Kazakhstan: Exhaustion Of Trademark Rights In The Eurasian Economic Union And Distributor Agreements

Last Updated: 10 December 2015
Article by Saule Massalina

The exhaustion of trademark rights together with the related question of parallel import is now a hot topic within the Eurasian Economic Union (the EAEU). On 23 June 2014, the Eurasian Economic Commission (the executive body of the EAEU) created the Working Group to study the question of the exhaustion and parallel import. The Working Group is currently considering solutions to balance the interests of industry (i.e. IP rightholders) and consumers. On 21 August 2015, the Working Group was instructed to draft, by 31 December of this year, amendments allowing the parallel import for selected categories of goods. In this article, we first look at what the principle of exhaustion means, and then we discuss what implications the regional exhaustion rule could have for certain provisions of distributor agreements.23 Finally, we consider certain competition issues of the distributor agreements in the EAEU context.

What Is Exhaustion?

The principle of 'exhaustion' of trademark rights provides that it is not an infringement of a trademark to use it on goods which have been put on the market within a particular territory by the trademark owner or with its consent.

The EAEU Agreement, which took force on 1 January 2015, sets forth the regional exhaustion of trademark rights as follows: "There shall be found no infringement of trademark rights in the use of the trademark with respect to goods which have been lawfully released into civil circulation on the territory of any of the Member States directly by the trademark rightholder or other persons upon its consent." In other words, once trademarked goods are lawfully released into free circulation in Kazakhstan by the rightholder or upon its consent, these goods may be further resold without the rightholder's consent in Kazakhstan, as well as in Russia, Belarus, Kyrgyz Republic and Armenia.

The principal of regional exhaustion is intended to struggle against parallel import, i.e. import of original trademarked goods from outside the EAEU but without the rightholder's consent. The exhaustion principle is not completely new to Kazakhstan law. In 2010 (with the effect in Kazakhstan only in 2012), the principal of regional exhaustion was introduced within the framework of the Customs Union (i.e. between Kazakhstan, Russia and Belarus). This principal can be contrasted with that of 'international exhaustion', that is, once the rightholder sells its goods, they may be further sold and imported to any country in the world without restrictions. The recognition of 'international exhaustion' legalizes the parallel import of goods.

Within the EAEU authorities and national regulators of Kazakhstan, there are now two opposing views. Antimonopoly bodies insist that the regional exhaustion be substituted by the international exhaustion, which would keep prices for trademarked goods lower, thus would protect competition and consumers' interests. Trade and economy regulators, on the contrary, believe that the principal of regional exhaustion should be retained, as it facilitates the development of local industries. The pharmaceutical industry, for example, argues that moving to a principle of international exhaustion would cause the flow of low quality medicine into the country.

There has as yet been no solution adopted by the EAEU Working Group. On 21 August 2015 the Council of the Eurasian Economic Commission convened and decided that the Working Group has to draft, by 31 December of this year, amendments to the EAEU Agreement that would allow parallel import for selected categories of goods. Therefore, it is expected that the existing system of regional exhaustion will be replaced by a "hybrid" system of the regional exhaustion as the default rule with international exhaustion in defined exceptional cases.

Distributor agreements and the exhaustion principle

Distribution agreements often allocate a specific territory to the distributor, and require the distributor to obtain the prior consent of the supplier to supply goods outside of this territory (a Territory Restriction). Among other contractual restraints on the distributor, there may be a requirement for a rightholder's prior consent for the sale of goods to certain persons (e.g. governmental organizations), and a restriction on quantity of a product that may be sold per customer.

Rule of the "First Sale"

In view of the freedom on movement of goods in the EAEU and the exhaustion rule, the question arises whether the Territory Restriction which relates to a territory within the EAEU (e.g. Kazakhstan) is legitimate.

We believe that it is legitimate for the following reason.

In our view, the exhaustion rule requires that the "first sale" by the Distributor on the EAEU territory must be on the rightholder's consent, and further sales do not need consent. Since the market of the EAEU is common, regardless of whether the first sale is made domestically or to the territory of another EAEU Member State, the rightholder is allowed to consent to such sale. The Territory Restriction is a case when the first sale is to be made to the territory of another EAEU Member State. Therefore, the rightholder would be entitled to restrict this first sale by the Distributor to the territory of another Member State.

Form of the consent

The EAEU Agreement is silent on what qualifies as "consent." In our view, this question is left for national laws to decide. According to Kazakhstan law, the situation is not completely clear: whether a consent letter would suffice or a licensing agreement is required.

Rightholders certainly would be in a safer position if they conclude a licensing agreement. A distributor agreement with incorporated licensing provisions would have the same status as a licensing agreement. Without the licensing agreement in place, use of the trademark by the Distributor would not be considered as "use" in the sense of the Trademark Law of Kazakhstan. As a result, a trademark would be vulnerable to an application for cancellation on a non-use basis at the instigation of any interested party.

It should be noted that licensing agreements (thus also distributor agreements with incorporated licensing provisions) are subject to registration with the IP office in Kazakhstan and may be invalidated if not registered. If, however, the rightholder is from a country which is a signatory to the Singapore Treaty on the Law of Trademarks, instead of the licensing agreement, parties may simply file an application for registration.

Consent for Specific Goods

What is also very important in the exhaustion rule is that the rightholder's consent appears to be for specific goods imported and further sold by the Distributor. The consent is given for "goods which have been lawfully released into civil circulation on the territory of any of the Member States." It may be concluded that where goods have not yet been lawfully released into free circulation, the rightholder has not yet exercised its right to consent to the sale of such goods. Therefore, the rightholder's consent would not cover all goods of the same type and of the same trademark that could be brought to the country in the future. For each new import the rightholder's consent would be required.

Distributor agreements and competition rules

The Competition Law of Kazakhstan prohibits anti-competitive agreements between market entities that result or may result in the restriction of competition, including agreements that restrict access to the market.

According to the EAEU Agreement, similarly, vertical agreements that result or may result in the restriction of competition shall be prohibited. Restriction of competition may be seen, for example, in market entities' giving up from independent acts on a market, or in other circumstances that create a possibility for a market entity to influence the general conditions of circulation of goods unilaterally.

The question is whether the Territory Restriction might qualify as restricting access of the Distributor to the market and thus be unlawful.

Under the Competition Law of Kazakhstan, there are certain exceptions when an agreement is not considered as an anti-competitive agreement. One exception is related to agreements on the exercise of IP rights. Distributor agreements are a mixed kind of agreements: they contain provisions on organization of distributor's business and include conditions on exercise of IP rights. As mentioned, those conditions on IP rights in distributor agreements are licensing provisions. If those licensing provisions are drafted and formalized taking into account of mandatory requirements of Kazakhstan law, we believe that such a distributor agreement could be considered as an agreement on exercise of IP rights in the sense of the Competition Law. Hence, a Territory Restriction would not qualify as restricting access of the Distributor to the market and would be allowed.

By paying attention to the way in which territorial distribution and licensing arrangements are drafted, such agreements may fall within the exception granted for IP licensing arrangements, and on this basis may avoid a challenge to the validity of such agreements on competition grounds.

As a concluding note, the EAEU legislation has only started to develop and has not yet been tested in practice. In addition, while the EAEU Agreement took force only on this year, the Working Group studying the question of exhaustion and parallel import is already considering amendments to the EAEU Agreement in the part of the regional exhaustion. Therefore, businesses operating on the EAEU market are advised to receive regular updates on relevant rules and regulations.

Footnotes

1 The same discussion may be applicable to dealer agreements

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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