Varying Intellectual Property Regimes: The Reception of Gray Market Goods in the United States and the European Union

Introduction: 

Most
consumers agree that intellectual property law is essential to ensure
that creators of inventions, ideas, designs, services and the like are
rewarded for their creativity and to promote the continuation of such
creations.[1] In order to grant creators with the incentive to continue
creating, such creators must be equipped with the satisfaction of
knowing that their creations will not be transformed into cheap
imitations which will inevitably compete with their own original
creations. Intellectual property is a field in which only the most
innovative thrive. While imitation is often considered the most sincere
form of flattery, it is doubtful that inventors will continue to
introduce the same number of creations at exponentially high rates,
knowing that their unique innovations may be reintroduced into the same
market to compete with their original goods within a short period of
time. The protection of intellectual property is at the forefront of
agreements between nation-states because of the relative ease of
copying, and the lax attitude of some nation-states to prevent and
punish infringement.[2] A prevailing argument is the thesis that
"technology drives investment" and to the extent that technology is
reluctant to flow where it is not protected, the lack of an adequate
level of protection could stunt technological transfer and foreign
investment entirely.[3]

While
there are countless instances of piracy in the fashion design industry,
in addition to imitations involving design patents, this study will
focus on a topic entirely distinct from imitation. Gray goods, or
parallel imports of genuine goods, refer to a fact pattern in which
someone other that the designated exclusive United States importer buys
genuine trademarked goods outside the United States and imports them
for sale into the United States in competition with the exclusive
United States importer.[4] While the terms, "gray goods" and "parallel
imports," are often used interchangeably, opponents of parallel imports
prefer to refer to the imports as gray market goods.[5] Gray goods are
not illegal and have not been smuggled or stolen.[6] The term, "gray
market goods," refers to foreign manufactured goods, for which a valid
United States trademark has been registered, that are legally purchased
abroad and imported into the United States without the consent of the
American trademark holder.[7] A federal District Court in California
defined gray goods in the United States as "goods that are intended to
be sold outside the United States but which are imported into this
country without the consent of the owner of the United States trademark
or copyright associated with the good."[8] In Europe, the term, "gray
market" applies to goods sold outside the European Economic Area
(hereinafter "EEA") and then re-imported against the wishes of their
copyright holder.[9] The gray market has the potential to harm more
than just the reputation of the goods being sold, although reputational
harm has served as the basis for most innovators’ arguments.[10] When a
manufacturer sells goods to distributors abroad, it often does so at
prices far cheaper than those in its own country (or in the EEA), based
on the differences in the two markets.[11] An overseas distributor can
then sell the goods back into the United States at prices that remain
much lower than those at authorized retailers, while still making a
large profit.[12] Through this parallel importation, gray marketers
devastate the businesses of United States trademark owners in a variety
of industries.[13] Because gray marketers can rely on the United States
trademark owners’ large expenditures for brand advertising or
warranties, they are able to turn a profit at prices substantially
below those charged by the United States trademark owner.[14] Such a
practice forces manufacturers into competition with their own products
and restricts their ability to control discounts within the United
States or EEA.[15]

The gray market appears to benefit consumers by offering brand name
goods at reduced prices.[16] Gray market goods, however, are often of
lower quality than goods sold by authorized distributors.[17] In many
cases, gray market goods are subject to different production standards
than goods marketed by authorized distributors, thus giving rise to
inferior and even unsafe products.[18] Purchasers of gray market goods
are also plagued by the fact that numerous authorized dealers do not
honor warranties on such products.[19] Often, only after a product
malfunctions do gray market consumers realize that the products they
purchased did not include warranties.[20] While facially attractive to
the consumer, gray market goods possess many latent drawbacks that
render shopping for such goods ultimately more costly than purchasing
higher priced goods from authorized distributors.[21]

