Understanding Trademark Exhaustion and Parallel Import in Indonesia

What is Trademark Exhaustion?

Intellectual property (IP) rights pertain to a set of exclusive entitlements conferred upon an IP holder. In the case of trademarks, the proprietor is endowed with an exclusive right to utilize, advertise, and market the brand. However, a pertinent question arises when an unauthorized party, without the proprietor's consent, vends goods under the said trademark, even if they are authentic and produced by the proprietor. The author alludes to this circumstance as "trademark exhaustion," which seeks to explicate the extent of the proprietor's right to prevent or restrict such acts.

Trademark exhaustion (known as “first-sale” doctrine in the US) refers to the practice of others selling goods from that trademark without the owner's authorization[1]. Trademark exhaustion occurs when a trademark owner or someone authorized by them places a trademarked product on the market, and a third party acquires ownership through a legal transaction and can freely sell that product[2]. To achieve exhaustion, the product must be placed on the market by the owner or their legal successor. The first-sale rule limits the exclusive rights of the trademark holder to the initial sale of the product in the location of purchase.[3] Just as the name denotes, the doctrine seeks to “exhaust” the rights of a trademark holder when he has been able to obtain an economic return from the first sale or placing of such product in the market hence, he loses his right of commercial exploitation for such product.

Various Types of Trademark Exhaustion

The scope of the principle of trademark exhaustion may vary depending on the region or country. There are three kinds of exhaustion of rights (re: trademark exhaustion).

First, under national exhaustion[4], trademark exhaustion occurs where a trademark product is out on the market within a specific country by the trademark owner  or someone authorized by them (re: trademark proprietor), a subsequent sales of the products on that country do not require the owner’s permission,  even if it conduct by a third party.

Second, in regional exhaustion[5], goods released with the rights owner's consent in any country within a regional market or union are subject to exhaustion of rights. The European Union (EU) is an example of a region that practices regional exhaustion, whereby once an IP work or product is lawfully sold or distributed by the owner of the trademark within the EU, the exclusive rights of the owner with respect to that product or copy are exhausted  only within the borders. In such cases, the trademark owner can no longer prevent third parties from reselling, renting, lending, or engaging in other types of commercial exploitation of the good within EU area. The application of the exhaustion doctrine to trademarks, particularly the regional exhaustion doctrine, is exemplified in the case of Silhouette International Schmied Gesellschaft & Co. KG v. Hartlauer Handelgeselschaft. This case illustrates how the regional exhaustion doctrine is applied. The European Court of Justice ruled that the exhaustion doctrine outlined in Article 7(1) of the First Council Directive 89/104/EEC on December 21, 1988[6], only applies to goods that were first sold within the EEA and does not apply to goods that were previously sold outside the EEA. Therefore, Silhouette can prevent parallel imports (explanation about parallel import will be provided on the next section) of its trademarked goods sold outside EEA.

Third, under the international exhaustion system[7], placing goods on the market by or with the consent of the intellectual property owner anywhere in the world results in the exhaustion of the owner's rights. This system allows for the free flow of goods and enables retailers to import from cost-effective suppliers.

Trademark Exhaustion and Parallel Import

Trademark exhaustion and parallel importation are two legal concepts that have a correlation that must be examined. Trademark exhaustion is a principle holds that a trademark owner’s rights over their trademark are exhausted after the first sale of a product bearing that trademark. This means, the trademark owner cannot control the resale or distribution of the product. Parallel importation, on the other hand, defined as "goods manufactured outside the jurisdiction, by, or under the authority of, the owner of an industrial property right relating to these goods, but imported by someone other than an authorised importer or distributor”. [8] Parallel importation involves the importation of genuine branded goods, but they are imported into a country by the unauthorized distributor/importer. Parallel import can also occur with goods produced within the importing country, sold in foreign markets, and then re-imported back to the importing country. This latter scenario is referred to as "round trip" parallel import .[9]

The relationship between trademark exhaustion and parallel importation is such that parallel importation relies on the principle of trademark exhaustion. If a trademark owner sells their products in one country, they cannot use their trademark rights to prevent the importation and sale of those same products in another country, even if those products were not intended for sale in that country. In other words, trademark exhaustion allows for the parallel importation of genuine branded goods, even without the authorization of the trademark owner.

Trademark Exhaustion and Parallel Import from the Perspective of the Existing Laws and Regulations in Indonesia

Article 6 of the TRIPS Agreement allows member countries the freedom to decide which exhaustion principle they consider suitable. However, there is no explicit or specific regulation on exhaustion rights in trademark legislation in Indonesia, starting even on Indonesian current trademark law (i.e. Law No. 20/2016 regarding Trademark and Geographical Indication, hereinafter referred as “Trademark Law”). This is unlike other forms of intellectual property, like patents, where Indonesia follows the national exhaustion principle. This means that patent owners have the exclusive right to prevent others from importing their products without permission[10].

