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Exhaustion of Trademark Rights in Russia: Recent Trends in Law and Judicial Practice

This year the national principle of exhaustion of trademark rights, which has been consistently applied by Russian legislators and courts for more than ten years, is facing developments that could potentially change how this principle is applied in practice. These trends, which need to be taken into account by business, include the recent position of the Russian Constitutional Court, which formulated criteria for considering court cases on parallel imports, and the recent Russian countersanctions proposals of local lawmakers, which could de-facto legalize parallel imports of certain categories of goods.

Existing legal regulation and judicial practice

Current Russian trademark legislation and judicial practice are explicit on the issue of parallel imports. At this stage unauthorized imports are recognized as infringing trademark rights and prohibited by both the legislators and courts. The right to prohibit parallel imports stems from the general authorities of the trademark owner, provided by the exclusive trademark right. The import of goods that bear trademarks into the Russian Federation with the aim of introducing such goods onto the market is recognized as a separate type of trademark use that requires the consent of the trademark owner. If such consent is missing, the import (and/or distribution) is deemed illegal.

Rules providing for the national exhaustion of trademark rights were directly written into Russian trademark law back in 2002. However, even before that date, the highest Russian judicial bodies had ruled in several court cases confirming the rights of trademark owners to prohibit unauthorized imports of genuine products bearing their trademarks into Russia.

Currently the national principle of exhaustion of trademarks rights is supplemented in Russia by the regional principle of exhaustion. This principle of exhaustion is in effect in Russia and in other countries of the Eurasian Economic Union (Armenia, Belarus, Kazakhstan and Kyrgyzstan) under the Treaty on the Eurasian Economic Union. This means that any trademarked goods that were brought to market in Russia or any other member country of the Union by the trademark owner or with the owner's consent can subsequently freely circulate on the markets of all member countries of the Union.

Recent position of the Russian Constitutional Court

This February the Russian Constitutional Court - the body responsible for judicial supervision over the compatibility of legislation and executive actions with the provisions and principles of the Russian Constitution - confirmed the constitutionality of current civil legislation establishing the national principle of exhaustion of exclusive rights to a trademark but defined criteria to be applied in cases involving parallel imports.

The Court established the following rules that the lower courts should follow when considering parallel imports cases.

1. The legal remedies for import of counterfeit (fake) products - i.e. withdrawal of the goods from circulation, their destruction, and payment of damages or compensation to the rights holder - can also be applied to import of grey (original but illegally imported into Russia) goods. However, to maintain the balance of rights, the severity of the sanctions in parallel imports cases should be significantly less than in cases involving fake products.

The confiscation and destruction of grey goods is possible only if they are of improper quality or if their introduction onto the market would create a risk to people's life or health, the environment or cultural interests.

The amount of trademark infringement compensation in cases involving parallel imports should be significantly less than in cases involving the import of counterfeit products, except in instances when the rights holder suffers significant losses, comparable to the losses resulting from the use of trademarks on counterfeit products.

2. Under certain circumstances, the actions of the trademark owner aimed at the prohibition of parallel imports may be considered as bad faith actions violating the legislation on unfair competition. In particular, in the Constitutional Court's view, such actions cannot be considered legitimate if they limit access to certain vitally important goods (certain categories of medicines, equipment which is necessary for life support, etc.) or are carried out as part of a sanctions regime against Russia.

3. If the courts, when considering cases on parallel imports, find that the actions of the trademark owners can be deemed as in bad faith, they may at their own discretion completely or partially refuse to grant the claims of the rights holder.

Summarizing the above, the Constitutional Court held that parallel imports are still prohibited and parallel importers may still be liable for the illegal use of trademarks. After the Constitutional Court's ruling there have been a number of cases decided in favor of trademark owners and prohibiting parallel imports. Now, however, it is necessary to be prepared for bad faith-related arguments from parallel importers and to be able to provide relevant evidence to challenge them.

Russian Countersanctions Proposals: Potential Impact on US and other International Trademark Owners

In April 2018 leaders of all the Russian parliamentary parties introduced Draft Bill No. 441399-7 "On Measures (Countermeasures) in Response to Unfriendly Actions of the USA and (or) other Foreign States". The draft lists countermeasures that Russia could introduce if the USA or other countries undertake sanctions against the Russian economy, legal entities or natural persons that are aimed at "threatening the territorial integrity, security and economic stability of Russia".

The draft, as initially worded, provides (among numerous other measures) for exhaustion of trademarks that are owned by (i) citizens of the USA or any other country; (ii) legal entities under the jurisdiction of the USA and/or other countries; and (iii) legal entities that are more than 25% owned "either expressly or by implication" by legal entities under the jurisdiction of the USA and/or other countries.

Although there is no specific definition of the term 'exhaustion' in Russian legislation or in the draft, most likely the draft refers to the 'international exhaustion' of trademark rights belonging to the above natural persons and entities. This would mean that original goods bearing such trademarks sold anywhere in the world could be freely imported into Russia even if they have not been allocated to Russia by the rights holders or with their consent.

It is difficult to identify the precise goods affected – the list of such goods is supposed to be announced by the Russian Government only after the law comes into legal force and if there is a direct decision by the Russian President to impose such exhaustion.

The draft is now under consideration in the State Duma (the lower chamber of the Russian Parliament) and the first hearing on the draft is scheduled to 15 May 2018. If the draft is adopted, it will be transferred to the Federation Council (the upper chamber of the Russian Parliament) which will then approve or veto it (in practice, the Council approves most bills). Once adopted by the State Duma and approved by the Federation Council, the law would then be submitted to the Russian President for signing. After its official publication, the law would become legally binding.

One point to note that the draft is currently subject of intense discussions between the lawmakers, experts and the business community and most likely by the date of the first and second hearings the draft will be significantly modified. As at the writing date there is unofficial news that the list of proposed countermeasures will be changed, and the 'exhaustion of trademarks' countermeasure could be theoretically removed from the final list of the countersanctions directly specified in the draft.

Bearing in mind that the above trends suggested by the Constitutional Court and the Russian lawmakers could significantly change both judicial practice and the current legal regulation in the field, it is extremely important for international brand owners to constantly monitor the positions of the lower Russian courts as they react to the Constitutional Court's guidelines and to be fully aware of further developments on the adoption and exact meaning of the proposed countersanctions to be able to assess their business impact.