Part I: Background
Part I provides background information on parallel importing and the Government's review of this in relation to the creative industries. This section includes:
- a working definition of "parallel importing";
- an explanation of how intellectual property laws (and copyright in particular) can restrict parallel imports;
- a description of how and why the ban on parallel importation of copyright goods was removed in July 1998;
- a description of the origin of the current review of parallel importing;
- a description of the consultation undertaken by the Ministry in March and April 2000 and a summary of the reasons for inviting further submissions on the proposed parallel-importing bans.
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1.1 What is Parallel Importing?
12. "Parallel importing" is the importation of goods subject to intellectual property rights through channels of distribution that have not been authorised by the owner of the intellectual property rights. This usually refers to goods made by overseas companies for sale in other countries. The term is, however, sometimes also used to refer to the unauthorised importation of goods that have either been exported from New Zealand for sale in another country or made overseas for sale outside New Zealand under a licence granted by a New Zealand right holder.
13. Parallel importing allows retailers, wholesalers and other parties to by-pass official or authorised local suppliers, licensees or agents and obtain goods directly from overseas sources. In doing so, parallel importing allows intra-brand competition for goods - that is, competition between sources of the same or similar goods.
14. Parallel-imported goods are sometimes confused with pirated and counterfeit goods. This association is both incorrect and misleading. Pirated and counterfeit goods are illegitimate goods produced without the consent of the owner of the intellectual property. In contrast, parallel imports are goods that are manufactured and put into circulation in another country either by, or with the consent of, the owner of the applicable intellectual property rights. It is the importation into New Zealand itself that might not have the consent of the right holder.
1.2 Parallel-Importing Bans Explained
Parallel Imports and Intellectual Property Rights Generally
15. Intellectual property rights confer exclusive rights to perform certain activities in relation to intellectual creations and inventions. The basis on which copyrights, patents and design rights are granted 1
is the expectation that proprietary rights will encourage both investment in intellectual creativity and inventiveness, and dissemination of knowledge and cultural goods to the benefit of all New Zealanders. Trademarks and "geographical indications" 2
grant rights that protect goodwill and reputation, and provide consumers with low-cost information on the source of goods and services.
16. One of the rights that can be granted by intellectual property statutes is an exclusive right to authorise imports of products into different markets. Where a third party imports goods without the right holder's permission, that right holder will be able to take legal action for infringement of their intellectual property right.
17. Such an exclusive importing right amounts to a parallel-importing ban. It allows the right holder to choose whether or not to distribute their goods and, if they do choose to distribute, it allows them to decide the time at which the goods will be released in each market. More importantly, an exclusive importing right can allow right holders to determine the price and the quality of the goods they distribute to each market (price and quality discrimination). An exclusive importing right also means that overseas intellectual property right holders can sell an exclusive licence or franchise to distribute their goods in different markets.
18. Parallel-importing restrictions can therefore enhance the value of the intellectual property rights in the products they apply to, and can confer a degree of market power. (The possession of such power is not a policy concern.)
19. Many imported products are subject to multiple intellectual property rights, each of which exists under a separate statute. This means that restrictions under any one of these statutes could effectively prevent the parallel importation of such a product. For example, a music recording will often be subject to copyright protection (both in the "fixation" itself and in the music and lyrics) as well as trade mark protection (in terms of any registered trade mark affixed to the product). Similarly, other consumer goods (for example, a compact disc player) might potentially be subject to:
- copyright protection (in terms of the packaging, the accompanying explanatory material, and aspects of the artwork);
- trade mark protection (in terms of any trade marks affixed to the product or the packaging);
- patent protection (in terms of the way the device operates); and
- registered design protection (in relation to visual design-features added to the device).
20. The ability to control the distribution of goods into different markets is usually conferred through intellectual property laws themselves, although other means can be used to restrict the distribution of goods across borders. These "other means" include commercial contracts, safety standards, censorship laws, and import-licensing restrictions.
Parallel-Importing Bans on Copyright Products
Why Is Copyright Particularly Relevant to Parallel Imports?
21. The Copyright Act 1994 does not prevent copyright goods lawfully made overseas from being imported into New Zealand without the consent of the New Zealand copyright owner or licensee. Nevertheless, copyright has in the past been the intellectual property right most relevant to the issue of parallel importing in New Zealand. A blanket ban - which dated back to the Copyright Act 1913 - existed for the parallel importation of copyright goods until 1998.
