International Trade and Intellectual Property

The Search for a Balanced System

George R. Stewart

• Publisher: Taylor & Francis
• Year: 2019
• Print ISBN: 9780367009120
• eBook ISBN: 9780429720420
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

In light of current negotiations concerning NAFTA and GATT, the question of intellectual property and its impact on international trade has taken on renewed urgency. The recognition and enforcement of intellectual property rights in national jurisdictions can serve to encourage international trade and economic growth or can create barriers to free and open commercial exchange. In this timely volume, Canadian, American, and Mexican scholars examine these landmark agreements and reassess the effects of intellectual property rights on international trade. Focusing on trade and intellectual property policies and practices between and within North America and Europe, they address several key issues, including "gray marketing" in North American and European trading blocs, U.S. trade policy concerning enforcement of intellectual property rights, and dramatic changes in Mexican law regarding intellectual property. The volume is essential for scholars working in intellectual property rights, international trade, and the global economy. Policymakers and anyone wishing to stay current with world trade negotiations will also find this book useful.

Part One
Intellectual Property Within Trading Blocs

1
When Business Strategy and the Law Are in Conflict: The Case of Parallel Importation in Canadian Border Communities

Megeed A. Ragab and G. Andrew Gostlow¹

Introduction

The Cross-border Shopping Phenomenon

The recession of 1989 and the concomitant appreciation of the Canadian dollar resulted in a serious business problem for Canadian retailers. It is generally known as cross-border shopping. Four forces drive the cross-border shopping phenomenon. First, the majority of the population of Canada (80%) live within 200 miles of the U.S. border and hence there has always been cross-border shopping—Canadians going to the U.S. and Americans coming to Canadian cities for a multitude of reasons.

Second, across a wide range of goods and services, prices are generally lower in the U.S. than in Canada and hence this has been an attraction to Canadians to visit American cities across the border. The closer the U.S. city, the heavier the traffic. Third, the recession of 1989 created high rates of unemployment in Canada (13%-18%). With so many persons on reduced incomes, buying less expensive household goods became more and more attractive to Canadians as a way of stretching their income. Fourth, fuelling the cross-border buying further is the appreciation of the Canadian dollar reaching as high as 89 cents by the summer and fall of 1992. The four forces together drove the cross-border shopping phenomenon amounting to billions of dollars (estimated around two billion dollars for the Province of Ontario alone)—a matter that had strong negative impact on the retailing sector resulting in a high bankruptcy rate. Some of Canada's largest retailing chains went out of business.

Intellectual Rights and Cross-border Shopping

Perhaps the central driving force of cross-border shopping is the price differential between the U.S. and Canada. Canadian retailers often complain that the retail price in U.S. cities is much lower than the wholesale price in Canada for the same quantity of the same product made by the same manufacturer. Although there are objective business and economic reasons for the difference, a big part of it cannot be justified on such grounds.

U.S. low prices can be explained in terms of economies of scale, lower taxes, lower labour cost, and above all strong competition. By contrast, in Canada, the opposite is true. The Canadian market is rather small and scattered thus inhibiting sizable economies of scale. Government regulation, an excessive tax burden, high property values and a high minimum wage all conspire to force Canadian retailers to charge a high margin in order to continue in business. However, the cost of goods from the wholesaler-distributor-importer is a the major portion of the retail price which drives Canadians to U.S. border cities. Such cost is high, in part, because of the monopoly given to the Canadian importer by intellectual property law. Retailers generally perceive it to be the fact that the importer of a branded product is the only entity from which the product can be purchased by retailers because of the protection accorded to it by the law. In most cases, such protection, coupled with the objective economic factors mentioned above, results in the unusually high prices in Canada. A product that sells for $4.95 in Detroit (U.S.) was selling for $14.95 in the city of Windsor (Canada).

The Parallel Importation Phenomenon

Canadian retailers in border communities were faced with an impossible challenge. If they buy from the authorized importer in Canada where the wholesale price exceeds the retail price of their competitors in the U.S., their Canadian customers will desert them to the U.S. Meanwhile, they cannot source the product from the U.S. at lower prices and bring it into Canada to satisfy their customers because they may be breaking the law which gives an exclusive right to import the trademarked goods to the authorized importer.

It was a case of survival versus abiding by the law. Many importers did not hesitate to use the law to stop "those unauthorized" imports as shown in the literature review below. In the event, many retailers opted for direct sourcing from the U.S. and hence the birth of the parallel importation phenomenon.

The expression "gray market goods" is commonly used to connote goods sold outside the normal, authorized, exclusive distribution arrangements. As distinguished from "black market goods", gray market goods carry a genuine trademark and are either imported or sold without the authorization of the relevant jurisdictional trademark owner.

