General Practice, Solo & Small Firm DivisionMagazine

International Law and Practice

Business and Legal Strategies for Combating Grey-Market Imports

By Lawrence M. Friedman

This article reviews the legal framework surrounding the parallel importation phenomenon and seeks strategies by which U.S. producers and licensees may protect their interests against unauthorized importations.

Trademark.

In the leading case on the application of trademark law to parallel imports, A. Bourjois & Company, Inc. v. Katzel, plaintiff was the assignee of a trademark in the United States from a French company. The French company continued to produce identical goods, including those it sold to plaintiff. Katzel imported genuine merchandise from France and sold it under the plaintiff’s trademark in the United States. The Supreme Court based its conclusion that the sale of the grey-market merchandise infringed the U.S. trademark on the assignment from the French company, reasoning that because the French firm could no longer sell its wares in the United States, it could not authorize another to do so.

The status of imported products bearing genuine trademarks was addressed in Lever Bros. Co. v. United States, where the court found that the Customs Service should have prohibited the unauthorized importation of merchandise from the United Kingdom bearing a U.S. trademark legitimately applied abroad. The merchandise as sold in the United Kingdom was modified to the tastes and preferences of British consumers. Noting prior cases in which courts found differences in the imported product to justify excluding merchandise from the U.S. market on the basis of the Lanham Act, the court concluded that material physical differences in a grey-market product mean that the trademark applied to the grey-market product "copies or simulates" the U.S. trademark. The court ordered the merchandise excluded from the U.S. market under section 42 of the Lanham Act. Section 42 addresses the importation of merchandise bearing trademarks that "copy or simulate" a U.S.-owned mark but does not specify whether a foreign trademark legitimately applied to genuine merchandise "copies or simulates" the identical trademark in use in the United States. The rule to be deduced from Lever Bros. is that a U.S. trademark holder may rely on section 42 to exclude parallel importations when the goods offered for sale abroad are materially different from those offered in the United States.

What constitutes a material difference is a fundamental question. In Societe Des Produits Nestle, S.A. v. Casa Helvetia, Inc., the court stated that "the existence of any difference between the registrant’s product and the allegedly infringing gray good that consumers would likely consider to be relevant when purchasing a product creates a presumption of consumer confusion sufficient to support a Lanham Act Trade-Mark claim."

Copyright.

Section 602 of the Copyright Act provides that an unauthorized importation is a violation of the distribution right of section 106 and is a copyright infringement under section 501. Producers of goods facing grey-market competition have seized upon the importation right as a means of excluding their own goods from the U.S. market, arguing that the unauthorized importation is a violation of the distribution right and, therefore, an infringement. However, the first sale doctrine of section 109 allows the legitimate owner of a copy of a work to freely distribute that copy by sale, lease, loan, or other transfer. Importers of grey-market merchandise base their defense to claims of copyright infringement of the importation right on the theory that merchandise legitimately purchased abroad is subject to the first sale doctrine.

Section 337.

Section 337 of the Tariff Act makes it unlawful to import into the United States, sell for importation, or sell within the United States after importation by the owner, importer, or consignee, articles that infringe a valid and enforceable United States patent or a valid, enforceable and registered United States copyright, or articles that are made, produced, processed, or mined under, or by means of, a process covered by the claims of a valid and enforceable United States patent. It is also unlawful to import, sell for importation, or sell within the United States after importation by the owner, importer, or consignee, articles that infringe a valid and enforceable and registered United States trademark.

Customs Service Enforcement.

Section 1526 of Title 19 of the U.S. Code empowers Customs to enforce registered trademark rights at the border. The statute applies only to articles "of foreign manufacture" imported bearing registered trademarks "owned by a citizen of, or by a corporation or association created or organized within, the United States." Customs does not have a role in prohibiting, for trademark reasons, the importation of U.S.-manufactured articles exported and re-imported without the authority of the trademark holder. To secure Customs enforcement without a court order, a trademark holder must record its registered trademark with Customs. Merchandise bearing a mark that copies or simulates a recorded trademark or a mark that is identical to a U.S.-owned recorded mark is prohibited merchandise.

State Law.

The principal state law theory U.S. companies use to combat grey-market imports is based on the tort of intentional interference with contract. The plaintiff must prove that the defendant intentionally interfered with its contract and that performance of the contract was made more burdensome.

Contract law may also provide avenues of relief. If the buyer can prove that the seller knew the good was a grey-market product and intentionally concealed that fact, the buyer has a basis on which to repudiate the contract. If neither party knew the good was from the grey-market, the court could declare the contract voidable or subject to reformation due to mistake. When a retailer inadvertently purchases grey-market goods, this theory presents a means of voiding the contract.

The contract theory of fraudulent inducement to contract applies when the U.S. or foreign vendor seeks assurances from its purchaser that it will not sell the goods in the U.S. market. If the goods are later found in the United States and the vendor can show the buyer had the intention to sell in the United States at the time of the sale, there may be a cause of action.

Strategies.

Every U.S. company selling products under a trademark should properly register the trademark with the U.S. Patent and Trademark Office and record them with Customs. Copyrights should also be registered with the Copyright Office and recorded with Customs.

An action before the International Trade Commission based on section 337 as a means of barring imports that infringe a U.S. trademark or copyright are often faster and less expensive than a comparable district court action that results in a similar remedy.

To protect their ability to make a Lanham Act claim of trademark infringement, manufacturers should produce goods for foreign distribution to different specifications. Because the threshold for a material difference between the authorized and unauthorized product is low, a visible difference in labeling, product color, or ingredients may support a claim for trademark infringement by unauthorized imports.

To assist in identifying parties making unauthorized sales into the U.S., manufacturers should mark their products to identify distributors. Manufacturers should include liquidated damages clauses in distribution agreements requiring the payment of a pre-set amount of damages in the event that goods sold to that distributor are found to be available in the U.S. market, or otherwise outside the limited geographic region of the distributorship.

Lawrence M. Friedman is a partner in the Chicago office of Barnes, Richardson & Colburn, where he practices customs and international trade law.

- This article is an abridged and edited version of one that originally appeared on page 27 in The International Lawyer, Spring 1998 issue (32:1).

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