A gray market good can usually be placed in one of three
categories.[22] In the first situation, a domestic firm will purchase
the rights to use a trademark from a foreign manufacturer and register
that trademark in the United States.[23] If the foreign manufacturer,
or a third party, subsequently imports the authentic goods of foreign
manufacture into the United States, the domestic trademark holder’s
market is being undercut and a gray market is said to exist.[24] In the
second case, if a domestic firm that registers a trademark is a
subsidiary of, a "parent" of, or the same firm as a foreign trademark
holder, the importation of goods by the foreign arm of the
organization, or by a third party, also gives rise to a gray
market.[25] In the third instance, a gray market exists when a domestic
trademark holder authorizes a foreign firm to use its trademark abroad,
and the foreign manufactured goods are imported into the United States
by the foreign corporation or a third party.[26]

A critical question posed to courts around the United States has
asked: can or should the designated "exclusive" United States importer
be able to block these "parallel" imports of "genuine" goods?[27] One
main factor of consideration is whether or not the foreign manufacturer
has assigned United States trademark rights and their registration to
the designated exclusive United States importer.[28]

United States and international antitrust and free competition
policies intersect with trademark law in that the designated United
States importer is usually concerned with gray market goods because
they are sold for less, undercutting the designated United States
importer’s national price structure for these branded goods.[29]
However, blocking gray market goods of genuine goods may enforce a
division of markets and a higher price structure in the United States,
raising possible antitrust issues.[30] Gray market goods also raise
questions involving trademark law and consumer perception.[31]

The ultimate issue in a trademark infringement suit against the
importer of gray market imports is the factual question of whether
United States consumers are faced with a likelihood of confusion.[32]
Traditionally, resolution of the question depended on whom United
States consumers identified as the source of the goods bearing the
mark: the foreign manufacturer or the United States importer.[33] The
modern approach involves a study of the nature of the goods: if there
is a material difference between the gray market imported goods and the
goods authorized for sale in the United States, then customer confusion
and infringement may be proven.[34]

Under copyright law, the unauthorized importation into the United
States of copies purchased outside the United States is an infringement
of the United States copyright owner’s exclusive right to distribute
copies.[35] The copyright issue with respect to gray goods is whether
the first sale doctrine exempts importers who acquired ownership of the
imported copies that were lawfully made abroad.[36] Some courts take
the position that sales abroad of foreign manufactured United States
copyrighted material gives copyright holder’s exclusive distribution
rights in the United States.[37] In at least one circumstance, the
United States Supreme Court has held that where goods are manufactured
in the United States with copyrighted labels, shipped abroad, and
subsequently re-imported, they are protected by the first sale defense
and are not barred entry into the United States by the Copyright
Act.[38]

Protection of intellectual property rights in the European Union and
the European Court of Justice (hereinafter "ECJ") is received quite a
bit differently than in the United States. For instance, there is no
provision like Article 1, Section 8, clause 8 of the United States
Constitution in any of the treaties establishing the TEU that protects
intellectual property rights like the United States does.[39] While the
ultimate goal is to harmonize all Member States in their approach to
intellectual property rights, such a goal has not yet been entirely
attained. When a Member State’s law grants a monopoly of exploitation
to the owner of such a right, it follows that the owner may forbid any
unauthorized third party, or infringer, from any sale, use or other
exploitation within that State.[40] If an industrial or commercial
property right has considerable economic significance, the owner in one
State usually seeks to obtain parallel protection in all of the other
States of the Community; however, this is not always possible, either
because someone else has prior conflicting rights in another State, or
because another State does not protect the right, or imposes differing
requirements for recognition of the right.[41] It appears that the
European Union’s ultimate goal of harmonizing individual Member States’
laws has been received well by the Community and is evidenced in the
fact that citizens and businesses will also benefit from a national law.