Gray market goods originate from both domestic and foreign jurisdictions. Domestically, the supply of gray market goods results from overproduction, distress merchandise or technological improvements motivating reduced inventories through market dumping. Internationally, price and quality differentials, variations in regulatory constraints, foreign exchange rates, free riding and in some cases outright smuggling provide volume and profit margin incentives to engage in the gray market trade. In either case, the goods are legally manufactured but sold outside sanctioned distribution channels.

The phenomenon of gray marketing has risen to prominence in the 1980s, though gray market goods controversies date back to the late 1800s. Early judicial decisions dismissed gray market concerns because of the limited known extent of the phenomenon, lack of recognition of widespread economic concern and the "universality" approach to trademark jurisdiction.

The state of the law on gray marketing in Canada can best be illustrated by two recent court decisions. The Federal Court of Canada, Trial Division, granted an interlocutory injunction, sought by Heinz Company of Canada to restrain Edan Food Sales from importing ketchup. On February 13, 1991, the presiding judge ruled that Heinz owned the trademark in Canada since 1940 and that the product's taste and packaging were distinctly Canadian. (Pritchard, 1991). In contrast, an injunction action brought by Nestle Enterprises Ltd., the registered user of the Nescafe trademark, to enjoin Edan Foods from importing Nescafe Mountain Blend coffee was refused. The court, on July 31, 1991, ruled that the refusal was due to Nestle's delay in bringing the action, failure to show irreparable harm, lack of ownership of the trademark, and the differences in the labels of the two products. ("Court Says Edan", 1991)

Numerous studies on the legal implications and impacts of gray marketing are available. In assessing damages in gray market cases, courts have struggled with the quantum of such damages. Awards of damages are often based upon an order for an accounting of profits against the infringing party.

In contrast to the numerous parallel importation court decisions, there is a paucity of reliable measures of the economic and business impacts stemming from the gray market trade. The Metro Edition of Globe and Mail on March 11, 1991, in reporting the H.J. Heinz Co. of Canada Ltd. (Toronto, Ontario) lawsuit against Edan Food Sales Inc. (Mississauga, Ontario), estimated that gray marketing was a $10 billion a year business. This estimate, like many others, is highly suspect having used primarily statistics of production and figures made public in cases where the court orders an accounting of profits. Arguably this estimate lacks empirical validity, and if anything, must be considered conservative since only larger gray marketers involved in litigation provided economic data and, of course, this data is provided involuntarily.

Several other estimates of the magnitude of gray market trade similarly lack ex post validity and must be considered equally imprecise. Understandably, most sources avoid any estimate of the quantitative extent of such practices. Any attempt to quantify the impact of gray market goods on any economy would meet with similar imprecision. Since no reliable statistics are available on the impact of gray marketing, there is a strong need to conduct research to assess the impact of parallel importation.

Judicial proceedings in gray goods actions have revealed many of the methods of parallel importation. These decisions have to a large degree focused on the higher volume gray market traders. Smaller businesses are expected to be equally ingenious in parallel importation tactics.

A cursory reading of the draft North American Free Trade Agreement (NAFTA) indicates that intellectual property rights will be afforded continued trilaterally prescribed protection. Nonetheless, enforcement efforts in the area of the gray market trade appear to have been less than clearly articulated if addressed at all. It would appear that, absent such express enforcement procedures, the gray market trade will continue unabated.

Study Purpose And Design

In view of the emergence of parallel importation, it is important to investigate further. This study was designed to examine the issue of parallel importation in Canada particularly in the border communities. At the outset, the investigation begins with an exploratory study. For this initial step, the City of Windsor was selected for the pilot study. Windsor was chosen because of its close proximity to the City of Detroit and southern Michigan—only the Detroit river separates the two cities. Windsor also lost considerable volume to cross-border shopping since geography makes shopping in Michigan very convenient. The retailing sector in Windsor was devastated by cross-border shopping. The City experienced about 40% retail space vacancy and a bankruptcy rate among the highest in Canada.

To focus the study, the three research questions below were formulated:

1. What is the extent of parallel importation by retailers in the Windsor area?
2. What are the strategies used to implement parallel importation?
3. What, if any, impact does parallel importation have on the businesses that engage in it, particularly:
   • impact on product line and quality;
   • impact on sales performance; and,
   • impact on financial performance.

In order to assess the impact of parallel importation, the survey method was selected as the research strategy for this study. Procurement practices, product quality, product variety, product price, employment levels, and sales performance were considered as the main areas for which impact data would be collected. A sample of 52 firms was selected on a judgment basis.

In selecting the sample, every effort was made to represent the various types of businesses whose operations were impacted by cross-border shopping. Although, in order to reach generalized conclusions, it may have been preferable to focus the sample population on a particular sector merchandising a particular product line, the researchers opted for a cross-se...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• Table of Cases
• Table of Statutes and Treaties
• Preface
• PART ONE Intellectual Property Within Trading Blocs
• PART TWO Intellectual Property and Global Negotiations
• About the Book
• About the Contributors
• Index