23

Free Movement Rules and Competition Law:

Regulating the Restriction on Parallel Importation of Trade
Marked Goods
Research Fellow: Yuka Aoyagi
The purpose of this report is to clarify the relationship between the free movement rules andthe competition laws in the laws of the EC Member States by mainly studying parallel imports
cases related to intellectual property rights.
The Treaty establishing the European Community (or the EC Treaty) uses the InternalMarket as the most important means for achieving its economic and social purposes. The freemovement rules and the competition laws are a central core of rules to make the Internal Market
function effectively. For the purpose of the text of the EC Treaty, both legal systems appear tohave different objects of regulation, but overlapping application of such systems can be observed,
depending upon the matter in question. This report studies the formulation of jurisprudence casesby the European Court of Justice (ECJ) from an early stage as a subject matter of cases of parallel
imports of brand products. It studies the understanding of the ECJ behind the application of thefree movement rules and the competition laws, and clarifies the relationship between and thefunction of such rules and laws in securing effective functioning of the Internal Market throughthe restriction of parallel imports.

I

competition laws to complement this rule. In
general, the purpose of the EC competition
laws is to impose regulations on acts which
restrict competition in the Internal Market;
such competition laws are a rule to make theInternal Market function based on faircompetition. The EC competition laws are thesame as the US antitrust laws and theJapanese Antimonopoly Law in that they
impose regulations on conducts by multiple
businesses and unilateral conducts which
restrict competition; however, they are also
unique in that they put regulations on acts
hindering the function of the Internal Market
as a violation of such competition laws.
The rules on free movement andcompetition, despite having different initial
purposes, are now used in the case of the EC
to form the Internal Market; and from anearly stage it has been pointed out that thecompetition laws together with the freemovement rules will carry out a function topromote market integration. In Japan,
however, it appears that no argument about
the relationship between such free movement
rules and competition laws has been made,although there have been several academic
studies made which introduce and examine

Introduction

The purpose of this paper is to study thefunction of legal systems of the freemovement rules and the competition laws to
the extent that such rules and laws areoverlappingly applicable to parallel imports
related to intellectual property rights.
The free movement rules are rules
forming the foundation of the European
Community (EC), one of the objects of whichis the integration of the Internal Market. In
the Internal Market, which is an area madeup of EC Member States, tariff and non-tariff
trade barriers of the EC Member States arein principle prohibited by such freemovement rules. In other words, the EC
Member States are prohibited from using
systems impeding the free movement of goods,
persons, capital and services between the EC
Member States, as well as from imposing
tariff barriers, thereby allowing the freemovement of goods, persons, capital andservices within the Internal Market toestablish a single market.
As stated above, a basic rule of theInternal Market is the free movement
principle. In addition, the EC has
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scope of this manuscript, the latter becomes
particularly problematic. The intention ofbusinesses to divide markets within theInternal Market through various methods(unilateral conducts or conducts by multiple
businesses) (in many cases, a possible
division of markets along borders) is nothing
but the formation of effective barriers to freemovement. For this reason, the competition
laws put regulations on the division ofmarkets by such businesses in certain cases.
As stated above, in promoting the
integration of markets and securing thefunction of the Internal Market, the freemovement rules and the competition laws,
which are closely connected with each other,are signified as playing a pivotal role in EC
Internal Market Laws.

the free movement rules and the competition
laws respectively. In this paper, therefore, I
will study how the systems function at
specific stages, and clarify the relationships
between such systems.
It is, however, difficult to carry out theabove in all fields, and as such it is necessary
to set limitations on the number of subjects
when studying the relationship between thefree movement rules and the competition
laws. This is because both free movement
rules and competition laws are applicable toa wide range of subjects: the free movement
rules are applicable to four subjects, namely
goods, persons, capital and services; while
the competition laws apply to a wide varietyof actions. In this paper, therefore, I willconcentrate on the application of the freemovement rules and the competition laws to
restrictions on parallel imports of brandproducts to the Internal Market.