Thus far, the European Union has made two concerted efforts toward
harmonization: a Directive and a Community-wide system for intellectual
property rights.[42] The European Union Trademark Directive 89/104 was
the first major legal instrument designed to facilitate the free
movement of goods by approximating national trademark laws, and
attempting to eliminate the differences between the (Member State) laws
to prevent distorted competition within the internal market.[43] The
European Union Trademark Directive 89/104 stemmed from the fact that
exclusive rights granted a trademark allow the owner to prevent any
authorized use of an identical or similar mark if it leads to a
"likelihood of confusion" for consumers.[44] Because the
distinctiveness of the mark is judged on a country by country basis and
not on a European Union level, the Commission makes it practically
impossible for Member States to extend the geographical protection of a
national trademark.[45] The concept of unionizing trademark law was
born in the early 1970’s when the Commission decided trademark law
should be harmonized to ensure European Union uniformity.[46] With the
Commission adopting the Council Regulation for Community Trademark,
which established a single trademark valid throughout the entire
European Union and the creation of the European Union Trademark Office,
any community trademark owner wishing to challenge trademarks under
both Community Trademark Law and national trademark law is freely
able.[47]

There have often been debates over the United States’ perception of
gray market goods and the reception of the gray market in the European
Union. There is not one perception which is correct and another which
is incorrect. Instead, it is a country’s promulgation of appropriate
laws which balance creativity and innovation, while recognizing
consumer rights that truly matters.

At first glance, one would think that both the United States and the
European Union have taken measures to ensure that trademarked goods
intended for foreign countries and identical to the domestic good do
not re-enter the United States only to compete with the original
domestic good. After a closer look, it is clear that there still
remains the problem with gray market goods having a crippling effect on
a trademark holder’s sales of original goods intended for domestic sale
only.

The policies of each country cannot be criticized without
understanding the incentives motivating both the United States and the
European Union in taking remedial measures against gray market goods
and the extent of measures taken.

A. The United States’ Perception of the Gray Market

Broadly, one could generalize that the United States appears to take
a stronger stance in favor of consumer rights than the European Union
in tolerating gray market goods. One rationale for such a tolerant
demeanor towards gray market goods is their ability to expose the
general public to affordable versions of otherwise upscale and
unattainable items. Some commentators have even argued that exposing
regular consumers to a normally unaffordable and thus, "unpopular" good
will help popularize the good amongst the masses through exposure.
These regular consumers may then notice the difference between their
gray market good and the "original" domestic product, potentially
causing them to switch their tastes toward the domestic version. On a
grand scale, such exposure may first increase demand for the gray
market good over the domestic good, but would eventually cause gray
market sales to drop and sales of the same domestic good to flourish.
One common example of such a phenomenon is seen in the sales of soap.
Manufacturers have studied that American consumers prefer soap with a
large amount of lather and thus, soaps intended for United States are
often made with such a preference in mind. The same trademarked soap
which is sold in the United States may be created in a slightly
different manner for sale in the European Union i.e. without as much
lather. If the soap intended for European consumers arrives back into
the United States and is sold at a cheaper price in a low-end outlet,
sales are likely to rise at first. However, after use, American
consumers are likely to recognize the difference in lather and may
notice that the ingredients are listed in a foreign language on the
cover. Such first-hand experience may cause many American consumers to
prefer to pay a higher price and buy the domestic version of
lather-inducing soap. The attorney representing Quality King favored
the court’s less-than-stringent view against gray market goods and
stated: "the court basically held that the copyright laws do not allow
companies to charge American consumers more than people in other
countries."[48]

Trademark and copyright-holders are naturally quite unhappy with the
lax regulation of gray market goods in the United States. Their main
un-satisfaction stems from the fact that American manufacturers are
forced into competition with their own products.[49] It is, however,
this increased competition that many gray market promoters focus upon
in order to help the economy thrive. A major downside to a lax view on
gray market goods is that the apparent benefit to consumers is in
actuality only an ideal. Consumers would benefit greatly if they were
able to pay a lower price for gray market goods in addition to
receiving customer service and warranties with their purchase.[50]
Unfortunately, gray market goods are normally sold without any
additionally promised services or warranties, confusing United States
consumers who have been exposed to promotions and guarantees regarding
quality.[51] In reality, consumers who purchase goods in the gray
market are often disappointed with the quality and left without a
guarantee in order to assert their rights over poorly manufactured
goods.[52]

