Select Committee on Trade and Industry Minutes of Evidence


Examination of Witnesses (Questions 221 - 237)

TUESDAY 27 APRIL 1999

MR ANDRE FRENKEL, MR BILL DOODY AND MR GARY LUX

Chairman

  221. Good morning. Could you introduce your colleagues and tell us a word or two about the Parallel Traders Association.
  (Mr Frenkel) On my right is Mr Gary Lux, who is a legal adviser to the Parallel Traders Association and works for Clintons; on my left is Mr Bill Doody, who is a parallel trader mainly in cosmetics and perfumes; and myself, Andre Frenkel, I am Chairman of the Parallel Traders Association and deal in parallel goods, in toiletries, cosmetics and goods you would find in pharmacists. As far as the Parallel Traders Association is concerned, we only recently got organised, mainly subsequent to the Silhouette ruling in July. At the moment we have approximately 20 direct members. We associate ourselves, however, with other groups and trade organisations that have similar interests as we have, and that is mainly to get the reinstatement of the international exhaustion principle. We have also formed a coalition, which is a European-based coalition, called EPIC; and through that we represent thousands of members in all sectors—importers, traders and retailers.

  222. The highest profile part of parallel trading seems to have been the supermarkets, but obviously there are other retail outlets whom you supply—independent traders, warehouse stores, markets etc. Do you import on demand?
  (Mr Frenkel) No, we look at a market, we know what products are in demand; and, if we are able to find these goods anywhere in the world, bring them here, pay the duties, pay the transport and sell them at a price which will allow the ultimate retailer to make a discount, we will buy these goods.

  223. What about branded grey goods? We have heard about Colgate toothpaste which is of a different character from the normal product consumed in the United Kingdom but which, through the grey market, can be available at a lower price but is a different formulae and different composition?
  (Mr Frenkel) We have to be very specific here. We merely deal with the principle of international exhaustion against European exhaustion. Whatever is illegal to import within the existing law taking out this principle of exhaustion, for instance if you are talking about different formulation Colgate, the trademark law would prohibit this anyway because it would confuse the consumer; he would get a different product from what he would expect to get. We are not dealing with that sort of issue. We are plainly dealing with issues where the product is essentially the same; it does not confuse the customer; he gets exactly what he is expecting; the only difference is he gets it at a cheaper price. At the moment, with limited exhaustion, we cannot do that. We would like to get the law changed so that we can do that. If there is a different formulation we enter into a different area of the law which is covered, I believe, by passing off.

  224. It is suggested that perhaps some of the British companies, some of the retailers operating in the mainstream market, are able to operate on higher margins, that they have perhaps a higher cost structure than the kind of people whom you serve. Would that be reasonable to suggest? Do you think in, say, the toiletries and perfume area the big high street stores, with their staff, their fancy advertising, with the training of staff, that they charge higher prices because they have higher costs; but the kind of people you deal with sell in perhaps a more perfunctory manner, just over the counter?
  (Mr Frenkel) No, because a large part of our customers are the larger retailers, the Tescos and Safeways of this world. They have also been able to buy those goods and sell them at a discount. You have had depositions from Tescos themselves and they gave you a few examples of some very, very, significant discounts they were able to provide. Although traditionally, until about three or four years ago, the main customer of parallel goods was the independent shop and goods were sold to cash and carries, of late more and more of the superstores have come into it.

Mr Baldry

  225. Could you explain the exhaustion principle to us?
  (Mr Frenkel) The exhaustion principle means a trade owner has lost the restrictive rights he has upon his trademark once he has made an initial sale. Once he puts the goods on the market he has lost most of his rights to stop anybody else using his trademark. By "using" you would include buying, selling, importing or advertising. This is a principle that has always been accepted, and still is accepted, in the US, Japan, Australia and New Zealand, where there is no restriction as to where the trademark owner initially puts his goods on the market—regardless of whether he sold them outside the EC or in another country. If he puts the goods on the market he cannot stop anybody else from dealing in these goods. If not for that principle of exhaustion you could not buy secondhand cars, for instance, because you would be using something that did not belong to you; you would be using a trademark. You are only able to do so because of the exhaustion principle. Prior to the new Directive in the United Kingdom in one of the famous cases in which Mr Lux was instrumental, in the Cripps and Lee v Revlon case, the United Kingdom adopted the principle of international exhaustion; meaning that it did not matter where the trademark owner sold his goods; if he had sold the goods he had exhausted his rights. The only right he retains after that is if anybody were to damage the reputation of the brand. As far as restrictive practices are concerned, where he would stop other people from buying, selling, importing or exporting, he had exhausted his rights. What has happened since the new Trademark Directive, which has been reconfirmed with the Silhouette judgment, is that it is now only the case that the trademark owner loses his right if he has put the goods on the market in the EC. If he has put the goods on the market outside the EC, in say the USA or Japan, he has still got the right to oppose any importation or resale of the product.

