer of the Centrum multivitamins and other products, sought to prevent LDZ Comércio Importação e Exportação Ltda from commercialising products bearing the CENTRUM mark, on the grounds that importing and commercialising original products without due authorisation constituted unfair competition and trademark infringement.

The lower court and the State Court of Appeals of São Paulo dismissed the complaint, finding that the Centrum products commercialised by LDZ were original and had been introduced into the Brazilian market by another company. The plaintiff filed a special appeal to the Superior Court of Justice in which it contended that LDZ could not import and/or commercialise products identified by the CENTRUM mark without its consent.

The Superior Court of Justice upheld the decisions of the lower courts, finding that “parallel imports are not necessarily unlawful”. If a product is introduced into the Brazilian market with the permission of the foreign titleholder or by another company which had its consent, the importation and commercialisation of the product in Brazil would not constitute trademark infringement and/or unfair competition.

The court also stated that:

“parallel imports are carried out outside the selective distribution system created by the product manufacturer and the owner of the industrial property rights in Brazil. The original product is introduced into the Brazilian market without the authorisation of the owner of the trademark in Brazil, but with the permission of the foreign titleholder or by another company which had its consent”.

According to the court:

“the legal protection afforded to trademarks does not have the purpose of protecting the distribution channels imposed by the manufacturer/titleholder, which form a strict relationship with an exclusive distributor. Hence, it is not possible to impose obligations established in an exclusive licence agreement on third parties”.

Therefore, on the one hand parallel importation is unlawful under Article 132(III) of the Industrial Property Law, but on the other hand, there is an express understanding that parallel importation is lawful, provided that it is carried out in a lawful manner in accordance with the principle of free enterprise.

In the recent DIAGEO case, the Superior Court of Justice partially granted a special appeal (No 1249718) filed by Diageo Brands BV and its Brazilian affiliate (collectively Diageo) against a decision of the State Court of Appeals of Ceará. The defendant in this matter was GAC Importação e Exportação Ltda.

Two lawsuits had been filed:

• one by the trademark owner, which sought the cessation of the importation, distribution and commercialisation of ‘Scotch whiskies’ by GAC; and
• the other by the importer, which sought to put an end to the boycott on the import of said products, as well as indemnification for the period during which Diageo had refused to sell the products to it.

The Superior Court of Justice ordered GAC to refrain from importing and commercialising any of Diageo’s products without the latter’s previous and express consent, bearing in mind that the direct importation carried out by GAC constituted parallel importation and infringed Article 132(III) of the Industrial Property Law. The decision thus expressly admitted that the principle of national exhaustion of rights applies in Brazil.

According to the Superior Court of Justice:

“This legal provision… is not designed to bar the importation of counterfeit products, ie products that ‘imitate, reproduce or falsify other trademarks’, meaning that it is not intended to prohibit the importation of ‘pirated’ products, for which no specific provision of the Industrial Property Law would be needed, since counterfeiting or… ‘piracy’ is totally prohibited by an entire system of protection of industrial property and constitutes a veritable crime - to the extent that, evidently, the importation of products of this kind could never be authorised. Therefore, the restriction would be intended solely for genuine products...

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Under Brazilian law, therefore, exhaustion of the use of the mark occurs through the legitimate introduction, with the consent of the mark owner, into the national market, because… ‘it is presumed that the owner, when placing the product on the domestic market, is automatically remunerated and will not be able to prevent said product from circulating indiscriminately’… Therefore, the owner of an international mark has, in principle, the right to demand that its consent be obtained for parallel importation into the national market…”

However, it was stated that Diageo’s products were introduced by GAC into the Brazilian market 15 years ago without any complaint or opposition by Diageo. Based on this circumstance, the Superior Court of Justice concluded that Diageo’s challenge should be accepted, but that GAC would be entitled to compensation for the damages resulting from the prohibition to import and commercialise Diageo’s products in Brazil henceforth.

The Superior Court of Justice considered that:

“… the parallel importation which has been carried out by… GAC cannot be held to be unlawful in view of the… appellants’ failure to oppose it for such a long time, thereby conferring consent… It had the right to purchase the goods, in view of this long acquiescence…

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Since there was no prior distribution agreement, the appellants cannot be forced to enter into a contract, but can only held liable for the consequences of the cessation of the economic activity of parallel importation, which they consented to for… 15 years.

The right to indemnification claimed by [GAC] lies within the ambit of the right to compensation, given the refusal to sell, to the extent that the grounds of the judgment are based on Article 186 of the Brazilian Civil Code of 2002.”

It was stated that the amount of the indemnification should be calculated in a specific proceeding before the lower court. The Superior Court of Justice:

“[upheld] the sentencing of the appellants to pay compensation for loss of profit for the duration of the period of refusal to sell, this period to be defined by means of settlement, subject to the criteria established by the judgment (but not connected with the time period used for computing the loss of profit, fixed by the appellate decision up to the date on which the arbitration examination was performed).”

It is likely that the approach of the Superior Court of Justice will be re-examined soon, in light of the differences with the decision in the CENTRUM case.

Therefore, the position of the Brazilian courts on this issue is yet to be harmonised and remains controversial. These two decisions represent an important step towards defining the limits of parallel importation, but a clearer approach is still needed on the issue of parallel importation in Brazil.

Fernando Eid Philipp, Gusmão & Labrunie, Sao Paulo