The Impact that the Exhaustion Principle still Applies to Different Domestic Trademark Owners

1. Introduction

In the past, the Exhaustion Principle only applies to situations where the domestic trademark owner and the foreign trademark owner are identical entities. However, in 2020, the Supreme Court in Taiwan issued a decision (108 taishon 397) demonstrating that the Exhaustion principle is still applicable, as long as a license or legal relationship exists between the different domestic and foreign trademark owners. The impact can be seen in the recent three IP Court decisions which make it more difficult to set the line between the Exhaustion Principle and the Territory Principle. Nonetheless, if the domestic and foreign owners are different, is the Exhaustion principle still applicable?

2. Summary of 108 taishon 397 decision issued by Supreme Court in Taiwan

Article 36-2 of Taiwan’s Trademark Act stipulates that “where goods have been put on the domestic or foreign market under a registered trademark by the proprietor or with his consent, the proprietor is not entitled to assert trademark rights on such goods unless such claim is to prevent the condition of the goods from being altered or impaired after they have been put on the market or there exist other legitimate reasons.” This is known as the “Exhaustion Principle” and the “First Sale Doctrine”. Thus, Parallel-Import products do not infringe trademark rights according to the Exhaustion Principle, which applies to a situation where a foreign trademark owner and a domestic owner are a single, identical entity. However, if the domestic and foreign owners are different, is the Exhaustion principle still applicable?

The Supreme Court in Taiwan issued a decision (108 taishon 397) demonstrating that the Exhaustion principle is still applicable, as long as a license or legal relationship exists between the different domestic and foreign trademark owners. In this case, the domestic trademark owner in Taiwan is not the subsidiary or otherwise an associated company of the original trademark owner in the United States. There was no legal relationship between them. However, the Taiwan trademark owner obtain the trademark registration in Taiwan based on the US owner’s consent. A Taiwan parallel-import seller bought the products bearing the proposed mark from the original US trademark owner and imported the same into Taiwan. As such, the products sold by the Taiwan trademark owner and the parallel-import seller were identical. The Taiwan trademark owner thus asserted that these parallel-import products were counterfeits and that the parallel-import seller was committing trademark infringement.

The lower court, namely, the IP Court, held that as the domestic owner and the foreign owner are different entities, the Exhaustion Principle is not applicable, based on the Territory Principle. The IP Court further indicated that as the Exhaustion Principle is also referred to as the First Sale Doctrine, the Taiwan owner did not consent to the first sale of the parallel-imported products and did not obtain any remuneration from the parallel-imported products. Thus, the right of Taiwan’s trademark owner was not exhausted in this case. Even though the products were identical, the IP Court held that the parallel-import seller still infringed the Taiwan owner’s trademark.

However, the Supreme Court in Taiwan revoked the IP Court’s above decision and returned this case to the IP Court. The Supreme Court indicated that Article 36-2 of Taiwan’s Trademark Act expressly acknowledges the legitimacy of parallel-imports. The original owner licensed its identical trademark device to another third party to obtain trademark registrations in different countries, but, the rise of natural exclusive rights originates from the same trademark owner, even though, based on the Territory Principle, they are different trademark rights. As long as a license or legal relationship exists between these different trademark owners, the Exhaustion Principle must be applied. The exhaustion result also arises against trademark owners who obtained trademark registrations based on the original owner’s license. Thus, the IP Court erred in holding that the Exhaustion Principle only applies to situations where the domestic trademark owner and the foreign trademark owner are identical entities.

3. Three recent IP Court decisions related to this issue

Following the above Supreme Court’s holding, there are three decisions issued by IP Court involving this issue recently. We can see the lower Court’s decisions further lead to the difficulty of setting the line between the Exhaustion Principle and the Territory Principle.

Case No.1_IP Court 110 minshon 2

Plaintiff, a Japanese company, claims that Eslite (a Taiwan famous company) infringed its M.U.SPORTS Taiwan trademark. Eslite argued that the products it sold in Taiwan were legally Parallel-Import products from Korea. They are all bearing M.U.SPORTS mark which was legally registered by a Korean company, MU S&C CO.LTD. However, Eslite cannot prove that the plaintiff (Taiwan trademark owner) has any relationship with MU S&C CO.LTD.in Korea. IP COURT held that Eslite cannot claim the exhaustion of rights against the plaintiff in Taiwan based on territorialism.

Case No.2_IP Court 109 minshon 25

The plaintiff, Love Pet, is the owner of trademark No. 1851361 "小喵同學", and claims that the defendant without the consent or authorization of the plaintiff, is selling on the Internet the products bearing "小喵同學" mark. The defendant argued that the disputed goods and those sold by the plaintiff were both produced by the Jingzhou Love Pet factory which is the plaintiff’s supplier in China. The defendant sells the disputed goods by means of parallel import of genuine goods. Regardless of whether the domestic and foreign trademark owners are the same person or not, the "exhaustion principle" referred to Article 36(2) of the Trademark Law shall apply.

IP Court held that since the plaintiff agreed with its China supplier to register the same trademark in China, and there existed a legal relationship between them, the defendant can claim the exhaustion of rights against the plaintiff. It does not constitute trademark infringement.

Case No.3_IP Court 107 minshon 29

The plaintiff is the owner of the trademark "FK&FK", and claims that the defendant sells products using the same trademark on websites such as "YAHOO Auction" and "Shopee Shopping". The plaintiff acknowledges that its Taiwan trademark was registered by the agreement of its original China trademark owner. The defendant claimed that the goods were "parallel imports" which were of the same origin as the plaintiff's goods.

IP court held that since the plaintiff’s "FK&FK" mark was registered based on the agreement of its original China trademark owner, and the products sold by two parties were both purchased from this China trademark owner, the defendant can claim the exhaustion of rights against the plaintiff.

4. Comment

Regarding the Trademark Exhaustion Principle, we always focused on whether the first release of products was agreed by the trademark owner. However, the above 3 cases focused on whether the products come from the same origin. And if the foreign and domestic trademark owners have legal relationships, they are deemed as the same origin. In this situation, the defendant needs to prove the relationship between the foreign and domestic trademark owner so that it can claim the Exhaustion Principle against the plaintiff. However, it may be difficult for a defendant to prove their relationship. In case No.1 above, the defendant can not prove the Taiwan trademark owner and Korean owner have a relationship so that it bears infringement responsibility. This problem may not happen in the past because just two trademark registration certificates are sufficient to prove the domestic and foreign owners are identical.

The Territory Principle is a fundamental principle in the world that indicated each trademark right in each country is separate and valid. In these cases above, Taiwan trademark owners can not enforce their rights just because there is a foreign owner registered the same trademark abroad and some undefined legal relationship existed. It seems to violate Territory Principle. Additionally, it is unclear how large a scope should be permitted for a “license or legal relationship” between domestic and foreign trademark owners in connection with the Exhaustion Principle.

Moreover, the confusion of consumers may happen after the foreign and domestic owners terminate their relationship. Even though their legal relationship no longer exists, the rights of the domestic and foreign marks are valid and co-existed. Thus, the two owners can freely use the same mark on different products based Territory Principle even if the products are materially different. The confusion of consumers is obviously expected.

A distributor who intends to import products to Taiwan should note these holdings issued by the Supreme Court and IP Court. Even though it obtains Taiwan trademark registration, a distributor may be still restricted by the Exhaustion Principle.