What is Parallel Trade and why does it Happen?
Parallel trade occurs when products produced under the protection of a patent, trademark, or copyright in one market are subsequently exported to a second market and sold there without the authorization of the local owner of the intellectual property (IP) right. Often, the local owner of the IP right will also be a local dealer who, through a license or other exclusive agreement, has been authorized by the patent, copyright, or trademark holder to market the protected product. Naturally, when the licensed dealer has an exclusive agreement, he or she expects to be the only party supplying the product in the local market.
Parallel trade does not refer to unofficial, illegal, or informal-sector activities that may take place inside a country or among countries. Moreover, parallel trade is not trade in pirated or counterfeit products. The latter are unauthorized versions of products that infringe an IP right. Parallel imports (also called gray-market imports) are genuine, often branded, products that do not violate an IP right. Importing the products from one country to another, however, may not be authorized by the right holder.
The main difference between parallel importation and “official” importation is that the parallel imports probably were produced originally for sale in a particular market and then were passed through an unauthorized dealer before reaching the consumer. Parallel imports may differ in superficial ways from those made available by the local dealer—they may be packaged differently or lack the original manufacturer’s warranty—but otherwise they will be identical to the official import being marketed locally.1
When parallel importation occurs, the practical effect is that a patented and/or branded product becomes available locally from multiple sources. Parallel importing allows dealers to bypass official or authorized local suppliers or licensees and obtain products directly from overseas suppliers. The enhanced market competition between sources of the same products tends to drive prices down.
Indeed, the incentive for parallel importation is the fact that there are price differences between identical products in different markets. Parallel importing usually occurs when the price differences are high, because then the potential gains (price savings, product availability, profit) for most stakeholders are large enough to compensate for the transaction costs, including shipping costs and complying with customs regulations. The price differences can be due to a variety of factors. In the case of the pharmaceutical market, where important price differentials exist between countries, price differences can result from government-enforced price controls, pricing manipulated by the owner of an IP right holder, fluctuations in currency values, a combination of these conditions, and other factors.