  226. You basically are finding market niches where there is popular demand and you are seeking to find goods similar to those being sold; you are not seeking to pass off goods which are already in the marketplace?
  (Mr Frenkel) Not at all, no. We are totally opposed to counterfeiting. We are speaking uniquely about goods that are essentially the same as the goods sold by the trademark owner himself (and this is the most important part) and that originate from the trademark owner in another part of the world outside the EC—but they originate from the trademark owner. The logic behind this whole principle of exhaustion is the fact that the trademark owner has to get a reward for his investment. It was always believed, once he sold the goods, if he sold them once he has had his reward and there is no need for giving him a reward later on again so that he can stop people dealing with his goods. He has been paid and has had his reward.

  227. That takes me to my next point, because your evidence states "there can be no doubt that brand owners value parallel trade and use it as a mechanism to shift surplus goods to new markets". How frequently do brand owners give explicit consent to parallel importing when they need to shift goods? Is this particularly prevalent in certain sectors?
  (Mr Frenkel) I think it is very difficult to say "explicit" consent, because it is one of these things which is never quite clearly stated, "Yes, you can go ahead and sell these goods wherever you want". We believe in certain cases there is implied consent. There was a case quite recently where one of the cigarette companies sold sufficient cigarettes to a very small state, Andorra, which meant that every single man, woman and child were smoking something like 100 cigarettes a day. In cases like that we do believe there is an implied consent. It is very difficult to say we can prove that.

  228. If brand owners are and have been supplying parallel traders why do you think some of them are now trying to prevent parallel trading? Why is there this split approach?
  (Mr Frenkel) What they would like to be able to do is control the parallel trade. At the moment if they do want some parallel trade to occur they will allow it. If they feel it is putting pressure on the prices in the United Kingdom and they do not want it then they have the option under the law to stop it. At the moment they have a fantastic situation.

Mr Laxton

  229. Your Association has been pretty critical in the evidence that you have provided to us against some of the views put forward by the brand owners. How would you respond to the comment that parallel traders are in the business to make a quick killing in the market and in it to make a fast buck?
  (Mr Frenkel) We are all in the business to make money and are not denying that; but we are not there to make a quick buck. Basically what we are saying is, if the brand owners themselves have decided on a pricing policy which means they are selling these goods abroad cheap (and anybody could theoretically take a plane, go to New York and buy these goods themselves) all we are doing is a shopping service for these consumers. What we are doing is saying, "These goods are available elsewhere; they are available cheaper; it's the brand owners who sets the price over there; we want to give the opportunity to the United Kingdom consumer to be able to buy them".

  230. It could be said you are killing the golden goose. You have got certain products, cosmetics and perfumes—although that may not be a good example because the prices are pretty much the same wherever you go in the world in terms of parallel imports. Getting into certain areas of goods, you are obviously in a situation to weaken demand for them and eventually the kudos that goes with certain products is then lost.
  (Mr Frenkel) That has not happened. If we take the most important markets in the world for branded goods we have admit they are the USA and Japan (mainly Japan). In both these countries there is this principle of international exhaustion and the brands are doing very strongly there.

  231. Some of the major brand owners would say that parallel trading could in some respects kill initiatives, innovation and development of products. What is in it for them? They invest a great deal of money and time into developing products then to find the market is undercut as a result of parallel trading activity.
  (Mr Frenkel) We are still buying goods from the brand owners at the price which they themselves set. What is interesting, when you talk about research and development, if you look at the table published by NERA, which gives the price comparisons, you will find you have two types of goods: you have the high technology goods where there is a lot of R&D, and you have the lower technology goods where there is not a lot of research and development. The price differentials are equal in both sectors which shows clearly there is no relationship between research and development to what the prices actually are. If you read the New Zealand study, they made an extensive study on the European market when they were considering whether they should adopt this, and what they found was 80 per cent. of the respondent manufacturers, when asked how they priced their goods, said it was based on what the market would bear.

