Examination of Witnesses (Questions 221
TUESDAY 27 APRIL 1999
221. Good morning. Could you introduce your
colleagues and tell us a word or two about the Parallel Traders
(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 sectorsimporters, 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 supplyindependent 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.
225. Could you explain the exhaustion principle
(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 marketregardless
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 ECbut 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.
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 perfumesalthough
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
(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
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
(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
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 Tescoone
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.
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
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.