E-commerce platforms are full of Chinese merchants selling foreign cosmetics they bought at a lower price outside of China. These branded products are sold without the consent of the brand owner at a much lower price than the official retailer. The consequences of these so-called “parallel imports” are well known: the foreign brand and its official Chinese distributor suffer economic losses and the brand is diluted by cheap sales of parallel imports. This last problem is particularly acute if the foreign brand markets itself in the luxury segment.
The relevant law on parallel import of cosmetics in China
Online sales of parallel imports are a particularly difficult problem in China. E-commerce platforms do not have withdrawal tools against parallel importing as they do against counterfeit sales and sales offers. The withdrawal mechanisms of e-commerce platforms are indeed limited to cases of trademark infringement. However, according to Chinese law, the parallel import into China of genuine products purchased overseas does not violate Chinese trademark law. The first legitimate sale of the genuine product abroad exhausts the rights of the trademark owner in China. Therefore, takedown actions for e-commerce in such cases lack legal basis and will be rejected.
However, parallel importation of cosmetics may still be illegal if it violates one of the PRC’s many complex cosmetic registration and labeling regulations.
Alternative legal avenues against imported foreign cosmetics
China allows the sale of imported cosmetics – without the need for registration with the Chinese FDA – but only if the products are sold to Chinese consumers (not B2B) through designated Chinese e-commerce platforms like Tmall (Alibaba) and JD.com (JingDong). The products, sourced directly from outside China, are exempt from all Chinese FDA licensing and registration requirements. However, only the legitimate trademark rights holder of imported cosmetics or its licensees can register and sell products on these platforms. Indeed, Tmall and JD.com always ask for proof of trademark registration from the seller before allowing them to open a store on their platform.
Outside of designated e-commerce channels, the importation of unregistered foreign cosmetic products by any person or entity for the purpose of resale is not exempt China FDA pre-registration requirement and related labeling provisions. Once the Chinese importer has received the goods purchased overseas and stored them in a Chinese warehouse, the importer will need to show Chinese customs that these cosmetics have been registered with the Chinese FDA before they can be cleared. and deliver them to the final Chinese buyer. . Violation of these provisions by the seller of cosmetic products imported in parallel into China may result in the confiscation of the property in question and require the payment of a fine of 3 to 5 times its illegal profits. We have seen several decisions of administrative sanctions rendered on the basis of these grounds.
The practical problem with suing parallel importers for violating registration provisions is that Chinese customs does not have the ability to check every package and every shipment. Therefore, parallel importers of foreign cosmetics usually ship small quantities that are likely to remain undetected by customs authorities.
There is, however, another way to attack these traders – even when trading in small amounts to avoid being caught by Chinese customs. Imported cosmetics must have a Chinese white label on the back of the main product packaging. This label contains mandatory information about the foreign product, the labels of which would otherwise be in other languages (i.e. those of the markets where they were first marketed). If the imported cosmetics do not have the Chinese white labels, they will violate Article 35.2 of the Chinese Cosmetics Supervision and Regulation Regulations (for not affixing the Chinese label on the concurrently imported cosmetics). Such violations can be reported by anyone to the local Market Surveillance Authority (MSA) and the products will be confiscated and fines imposed on the importer. The administrative decision must be issued within 90 days from the date of the complaint and, in practice, decisions are normally issued within 3 to 40 days. If the infringer then refuses to comply with the decision and continues to sell illegal parallel imports, the right holder can file a second administrative complaint. The administrative authorities will add other sanctions to those already indicated, in particular the suspension or the revocation of the business license of the importer.
The parallel import of foreign cosmetics into China is a growing problem for foreign brands. E-commerce and small shipments make it difficult for foreign brands to track and punish these gray market importers. Although this phenomenon can be reduced by tightening the supply chain outside of China (for example by tightening the terms of sale of European or American distributors and monitoring the supply chain), not all brands have this ability. . Moreover, even when strict distribution rules are in place, parallel importing does not completely disappear. At some point, a brand owner will have to deal directly with these Chinese importers or risk incurring market losses.
Considering the facts above, taking administrative action against parallel importers who violate white label regulations seems like an effective strategy. Not only will infringers be arrested and deterred through the imposition of a fine and the confiscation of illicit earnings, but with such an administrative order in hand, the right holder can legitimately and successfully obtain the removal of infringing listings from the site. Relevant website. trading platforms. Last but not least, taking a proactive stance against parallel imports will effectively reduce the brand owner’s risk against product liability claims from Chinese consumers.
© Copyright 2022 Squire Patton Boggs (USA) LLPNational Law Review, Volume XII, Number 215