II

2

Overview of Rules
The rules on free movement and oncompetition laid down in Article 81 of theTreatyEstablishingtheEuropeanCommunity (or EC Treaty) are similar in thatboth the rules on free movement andcompetition laws are composed of prohibiting
provisions and provisions which provide
exceptions. Concerning the provisions which
provide exceptions, however, the freemovement rules apply the objectives of themeasures as justification for the provisions
which provide exceptions, and such grounds
for justification are limited; while theprovisions, which provide exceptions, of thecompetition laws provided as exceptions on
the grounds of a competition-promoting effect,assuming that the act in question satisfies
certain requirements. Restrictions as seen in
Article 30 of the EC Treaty are not imposed
for the purposes of such acts.
However, there seem to be several
differences according to the text of provisions
and case laws.
For the purpose of the text of the EC
Treaty, there is a difference in the addressees
or objects of regulation between the freemovement rules and the competition laws.
The text sets forth that the objects ofregulation are Member States for the freemovement rules, but businesses as far as thecompetition laws are concerned.
There is also a difference in the scope of
application between the free movement rules
and the competition laws. In the applicationof the competition laws, there is the conditionof threshold that if effect on the InternalMarket does not satisfy certain criteria, theOverview of Free Movement Rules
and Competition Laws

Chapter II provides an overview of thefree movement rules and competition laws
applicable to the restricting acts of parallel
imports of brand products. The EC has abroad range of economic and social policy
objectives, and the Internal Market issignified as the principal means in the Treaty
establishing the European Community (orthe EC Treaty). The EC Treaty provides forthe free movement rules and the competition
laws to secure the actual function of theInternal Market deemed to be important as
such.

1

Significance of Free Movement Rules
and Competition Laws
The importance of the legal systems isunderstood as follows.
(In principle) the purpose of the freemovement rules is to abolish trade barriers
imposed at the level of Member States. As
used in the definition of the Internal Market,
the provisions of free movement to secure thefree movement of goods, persons, services
and capital by abolishing trade barriers in
the Internal Market are considered to beindispensable to the formation of the InternalMarket.
The function of the EC competition laws
is deemed to ensure (i) fair competition and(ii) the integration of markets. Within the
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respect, precedents have been outlined below,
in particular in respect of trade marks.
First of all, the inherent objective of the
trade mark is to assure the trade mark ownerof the exclusive right to use the trade mark inorder to first distribute a product protectedby the trade mark and accordingly to assure
the protection of the owner against
competitors who intend to take advantage ofthe status and reputation of the trade markby selling goods for which the trade mark has
been illegally used
Furthermore, the ECJ claims that the“essential function” must be considered in
judging the trade mark’s inherent objective.
The “essential function” of trade marks
approved by the ECJ in its past judgments
corresponds to three functions primarily
comprising the trade mark function theory,
namely, (i) the origin function, (ii) the quality
function, and (iii) the advertising function.
Based on the above understanding, we
will discuss below the function of the freemovement rules from the case laws regarding
community extinguishment and the inherent
objectives.

competition laws shall not apply tobusinesses; while in the free movement rules,
the application of de minimis rule is
excluded.

III Regulations for Restriction on
ParallelImports
underFree
Movement Rules
Chapter III deals with the case laws
regarding the application of the freemovement rules to acts restricting parallel
imports of trade mark products.

1

Free Movement Rules and Intellectual
Property Rights
The relationship between Article 28, aprovision concerning the free movement ofgoods, and intellectual property rights is
discussed below. First of all, the quantitative
restriction on free movement of goods and“measures of equivalent effects” (MEEs) areprohibited by Article 28. In accordance with
Article 30, however, Article 28 may not beapplied to the exercise of intellectual
property rights by reason of “protection ofindustrial and commercial ownership.” Inother words, it may only be applied to theprotection of intellectual property rights, tothe extent of the proportionality principle,
only within the scope of protection of thespecific
subject-matterofintellectual
property rights. Furthermore, intellectual
property rights are applicable under thecommunity exhaustion theory. This theory isapplicable if a product to which theintellectual property rights are applied is
distributed (i) within the community and
EEA region or (ii) by or under approval of therightful owner.
Accordingly, if a trade mark product is
distributed by or under the approval of theintellectual property right owner in anothermember state, including EEA member states,
the owner cannot stop the parallel import ofsuch products by exercising intellectual
property rights.