22. The wide scope of New Zealand's copyright protection, which is among the broadest in the world, meant that the blanket ban on parallel importation of copyright goods applied to an extremely wide range of goods - from books and sound recordings to apparel, spare car parts, and toilet fittings. 3
With the dismantling of government restrictions on imports under the import licensing system in the 1980s 4
copyright law became the primary means for local importers and distributors of many consumer goods to prevent parallel imports.
How Can Copyright Law Restrict Parallel Imports?
23. A core right granted under the Copyright Act 1994 is the right to issue copies of a copyright work to the public - sometimes referred to as "the right of distribution". 5
"Issuing copies to the public" is defined as the putting into circulation of copies not previously put into circulation. 6
Copyright holders therefore have the exclusive right to be the first to put particular copies of a work on sale.
24. In relation to computer programs, sound recordings, and films, copyright holders also have a "rental right" - a right to authorise the rental of copies of their copyright works. These rights generally last for the life of the author plus 50 years, 7
or for 50 years from when the work is made or is made available. 8
Once a copyright work has been put into circulation, the right of distribution is exhausted in relation to each copy of that work.
25. The key issue in relation to parallel imports is whether the copyright owner's distribution right is exhausted, on first sale anywhere in the world (international exhaustion), or the first sale in New Zealand (national exhaustion). Where national exhaustion applies, the New Zealand copyright holder would have the exclusive right to be the first to import or sell copyright products in this country even if the products have already been put into circulation or sold in another country. This would allow the right holder to prevent the parallel importation of goods for which they hold the New Zealand copyright. However, where international exhaustion applies to the right of distribution for copyright works - as it does in New Zealand - copyright law does not prevent the parallel importation of copyright goods.
26. New Zealand is not subject to any international obligation that requires our law to provide for national exhaustion rather than international exhaustion. This means that, as long as a right of distribution is granted in compliance with our international obligations, the distribution rights for particular categories of goods could be subject to national exhaustion while all others would be subject to international exhaustion. Such a national distribution right could provide a parallel-importing ban for a limited period - and, after this, international exhaustion would apply.
Other Intellectual Property Rights and Additional Areas of Law and Regulation That Can Restrict Parallel Imports
27. As mentioned above, other intellectual property rights that can apply to parallel imports are trade marks, patents and designs. The degree to which each of these can potentially restrict parallel importing, despite the absence of a ban on parallel imports, is outlined in Appendix 1
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28. There are also a number of other areas of law that can affect commercial dealing in parallel-imported goods (and sometimes can even prevent them from being brought into the country). These include:
- safety and health standards;
- general import restrictions imposed by customs import prohibition orders, including goods with misleading or incorrect descriptions;
- the Medicines Act 1981;
- censorship laws under the Film, Videos, and Publications Classification Act 1993;
- the Consumer Guarantees Act 1993;
- the Fair Trading Act 1986; and
- the common-law tort of "passing off".
1.3 The Removal of the Copyright Parallel-Importing Ban in 1998
How the Ban Was Removed
29. Prior to July 1998, the Copyright Act prohibited the parallel importation of goods protected by copyright, unless the goods were imported for a person's private and domestic use (for example, goods purchased by international mail order or during overseas travel). The act of parallel-importing copyright goods for commercial reasons therefore amounted to copyright infringement. This did not, however, mean that parallel importing did not occur in some situations, for example where right holders might not have been aware of illegal activities or where they were aware of small shipments entering New Zealand through unauthorised channels but decided not to take action to restrain this.
30. The Copyright (Removal of the Prohibition on Parallel Importing) Act 1998 removed the prohibition in the Copyright Act on the importation of lawfully made copyright goods. 9
This limited the distribution right granted to copyright holders in New Zealand to the right to be the first to put copies into circulation. Consequently, copyright owners can no longer use copyright to prevent the importation of goods without their permission, if those goods have already been sold overseas.
Why the Ban Was Removed
31. The previous Government's rationale for removing theprohibitionon the parallel importation of copyright goods was to ensure that New Zealand consumers could access imported copyright goods at world-best prices by promoting a more open and competitive environment. At the time it was believed that the likelihood of competition from parallel importers would put pressure on copyright owners and authorised distributors to reduce their prices in cases where they might have been maintaining them at levels higher than in other countries. It was also thought that parallel importing would have other benefits for consumers, including the availability of a wider range of copyright goods.
