Policy Statement & Submission

Regulation of parallel imports

Background paper

June 2001

Copyrights

Background

Before 1997, whilst the copyright law (Copyright Ordinance 1973) provided for regulations over importation, its position on parallel importation was not very clear. In practice the law was enforced against import of pirated products, while problems with parallel importation (breach of license conditions) was interpreted as breach of contract rather than infringement of copyright. While criminal sanction is available against "problematic" importation, in practice it was applied only to piracy and not to parallel imports. In the latter case, only civil liabilities applied; criminal sanction was theoretically possible but had never been used, hence it acted as a deterrent only.

Law Reform Commission study

The Law Reform Commission began studying the reform of the copyright law in 1987 and it published a consultation paper in 1991. At the time the predominant view within the LRC on parallel importation was:

• to remove regulation altogether from the copyright law, leaving it entirely to the law of contract;
• even if it were to be regulated under the copyright law, criminal sanctions should not apply.

After taken account of views from the consultation exercise, some three years later, in 1994, the LRC published its final report in which it took a slightly tighter position:

• It recommended that parallel importation should continue to be regulated under the Copyright Ordinance.
• There was a proposal to make software an exception, i.e. parallel importation of software to be de-regulated; but that was not accepted.
• In any case, criminal sanctions should not apply.

The 1997 amendment

It took another three years of discussion and debate before the law was changed. The debate gathered momentum in 1996 and intensified in 1997.

On parallel imports, predictably, the views were polarised between on the one hand, retailers and consumer groups and on the other, rights holders like the Motion Picture Association. Eventually, the government bowed to the pressure from the film industry thus resulting in the current provision.

The provision is that parallel imported articles may attract criminal sanctions for 18 months commencing from first publication anywhere in the world.

From the point of view of rights holders, this is a compromise because they wanted no time-exhaustion (i.e. perpetuity instead of 18 months). The original law provides for criminal sanction but without the time limit.

From the point of view of retailers (and also from the spirit of the LRC recommendation), this is a tightening since the previous criminal sanction was never actually applied to parallel importation. They wanted that ambiguity removed but instead they get the opposite: they now have a firm criminal sanction.

Going back: decriminalisation?

The retailers and consumers will argue for retracting the 1997 provision, thus decriminalising parallel importation. This is likely to be strongly resisted by the film and software industries.

A possible compromise is to go back to the 1994 debate, when LRC considered making software an exception. Although the LRC decided against it then, there are some justification for re-visiting the debate. The main argument is that the showing of a film has to be "localised" thus requiring different advertising, editing, subtitling etc. in different places, thus some regulation over parallel importation is justified to safeguard the rights of the copyright owner; whereas a computer software runs in the same way anywhere in the world, thus the copyright should be "exhausted" after it has been sold (thus allowing parallel importation).

However, it should be borne in mind that with the convergence of software and multimedia, it is not easy in practice to make a distinction between audio-visual and software products.

Trademarks

Other cases of parallel importation (e.g. of goods like electrical appliances, cars, handbag, etc.) come under the Trademark Ordinance. Hitherto there is no criminal sanction against parallel importation although civil liabilities may apply. Goods like electrical appliances will be subject also to other legislation relating to safety standards.

In 1999 the Trademarks Ordinance was amended with a total liberalisation of parallel importation with regard to trademarks. In other words, the rights of an article is deemed to be totally exhausted once sold, anywhere in the world, and the subsequent importing would not be against the law and would not even attract civil liabilities.

However, the new law, though passed, is not yet in force. At present, therefore, there is some murkiness in applying the Trademark Ordinance to parallel imported goods.

The case of software

In the Chamber's response to the government consultation on combating intellectual property rights infringement in Hong Kong in April 1999, the Chamber stated, among other things, that: "An important weapon against IPR infringement is to have a more open market offering more choice of genuine products. Policies which are not consistent with the development of a more open market, for example, the ban on parallel importation, should therefore be reviewed." Such a review is now being conducted for computer software.

The Chamber supports the proposal to liberalise parallel importation of computer software. We believe there are compelling reasons for allowing parallel importation of computer software, both as a matter of principle and having regard to the practical situation in Hong Kong.

On the matter of principle, we take the Law Reform Commission's view that "the object and purpose of restricting parallel importation is to protect local manufacture and to allow the copyright owner to maximise his profits through the commercialisation of his work." (Para 18.31 of the 1994 report by the LRC.) While in some cases, (for example, films) the safeguarding of the copyright owner's interest through restrictions on parallel importation may be justifiable, the same cannot be said of computer software. The pricing of software is much more globalised than other copyrighted products such as films and music, and in any case most software products run in the same way anywhere in the world. There is hence a much stronger case to argue that the copyright should be "exhausted" after the product has been sold. Thus parallel importation of computer software should be considered more as a trade matter rather than a matter of copyright protection.

Our SME members have also raised the concern that businesses who are willing to buy genuine copies sometimes have difficulty to do so as supply is limited by the 18-months ban over parallel importation. In the modern world, information technology changes rapidly and eighteen months will render many software products outdated. It is unrealistic and unreasonable, therefore, for the ban to remain for computer software.

In conclusion, there is over-regulation over parallel importation of computer software under the Copyright Ordinance, and hence a strong case for liberalising that aspect of the Ordinance.

Decriminalisation versus total de-regulation

We have no doubt that the parallel importation for computer software should be decriminalised.

For computer software, criminal sanctions should apply only to infringing products, not to legitimate products. Such sanctions is already available under the Intellectual Property (Miscellaneous Amendment) Ordinance to cover infringing copies of computer software made in the course of business. With regard to importation, the criminal provision should apply only to imports of pirated products, not to parallel importation of genuine products. In other words, the current criminal sanctions over parallel importation of copyrighted material within 18 months of first publication should be removed for computer software.

We note, however, that the current liberalisation proposal is one of total de-regulation, with the removal also of civil liabilities. The latter has been a matter of some debate, as reflected in the comprehensive report on the Copyright Ordinance by the Law Reform Commission in 1994.

The LRC's position then was to regulate parallel importation through civil sanctions, and in its deliberations it had considered exempting software and books from such regulation.

In the end the LRC decided against making such exception. On reason was that for the education sector, exception provisions already existed in private and domestic use, fair dealing, library and education copying etc., thus further exemption from regulation of parallel importation would not be necessary. While it could be argued that no such exceptions existed for computer software, the LRC considered that giving special treatment for certain categories of work might cause confusion and uncertainty. It concluded that "a clear policy for partial deregulation or exemption should first be formulated, as the introduction of an exception in one sector would inevitably invite demands for exemption in other sectors." (Para 18:30, LRC report.)

There are two further considerations regarding whether it is "safe" now to de-regulate totally. One is the convergence of computer and multimedia, which has made it difficult in practice to make a distinction between the software and audio-visual contents of many multimedia products. The second is to ask whether the law is the right place to make the distinction between different aspects of intellectual property products in a field which is increasingly marked by convergence. It could be said that other than clearly identifiable sectors for which exceptions can be specified in the law, more room should be left to the court and the Administration in the actual interpretation and application of the law.

How to liberalise

In implementing de-regulation, the greatest flexibility would be provided through the introduction of enabling provisions in the Copyright Ordinance to empower the Administration to exempt or suspend the application of the sanctions on parallel imports to a particular sector where there is a clear case to do so. This has also been alluded to in the LRC report.

Some analysis

Current situation

Options for consideration

Implications