Gray-Market Solutions: Many Tools in the Toolbox

Companies with international product distribution face considerable logistical challenges just getting a product to its intended market. Additionally, that product will likely come back to the United States in the form of unauthorized gray-market goods. The good news is that there are many tools in the legal toolbox for stopping those imports.

In a July 2019 article and a July 2020 article for Business Law Today, we highlighted how to use the US International Trade Commission (ITC) to stop unauthorized imports at the border. But there are many other options that companies can use to police the market and address the shifting realities of the post-COVID-19 economy.

Since the supply chain disruptions caused by the pandemic, companies are seeing counterfeit goods mixed in with gray-market goods (which were already problematic) more and more often. United States trademark, anti-counterfeiting, and anti–unfair competition laws provide private causes of action that companies can use to aggressively shut down unauthorized resellers of gray-market and counterfeit goods. These laws provide for seizures of goods, injunctive relief, and recovery of substantial compensatory, equitable, and punitive monetary damages.

The Problem

In today’s global economy, companies in the United States face unlawful importation of goods from abroad bearing genuine trademarks—referred to as gray-market infringement—as well as the importation and sale of counterfeit goods that can include spurious marks, labels, and paperwork. Even though the height of the COVID-19 pandemic is now behind us, the lingering effects of severe supply chain issues can present ripe opportunities for unauthorized goods to enter the United States via online marketplaces run by bad actors located anywhere.

The Tools

The ITC remains an important venue for stopping unauthorized imports and has the benefit of offering broad injunctive relief in the form of general exclusion orders. However, monetary relief is not available at the ITC.

When the identity of unlawful importers is known and US sales are substantial, actions brought in federal district courts allow companies to seek monetary damages as well as injunctive relief. In our experience, a powerful case against infringers can be built from the multiple available causes of action under federal and state law.

First, claims can be brought under the Lanham Act (15 USC 1051 et seq.) for trademark infringement, false advertising, false designation of origin, and dilution. The pathways available under the Lanham Act for monetary recovery depend on the violations for which the defendant is found liable. It is therefore important to conduct a thorough investigation and marshal the appropriate facts regarding the defendant’s activities so that all potential violations can be pleaded and tried against the defendant.

Second, private claims can be brought under federal and state anti-counterfeiting laws. In our experience, those laws provide strong avenues for investigating and stopping counterfeiting, including ex parte seizures, expedited discovery, asset freezes, and preliminary injunctive relief. These tools can be used in addition to those available for simple gray-market infringement claims. For instance, an unauthorized reseller that engages in both counterfeiting and gray-market infringement of other products beyond the counterfeit products commits multiple violations under the Lanham Act. Besides civil counterfeiting actions, the government can initiate criminal prosecution under US counterfeiting laws that include serious penalties.

Third, plaintiffs can bring suits under various state and common-law unfair competition, unjust enrichment, and deceptive trade practices laws. These laws differ from state to state but mostly track the Lanham Act’s prohibition against false, misleading, or deceptive acts or practices that are likely to confuse consumers, which typically include trademark infringement. One advantage of this approach is that many of these state statutes allow for automatic entitlement to attorney fees, without a need to prove that the case is exceptional as with Lanham Act claims.

State laws governing deceptive trade practices and unfair competition may also be triggered by a broader scope of conduct than claims under the Lanham Act, such as passing off, deceptive representation of geographic origin, selling old products as new, false or misleading advertising, and other specific deceptive practices. These additional causes of action can be powerful tools when companies are faced with an unauthorized reseller engaged in activity that aligns with the language of the relevant statute.

Available Remedies for Gray-Market and Counterfeiting Cases

Claims under the Lanham Act and state law can allow for multiple nonexclusive remedies for trademark infringement arising from the sale of gray-market goods and counterfeiting. These include seizures of goods, injunctive relief, and recovery of substantial compensatory, equitable, and statutory monetary damages as well as attorney fees. State law and common-law claims for unfair competition and deceptive trade practices can also implicate powerful punitive damages.

Injunctive Relief

Under the Lanham Act, a court is authorized to grant an injunction “according to the principles of equity and upon such terms as the court may deem reasonable” in trademark infringement, false advertising, trademark dilution, and cyberpiracy claims brought under Section 43 of the Act. To obtain such relief, the trademark holder must demonstrate a likelihood of success on the merits, irreparable harm, and that a balancing of equities and the public interest favors the entry of an injunction.

