Combating gray market goods in a global market: comparative analysis of intellectual property laws and recommended strategies.

• Author: Swanson, Tait R.

I. INTRODUCTION

Gray goods, also called parallel imports, pose a significant threat to multinational companies (MNCs) that enter foreign markets.(1) Gray goods are genuine goods sold through unauthorized channels in direct competition with authorized distributors.(2) Gray goods comprise three categories: "unintended" goods, "licensed" goods, and "distress" goods.(3) Unintended goods are those goods authorized for sale in one country, but then redirected to another country, often in direct competition with authorized distributors in that country.(4) Unintended goods may be further divided into goods manufactured domestically, and those manufactured abroad by an entity under "common control" or a foreign license.(5) Licensed goods are those goods manufactured pursuant to a trademark license but sold through unauthorized channels.(6) For example, a licensee may sell to a gray marketer for a better price or because authorized distribution channels are closed due to a canceled license.(7) Distress goods are those goods dumped by an otherwise authorized dealer, who typically has an excess supply or outdated goods.(8) Whatever the scenario, intellectual property owners may find themselves competing against their own "genuine" goods, effectively reducing their profits.(9)

Case law in various countries, including the United States, is inconsistent on the issue of gray goods.(10) The trend toward international business operations, international trade, and high technology makes intellectual property protection critical to MNCs.(11) Uniform protection is necessary to fully protect intellectual property rights, otherwise parallel importation may be permitted in one country and prohibited in another, thereby deterring international trade and business.(12) The gray market arguably benefits the consumer by providing low cost goods in competition with the copyright holder,(13) yet it may also harm the intended country by reducing the supply of those goods.(14) Inferior goods may also enter the gray market, such as goods from a foreign licensee that were not approved by the licenser.(15)

The gray market exists primarily due to price differentials between products marketed abroad and those products sold domestically.(16) Differences in currency exchange rates, product quality and characteristics, warranties, and services offered all contribute to the gray market.(17) Entering a new foreign market requires a business strategy, such as differentiation of a product, usually by price, quality, or service.(18) An MNC may decide to enter the market at a deep discount competitive with local products to capture market share.(19) If the discount is large enough, it may be profitable for a gray marketer to purchase the discounted goods and redirect them to a more profitable market such as the United Stats.(20)

Gray goods are said to benefit the consumer at the expense of the intellectual property owner.(21) Opponents argue that gray goods undercut prices offered by authorized dealers, confuse consumers, and even reduce consumer goodwill when the products materially differ from those intended for U.S. distribution.(22) Goods intended for a foreign market may comply with different regulations; include instructions in a foreign language; or even look, smell, or taste different, having been adjusted for the targeted foreign market.(23) Consumers may become disappointed in so-called "luxury" goods when they are retailed at a discount.(24) Furthermore, gray marketers are said to have a free ride on the U.S. intellectual property owner's advertising and promotion, further fueling the gray market.(25) Proponents argue that consumers benefit from the gray market due to increased competition and choice between serviced and no-frills products.(26)

The primary controversy regarding gray goods concerns the doctrines of first sale and exhaustion of rights in the international context.(27) The first sale doctrine mandates that once an intellectual property owner makes a first sale, he has exhausted his intellectual property rights with respect to the goods sold.(28) However, the extent of the exhaustion of rights is unclear. Some courts hold that a first sale results in international exhaustion, arguing that the intellectual property rights are internationally exhausted because the product has been placed into the stream of commerce and may forseeably reach other countries.(29) Other courts hold that a first sale results only in territorial exhaustion, since each country is a separate zone of exclusivity with respect to the intellectual property.(30)

An MNC may enter a foreign market by setting up its own operations by joint venturing, or by simply exporting its product.(31) In each case, intellectual property rights are at stake. The risk largely depends on the intellectual property at issue, the interpretation of a first sale, and the extent of exhaustion of rights with respect to such intellectual property.(32) The gray market has been attacked using the "law of trademarks, contracts, copyrights, civil RICO, tariffs, and international trade," but the most important legal weapons are tariffs and intellectual property rights enforcement.(33)

