Parallel import is not easily tolerated by brand owners. Parallel import products, sometimes referred to as grey market goods, create market distortions, attack the official supply chain, double the risk of product liability and dilute trademarks. Brand-owners know, however, that trademarks are not a viable tool to stop parallel import of foreign cosmetic brands into China, as the first sale of these cosmetics abroad exhausts their exclusive right in China.
However, holders of trademark rights on imported cosmetics in China can now take action against parallel import if the importers have violated local safety and product quality regulations, modified the product, or failed to adapt labeling to local mandatory requirements. As recently as 2019, legislative changes in China have opened to foreign cosmetic brands a strong and reliable avenue to stop parallel import of their products into China, while allowing them to import their not yet FDA-approved products through designated e-commerce platforms. This window of opportunity may close soon, however, if and once animal testing is abolished in China, which may happen as early as January 2021.
Animal Testing and Recordation of Cosmetics
The relevant regulations allow the import and distribution of foreign generic cosmetics products in China after their successful recordation with the Chinese State Food and Drug Administration (China SFDA). In order to obtain such recordation, the foreign applicants must prove they have undergone all the mandatory safety testing, including animal testing. However, most foreign brands have abandoned animal testing for several years either because of a specific company missions or because forced by the relevant national regulations, such as those in force in the US (e.g., California banned animal testing in 2002) and in Europe (the so called “marketing ban” in force since 2013).
The abandonment of animal testing is the reason why many foreign cosmetic brands have not been able to record their products with China SFDA and enter the Chinese market through the main door of the traditional channels of distribution. In such situations, it was difficult to consider possible measures against parallel importers. On one hand, cosmetic brand owners were not keen to invest resources on tackling that issue when they were not selling any products in that market. At the same time, they were keen to tolerate such parallel import so as to have at least some of their products enter that market with all the related benefit of it, like building brand awareness in a yet unexplored market.
Online Sales on Designated e-Commerce Platforms
This status quo changed in 2019, when many such cosmetic products were made lawfully available to Chinese consumers by exempting foreign brands from having to comply with the animal testing requirements. In 2018 China issued the “Notice of the Ministry of Commerce, the National Development and Reform Commission, and the Ministry of Finance on Improving the Supervision over Cross-border E-commerce Retail Imports”(1) (also referred to as the “Notice”), which took effect on January 1, 2019.
Article 3 of the Notice specifies that imported goods in “cross-border e-commerce retail” are exempt from initial import licensing (referring to the customs licenses), and registration or recordation of goods (referring to the registration and recordation with China FDA). Also, in 2018, cosmetics were included in the List of Retail Imports in Cross-Border E-Commerce.(2)
These administrative provisions allowed a foreign cosmetic brand to directly sell its products to Chinese users through designated Chinese e-commerce platforms like Tmall (Alibaba) and JD.com (JingDong). The products, coming directly from outside China, are not subjected to any licensing and recordation requirements.
This has changed the perspective of foreign brands towards parallel import. Tolerated before 2019, parallel imports are more burdensome now that the brands can enter the Chinese market and brand owners are dealing directly with Chinese customers. This burden will be increased by a full market entry once the animal testing requirements are removed, likely in early 2021. It is in this new scenario that foreign cosmetic brands have an immediate interest and need to take action against parallel imports.
No Exemption for Parallel Importers Acting Outside the Designated e-Commerce Channels
Unlike the exemption of sales of foreign cosmetics via Tmall, JD.com, or other authorized platforms in China, the import of foreign cosmetic product by a person or an entity for resale outside the designated e-commerce channels is not exempted from the requirement of recordation with China FDA. Once the Chinese importer has received the goods purchased abroad, and stored them in a Chinese warehouse, the importer will have to show China customs that those cosmetics have been recorded with China SFDA before being able to clear and deliver them to the end Chinese buyer.
The importer is not the one legally entitled to carry out and obtain the China FDA recordation. In such situation, it is evident that an act of parallel import violates the relevant Chinese laws including but not limited to the China Regulations Concerning the Hygiene Supervision over Cosmetics,(3) and the Provisions of the Supreme People’s Court on Several Issues concerning the Application of Law in the Trial of Cases Involving Food and Drug Disputes(4) for selling imported cosmetics without FDA permission.
