Parallel importation—the practice of importing genuine, non-counterfeit goods into a country through channels other than the manufacturer's official distribution network—is a well-established feature of international trade. In Japan, like in many other jurisdictions, parallel imports are generally considered lawful and beneficial for consumers, as they can lead to lower prices, increased product variety, and greater intra-brand competition. However, businesses, including foreign manufacturers and their authorized Japanese distributors, must tread carefully. Certain actions aimed at obstructing or eliminating parallel imports can run afoul of Japan's Antimonopoly Act (AMA), leading to scrutiny from the Japan Fair Trade Commission (JFTC).

This article explores the legal status of parallel imports in Japan, the types of conduct that can constitute anti-competitive obstruction, insights from a notable JFTC case, and compliance strategies for U.S. businesses.

The Legal Standing of Parallel Imports in Japan

As a general principle, the parallel importation of genuine goods into Japan is not illegal. This stance is supported by the prevailing interpretation of intellectual property (IP) rights, particularly the principle of "international exhaustion" of trademark rights. Once a trademarked product has been legitimately sold on the market anywhere in the world by the trademark owner or with their consent, the trademark rights are generally considered "exhausted" for that specific item. This means the trademark owner cannot typically use their Japanese trademark rights to block the subsequent importation and sale of those genuine goods in Japan by a third party.

The Supreme Court of Japan affirmed this principle in several landmark cases, notably concerning "BBS Wheels" (Judgment of February 27, 2003). The court laid down conditions under which parallel imports of genuine trademarked goods are permissible, focusing on whether the goods originate from the same source as those sold through official channels and whether the quality guarantee function of the trademark is impaired.

The JFTC also views parallel imports positively due to their pro-competitive effects. They can act as a check on the pricing power of sole authorized distributors and provide consumers with more choices.

When Does Obstructing Parallel Imports Violate the Antimonopoly Act?

While parallel imports themselves are lawful, actions taken by manufacturers or their authorized distributors to unduly restrict or eliminate this trade can be deemed Unfair Trade Practices (UTPs) under Article 19 of the AMA. The JFTC's "Guidelines Concerning Distribution Systems and Business Practices under the Antimonopoly Act" (流通・取引慣行に関する独占禁止法上の指針, Ryūtsū Torihiki Kankō ni Kansuru Dokusen Kinshi Hō Jō no Shishin) provide crucial guidance on this.

Conduct that may be problematic includes:

1. Dealing on Restrictive Terms (拘束条件付取引, Kōsoku Jōken-tsuki Torihiki):
   • Imposing contractual conditions on domestic or overseas distributors that explicitly prohibit them from supplying to parallel importers or from selling outside assigned territories/customer groups in a way that effectively prevents parallel trade into Japan.
   • Resale Price Maintenance (RPM) aimed at preventing price competition from parallel imports.
2. Interference with a Competitor's Transactions (競争者に対する取引妨害, Kyōsōsha ni Taisuru Torihiki Bōgai):
   • A Japanese sole distributor pressuring its foreign supplier (manufacturer) to cut off supplies to overseas dealers known to be sources for Japanese parallel importers.
   • The manufacturer and its Japanese distributor collaborating to trace and penalize distributors who supply parallel channels.

The JFTC typically examines the purpose and effect of such obstructive conduct. Actions are particularly likely to be challenged if they are primarily intended to maintain artificially high price levels in Japan by eliminating the competitive pressure from lower-priced parallel imports, or if they substantially foreclose competition in the relevant market.

JFTC Scrutiny in Action: The Tennis Racket Case (March 2022)

A notable recent example of JFTC action in this area involved a case concluded in March 2022 concerning high-end tennis rackets. The JFTC had initiated an investigation into a Japanese subsidiary of a foreign sports equipment company and its foreign parent.

• The Suspected Conduct: The Japanese subsidiary (the official distributor) allegedly identified parallel imported rackets in the Japanese market. It then relayed information about these products (such as hologram serial numbers) to its foreign parent company. The parent company would use this information to trace the overseas authorized dealer who had sold these rackets to a Japanese parallel importer. Subsequently, the parent company, citing contractual territorial restrictions, would warn or pressure that overseas dealer to cease supplying Japanese parallel importers.
• JFTC's Concerns: This collaborative conduct was suspected of constituting an Unfair Trade Practice, specifically "Interference with a Competitor's Transactions," by hindering the business activities of parallel importers.
• Resolution via Commitment Procedure (確約手続, Kakuyaku Tetsuzuki): Instead of a formal cease-and-desist order, the case was resolved through the AMA's "commitment procedure." This procedure, introduced in 2018 (effective late 2019), allows the JFTC to approve a voluntary plan submitted by the investigated parties to address the alleged anti-competitive concerns. If the plan is deemed sufficient and is duly implemented, the JFTC can close the investigation without issuing an order or finding a violation.In this case, both the Japanese subsidiary and, significantly, the foreign parent company, proposed commitment plans that the JFTC approved. Key elements of their commitments included:
  • Confirming the cessation of the suspected obstructive conduct.
  • Board resolutions by both companies to refrain from similar conduct for the next three years.
  • Notifying relevant parties (including parallel importers and group employees) of these resolutions.
  • A crucial commitment from the foreign parent was an agreement not to enforce any policy that would prohibit its non-Japanese authorized dealers from making "passive sales" (i.e., responding to unsolicited orders) to Japanese parallel importers for a period of three years.
  • Implementation of enhanced compliance programs, including regular training and internal audits regarding AMA compliance for parallel imports.
  • Periodic reporting to the JFTC on the implementation of these measures.
• Significance of the Case:
  • It marked a renewed focus by the JFTC on parallel import obstruction after a considerable period without formal actions in this specific area.
  • The JFTC's willingness to subject a foreign parent company to the commitment procedure for conduct directly impacting competition within Japan was noteworthy. This signals that the JFTC will look beyond domestic entities if overseas companies are actively involved in implementing or facilitating restrictions on the Japanese market.
  • The explicit allowance of "passive sales" in the commitment plan aligns with the JFTC's general stance, as reflected in its Distribution Guidelines, which tend to be more tolerant of restrictions on active sales efforts by distributors outside their designated territories than on their ability to respond to unsolicited orders from outside (passive sales).

