Although many countries permit parallel imports, little uniformity exists in the overall approach to this problem. This becomes clear from Article 6 of the intellectual property provisions of the World Trade Organization Agreement (GATT-TRIPS), which provides that as long as appropriate laws regarding parallel imports do not violate the non-discrimination rules of most favored nation and national treatment, "nothing in this Agreement shall be used to address the issue of the exhaustion of intellectual property rights". This international body left the treatment of parallel imports to national law. Absent international consensus, individual national approaches must be examined.

There are two prevailing theories regarding exhaustion, namely, that once goods bearing a trademark have been placed into commerce by, or with the consent of, the trademark owner either (a) the owner cannot use his trademark rights to prevent the further distribution of such goods anywhere, the so-called international exhaustion rule; or (b) he cannot use his trademark rights to prevent further distribution of such goods in the same country, but may prevent such distribution in other countries, the so-called national exhaustion rule.

Although there are a number of laws in the United States that address the issue of parallel imports of trademarked products, the treatment of parallel imports is fairly uniform. In an early decision permitting the unauthorized importation and sale of genuine bottled water from Europe, it was held that once a trademarked product is placed on the market, trade mark rights may not be used to control the product's further destination. [3] Although decided under common law principles of trademark law, this early decision was subsequently applied to the codified trademark law and has remained the law to this day under the infringement provisions of the present day Lanham Act. Thus US laws have long considered that the nature of trademark rights, at least with respect to parallel imports, are universal, namely, once a genuine trademarked product is placed on the global marketplace anywhere in the world, by or with the consent of the trademark owner, the trademark owner may not control the further distribution of that product under a theory of trademark infringement. This theory of parallel imports is said to be the rule of universal, or international, exhaustion.

The European Union [4] has adopted a regional exhaustion rule that originally developed through decisional law on the theory that the ability to prevent further distribution of genuine goods would distort trade among the member states. A seminal case on this issue involved a Dutch trademark owner, which was also the distributor and subsidiary of an English manufacturer, and which sought to prevent the unauthorized sale in Holland of drugs made by the parent company in England. The European Court of Justice held that although the EEC Treaty guaranteed the existence of trademark rights granted by the individual member states, since such rights restrict the free movement of goods, their exercise must be limited to protecting the specific subject matter of the trademark right, namely, to provide an exclusive right for the owner to put trademarked products into circulation and to protect the owner against competitors selling products that illegally bear the trademark. However, the right in a trademark must be considered exhausted after it is placed on the market by or with the approval of the trademark owner, otherwise the trademark owner would be able to partition national markets and restrict trade between the member states, a result that is unnecessary to preserve the specific subject matter of the trademark right. [5] Thus the principle of exhaustion of rights was adopted with respect to trademarks, although this has been adopted only on a regional level; namely, only with respect to goods first placed on the market within the Community, [6] or previously imported into the Community through a member state. [7]

This regional exhaustion rule has been codified in the harmonization directive [8] ("Directive"), in accordance with which the member states were required to conform their national trademark laws. Article 7 of the Directive provides that "the trade mark shall not entitle the proprietor to prohibit its use in relation to goods which have been put on the market in the Community under that trademark by the proprietor or with his consent" except under the provisions of Article 7(2), which exempts altered or damaged goods. In addition, as a result of the Agreement on the European Economic Area (EEA) between the EU and the European Free Trade Association countries of Iceland and Norway, the regional reach of the exhaustion principle in the Harmonization Directive extends to Iceland and Norway, even though Iceland and Norway are entitled to determine for themselves whether to adopt a national, regional or international theory of exhaustion. [9]

However, the regional exhaustion rule does not imply international exhaustion, as held by the European Court of Justice [10] and other national decisions. [11] However, this does not prevent international ramifications where, for example, parallel imports are in transit from one non-EEA member state, through an EEA member state, to another non-EEA member state, and are seized in the EEA member state as parallel imports voilative of the trademark owner’s trademark rights in the member state. [12]

The community-wide exhaustion principle has also been codified in the European Union's Regulation on the Community Trademark [13]. Therefore, the exhaustion principle under a Community Trademark Registration will be limited to goods that are first placed on the market within the Community (or EEA). As a result, Community trademark rights are not considered to be exhausted, for example, with respect to goods that are first introduced to the global marketplace in the United States or Canada, and then imported into an EEA member state.