II. U.S. INTELLECTUAL PROPERTY LAW

The law regarding gray goods is not uniform within the United States, let alone within the international market, and wide variances are seen among trademark, copyright, and patent laws.(34) The courts interpret statutes differently, emphasize different policies, and leave the area of gray goods in a complicated arena of territorial and first sale issue.(35)

1. Trademark Law

   Trademarks symbolize a product's reputation and goodwill, represent consistent quality to the .consumer, and prevent confusion among competing products.(36) Trademark law provides protection against gray goods pursuant to section 42 of the Lanham Act and section 1526 of the Tariff Act.(37)

   Section 42 of the Lanham Act prohibits importation of goods falsely designating origin or displaying a counterfeit mark.(38) Section 42, entitled "Importation of Goods Bearing Infringing Marks or Names Forbidden," provides that:

   [N]o article of imported merchandise which shall copy or simulate the name of ... any domestic manufacture, or manufacturer, ... or which shall copy or simulate a trademark registered in accordance with the provisions of this chapter or shall bear a name or mark calculated to induce the public to believe that the article is manufactured in the United States, or that it is manufactured in any foreign country or locality other than the country or locality in which it is in fact manufactured, shall be admitted to entry at any customhouse of the United States....(39) As entitled, section 42 directly addresses the "importation of goods bearing infringing marks...."(40) Yet the definition of "infringing" is unclear.(41) In view of this ambiguity in the term "infringing," sections 32 and 43 of the Lanham Act define infringement and false designations of origin, respectively.(42) Section 32 provides that:

   Any person who shall, without the consent of the registrant-- (a) use in commerce any reproduction, counterfeit, copy, or colorable imitation of a registered mark in connection with the sale, offering for sale, distribution, or advertising of any goods or services on or in connection with which such use is likely to cause confusion, or to cause mistake, or to deceive ... shall be liable in a civil action....(43) Thus, according to section 32, trademark infringement under the Lanham Act requires a likelihood of confusion between the genuine goods and the allegedly infringing goods, even for gray goods.(44) Similarly, section 43(a) of the Lanham Act provides a civil cause of action when the unauthorized use of a trademark or other misleading fact causes a likelihood of confusion concerning the origin of the goods.(45)

   Finally, section 1526(a) of the Tariff Act states: [I]t shall be unlawful to import in the United States any merchandise of foreign manufacture if such merchandise, or the label, sign, print, package, wrapper, or receptacle, bears a trademark owned by a citizen of, or by a corporation or association created or organized within the United States, and registered in the Patent and Trademark Office....(46)

   Goods imported into the United States in violation of section 1526(a) are "subject to seizure and forfeiture."(47)

   Territoriality is a key issue in the area of gray goods, but early trademark law did not consider the possibility of international business.(48) The Supreme Court established the territoriality of trademarks in Bourjois & Co. v. Katzel, providing that trademarks are legally enforceable only in the country granting the trademark and its accompanying rights.(49) However, the lower courts did not consistently follow the decision and often interpreted it narrowly.(50)

   In the 1980s, federal courts developed the material difference standard as a proxy for the likelihood of confusion test,(51) allowing parallel importation unless the goods are materially different from those sold through authorized channels.(52) In Osawa & Co. v. B & H Photo, the court held that differences in point-of-sale servicing irreparably injured the trademark holder.(53) The absence of these services created a material difference between authorized dealers and unauthorized gray goods dealers, creating a likelihood of consumer confusion that injured the trademark holder.(54) However, the meaning of material difference is unclear because the courts have found difficulty in applying a uniform rule.(55) In Original Appalachian Artworks, Inc. v. Granada Electronics, Inc., the Second Circuit interpreted material difference as that which causes consumer confusion or disappointment with the goods.(56) In Societe Des Produit Nestle, S.A. v. Casa Helvetia, Inc., the First Circuit interpreted material difference to mean any difference which the consumer would consider relevant when purchasing a product.(57) In...