Practices That Can Attract JFTC Scrutiny

Based on JFTC guidelines and past actions, businesses should be wary of the following practices, which can increase the risk of an AMA investigation related to parallel imports:

• Explicit Contractual Prohibitions: Distribution agreements that directly forbid distributors from dealing with parallel importers or that impose overly broad territorial or customer restrictions designed to prevent any outflow of products to parallel channels targeting Japan.
• Monitoring and Tracing: Systematically monitoring the market for parallel imports, tracing them back to their source distributors, and then taking punitive action (e.g., reducing supply, imposing penalties, terminating agreements) against those source distributors.
• Refusal to Deal or Discrimination: Unjustifiably refusing to supply, or supplying on discriminatory terms, to businesses merely because they are engaged in parallel importation or because they supply parallel importers.
• Pressure on Third Parties: A manufacturer or sole distributor pressuring upstream suppliers or downstream retailers not to deal with parallel importers.
• Misuse of IP Rights: Attempting to use intellectual property rights (e.g., trademarks, patents) to block the importation of genuine goods where the IP rights have been exhausted, or making unsubstantiated claims of IP infringement to deter parallel trade.

Legitimate IP Protection vs. Anti-competitive Obstruction

It is crucial to distinguish between legitimate efforts to protect intellectual property rights and actions that unlawfully obstruct parallel imports of genuine goods.

• Trademark Rights: A Japanese trademark owner can legitimately prevent the importation and sale of goods if:
  • The goods are counterfeit (not genuine).
  • The parallel imported goods, although originally genuine, have been altered or repackaged in such a way that their quality, or the quality guarantee function of the trademark, is impaired, and this is not clearly indicated to consumers.
  • The parallel imported goods create a false impression as to their origin or their connection with the Japanese trademark holder, leading to consumer confusion that goes beyond merely recognizing the goods as genuine products sourced internationally.

The JFTC's Distribution Guidelines acknowledge that the exercise of IP rights is generally not an AMA issue. However, if IP rights are used as a means to achieve anti-competitive ends, such as maintaining resale prices or unduly excluding competitors, the AMA may be applicable.

Compliance Strategies for U.S. Businesses

U.S. companies that supply goods to Japan, either directly or through subsidiaries and distributors, as well as those whose products might be parallel imported into Japan, should adopt proactive compliance strategies:

1. Review Distribution Agreements: Carefully review all distribution agreements (both for Japanese distributors and for distributors in other countries) for clauses that could be interpreted as unduly restricting parallel trade into Japan. Remove or revise clauses that explicitly ban sales to parallel importers or impose overly strict territorial/customer restrictions that are not justifiable by legitimate business needs (e.g., the need to ensure effective after-sales service that cannot be provided by parallel importers).
2. Understand "Active" vs. "Passive" Sales: Be mindful of the JFTC's distinction. While restrictions on a distributor's active solicitation of customers outside its designated territory might be permissible under certain conditions, blanket prohibitions on fulfilling unsolicited orders (passive sales) from customers outside the territory (including those who might be parallel importers) are highly likely to be viewed as anti-competitive if they aim to restrict parallel imports into Japan.
3. IP Rights Enforcement Policy: Develop a clear internal policy for the enforcement of IP rights. Ensure that any action taken against suspected infringing goods is based on a legitimate IP claim (e.g., counterfeit goods, genuine but materially altered goods where consumer confusion is likely) and not as a pretext to block genuine parallel imports. Document the basis for such actions thoroughly.
4. Training: Educate sales, marketing, and legal teams about Japanese AMA principles related to parallel imports and distribution practices. Ensure they understand what constitutes permissible and impermissible conduct.
5. Handling Complaints from Authorized Distributors: If a Japanese authorized distributor complains about competition from parallel imports, any responsive actions taken by the manufacturer must be carefully vetted for AMA compliance. Pressuring other distributors to cut off supply to the source of parallel imports is high-risk.
6. Responding to JFTC Inquiries: If the JFTC initiates an inquiry, cooperate fully. Understand the JFTC's commitment procedure, as it can offer a way to resolve concerns without a formal finding of violation, as seen in the 2022 tennis racket case.
7. Focus on Genuine Business Justifications: If restrictions are placed on distributors, ensure they are based on legitimate, pro-competitive, or efficiency-enhancing reasons (e.g., maintaining brand image through quality control, ensuring specialized pre-sale or after-sale services that parallel importers cannot provide, incentivizing distributors to invest in promotional activities) rather than solely to eliminate price competition from parallel imports.

Conclusion

Parallel imports play a recognized role in fostering competition and benefiting consumers in Japan. The JFTC remains vigilant against practices that unjustifiably obstruct this legitimate form of trade, particularly when such actions are aimed at maintaining high prices or excluding competitors. The 2022 case involving tennis rackets underscores the JFTC's willingness to use tools like the commitment procedure and to scrutinize the conduct of both domestic distributors and their foreign parent companies.

For U.S. businesses involved in the Japanese market, a nuanced understanding of the AMA, the JFTC's guidelines, and the principles surrounding the exhaustion of IP rights is essential. By implementing robust compliance programs and ensuring their distribution and IP enforcement strategies are pro-competitive and fair, companies can mitigate antitrust risks while continuing to thrive in the dynamic Japanese marketplace.