Parallel importing is a form of unauthorized or unlicensed international trade that some importers partake in to capture the customer market. It is often referred to as the “gray market” because it needs some specific examples and explaining so that all parties are aware of its meaning and understand its lawfulness. The product themselves are not counterfeit, bootleg, or fake. However, the privilege to import those goods has not been granted by the owner of the intellectual property.
The Basics of Parallel Importing
Parallel importing is an unauthorized import of non-counterfeit goods into a country. The goods are imported without the express permission of the intellectual property owner. Individuals refer to this as gray market goods, and most trades entail high-priced branded goods such as jewelry, cameras, tablets, and watches.
In the parallel part of the import, it is a distributor, wholesaler, or retailer involved in bringing a reduced price patented, copyrighted, or trademarked product into a country. The distributor, wholesaler, or retailer may already market the product. This established marketplace provides the initial incentive for the import because the lower prices create a more competitive landscape. Competitors are forced to provide greater customer service satisfaction or lower their price to stay competitive.
Results of the Gray Market
While pharmaceuticals are a product that is ripe for parallel importing, it is not the only one. Different countries struggle with different parallel products due to consumer demand. Computer games and hardware, automobiles, and even toothpaste can fall prey to the trade. In 2019, as reported by National Public Radio, the Trump administration begin considering allowing certain drugs intended for foreign markets to be brought into the U.S. from Canada. The thought is that the parallel trade will drive down the price of these drugs in the U.S.
In some tourist frequented areas, there is a strong market because the consumer can not tell the difference between the authorized and the non-authorized product. As an example, in the United States, California places many controls on products sold in the state. In a parallel import, a product made for use in Florida may be brought into California for sale at a lesser price. The product made for use in California has the additional features required by the state and so are more expensive.
Example of Parallel Importing
Let's say an Entrepreneur XYZ wanted to export Nabisco’s Oreo cookies to Japan. Instead of reaching out directly to Nabisco to buy Oreos and exporting to Japan, they went to a major food distributor in Chicago. XYZ asked the distributor if they could buy volume quantities of Oreos each month from them for export to Japan.
Even if they said yes, Nabisco has strict rules in place on who handles its products on an exclusive basis worldwide. In this instance, some of Nabisco’s products are either made in Japan or a neighboring country for transport to Japan. While Entrepreneur XYZ might want to scratch the idea because it was too complicated or might constitute infringement, in reality, the effort actually constitutes parallel import to Japan.
The Lawfulness of Parallel Imports
At first blush, there's nothing illegal about producing goods and exporting them. But what comes into question is how your goods arrived in a particular country. For example, if you originally exported your goods to the U.K. and then discovered that those goods were then moved from the U.K. to Spain for consumption without your permission, that form of parallel importing is illegal.
How Illegal Parallel Importing Occurs
Let’s say you have an exclusive distributor in the U.K. called Company XYZ and a different exclusive distributor in Spain called Company ABC. You recall receiving an inquiry from a different company, LMP in Spain, asking to sell your products in that market on an exclusive basis. You recall responding that you already have representation in that market. Company LMP responds, “but we sell through e-commerce channels and your representative only sells through mom-and-pop stores.”
However, if you do your due diligence and double-check your contract, you discover that your Spain contract with Company ABC is responsible for selling throughout Spain in all customer categories including e-commerce, so you hit the brakes.
Fast forward and you receive an angry email from Company ABC that sales of your products are being made on one of the largest online platforms in Spain (and it's not your doing). Company ABC is clueless how these sales are taking place and question why you would authorize sales to another company when your contract specifically states they have “exclusivity” in Spain.
This is a wake-up call to a potential parallel import. Spain Company LMP did its homework. It found out who was importing your product in the U.K., contacted a third-party intermediary in the U.K. to solicit Company XYZ. Next, they made it appear that the intermediary was buying the product for U.K. consumption and then the intermediary re-exported the product to the Spain Company LMP so it could sell (unauthorized) goods through its e-commerce channels.
The difficult aspect of gray market activity is that when big money can be made, someone could easily turn a blind eye for fear of losing out on sales and profits. Besides, there is little you can do about controlling further acts of commercial exploitation, such as resale or selling to unauthorized distribution channels or customers, short of patrolling the market in person.