Chairman

  232. We have discussed this business about R&D; there is the question about promotion materials, the vast advertising budgets that in some ways you are riding on the back of, but there is this other question of consumer protection. You have been talking about toiletries and sometimes mistakes happen and the application of particular goods has a deleterious effect on people's skin and you have a recall. How would you deal with that, given there are other informal links you have with the original supplier? Have you had any circumstances like this where goods of this character have had to be recalled; and have you had difficulties in having dealings with the initial supplier or the manufacturer?
  (Mr Frenkel) Personally, no. We have never had any experience like that and must compliment the brand owners for making an excellent product. All the goods have got batch numbers, and if there is a product recall it is well-publicised either in the country where they were sourced or sometimes even wider. We are able to track these through the batch codes. The batch codes will indicate whether it belongs to a faulty run or not.

  233. Mr Doody, have you had any experience in that area?
  (Mr Doody) Yes, but only had it three times. We have been parallel importing for 22 years so we are not in it for the fast buck, we have been in it for the long run.

  234. A lot of small fast bucks!
  (Mr Doody) One or two, yes. In the 22 years I can remember three times: two were Estee Lauder products and one was a Proctor & Gamble product. We deal regularly with Proctor & Gamble in this country and in other parts of the world. That was a particular item which was suspect and we withdrew that. With the Lauder thing, when we suspected there was a problem with it; we had a contact in the company and we phoned up with the batch numbers and asked if there was a problem and in those two particular cases there was a problem. Those are the only times I have personally experienced. I do not think it happens very often.

  235. That was a case where you were parallel importing with the acquiescence of the supplier?
  (Mr Doody) No, in the Proctor & Gamble one it was not a parallel imported job but was one we bought from them in Europe. In the case of Estee Lauder, they knew we were parallel importing but they ignored it and this was pre-Silhouette anyway. We had a contact with them, mainly because we had approached them to try and open a direct account with them which they would not agree to; but then we made a contact and used that contact in that particular instance.

  236. Could I ask one last question on this area which is related. You hinted that there are occasions where, once you have established your bona fides with the manufacturer, you get to the point where the relationship becomes formalised. We have seen this in evidence we have had from Tesco—one or two of the goods, not necessarily the kind you are engaged in offering, electrical and electronic goods, once they had established they were responsible sellers the companies were prepared to deal with them; and it has probably had the effect (as with motor cycles) of pushing prices down. Has that been your experience, where you have a toehold in a market, they have accepted you as the supplier and the fact you are responsible, that they have dealt with you and prices have come down? Has this happened?
  (Mr Frenkel) Yes. We certainly believe that parallel trade has a very important effect on the global market. If you look at figures, parallel trading is responsible for about 10 per cent. (and in the case of cosmetics 13 per cent.) of the global market share. Why this very strong opposition to parallel trading by the brand owners? The reason must be because, due to parallel trade, there is pressure on the brand owners to actually discount in other areas because they have to satisfy their other customers. This has happened constantly. We know that Gillette, during a period where there was a lot of Gillette coming in on the parallel market, dropped the price of the Gillette Sensor, so where the company price was somewhere in the middle £40s it came down as low as £33. There is no denying the pressure of parallel trading. We are not only discussing the 10 per cent. that we are responsible for; it has an effect on the rest of the prices as well. Take away parallel trading and they can price it whichever way they want to.

Mr Baldry

  237. The Anti-counterfeiting Group in their evidence say, "there have been a number of cases recently where shipments of `grey' or `parallel' goods have been a cover for a much larger shipment of counterfeit goods". What mechanisms do you and your members have in place to ensure goods you are importing are in fact genuine and not counterfeit?
  (Mr Frenkel) Very often we have access to the paper trail and we know where the goods are coming from; we deal with reputable people who have, in the past, been able to provide us with the goods that we requested. I am not aware of what they were actually talking about. They might be referring to cases where the brand owners claim the goods are counterfeit in order to obtain the information of where they have been coming from through Customs, and then saying, "No they were not counterfeit" and then a few days later the importer gets a writ based on Silhouette. I do not know if this is what they were referring to; but there is absolutely no relationship between counterfeit and parallel goods; on the contrary, we are very strongly opposed to any counterfeit goods.

  Chairman: Thank you very much, that was very helpful. We did not take a long time with you but I do not think that is a problem because your evidence has been extremely succinct and very helpful. We are more than happy for you to stay, because it may be the other evidence we hear will be set alongside your own. If there are points which do arise we will get in touch with you. Thank you very much for providing us with your membership lists and the other matters, and where commercial confidentiality and legal sensitivities will be observed we will not be publishing them. Thank you very much for coming.





 
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