3

Review of Precedents
In this chapter, the exercise of trade
mark rights against the parallel import oftrade mark goods is discussed for each type oftransaction in relation to Article 30. The freemovement rules have been reviewed
primarily from the viewpoint of fourfunctions to promote free movement within
the Internal Market, but the question
remains as to whether any other mattersrequires consideration. After reviewing
precedents aware of this issue, the following
conclusions were reached.
(1) Function to Assure Free Movement
The first function of the free movement
rule is to assure free movement. Precedents
for the application of Articles 28 and 30 totrade mark rights reveal the following.
Articles 28 and 30 provide that the freemovement rule cannot be applied tointellectual property rights. Exercise of trade
mark rights against parallel imports underdomestic laws, however, has the same effectas the separation of the Internal Market
along the border. Accordingly, the ECJ
created Dichotomy to divide intellectual
propertyrightsinto“existence” and“exercise” to formulate the base of case lawsthat makes it possible to apply freemovement rules to the exercise of intellectual2

Restrictions on Parallel Imports andFree Movement based on Trade Marks
The above is a summary of thecommunity extinguishment theory and its
inherent objectives with respect to therelationship between free movement rules
and intellectual property rights. In this3
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even after the trade mark product has been
distributed. According to the precedent, allthree primary functions applied in the theory(i.e. origin function, quality function andadvertising function) are deemed as the“essential functions” of the trade mark andalso as inherent objectives.
Even for the protection of “essentialfunctions”(i.e.
“inherent
objectives”),
however, trade mark rights are not always
justifiably exercised without application of
Article 28.
In the HAG II judgment, the ECJ
revoked the “theory of common origin”
because it considered that trade marks which
describe certain qualities and origins of
products to consumers are essential for the“undistorted system of competition” that theTreaty intends to establish and maintain.
Accordingly, the ECJ is of the opinion that
trade mark rights can be justifiably exercisedin accordance with Article 30 to prohibit thetrade mark product from being imported
because even the same trade mark of“common origin” may impair the originfunction and quality function.
To achieve the “undistorted system ofcompetition” that the Treaty intends toestablish and maintain, it can be seen that
the ECJ has narrowed the scope of
applicationoffreemovement
rules.
Conversely, the HAG II judgment shows thatthe assurance of a competitive market base,that is, an “undistorted system ofcompetition” is taken into consideration ininterpreting whether or not to apply freemovement rules.

property rights. This shows that the ECJ has
made strong demands to assure the freemovement in respect of Article 28.
Theprecedent
alsostatesthat
non-application of Article 28 under Article 30
is subject to the fulfillment of certain
requirements even if exercising trade markrights against parallel imports of trade markproducts. In other words, rights are to be
extinguished if the trade mark product is
distributed by or under approval of the trade
mark owner.
Thus, by introducing the extinguishment
theory, the ECJ allows only a limited“exercise” of rights under Article 30.
As mentioned above, it is understoodthat, for Articles 28 and 30, the ECJ
emphasizes the role of free movement rules toassure free movement within the InternalMarket in interpreting the restrictive
exercise of intellectual property rights.
A series of repackaging judgments
showed that the trade mark owner could
justifiably exercise rights in certain cases.
Subsequently, however, in the Bristol-Myers
Squibb v Centrafarm case and the Merck v
Paranova case, the court argued that theexercise of rights against repackaging byparallel importers was deemed to be an“artificial market division among member
states” if necessary for “effective market
access.” In the case of relabeling, too, the“effective market access” theory was adopted.
Of note here is the fact that freemovement rules look for the effectiveness offree movement (i.e. “market access”), rather
than intending only to facilitate freemovement. In other words, free movement
rules characteristically aim not only for thefree movement of original trade markproducts, but also the sale of such products in
a form suitable to distribution in the hostcountry.
(2) Function to bring about a basis forcompetition
The ECJ has created the community
extinguishment theory so that trade markrights will be extinguished if the trade markproduct is distributed by or under approval of
the trade mark owner within the community.
At the same time, however, the ECJ admits
that trade mark rights may not be
extinguished in certain cases. In other words,
case laws has been formulated whereby trade
mark rights are not extinguished in respectof certain objectives coming about as a resultof the essential functions of the trade markIV Rules Applying to Restrictions ofParallel Imports under Article 81 of
the Competition Laws
Chapter IV has identified the various
case laws according to type of activity for theapplication of the competition laws toactivities restricting parallel imports oftrade-marked
products.
The
ECJ’sinterpretation is as follows.
The judgment of Consten & Grundig
clarified that any agreement between
businesses for restrictions on parallel
imports of trade-marked products could be
subject to the application of the competition
laws.
In the application of the competition laws
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of a trade mark, held that such effect alone
was not illegal in itself.
On the other hand, the ECJ also decided
in the above judgment that whether thecompetition laws are applicable should
depend on a review of “the background of any
assignment,
thefactors
behindtheassignment, the intention of the parties
concerned and in consideration of theassignment.”
In this respect, the same applies to the
judgment of BAT following the above
judgment. The judgment of BAT is a casereferring to not geographical but habitat
segregation of the product markets. The ECJ
held any agreement for habitat segregation of
the markets for trade-marked products to be
lawful to the extent of mutual benefit of theparties if such agreement is made for the
purpose of eliminating confusion or conflict oftrade marks, provided, however, that this issubject to regulations by the competition
laws if there is any intention of restrictedcompetition.
Therefore, in the case of parallel existentholders of trade mark rights, the enforcementof the competition laws to secure freemovement is different from that in an
ordinary situation. “Effect” is not the only
criterion for judgment, and “intention” forarrangements between businesses could beseen as a more important criterion. This
makes the application more restrictive thanin the case of licensing with non-parallel
existent rights.