Historically, some circuits applied a rebuttable presumption of irreparable harm upon a finding of infringement, while other circuits did not. Some circuits did not apply the presumption for some claims, such as false advertising in cases of implied falsity or when the defendant’s false claims were about its own products. However, the Trademark Modernization Act of 2020 amended Section 34(a) of the Lanham Act to restore a rebuttable presumption of irreparable harm upon a finding of infringement, including causes of action brought under Section 43 of the Lanham Act. Prevailing plaintiffs can now seek injunctive relief with more confidence, including for false advertising claims.

Monetary Relief

The Lanham Act specifies that victorious plaintiffs shall be entitled to recover, subject to the principles of equity: (1) the defendant’s profits; (2) any damages sustained by the plaintiff; and (3) the costs of the action. Under Section 1117(a) of the Lanham Act, courts have great latitude to adjust these profits and damages, including the discretion to enter judgment “for any sum above the amount found as actual damages” according to the circumstances of the case. Under Section 1117(a), courts also may exercise discretion to enter judgment for any “sum as the court shall find to be just” if it finds that the amount of the recovery based on profits is either inadequate or excessive.

The Lanham Act also provides for treble damages for violations involving the intentional use of a counterfeit mark. Moreover, in cases involving the use of a counterfeit mark, at any time before judgment is entered, the plaintiff may elect to recover statutory damages within a prescribed range of $1,000 to $200,000 per counterfeit mark per type of goods or services sold and up to as much as $2 million for willful infringement. The court may award reasonable attorney fees to the prevailing party in exceptional cases.

The rationales behind the Lanham Act’s damages and remedy provisions can be powerful tools for plaintiffs to (1) avoid the defendant’s profiting off its infringement; (2) compensate the plaintiff for damages it sustained; and (3) deter infringement by the defendant or deter others from engaging in similar acts. Plaintiffs should keep these three principles in mind when crafting their damages case to ensure that the court has the necessary evidence to consider each of the rationales in a trademark owner’s favor. For instance, the brazen nature of a willful infringer can help to establish that there is a strong need for deterrence of others that may follow in the infringer’s footsteps for a quick but unlawful profit. While the Lanham Act is not designed to punish infringers, defendants that are found liable under state law and common-law unfair competition claims can be assessed additional punitive damages to punish outrageous conduct that was intentional or reckless.

Split Burden to Show Revenues and Costs

Trademark owners bringing claims against counterfeiters and gray-market infringers often face the difficult task of demonstrating the scope of the wrongdoing. Counterfeiters often take great care to cover their steps or avoid a paper trail. To level the playing field, the Lanham Act includes a burden-shifting framework trademark owners can use to great effect.

In assessing profits under Section 1117(a) of the Lanham Act, the plaintiff “shall be required to prove defendant’s sales only.” The burden flips to the defendant to “prove all elements of cost or deduction claimed,” and the defendant must demonstrate how any alleged deductible cost contributed to the sale of the infringing product. If a defendant is unable or unwilling to meet this burden, courts have discretion to award the entire gross revenue as the defendant’s profit. Moreover, if damages cannot be proven with certainty because of a defendant’s own actions, whether it be through a purposeful lack of recordkeeping or obstruction in discovery, courts can hold the uncertainty against the defendant. The burden-shifting framework can provide a powerful boost to plaintiffs facing uncooperative or sophisticated infringers and counterfeiters.

Conclusion

Companies have many different tools at their disposal to police the market and guard against the unlawful importation of gray-market and counterfeit goods. The ITC presents an important venue for broad injunctive relief. In addition, actions brought in federal district courts can be a powerful option against unlawful importers that allow companies to seek injunctive relief as well as monetary damages. There, companies can seek multiple nonexclusive remedies that include seizures of goods, injunctive relief, and the recovery of compensatory, equitable, and statutory monetary damages as well as attorney fees, along with the potential for punitive damages in certain cases. Companies that are aware of these different tools can take proactive steps to investigate infringers and counterfeiters to prepare for efficient litigation and advantageously leverage these tools to combat unlawful importation and sales.