In a recent decision between Hou Xuejing (a consumer) and Qingdao Meilin Internet Technology Co., Ltd. (the owner of an online shop on taobao.com),(5) the Qingdao People’s Court has confirmed the above conclusions. In this case, Qingdao Meilin and Zhejiang Tmall were sued by the individual consumer for selling unrecorded imported cosmetics that were not inspected by the Chinese Customs and did not have Chinese labels. The seller (Qingdao Meilin) submitted a verification report showing that the cosmetics sold met the national standards. He also submitted a customs declaration document to show that these cosmetics were shipped to a bonded warehouse in China from abroad before being delivered to their buyers. The court determined that the involved cosmetics were indeed manufactured in Taiwan, and therefore were classified as “imported cosmetics” under the “China Regulations Concerning the Hygiene Supervision over Cosmetics” and were subject to the mandatory recordation process with China FDA, but their importer or brand owner had failed to do so. The court then ordered Qingdao Meilin to refund Huo Xuejie and pay him damages for selling unrecorded imported cosmetics.
Enforcement Opportunities for the Brand Owners
Given the above situation, foreign brand owners have been handed a golden opportunity to stop parallel import of their cosmetic products into China without fear of fallout, while they can keep selling legally without need of FDA recordation as long as they sell through the designated e-commerce channels.
Actions to stop parallel import can be filed with the territorially competent Market Supervision Administration (MSA). And according to article 26.1 of the Regulations on the Hygienic Supervision of Cosmetics,(6) “(t)hose who import or sell imported cosmetics that have not been approved or examined shall be punished by having their goods and illegal earnings confiscated and by a fine 3 to 5 times their illegal profits.” This should be a good deterrent against their future attempts at importing the goods again.
Can Chinese parallel importers try to go around this problem by selling in Tmall or other designated e-commerce platforms? The answer is simply no. In order for a Chinese importer to sell in such platforms they would need to own the relevant trademarks or be authorized as licensees by the brands owning the relevant trademarks. So this avenue is closed.
Can the parallel importer try to record the cosmetic products themselves? Of course not. They would need all the proprietary testing results and formulas to be submitted with special samples, company certificates, including trademarks and patents which of course they cannot have.
Therefore, parallel importers will simply have to give up importing cosmetics meant for other markets into China to the benefit of legitimate right holders.
Why Taking Action Now Is Important
This favorable window of opportunity might not be opened for long. If animal testing is removed as a requirement for the registration of imported foreign cosmetics, the designated e-commerce channel exemption will also go. At that point, foreign cosmetic brands will lose this very effective way to control parallel import of their products into China. At that point foreign cosmetic brands will have to comply by recording their products with China FDA and importing them into China through the more traditional channels.
It is therefore in the best interest of legitimate right holders of trademarks and other IP rights on imported cosmetic products in China to take action against parallel importers now. There are several advantages in taking action while it is still possible.
First, reducing the number of parallel importers through such enforcement actions will benefit the foreign cosmetic brands’ transition into a more traditional distribution model once they are able to record their products with the FDA without need to prove animal test results. By acting now they will reduce unwanted distribution that may later create serious pricing and supply imbalances and hinder the setup of the official supply chain. Banning parallel importers now will cause them to move away from their brands and will make it less likely for them to come back later.
Secondly, by reducing parallel import now, right holders can diminish the risk of liability claims. The holder of the trademark is always liable for product liability and product quality claims even if it did not import the product into China. Given that the right holders do not control the way parallel importers store and distribute the products, there are always quality-related risks involved with parallel import products. Improper or lack of locally-required labelling adds additional risks. Banning parallel import now will reduce the quantity of products in circulation and therefore lower the risk of such claims.
Thus, closing down parallel import activities now will slow down dilution of the brand by excessive and unwanted circulation of goods into the market, bad advertising and negative social media due to poor service related to parallel importer activities.
Once this ground for enforcement based on parallel import non-compliance with the recordation requirement due to animal testing is gone, parallel import will be more difficult to attack.
For all of these reasons, foreign cosmetic companies that have not recorded their products yet with China FDA, due to the issue of animal testing, should act now to tackle the issue of parallel import in a very safe and efficient manner, and before this grace period ends, which is expected by beginning of 2021. Once the exemption of Art. 3 of the notice is gone and recordation without animal testing is possible, the opportunities to go after parallel importers will be limited to mislabeling or product modification, which are less likely to happen.
(2) E.g. List of Retail Imports in Cross-Border E-Commerce (2018)/ 跨境电子商务零售进口商品清单（2018年版）.
(5) Hou Xuejing v. Qingdao Meilin Internet Technology Co., Ltd. and Zhejiang Tmall Internet Co., Ltd.”, (2019) Zhe Min Chu No. 10992.
(6) 化妆品卫生监督条例, 2019 version.