It is interesting to note that the European Commission made overtures in 2000 to introduce an international exhaustion theory into Community law, by publishing a working paper on the issue. However, after the working paper was laid open for debate and consideration, the Commission withdrew from the debate by deciding in June 2001 not to propose changes to the law.

As part of the European Union, the United Kingdom applies the European Union law on exhaustion with respect to goods first placed on the market in an EEA country. Article 12 of the new United Kingdom Trade Marks Act of 1994 has enlisted the language of the Directive. However, a separate body of English jurisprudence, developed under the former Trade Marks Act 1938 adopted an international exhaustion principle, uninfluenced by the European Union law, and this body of law, although arguably no longer applicable under the new United Kingdom Trade Marks Act, serves as the model for other British law countries in the Commonwealth.

One of the earliest and leading cases on this issue involved plaintiffs who owned a trademark in the United Kingdom and France but who produced different kinds of Champagne for each national market. The producers objected to the parallel importation into England of "Brut wine" that they produced specifically for the French market. In the decision, the judge reviewed the different theories of how a trademark functions, stating:

As a result, the court decided that proprietorship of a registered trade mark does not entitle the proprietor to control the distribution of his branded goods after they have left his hands. Thus, the Commonwealth position considers that a trademark serves as an indication of the origin or source of the goods, not as a "badge of control" which would allow the trademark owner to control the trademarked goods throughout their passage in commerce.

Other British law countries have interpreted these passages to provide no cause of action to trademark owners against sellers of genuine goods on which a trademark has been placed by the trademark owner or registered user. [15] As Smithers, J. articulated in the Atari/Fairstar case, the trade mark owner who releases goods "on the billowing ocean of trade" will not be able to use the trademark to control the ultimate destination of those goods.

Although many countries allow the war against parallel imports to be fought by private parties in the courts or before administrative tribunals, certain countries, such as Japan and Korea, not only expressly permit parallel imports, but also take affirmative steps to protect parallel importers.

At one time, South Korean customs officials were holding parallel imports at the border pursuant to complaints from either trademark owners or their exclusive licensees. In response, the government issued customs regulations expressly permitting parallel imports, except in certain circumstances. In addition, the government revised the Fair Trade Commission enforcement guidelines under the Monopoly Regulations and Fair Trade Act, enabling the Commission to act against those who attempt to prevent the sale of parallel imports and defining unfair trade practices as, inter alia , interference with the importation, sale or distribution of parallel imports, interfering with advertisements for parallel imports or sponsoring advertisements that criticize parallel imports.

Japan also follows the concept of international exhaustion, as seen in a decision by which the parallel import of genuine PARKER pens into Japan was allowed over the objection of the Japanese exclusive distributor. The court held that, although parallel imports may constitute a literal infringement of the trademark law, parallel imports do not affect the function of a trademark under Japanese law, namely, to guarantee the source and quality of the goods, they do not harm the business reputation of the trademark owner and they do not generally mislead consumers. [16]

The Fair Trade Commission Guidelines Concerning Distribution Systems and Business Practices enacted in Japan in 1991 under the Anti-Monopoly Act also prohibit acts that serve to inhibit parallel imports, such as preventing an overseas supplier, except a direct supplier to an exclusive distributor, from supplying products to the parallel importer; alleging, without sufficient basis, that the parallel importer is handling counterfeit products; purchasing all of the parallel imports from the distributor; or unjustly interfering with advertising of parallel imports.

Trademark owners, their licensees and authorized distributors must always be cautious when contemplating preventive or curative action against parallel imports since such action, in many countries, may be considered to conflict with local antitrust and free competition laws.