32. The suggestion that some copyright products were more expensive in New Zealand than other countries was based on analysis undertaken for the Ministry of Commerce by the New Zealand Institute of Economic Research (NZIER). 10
This 1998 NZIER Report looked at the ban on parallel importation of copyright goods in respect of three industries: books, music and used cars. It concluded that parallel-importing restrictions meant that New Zealanders were paying higher prices for books and music than consumers in some overseas countries were, and that considerable savings had been made in respect of the cost of motor vehicles since import-licensing restrictions in this area were removed in 1989. The Report reached a general conclusion that lifting the blanket parallel-importing ban on all copyright goods was likely to provide net gains to the New Zealand economy as a whole.
33. At the time the ban was removed, there was also a need to clarify the application of parallel-importing restrictions to used motor vehicles because of uncertainty arising from imminent litigation on this issue. A decision was consequently made to implement the policy change swiftly and to remove the ban across the board for all copyright goods. An industry-by-industry approach was not at the time thought to be feasible, given the wide scope of copyright protection in New Zealand and the many different industries that would have to be looked at.
34. The changes made in 1998 to the Copyright Act did not, however, change the applicability of other intellectual property laws. Nor did it change the other potential restrictions on parallel importing referred to above (paras 27 -28 ) and in Appendix 1.
1.4 The Government's Arts and Culture Programme and Parallel Importing
35. In the lead-up to the 1999 election, the Labour Party stated that it intended to take an industry-by-industry approach to the issue of parallel importing. In Uniquely New Zealand - Labour on Arts and Culture (November 1999) 11
Labour said that it would:
reconsider parallel-importing restrictions on a market-by-market basis, and apply specific time periods for parallel-importing restrictions, where the time periods are based on the length of time that copyrights or trade marks have significant value for different markets.
36. The 1999 Speech from the Throne included a statement that bans of up to two years from first release would be introduced for "CDs, videos, films, books and software". In February 2000 the Government confirmed the following concerning the coverage of these categories of "creative-industries" 12
goods:
- the musical works covered would not just be those fixed on compact discs, but phonographic works fixed in any media;13
- "videos" would refer to copies of films and television programmes stored on cassette or disk formats and intended for rental or retail sale;14
- "films" would refer to films produced in formats suitable for cinema release;
- "books" would refer to printed editions and pictorial publications for retail sale, and would include magazines and journals; and
- "software" was intended only to cover "consumable" software products, such as operating systems and applications for home and business, games, electronic books and journals, and informational computer products (such as electronic encyclopaedias), for retail "off the shelf" sale, and therefore would exclude industrial software and software in electrical appliances and devices.
37. The creative industries were singled out in respect of parallel importing as one of a wide range of initiatives under the new Government's arts and culture programme. This programme was aimed at ensuring support for local artists (by expanding innovation, job opportunities and arts-based wealth creation) as well as promoting New Zealand's culture and identity to the world.
38. The specific policy objective for introducing limited parallel-importing prohibitions for creative-industries goods, as stated in Uniquely New Zealand and subsequently confirmed by Ministers, was to encourage increased overseas investment in, and overseas promotion of, New Zealand creative talent. The assumption behind this objective was that granting an exclusive importing right to copyright holders or their authorised distributors would guarantee, if not increase, their profit margins. Secure or increased profits would then allow them to increase both their investment in New Zealand creative talent and the promotion they undertake overseas to sell the fruits of that investment.
39. Accordingly, the Government's policy objective in relation to parallel importing is aimed at facilitating increased involvement by international companies and their New Zealand subsidiaries (such as publishing companies, record companies, film-production companies, and software developers) in developing, producing, distributing, and promoting New Zealand creative talent.
40. Key aspects of the Government's arts and culture plan, including the establishment of a Film Production Fund and the Music Industry Commission, have already been delivered through the $86 million Cultural Recovery Package announced in May 2000. In the copyright area, the Government has also directed that work be undertaken to: 15
- ensure that copyright legislation takes account of changes in technology and practice; and
- investigate the scope for shifting the onus of proof in copyright infringement proceedings from copyright holders to importers and copiers.
1.5 The March/April 2000 Consultation on Parallel-Importing Bans for the Creative Industries
41. In February 2000 the acting Minister of Commerce directed the Ministry to undertake consultation with stakeholders and other interested parties in respect of the industries under review on the proposed parallel-importing bans. The consultation was designed to inform the Government of:
- the likely effectiveness of limited parallel-importing restrictions in achieving the Government's specific policy objective of encouraging increased overseas investment in, and overseas promotion of, New Zealand creative talent in each of the four industries under consideration;
- the likely impact of the proposed bans on the parallel importation of the creative-industry goods in question on consumers, retailers, other affected groups, and the New Zealand economy as a whole; and
- the appropriate period, if any, of a ban for each of the creative-industry goods, and what exceptions or exclusions, if any, should apply.
