Battle hots up over sales of ‘grey goods’

Date: 18/02/1999

By Peter Chapman

AS YOU stroll down the high street, the guy in front of you looks as though he has stepped out of the pages of a men's fashion magazine.

He is decked out in Levi's combats, Calvin Klein T-shirt, Ralph Lauren belt and Gucci shoes, with each brand speaking volumes for the man who cares about his image.

At first glance, they suggest he values quality and is willing to pay top dollar at exclusive outlets to project that image. But, in fact, the labels hide the fact that he is a shrewd shopper.

It turns out that he bought every last item at rock-bottom prices from unauthorised dealers: market stalls and supermarkets which often break the law in their efforts to undercut official outlets on price.

They do this by buying branded products on the 'grey market' from outside the EU, often from Asia or former Soviet bloc countries where they can be purchased - even via licensed dealers - at prices well below those in the Union.

Under the EU's trade-marks directive, this process, which is known as 'parallel importing', is outlawed without the permission of the manufacturers who licence distribution of their goods.

This prohibition was upheld by a judgement of the European Court of Justice last July, which found for up-market sunglasses manufacturer Silhouette in its bid to stop an Austrian retailer from reselling cheap shades it had bought in Bulgaria. The directive, backed up by the landmark ruling, means that manufacturers such as Silhouette and Calvin Klein can license distribution of their trade-marked goods and use of that trade mark in many parts of the world.

In the EU, only goods licensed for sale within its boundaries can be bought and sold there. In practice, this prevents retailers from scouring the world and buying knock-down but genuine goods from authorised dealers in China and Russia to be resold within the Union.

Retailers are only free to engage in parallel importation of goods if they can find them cheaper in a legitimately-licensed outlet in another part of the EU. This legal principle is known as 'Community exhaustion' of trade-mark rights. It contrasts with the principle whereby retailers are allowed to buy from licensed distributors anywhere in the world, known as 'international exhaustion'.

A simmering dispute over whether the principle of international exhaustion should be applied in Europe is about to break out into a full-scale lobbying war. It is pitting trade-mark holders who enjoy the status quo against supermarket chains, importers and consumer groups who want the cheapest goods regardless of their origins.

The most aggressive pursuer of its trade-mark rights is American jeans manufacturer Levi's, which is taking legal action across the EU to prevent the sale of 'grey-market' jeans.

Mark Elliot, the company's EU affairs spokesman, is adamant that the current regime protects the 'integrity' of Levi's brands. He says this is guaranteed by training staff in a limited number of licensed EU shops, which are obliged to supply the full range of Levi's products and cannot resell them to non-licensed retailers, and by investing in market research to ensure customers are supplied with the products they want.

Branded-goods manufacturers target specified classes of customers in different parts of the world, says Eliot, warning that "lower-specification goods or even seconds" could penetrate the EU if parallel imports are allowed.

"What it comes down to is whether people think a brand has validity," he insists. "We are investing in new forms of product and testing them on consumers. We are looking at new fabrics and new finishes. We can only do that because people are buying that brand, because it performs in a certain way."

Without brand protection, Elliot claims, firms would not invest in them and shops would become bland places. "It would be like the old Soviet Union, where you would go into a shoe shop or restaurant with no brands and no idea of what the quality was going to be," he argues.

Levi's is locked in a court battle with British supermarket chain Tesco after the retailer sold cheap Levi's products it had bought outside the Union, claiming that the jeans company had refused to license it as an outlet.

Tesco chief executive Terry Leahy says he has spent millions of euro transforming out-of-town supermarkets into a smart retail environment where consumers will feel at home buying top-branded goods. Moreover, he claims, this type of store could sell high volumes of products, make more money for brand-owners and offer lower prices for consumers.

The Office of European Consumers' Unions (BEUC) complains that 'Community exhaustion' is an anomaly which "favours anti-competitive behaviour" and "provides trade-mark holders with the possibility to segment markets and to maintain high prices".

On the side of the importers, Hendrik Abma of the Foreign Trade Association rejects the brand-holders' claims that parallel importation undermines after-sales service. "That is a false argument," he said. "How can you talk of after-sales service on a product such as bed linen?"

The European Commission sensed the issue was about to explode when it promised last autumn to carry out a study into the pros and cons of the current regime. Internal Market Commissioner Mario Monti is expected to unveil the findings of a report by market researchers NERA at a ministerial meeting next Thursday (25 February).

Monti has worried many of the opponents of the current regime with recent written answers to MEPs' questions, which have pointed out its advantages to consumers of certain goods.

But his spokeswoman insists he is keeping an open mind on the issue until the results of the study have been thoroughly analysed by his experts, member states and interest groups.

The Swedish government, which was forced to rejig its own trade-mark legislation to bring it in line with EU rules, has conducted its own study into the issue which parallel traders hope will be a model for NERA.

It found that such traders would lose sales income to "established retailers", who would employ more staff and make more profits if the regime stayed at it is.

Moreover, banning parallel imports would, in the long run, create a net "welfare loss" because more jobs would be lost than created and consumers would end up paying more for the same goods.

Major feature on the concept of 'parallel importing'.