the existence of restrictions on competition
should be recognized in terms of “intention”
or “effect.” In this respect, trade mark rights
seem to be taken into consideration to acertain extent in the precedents regarding
actions to restrict parallel imports oftrade-marked products. Handling would
appear to differ according to the whether
trade mark rights are independent or
coexistent.
The judgment of Nungesser went one
step further from the decision made in the
judgment of Consten & Grundig. The
judgment of Consten & Grundig held
territorial restrictions by assignment of trade
mark rights to be illegal. On the other hand,the judgment of Nungesser held open,
exclusive licenses to be lawful. This decisionby the ECJ is based on its interpretation of
intellectual property rights that granting an
exclusive license to a licensee should lead todecreased risk of entry by a business into a
new market, thereby promoting licensing.
Thus, it may be safe to argue that in theevaluation of the competition laws in the caseof licensing of intellectual property rights,
the ECJ takes the stance of permitting
certain effects of restrictions on competition
which may be accompanied with the use of
intellectual property rights.
Despite this, the ECJ held the absolute,
exclusive license to be illegal in the above
judgment. In other words, to build a licensing
relationship to restrict parallel imports isagainst the competition laws. So in the caseof a (substantially) independent holder ofrights, there is no regard to intellectual
property rights when the entry by parallel
imports into the market (namely, freemovement of goods) is impaired.
A series of judgments for parallel
existent holders of rights held therestrictions on parallel imports with the useof trade mark rights to be in principle not in
violation of the competition laws. The
judgment of Ideal Standard held that thedividing of markets based on such trade
marks is naturally legal even in the case ofvoluntary assignment of rights.
Originally in accordance with Article 81of the competition laws any action by abusiness shall be subjected to regulations if
there is the “intention” or “effect” ofrestricted competition. However, in the caseof the judgment of Ideal Standard the ECJ,
while admitting there was an “effect” ofdividing the market through the assignment

V

This chapter identifies and studies
conflicting reviews of the relationshipbetween the free movement rules and thecompetition laws.
For the purpose of the text of the EC
Treaty, there is a difference in the addressees
or objects of regulation between the freemovement rules and the competition laws.
The text sets forth that the objects ofregulation are Member States for the freemovement rules, but businesses as far as thecompetition laws are concerned. However, acase in which free movement rules wereapplied to the actions of businesses that were5

IIP Bulletin 2007

Free
Movement
Rules
andFunctions of the Competition Laws
under Restrictions of Parallel
Imports: Review of the Theories

