Parallel Imports Are Good for Welfare, not Bad for Welfare - Assignment Example

s Parallel imports are good for welfare, not bad for welfare A manufacturer wishing to sell its merchandise in a foreign market frequently does so by means of an exclusive distributor who builds goodwill through advertising, imports the goods from the manufacturer, and sells the goods for a profit. Depending on such variables as exchange rate differences or local pricing practices, a third party--the "parallel importer"--may then find it profitable to purchase identical goods from distributors in other countries and import them in competition with the exclusive local distributor. Relieved of local advertising expenditures and other costs, the parallel importer can sell the goods at prices well below those the authorized distributor is willing to charge. Increases in the volume of world trade over the past decade have heightened the importance of such parallel importation. In the United States annual retail sales of the unauthorized imports, or "gray market" goods, may have approached $10 billion during the 1980s. Governments around the world have struggled with the question whether the exclusive distributor ought to be able to block such parallel importation. (Takamatsu 57) The unauthorized importers have maintained that because their activity encourages price competition and benefits the consumer, it should be freely permitted. Allowing foreign manufacturers to establish exclusive distributorships and prevent all intrabrand competition, they point out, would be inconsistent with the principles of free enterprise in a market economy and would be inconsistent with the interests of consumers. As one gray market retailer pointed out: As a result of this importation of merchandise at lower prices, we sell at lower prices. The price differential to the consumer is between 10 and 40 percent with an average of probably 20 to 25 percent. This savings to the consumer also occurs on merchandise purchased from foreign brand distributors because most of the subsidiaries of foreign manufacturers have been forced to lower their U.S. dealer price to meet the so-called "Gray" competition. As a result of this, camera prices in general are on average at least 20% lower than they would be otherwise. (Rothnie 2004) The authorized distributors respond that irrespective of any benefit to the consumer, parallel importation unfairly injures enterprises which have made significant expenditures in generating goodwill, only to have the resultant returns siphoned off to others. The U.S. distributors may, for example, have spent large sums of money preparing to introduce a new product to the North American market, and gone to great effort and expense to build up consumer awareness, as well as to develop effective distribution channels. In 1983 the grey market hit us with full force as up to 30% of our sales were lost to the diverters. We experienced two layoffs and our advertising and promotion efforts were severely curtailed. . . . The impact of the grey market greatly impacted our bottom line as we suffered a catastrophic loss. And even established international brand names require careful attention to local regulatory standards, consumer tastes, income levels, language, and a host of other factors. Typically it is the U.S. distributor's responsibility to monitor and respond to these variables, to preserve and improve a product's image in the public mind. Parallel importers' "free ride" on the goodwill generated by such activities should be prohibited, the distributors maintain. But the parallel importers argue that the goodwill on which they trade ordinarily belongs to the manufacturer, not the distributor. The typical consumer decides to buy a "Nikon" camera, for example, not because of the reputation of the Nikon distributor, but because the customer recognizes the manufacturer's name as signifying a particular standard of quality. And gray market sales, the importers urge, cannot constitute free riding on this goodwill of the foreign manufacturer, since the products involved are genuine, and all sales ultimately accrue to the manufacturer's benefit. According to this view, any protection of "authorized" U.S. distributors from genuine brand-name imports is no different from the establishment of high tariff or nontariff barriers to the entry of ordinary foreign commodities. In both cases, the primary goal is to provide a select group of politically influential companies with an exemption from the normal rigors of competition, and the effect is artificially to raise prices at the consumer level. As long as "gray market" consumers are getting the genuine goods they intend to buy, the parallel importers maintain, no one's reputation is being injured. According to this argument, any loss to a manufacturer's sales through its authorized distributor in the United States is made up for by a corresponding sales increase in the parallel importer's source country. Under this view, it would be entirely within the manufacturer's ability to prevent the parallel importation by establishing an international pricing scheme which removes any incentives for third party arbitrage. Indeed, as the Swedish "Hasselblad" camera maker discovered, Initially in 1981, the relative exchange rates between the U.S. dollar and other currencies resulted in price differentials which opened the doors to parallel imports into the U.S.A. However, upon reviewing the destructive effects of unequalized pricing due to foreign exchange fluctuations, Victor Hasselblad AB, Sweden, implemented a new pricing system throughout the worldwide distribution network. This pricing policy adjusts the various distributors [sic] price lists on a quarterly basis for relative exchange fluctuations, therefore, the exchange problem appeared to be solved. Viewed in terms of trademark functions, the parallel importation debate thus revolves around the central issue whether a trademark acts primarily as a channel through which economic returns flow to the trademark owner, or as a beacon by which customers are guided to products of their choosing. In historical terms, the perception of a divergence in these two functions is novel: the entire body of trademark law is steeped in the notion that the interests of consumer and trademark owner naturally coincide. In 1943, a House Report on the Lanham Trademark Act explained: The purpose underlying any trade-mark statute is two-fold. One is to protect the public so it may be confident that, in purchasing a product bearing a particular trade-mark which it favorably knows, it will get the product which it asks for and wants to get. Secondly, where the owner of a trade-mark has spent the energy, time, and money in presenting to the public the product, he is protected in his investment from its misappropriation by pirates and cheats. This is the well-established rule of law protecting both the public and the trade-mark owner. Viewed both in terms of the functions of trademarks and in terms of the goodwill with which they are associated, the law addresses a mixture of public and private concerns. The standard functional analysis of trademark protection presumes a trademark's normal role as a device working to the mutual benefit of buyer and seller. Judges have traditionally regarded a trademark's "primary and proper function" as identifying "the origin or ownership of the article to which it is affixed." If a trademark indicates to the public either the original producer or an exclusive distributor as the source of the goods on which the mark appears, the law will provide its owner with protection against infringers. Related to this "source identification" function are a trademark's "quality assurance" and "advertising" functions. Because the public comes to associate trademarked goods with a certain standard of quality, a trademark indicates that the goods on which it appears will meet consumer expectations. Moreover, because of the mark's consequent power to attract buyers, it serves its owner as a valuable advertising device. Indeed, a trademark's ability to "make a direct emotional appeal or insinuate itself into the memory" (Isaacs 1210-1220) may make it "a more convincing selling point than even the quality of the article to which it refers." Examinations of the goals of trademark law typically have merely listed these mechanisms of trademark activity, rather than developing a comprehensive model for trademark functioning based on the distinct interests of those whom the mark serves. One reason for this tendency is that the possibility of a trademark benefitting consumer or trademark owner alone simply never arises as an issue in the standard trademark infringement case: under the very test for trademark infringement, an injured trademark owner cannot make out a case unless a competitor's activities are likely also to infringe the interests of the public, in the form of confusion, mistake, or deception among potential consumers. Although the competitor's use of the mark might impair the trademark owner's economic interests, without deception of the public the impairment is not wrongful. As one court put it, "It is true that in suits by private traders to enjoin unfair competition by 'passing off,' proof that the public is deceived is an essential element of the cause of action. This proof is necessary only because otherwise the plaintiff has not suffered an injury." This interdependence of interests also requires that trademark owners seeking to protect their property should not themselves have used their trademarks deceptively: "Any material misrepresentation in a label or trade-mark as to the person by whom the article is manufactured, or as to the place where manu factured, or as to the materials composing it, or any other false representation, deprives a party of the right to relief in equity." The buyer and seller have thus usually been seen as but two beneficiaries of a single economic mechanism. According to the standard analysis, if the mechanism functions properly, it rewards both parties; if it fails, both suffer the consequences. The prevailing view today is that "trademark owners generally do an excellent job in preventing deception. They have the incentive to sue infringers, usually have the resources to do so, and normally will find it to be in their own interest to maintain the value of their marks by ensuring that their own use is not deceptive." (Shanahan 233-236) Or, as one judge put it, in trademark law, "the right of the public to be free of confusion" and "the right of the trademark owner to control his product's reputation" are "synonymous." Just as trademark functions can be viewed from a public or a private perspective, so too can the goodwill which trademarks generate and support. From one perspective, goodwill is property, a business asset: it is the advantage or benefit, which is acquired by an establishment beyond the mere value of the capital, stock, funds, or property employed therein, in consequence of the general public patronage and encouragement which it receives from constant or habitual customers, on account of its local position or common celebrity or reputation for skill or affluence, or punctuality, or from other accidental circumstances or necessities or even from ancient partialities or prejudices. From another perspective, "goodwill is something intangible which exists only in the mind of the purchasing public"; it is a friendly mental attitude which is assumed in life. Like living things, with proper care it can be made to grow, and, if neglected, it may die. It is a form of public opinion. It resides in the conscious and subconscious minds of customers and prospective customers wherever they may be. It is based in part upon their memory, beliefs, habits, usages, desires, credulity, fancies, preferences, confidence and all those other things which make them act the way they do. The single term "goodwill" thus concisely captures the duality of trademarks, indicating at once the proprietary goodwill of the trademark owner and the psychological goodwill in the mind of the public. The existence of a single term to describe both these separate notions, however, has obscured their distinctness. Invariably, one aspect of goodwill is submerged beneath the other in legal discourse and thought, and one aspect may be offered protection at the expense of the other. (Fink 2005) Parallel importation has raised the possibility that trademarks may not always be able to fulfill their traditionally recognized functions; it has posed a conflict in the two aspects of goodwill, and it has raised broader questions of the role of trademark protection in an open economy. It has done so, moreover, in a larger context of doubt about the fundamental principles of trademark law. In early parallel importation cases, judges operating under the "universality principle" refused to enjoin the importation of genuine goods, for the reason that no purchasers had been deceived. More recently, courts have adopted the "territoriality principle" and recognized that some trademarked products, while genuine in their country of origin, may well infringe domestic trademark rights. Still, the precise dictates of the territoriality principle remain in dispute. While some understand it to recognize that inevitably, "a mark in one country symbolizes the domestic goodwill of the entity which stands behind the entity in that country," others interpret it merely to mean that domestic law governs the rights of domestic trademark registrants. Under this latter choice-of-law view, territoriality imposes no requirements about the actual content of that domestic law. While many courts and commentators reviewing a spate of recent parallel importation cases have offered various theories about the twofold nature of trademark protection and about the distinction between universality and territoriality, none has fully examined the actual origins of these doctrines. It would seem useful, therefore, to investigate the historical foundations upon which the modern approaches are based. By examining trademark doctrine in its earlier stages, we may gain some insight into the forms it takes today. Works Cited Fink, Carsten and Maskus, Editors (2005) "Intellectual Property and Development: Lessons from Recent Economic Research". IBRD/WORLD BANK. Isaacs, Nathan, Traffic in Trade-Symbols, 44 HARV. L. REV. 1210, 1220 ( 1931). Rothnie, W. "Parallel Imports and Copyright", http://www.comml-iba.org/ak2004/piIBA04.pdf Shanahan , D., The Trademark Right: Consumer Protection or Monopoly, 72 TRADEMARK REP. 233, 236 ( 1982). Takamatsu, K., Parallel Importation of Trademarked Goods: A Comparative Analysis, 57 WASH. L. REV. 433 (1982). Read More