December 23, 2013 Articles

Gray Matters: Statutory Remedies for Sales of Unauthorized Parallel Goods Post-Kirtsaeng

It appears that brand owners may be moving toward Lanham Act claims.

By Michael Steger

Gray market goods or parallel imports are genuine branded goods that are legitimately produced but then imported into a market without the consent of the trademark and/or copyright owner. In contrast to counterfeit goods, gray goods are manufactured under license from or even by the brand owner, but then imported by another party into a jurisdiction for which the goods were not intended.

Brand owners have historically used litigation to combat sellers of gray goods through a combination of copyright, trademark, and other unfair competition actions. In March 2013, however, the United States Supreme Court ruled that the "first-sale" doctrine under section 109 of the Copyright Act protected the importation and sale of copyrighted works legally made abroad. This decision, in Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351, 185 L. Ed. 2d 392 (2013), which overturned contrary circuit court case law, opened up the American market to importers who purchase copyrighted goods legally manufactured abroad, by removing one of the primary weapons used by U.S. copyright owners to keep lower-cost foreign goods out of the American market.

Copyright Infringement
In Kirtsaeng, the defendant, a Thai national, imported into the United States hundreds of thousands of dollars' worth of foreign editions of textbooks that his family and friends purchased overseas. These textbooks were produced under licenses from U.S. textbook publishers. Kirtsaeng then resold the textbooks in the United States at prices far lower than those for comparable authorized U.S. versions, eventually netting a profit of about $100,000, which he used to pay for his education at Cornell and the University of Southern California. John Wiley & Sons, Inc., a major textbook publisher, sued Kirtsaeng for copyright infringement. The text of the overseas edition and the text of the U.S. edition were usually identical. The U.S. editions of Wiley's textbooks, however, had strong, hard-cover bindings with glossy coatings and high-quality photographs and graphics, and frequently included supplements such as CD-ROMs or access to password-protected websites featuring additional material or updates. By contrast, the foreign editions usually had no academic supplements, were printed on thinner paper, used fewer ink colors, and had lower-quality images and graphics. The foreign editions usually contained a legend that they were not authorized for sale in the United States or that they were only authorized for sale in limited geographic markets.

Reversing the Second Circuit, the Supreme Court held that the language of section 109 of the Copyright Act, which states that the owner of a copyrighted item "lawfully made under this title . . . is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phone record," applied to copyrighted items produced overseas. In doing so, the Supreme Court held that section 602(a)(1)'s prohibition of unauthorized importation of copyrighted goods applied only to the exclusive distribution right under section 106(3), which is itself limited by various other provisions of the Copyright Act, including the first-sale doctrine. This extension of the first-sale doctrine to goods produced overseas potentially opened the U.S. market to a flood of lower-priced imported goods.

The Copyright Act grants powerful remedies to prevailing copyright owners, including the choice of actual damages or statutory damages up to $150,000 per infringed work (section 504), injunctive relief (section 502), and costs, including attorney fees (section 505). The enhanced statutory damages under section 504 can be awarded against willful infringers, and courts almost invariably award attorney fees for copyright owners who prove willful infringement. Because almost all importers and resellers know what they are doing and are therefore willful, a copyright-infringement suit was usually the first arrow out of the quiver for keeping foreign goods out of the United States.

In many cases involving unauthorized resellers, the statutory damages far exceeded the infringer's profits or the copyright owner's lost profits, making statutory damages an effective tool for forcing settlements and putting infringers out of business. In the wake of Kirtsaeng, copyright owners in some industries can rely on physical protections to segment markets—foreign-made DVDs generally do not work on American playback systems; other digital rights management controls can prohibit copying for U.S. consumers; and the increasing move to digital media avoids the problems of controlling physical importation to the American market. For the physical textbooks that were the subject of Kirtsaeng, however, the low-cost overseas versions of their U.S. counterparts still present a threat to their publishers.

Lanham Act Remedies
Under the Lanham Act, sellers of gray goods may be liable for selling goods likely to sow confusion in the marketplace or by falsely advertising the nature, qualities, characteristics, or origin of their goods. Section 43 of the Lanham Act imposes liability as follows:

 (1) Any person who, on or in connection with any goods or services, or any container for goods, uses in commerce any word, term, name, symbol, or device, or any combination thereof, or any false designation of origin, false or misleading description of fact, or false or misleading representation of fact, which—

(A) is likely to cause confusion, or to cause mistake, or to deceive as to the affiliation, connection, or association of such person with another person, or as to the origin, sponsorship, or approval of his or her goods, services, or commercial activities by another person or as to the origin, sponsorship, or approval of his or her goods, services, or commercial activities by another person, or

(B) in commercial advertising or promotion, misrepresents the nature, characteristics, qualities, or geographic origin of his or her or another person's goods, services, or commercial activities, shall be liable in a civil action by any person who believes that he or she is or is likely to be damaged by such act.