B. The European Union’s Perception of the Gray Market

 

The EJC’s decision in Silhouette had the most impact on
preserving trademark holders’ rights in the EEA. In addition, the
European Union Trademark Directive prohibits member states from
adopting international exhaustion, allowing trademark holders in the
EEA to freely trade outside the EEA without fear that they will be
without an infringement remedy if their goods are sold back into the
EEA without authorization.[53] However, all manufacturers in the
European Union will not benefit from the holding in Silhouette
until its principles are adopted by all member states and ideally, in a
uniform international agreement that applies equally in both the United
States and the European Union.[54]

In the meanwhile, it seems that the European Union has taken
drawbacks to the gray market more seriously than the United States,
while still seeking a "net positive effect" on the respective rights of
manufacturers and gray market importers.[55] The Silhouette victory
has empowered trademark owners in the EEA and it appears that the
European Union need not make any drastic changes to its gray market
policy. Overall, the European Union has set a precedent on the
possibility of curbing the gray market and now it is up to the United
States to follow suit.

SOURCES

[1] Lee Ann Askew, Comment, The ECJ, the ICJ and Intellectual Property: Is Harmonization the Key?, 7 TULSA J. COMP. & INT'L L. 375, 375 (2000).

[2] Id.

[3] Carlos Alberto Primo Braga, The Economics of Intellectual Property Rights and the GATT: A View from the South, 22 VAND. J. TRANSNAT’L L. 243, 260 (1989).

[4] J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition, 29:46 (2007).

[5] See id.

[6] Elin Dugan, Note, United States of America, Home of
the Cheap and the Gray: A Comparison of Recent Court Decisions
Affecting the United States and European Gray Markets
, 33 GEO. WASH. INT’L. L. REV. 397 (2001).

[7] McCarthy, supra note 4.

[8] Dugin, supra note 6, at 397.

[9] Id.

[10] See id. at 398.

[11] Id.

[12] Id.

[13] David Schneider, Vivitar Corp. v. United States: The Beginning of the End of the Grey Market?, 35 AM. U. L. REV. 1207 (1986).

[14] Id. at 1207-08.

[15] See Dugan, supra note 6, at 398.

[16] John J. McNamara, Note, Attention Gray Market Shoppers: K Mart Corp. v. Cartier, Inc. Fails to Clarify the Clouded Area of Gray Market Goods, 38 CATH. U. L. REV. 933, 938 (1989).

[17] Id. at 938-39.

[18] Id. at 939.

[19] Id.

[20] Id.

[21] Id.

[22] Id. at 933.

[23] Id.

[24] Id.

[25] Id.

[26] Id.

[27] See McCarthy, supra note 4.

[28] See id.

[29] See id.

[30] Id.

[31] See id.

[32] See id.

[33] Id.

[34] See id.

[35] Id.

[36] Id.

[37] Parfums Givenchy v. Drug Emporium, 38 F.3d 477 (9th Cir. 1994)
(holding that sales abroad of foreign manufactured United States
copyrighted materials do not terminate the United States copyright
holder’s exclusive distribution rights in the United States under
section 106 and section 602(a)).

[38] Quality King Distrib., Inc. v. L’Anza Research Int’l, 523 U.S.
135 (1998) (reasoning that since section 602(a) makes an infringement
of the exclusive right of importation an infringement of the exclusive
right of distribution under section 106(3), the first sale defense to
the section 106(3) distribution right must also apply to the section
602(a) importation right).

[39] See U.S. CONST. art. I, § 8, cl. 8; Askew, supra note 1, at 388.

[40] Askew, supra note 1, at 388.

[41] Id.

[42] Id. at 391.

[43] See id. at 392.

[44] Id. at 391-92.

[45] See id. at 392.

[46] See id.

[47] Id.

[48] Dugan, supra note 6, at 410.

[49] See id.

[50] See id. at 411.

[51] See id.

[52] See id.

[53] See id. at 404.

[54] See id. at 417.

[55] See id. at 398.

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