In Indonesia, the provision in the Trademark Law is almost all exclusive licensing agreements. Non-exclusive license is previsioned in Article 43 of Indonesia Trademark Law, which states: "Registered trademark owners who have granted licenses to others as referred to in Article 42 paragraph 1 of this Act can still use the trademark themselves or grant licenses to third parties to use the trademark, unless otherwise agreed." This provision, author believe, can be interpreted to mean that a trademark proprietor is allowed to grant licenses to others while still retaining the right to use the trademark for themselves or to grant licenses to third parties, unless there is an exclusive agreement in place.

According to Mr. Budi Agus Riswandi in his book titled "Important Issues of Intellectual Property Rights in Indonesia," it is challenging to interpret that trademark law in Indonesia provides trademark holders with an exclusive right to prevent parallel imports.  In fact, the issue of parallel imports is often associated with trademark infringement. This occurs even when genuine goods obtained legally from overseas are brought in to Indonesia for commercial purposes without the knowledge and consent of the trademark licensee, and the products are sold in Indonesia. This is reflected in the Supreme Court of Republic of Indonesia decision between  PT Modern Photo tbk (“Modern”) V. PT International Photographic/PD Star Photographic Supplies (“International”)[11] . In this case, the Supreme Court of the Republic of Indonesia has ruled that the parallel importer, i.e. International, has infringed upon the trademark rights of Modern, the sole distributor of Fuji film rolls in Indonesia. However, the imported products by International are actually genuine products sourced from Union Camera Ltd, which has been officially appointed by Fuji Photo Film Co as the worldwide distributor of Fuji products at a lower price. The legal basis used by the Supreme Court is Article 90 of the Trademark Law of 2001, which considers International as "wrongfully using an identical trademark as a registered trademark owned by another party," referring to Fuji Photo Film Japan or its license holder in Indonesia. This decision gives the impression that the Supreme Court has interpreted the term "wrongfully using an identical trademark as a registered trademark owned by another party" broadly[12], even though the Trademark Law of 2001 does not explain the meaning of “using” a trademark.

Having said the above, even though, the Indonesian legal system does not recognise the principle of stare decisis[13], so the lower courts are not bound to follow the decisions of higher courts, one can still argue that under the realm of IPR, Indonesia itself recognizes that parallel imports (by law) are not permitted as it is limited by rights that can only be enjoyed by the proprietor of trademark and/ or its licensee.

This decision is actually hindering the protection of consumer and unfair competition, where the rationale behind permitting parallel imports in the field of trademarks was to protect consumer interests from the possibility of monopolistic pricing practices by sole distributors.  With parallel imports, the prices of genuine goods indeed can be reduced, allowing consumers to obtain genuine products at a lower cost[14]. The absence of the law of trademark exhaustion also, the Indonesian government also cannot interfere in the agreements between the Licensor and Licensee outside of Indonesia, where both are not subject to and within the jurisdiction of the Republic of Indonesia, actually encourage that Parallel imports must be regulated clearly under both intellectual property (IP) and competition laws[15].

In light of the aforesaid, Article 60 of TRIPs provides an exception to suspected violations and the application of member state authority to detain goods suspected of infringing intellectual property rights. It states that "members may exclude from the applications of the above provisions small quantities of goods of a non-commercial nature contained in travellers’ personal luggage or sent in small consignment." A similar provision appears in Article 63 of Law No. 10 of 1995 on Customs, which states that "the provisions on the suspension of the release of goods suspected of infringing intellectual property rights do not apply to personal belongings of passengers, crew members, border crossers, or goods sent by post or courier services that are not intended for commercial value." This provision does not include the provisions that were amended by Law No. 17 of 2006 on Customs, so it remains in effect. Thus, it can be said that Indonesian government cannot prevent the entry of goods so long as those goods are not intended for commercial purpose and being suspected as infringing IP rights (i.e. counterfeit goods). Trademark law is particularly relevant to this issue, as the rights of traders and manufacturers are affected. It should be noted that trademark owners may still have other legal remedies available to them to prevent the importation and sale of counterfeit or pirated goods, such as patent or copyright infringement claims. Trademarks protect the reputation and goodwill of traders and improve their commercial reputation. They indicate the source of trademarked items or services and identify the territorial rights of the trademarked products or services. When parallel importation leads to a misrepresentation of the origins, reputation, or quality of trademarked goods, a dispute can arise.