In this situation, to be liable under the Lanham Act, the alleged infringer must sell or advertise goods that are materially different from the trademark owner's authorized goods; where the goods are identical, there is no violation of the Lanham Act. See, e.g., Am. Circuit Breaker Corp. v. Or. Breakers, Inc., 406 F.3d 577 (9th Cir. 2005) (defendant's gray circuit breakers were genuine products compared with plaintiff's black circuit breakers; despite unauthorized importation, lack of material differences between products compelled finding of no likelihood of confusion).

Damages under the Lanham Act in gray-goods cases are limited in comparison—both by statute and in practice—to those provided for by the Copyright Act. Historically, the primary remedy in trademark litigation has been an injunction barring the infringer from distributing the offending product and requiring the turnover or destruction of the goods in violation of the mark.

Damages for trademark infringement and false advertising under section 35(a) (15 U.S.C. § 1117) may include a disgorgement of the defendant's profits, the plaintiff's lost profits, costs, and, "in exceptional cases," attorney fees. Under section 35(a), lost profits can include actual sales lost to the defendant due to the infringement, price erosion caused by the defendant's infringement, and possibly future lost sales if such sales cannot be prevented by an injunction. Lost profits involves an analysis of the marketplace. Disgorgement can also be obtained, but any disgorgement may not result in a "double counting" of the plaintiff's lost profits and the defendant's gains. For both disgorgement and lost profits, the burden of proof rests on the plaintiff.

Proving the lost profits and price erosion requires expert witness testimony, and the resulting expense may not be justified by the potential damages.

Which Way Forward?
In one of the first decisions addressing claims for copyright and trademark infringement for unauthorized sales of imported goods, the District of Arizona ruled that the subsidiary of a trademark and copyright registrant could proceed with Lanham Act claims even as its copyright-infringement claim was barred by the first-sale doctrine. In AFL Telecommunications LLC v. SurplusEQ.com Inc., 2013 U.S. Dist. LEXIS (D. Ariz. 2013), the plaintiff sold fusion splicers, a device consisting of hardware and operating software. The splicers were sold under a registered U.S. trademark, and the operative version of the splicers contained software for which the plaintiff's parent company had registered the copyright. The defendant was not an authorized U.S. distributor of the plaintiff's splicers but obtained them from authorized Asian distributors, imported them into the United States, and sold them over the Internet. The court found that the plaintiff's copyright-infringement claim was barred by the first-sale doctrine, as interpreted in Kirtsaeng, but let stand the plaintiff's claims for unfair competition and false advertising under section 43 of the Lanham Act. Specifically, the court found that without any evidence that consumers were aware of all differences between the authorized U.S. goods and the unauthorized gray goods, the defendant could not obtain summary judgment on the trademark claims.

In the wake of Kirtsaeng's foreclosure of copyright-infringement remedies for unauthorized importation of gray goods, it appears that brand owners may be moving toward Lanham Act remedies. Of the nine textbook infringement cases that John Wiley & Sons, the plaintiff in Kirtsaeng, had pending in the Southern District of New York when the Supreme Court decided Kirtsaeng, three also included Lanham Act trademark and unfair competition claims. Each of those cases was filed or amended to include the Lanham Act claims after the Supreme Court granted certiorari in Kirtsaeng.

In proving trademark infringement, the plaintiff will have to show a likelihood of confusion. Where the relevant consumer—the student purchaser—is knowingly buying a less expensive foreign edition of a textbook because that student wants to pay less for the actual content of the book, will the publisher be able to show that the consumer is likely to be confused? Will the student, who could buy the authorized U.S. version at the campus bookstore or online, be misled that the imported version lacks a CD-ROM, upgraded graphics, and access to secure websites? Or will the student just be happy that he or she spent only a fraction of the price of the authorized version? If a defendant were willing to invest the resources to demonstrate that such confusion were nonexistent through survey rather than anecdotal evidence, it may lead to a different result. And if a court were willing to hold that actual confusion rather than likelihood of confusion is the paramount factor under a Lanham Act analysis in such situations, we might have a different result. Until then, the prevailing case law holds that likelihood of confusion renders such uses infringing.

Keywords: litigation, intellectual property, parallel goods, gray market, first-sale doctrine, copyright, likelihood of confusion, foreign goods, Lanham Act, copyright infringement, Kirtsaeng

Michael Steger – December 23, 2013


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