the competition laws to the activities
restricting parallel imports of trade-marked
products in the EC.
However, there remains room for reviewof the objectives of regulations of the freemovement rules and the competition laws.
The conflict of theories is as follows.
Concerning the objectives, the theory ofcomprehensive application interprets theobjectives of free movement rules and thecompetition laws in an integrated way, while
the theory of separate interpretation holds
that the objectives of the regulations of thefree movement rules and the competition
laws overlap in terms of the promotion ofmarket integration through established freemovement, with the competition laws having
other
objectivesofregulatingcompetition-restricting activities.
How does the ECJ interpret theseobjectives? A series of judgments concerning
the free movement rules indicates the ECJ’s
stance placing a high value on the function of
establishing free movement. This was
triggered by the Dichotomy of “existence” and“exercise” concerning intellectual property
rights held by the judgment of Consten &Grundig. In other words, the case laws
restricts the scope of justification on groundsof the protection of intellectual property
rights whose deviation from Article 28 has
been evidenced by Article 30. Due to a
growing tendency to restrict the scope of suchjustification in subsequent judgments, theECJ appeared to be of the opinion that it wasnecessary to establish free movement byapplying free movement rules to the exerciseofintellectual
propertyrightsmore
extensively.
On the other hand, the ECJ made it clear
in the case laws that the justification under
Article 28 should be recognized to someextent on grounds of the protection of
intellectual property rights. Within the scopeof this paper, justification under Article 30
should be recognized with some restrictions
considering the original functions of trade
marks to be a unique objective. In particular,
the ECJ made the HAG II judgment bearing
in mind the Internal Market based on the“undistorted competition system,” to which
the source indication and quality assurancefunction of trade marks are indispensable. In
this judgment, the ECJ does not adopt thefree movement rules. This ECJ judgment
may be based on the interpretation that trade
marks create the market order in which

restricted in their parallel imports ofproducts vested with intellectual property
rights triggered a conflict of theories as to theinterpretation of the subject for regulations(the addressee) under both rules. Whatunderlies this conflict is a difference ininterpretation of the objectives of the freemovement rules and the competition laws.
The theory of comprehensive application
is a view made by Pescatore in order to copewith the invalidity of regulations concerning
certain activities caused out of the scope of
the addressee under the provisions of freemovement rules and the competition laws.
The theory of separate interpretation was
initially proposed by Marenco to challenge
this idea.
According to the theory of comprehensive
application, for the purpose of the text of theTreaty, the free movement rules are intended
for Member States and the competition laws
are intended for businesses. In actual
application, however, the free movement
rules are applicable to businesses and thecompetition laws to Member States.
The theory of separate interpretation
holds that free movement rules are intended
for Member States and the competition laws
for businesses in accordance with theprovisions of the Treaty.
There are some differences in both thesubjects
ofregulations
andtheinterpretations of the objectives of the twolegal systems. The theories of comprehensive
application and separate interpretation
share the viewpoint that both systems havethe same objective of establishing freemovement. Furthermore, the theory ofcomprehensive application is characterized
by its interpretation that the free movement
rules and the competition laws share thesame ultimate objective, which affects any
interpretation.

VI Conclusions
This chapter has reviewed in light of thetheories the precedents concerning the caseson activities which restrict the parallel
imports of trade-marked products to which
free movement rules and the competition
laws, which were examined in Chapters III
and IV, have been applied and the following
conclusions can be made.
There is no objection to the overlapping
application of both free movement rules and6
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competition is organized. A similar judgment
was made in the Ideal Standard case, with
the ECJ introducing the concept ofcompetition through its interpretation of thefree movement rules. It holds that it should
contribute to the creation of competition by
not applying free movement rules in somecases. In other words, the ECJ can be seen as
passive in requesting the establishing freemovement and “undistorted competition
system” in respect of the objectives andfunctions of free movement rules.
The ECJ’s interpretation of competition
and free movement as the objectives ofregulations under the competition laws isevidenced by the case laws in addition to thefact that in the application of the competition
laws the wording illustrates with examples
the prohibition on market division, provided,
however, that such application is limited toactivities restricting competition.
Based on the organization of the caselaws
described
above,
thegeneralinterpretation by the ECJ of the objectives ofregulations under the free movement rules
and the competition laws concerning
activities restricting parallel imports oftrade-marked products can be seen as follows.
The two legal systems have their respective
primary objectives for regulations. Under thecompetition laws, any activities causing freemovement to be disturbed by market division
should be regulated for the primary purposes
thereof. The primary objective of the freemovement rules is to establish freemovement.
However,theconceptofcompetitive order is incorporated into theinterpretation of the provisions thereof sothat the objective of regulations may be theestablishment of substantial functions in theInternal Market in a wider sense. This
interpretation by the ECJ could be describedas closer to the objectives of regulations
contained in the theory of comprehensive
application.

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