Latin America Overview
This is an Insight article, written by a selected partner as part of GCR's co-published content. Read more on Insight
In short, a trademark is the sign through which products are distinguished. When the competent authority in a given country grants a trademark, its owner is the beholder of a monopoly for its use within the boundaries of the particular classes assigned, according to Nice Classification standards.1
The trademark monopoly will be represented by its exclusive utilisation, which encompasses the prohibition of its use by third parties. However, because of case law, which helps interpret the law in different countries, several discussions were generated relating to the limits and far reaching consequences of the exclusive right for the use of the trademark by its titleholder.
It was therefore set out that proprietary rights for a trademark must have its limits, following the premise that the rights a person or legal entity has are considered valid unless another person’s rights are infringed. In other words it can be affirmed that public interest is on a higher level than private interests and that public interest should prevail, not allowing private interests to become a legitimate way to violate what in the eyes of the law should take priority. Below, we will concentrate on this issue of principles as it is deeply related to the problem of trademark depletion. For now, we can initially state that the proprietor of the trademark has a legal right; the question is to what extent can its titleholder utilise it and if, in exercise of such right, competition can be hampered. Let’s not forget that in many jurisdictions in our region competition can be protected by constitutional law to a higher degree than private property. This is the main subject of this chapter: the right of obtaining a monopoly of a trademark, but limiting its right when competition rights are threatened.
These are agreements between companies in the same market, but on different scales within the value chain, like for instance between a manufacturer and one of its distributors. Within this we can observe the distribution of markets, product exclusivity, geographical exclusivity and price fixing.
In most jurisdictions in our region, it is unlawful for the manufacturer to fix its distribution channel’s market conditions in the aforementioned categories unless it presents itself as one company or integrated companies (eg, it can’t be agreed to fix a territory for distribution; to prevent a merchant from selling competitors’ products; and fixing the resale value of its products).
Abuse of dominant position
Which can be exercised in two ways: the first within the market and the second within the contract. Abuse of dominant position within the market is regulated by commercial restrictive practices (antitrust), whilst the contractual one is regulated by contract interpretation, contractual utmost good faith, abusive clauses and the consumer protection regime.
An abuse of dominant position within the market occurs when there is no elasticity present regarding offer and demand, the market relies on one economic agent, who as product of the situation will extract the benefits for its own interests, abusing of its privileged situation.
As we established on our previous article last year, it is possible for a manufacturer to compete with its own distribution channel if the manufacturer also utilises a direct distribution channel, (ie, third parties and employees distribute the company’s products). If this situation occurs, the principles of transparency, rightfulness, and clarity should be present, in other words loyalty should operate.
Trademark protection begins when it is registered in the trademarks registry. From that point on, the titleholder carries the right to oppose any third party who uses the trademark or any similar mark that might cause confusion in the market.
In our opinion, however, rights pertain to a trademark’s owner even before the trademark has been registered, if it has been used beforehand. For example, if a third party decides to register it knowing how it has been used, the act would be enshrined by bad faith, hampering the right of concurrency and giving the affected party the right to sue the other.
Another important issue is when does the trademark monopoly end? There are occasions when such rights might lapse due to expiry or lack of renovation by its owner. Anyhow, there is a difference between losing the right of ownership and depletion. Depletion means to reach the maximum limit and then lose the right of any possibility of usufruct. There are three types of depletion;
- national: it occurs on the local market with the first sale;
- communitarian: the first act of sale permits the customer to resell within community boundaries.
- international: the sale in a foreign country exhausts the right to oppose commercialisation in other countries.
The trademark becomes economically important when it enters consumer knowledge. If the consumer is loyal to it, if the trademark acquires fidelity, then it may become extremely valuable. Later on, it may be passed on by word of mouth to other consumers, making it well known on a given market.
If this occurs companies, after choosing a distinctive sign, should seek trademark recognition. This implies that there is a financial cost involved in placing it within the market. It is pure logic to say that all costs derived from the product, associated or not with production (including trademark costs) must be recovered to be able to earn profits.
After the sale has been completed the manufacturer obtains a monetary benefit but, financially speaking, is deprived economically of what has already been exploited (ie, the product). The purchaser now holds the right to exploit it by consuming it or reselling it; in other words the consumer now holds the proprietary rights of the product.
The principle of trademark depletion presents itself as the termination of ius prohibendi, understood as the impossibility of prohibiting the use of the trademark after the first sale made directly by the manufacturer or by a third party that the trademark titleholder authorised.
What we refer to, as parallel commerce is the right the purchaser of the trademarked product has to commercialise or resell the products bought legitimately through the authorised channels.
As we have been explaining, trademark depletion relates to the end of a right due to its consumption. That occurs due to the sale of a given product, which is indivisible from the trademark.