42. The first part of the consultation involved interviews with key industry groups and stakeholder representatives in each of the four industries - creators (for example, artists and writers), publishers and producers, authorised importers and distributors, parallel importers, retailers, and consumers. These interviews took place in March and April 2000. The second part of the consultation was the circulation of a written questionnaire to stakeholders and other interested parties in March 2000.
43. The Ministry circulated a short questionnaire on the Government's proposals in March 2000 to obtain industry-specific information, experiences and views from the music, book, motion picture and software industries. The Ministry also met with representatives of key stakeholder groups in each of the industries in question. Sixty submissions were received; less than a third of these supported the introduction of parallel-importing bans. 16
44. The consultation revealed that the stakeholders who would directly benefit from the reintroduction of some form of parallel-importing restrictions (primarily international copyright owners and authorised distributors of overseas titles) have a number of different imperatives for advocating those restrictions. The majority of these are quite different from the Government's stated arts and culture-related rationale for considering introducing restrictions for the industries under review. These included arguments that parallel-importing restrictions are required to combat piracy, to remove the possibility of New Zealand books being imported from other countries, and to protect cinemas by preventing the rental of motion picture DVDs not officially released in New Zealand.
45. Against these concerns, the consultation showed that a number of groups and individuals had serious concerns about the proposal to introduce parallel-importing bans for creative-industries products. Foremost amongst these were concerns held by libraries, retailers, Internet retailers, and consumers that parallel-importing restrictions would lead to increased prices, reduced availability of titles, inferior specialist services, and longer waiting times for new-release titles.
46. Overall, the Ministry has yet to be provided with conclusive evidence to support the re-imposition of parallel importing restrictions.
47. Many submissions emphasised the benefits that parallel importing has had for consumers. The threat of parallel importing is said to have restricted price rises for music and books, despite the depreciation of the New Zealand dollar against the United States dollar and the pound sterling. Some submissions asserted that prices had fallen in some cases. Submissions also stated that consumers had benefited from earlier release dates and a greater range of titles. A recent study undertaken by the New Zealand Institute of Economic Research on the effects of parallel importing 17 confirms these observations. This report concluded that New Zealand prices for books and music compact discs now compare favourably with the rest of the world, and that there have been some price reductions for software since the ban on parallel importation of copyright goods was removed in mid 1998.
48. Given the range of different concerns raised by stakeholders in each of the creative industries under review, and the unique characteristics of each industry, it appears that the potential for parallel-importing bans to achieve the Government's arts and culture-related policy objective might be more limited than the Government had initially hoped. The evidence of links between parallel-importing bans and the likelihood of increased overseas investment in, and overseas promotion of, New Zealand creative talent varies greatly between each industry. Some stakeholders in the music and book industries stated that such a connection exists, but little evidence of this has been provided to date. References to the potential effect of parallel importing on investment in New Zealand were made by film distributors; but no links were made by the software industry between parallel importing and investment in local software production.
49. Parallel-importing bans are one measure that has been suggested by some stakeholders to address concerns about piracy. There is, however, an issue about whether such bans are an effective means of combating piracy and related concerns about counterfeit goods - and a number of new initiatives (which are in various stages of development) have been designed to address these concerns
50. The Government has therefore decided to invite further submissions from stakeholders and other interested parties and individuals on the parallel importation of creative-industries products. Additional views and information are requested on the arguments made both for and against the imposition of parallel-importing restrictions. Submissions are also invited on the Government's proposals for addressing piracy and counterfeiting concerns. In particular, the Government seeks further views, information and evidence concerning:
- whether bans on the parallel importation of creative-industries products will encourage more overseas investment in, and overseas promotion of, New Zealand creative-industry products; and
- whether parallel-importing bans are an effective means of addressing concerns about the presence of pirated and counterfeit material in New Zealand, and whether more targeted initiatives currently in development will address these concerns.
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10Parallel Importing: A Theoretical and Empirical Investigation: Report to the Ministry of Commerce
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15Part V.
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17 New Zealand Institute of Economic Research Parallel Importing: The economic effects of lifting the ban in NZ - Report to the Intellectual Property and Competition Review Committee (February 2000) ["the 2000 NZIER Report"].
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