Grey marketeers face uphill struggle

Date: 14/10/1999

By Peter Chapman

Welcome to the global economy. That is the message which multinationals, politicians and trade lawyers are ramming home as the world prepares to embark on a millennium round of tariff-busting talks, starting in Seattle next month.

But globe-trotting EU traders and retailers argue that the Union's own laws are actively preventing them from delivering the fruits of the global market-place to its 350 million consumers. They want to be free to scan the far-flung corners of the world for bargain-price branded goods and bring them to EU shores.

Through a combination of simple arguments and skilful lobbying, they have put their demands for a reform of the system firmly on the top of the new Single Market Commissioner Frits Bolkestein's policy in-tray.

With almost religious zeal, they argue the Union's 1989 Trademark Directive is standing in the way of their crusade to deliver the cut-price Levi's jeans, Calvin Klein boxer shorts and Gucci shoes which EU shoppers demand.

This legislation is meant to bestow legal protection on trademarked goods, allowing brand-owners to differentiate their products from those of rivals. But, unfairly in the eyes of the importers and their retail allies, it also grants trademark holders the right to prevent 'parallel imports' of legitimate goods - not fakes - from foreign markets into the Union.

These are often sold much more cheaply outside the EU because local market conditions make it impossible for manufacturers to charge the prices which Europeans are forced to pay.

Under the EU's system, only goods put on sale in the Union with the manufacturers' approval can be resold to a retailer in another EU member state. In the legal jargon, this means trademark holders' rights are only 'exhausted' once they have authorised the sale of their goods in the Community.

This contrasts with the system under which retailers and importers are allowed to buy genuine products from dealers anywhere in the world willing to sell to them, known as 'international exhaustion'.

André Frenkel, chairman of the UK's Parallel Traders Association, wants the principle of international exhaustion to be introduced in the Union. He claims that the current restrictions on the so-called 'grey market' of parallel imports means EU consumers are effectively subsidising their foreign counterparts, particularly US shoppers who pay far less for their branded goods.

Frenkel also argues that the limited parallel trade which currently exists keeps prices in check. "Take parallel trade away and manufacturers can charge what they like. Inter-brand competition such as that between a couple of different perfume brands is insufficient to keep prices down," he insists.

Brand-owners disagree. Philip Sheppard, of the European Brands Association (AIM), points to studies which show that most price differentials are due to external factors such as local taxes or the efficiency of distribution systems. This, he says, means that profit margins are no bigger in the EU than elsewhere. According to Sheppard, US stores are cheaper because of America's unique combination of low taxes and a massive, homogenous market.

Supporters of the EU's current regime also argue that it rewards firms for the massive investments they have made in their products. End this system, warns Mark Elliot of US jeans giant Levi's, and the Union could soon start to resemble "1970s Communist Russia", where customers were denied the huge range of quality branded goods which western consumers take for granted.

Moreover, argues Elliot, the EU rules allow firms such as Levi's to tailor products to specific European preferences without facing a plethora of imported products designed for smaller-framed Asian consumers or overweight Americans.

Levi's is locked in one of a raft of 'parallel imports' court cases with the British supermarket chain Tesco, which wants to be able to sell grey imported jeans in its stores. Meanwhile, French scents company Davidoff is awaiting a European Court of Justice hearing on its case against a UK parallel importer, A&G Imports.

Experts expect the brand-holders to score victories in these high-profile cases, adding to the precedent set in a previous court case involving sales of designer Silhouette sunglasses in Austria.

But the grey marketeers have won influential support for their stance by playing the brand-owners off against beleaguered EU consumers with tales of 'rip-off Europe'.

Politicians and European Commissioners, including former single market chief Mario Monti, have been wary of appearing to side against the consumer. The Italian economist began by supporting the status quo, arguing that it offered consumers more guarantees. But by the time he left his post to become the EU's new competition tsar, he was not so sure. Companies, argued Monti before switching jobs, should not be allowed to use the trademarks rulebook to keep prices high and exploit helpless customers.

The newly-elected European Parliament, which insisted on Community exhaustion in the first place, has also begun to re-examine the issue, with MEPs on the assembly's consumer affairs 'intergroup' holding a special hearing to debate the scope for overhauling the EU regime last month.

Bolkestein now faces the unenviable task of tackling one of the hottest issues facing the new Prodi Commission. His officials are currently drawing up a paper on the advantages and disadvantages of reforming the law which is expected to be unveiled at a December meeting of single market ministers. One of their tasks is to make sense of the plethora of inconclusive research on the issue, such as the report by UK market analysts NERA commissioned by Monti.

Frenkel, who also spearheads a European Parallel Importers Coalition fighting for a change in the law, claims he has already rallied enough member states to the cause to ensure a qualified majority vote in favour of reform if the issue was put to the test in the Council of Ministers.

But even if the grey marketeers have succeeded in winning recognition for the case for amending the legislation, diplomats and single market experts warn that they still face a long battle to get the law changed.

Amid all the debate about the future of the trademark directive, they say, everyone appears to have forgotten separate EU rules which could throw a spanner into their efforts to reform the system.

A 1994 European regulation established a Union-wide trademark for firms which wanted a 'one-stop shop' to register their products, avoiding the need to go through the process separately in each member state.

Unfortunately for the parallel traders, this regulation is based on the same 'Community exhaustion' regime as the trademark directive. Worse still, it can only be amended with the unanimous support of all 15 EU member states and some hard-liners - including France, Italy and Spain - remain adamantly opposed to reform.

Even André Frenkel acknowledges that the Commission and many of those governments which support a change in the rules will be reluctant to push for amendments to the Trademark Directive on the basis of a qualified majority vote while there is no chance of getting unanimous agreement to change the regulation.

"You cannot have two different systems. That would create havoc," he says. In the meantime, he concludes, "we can only keep up the pressure on the politicians".

Even if a total shift towards international exhaustion is not on the cards, there is talk of a partial shift, covering certain products such as designer clothing or perfumes. Experts claim, however, that drawing up the list of products to be covered would be a nightmare, as lobbyists on both sides of the arguments wrangled over what should and should not be included. Moreover, fans of the EU's single market are loathe to fragment markets with sector-specific red tape.

For the parallel traders, therefore, the short-term outlook appears gloomy, with most admitting that they will need persistence and patience to secure the changes they seek. Whether the inevitable delay is a good or bad thing depends on which way you look at it.

For critics of the system, European consumers will continue to pay over the odds. For its supporters, the Union's brand-owners will continue to get a fair return on their investments.

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