When the product is resold it can not be deprived of its original trademark. As the rights the manufacturer has regarding a product end when the purchaser’s rights begin, the manufacturer can not stop a new sale by the previous buyer and or any further resales.
There have been opinions that want to economically distort the figure of trademark depletion:
Parasitic advantage of parallel distributors.
Parallel distribution takes place when the official channels (white market) conflict with an unofficial channel. An unauthorised distributor company or individual who buys the product as a third party and later resells constitutes an unofficial channel, also known as the grey market.2
The official exclusive distributor from a given area has made a monetary investment for the positioning of its trademark within a particular geographic zone, which in turn carries an expectation to recover the investment made through market penetration and client loyalty.
The cost of the investment by the exclusive distributor may give an advantage to an unofficial distribution channel. However, some economists argue that the parallel distributor also pays the manufacturer or official distributor for rights over the product through purchase, granting an entitlement which permits the buyer to exploit the product freely.
Warranties of quality and suitability
The warranty is the right the consumer has that the products received correspond with what was offered. It is the protection established so that the weakest party in a contractual relationship is given a tool for obtaining redress in the event of a faulty product. It is argued that the parallel distributor is deceiving its consumer by promising a warranty that cannot be offered or granted. This is not true, the manufacturer is still obliged to render warranty rights independently of who the seller is under normal circumstances. There is joint liability between manufacturer and distributor relating to warranties, meaning it can be rendered by the consumer either against the manufacturer or the distributor, and the manufacturer can not exclude its responsibility by claiming it is a fabrication fault which has nothing to do with the buyer irrespective of whether the seller belongs to an official or unofficial network. Another issue relates to warranties which accrue from false information created by unofficial sellers where an extraneous cause, especially through the fault of a third party, may be present.
Limits to private property
When one obligation depends on another obligation (eg, when obligations related to the official distributor want to be extended to the second purchaser of a product on matters that relate to the manufacturer) the principle of contract relativity operates, establishing that the contract is binding for the involved parties without the possibility of involving third parties, save if the third party agrees with the imposition of such a provision.
We must now associate the different subjects developed in this chapter to reach the conclusion that public interest comes before private interests and that competition law prevails over trademark law.
To be able to develop this idea it is necessary to explain what occurs in a given market, as market activity is what is regulated by law.
We explained the significance of an official distribution scheme as well as a non-official or parallel one. Competition may occur between two distributors representing the same trademark (intra-brand) and between distributors of different trademarks (inter-brand).3
The narrative involving these issues is very subjective. Regardless, what can be observed very clearly is that control over a legitimate distribution scheme can be easily lost when an unofficial party appears.
Parallel distribution, however, is favourable for the consumer; due to the many alternatives that will be offered and the consumers’ only interest will be to get the most competitive price on original products within a particular brand. This is the conflict that arises between public and private interests, where the public one should prevail.
To make our point easier to comprehend the following example will be given:
A is a manufacturer with great market power and strength who serves directly some countries within a region. B is an official distributor of A who serves country X. C is an investor who observed that the product manufactured by A is much cheaper in country Y and that even with the costs of importing and transporting the product would be less expensive and could be sold in country X at a lesser cost than that offered by distributor B giving a good margin of profit. C decided to do that, however, A prohibited the selling of the product to C.
What are the consequences of this example?
- The consumers of country X pay more than those in country Y (which would also apply to two different cities, within a country).
- A has compartmentalised its intra-brand market (vertical territorial agreements).
- With its vertical agreement, A creates a sector monopoly, eliminating alternatives to the consumer.
- The fact that a consumer pays more for a product implies that another sector of the economy loses a sale, because a consumer buying a product at an augmented price loses the opportunity to buy another product (ie, its acquisition capacity is lessened).
We do not question the right A has to choose to whom its products are sold, but A cannot prevent C from selling products under its trademark. For that to occur, A must be able to provide proof that C caused damage to its brand while selling its products, and we have already explained that what can’t be argued is economical expense,
as this was already given up at the moment of the original sale of the product.
What does occur is this example, is that A has blocked C by assigning an area distribution monopoly to B, and damage is effectively caused by A and B to C; this would not have occurred if competition law was present.
This is the reason why trademark depletion should be aligned with the prohibition of:
- vertical agreements (price, product and territory);
- abuse of dominant position (imposition of a double margin, with profits for manufacturers and distributors); and
- unfair competition (concurrence to the market is affected).
- The Nice Classification (NCL) is an international classification of goods and services applied for the registration of trademarks and service marks. It was established by an Agreement concluded at a Diplomatic Conference held in Nice in 1957: the Nice Agreement Concerning the International Classification of Goods and Services for the Purposes of the Registration of Marks.
- There are also black markets, which constitute contraband.
- STANTON, ETZEL AND WALKER. Marketing Fundamentals