IBT – Problem 9.2 Parallel Import - Gray Market Victor H. Bouganim WCL, American University

Victor H. Bouganim, WCL, American University, Spring 2001 Intellectual Property Piracy Problem 9.2: The Setting F Sales of the ROCKERS’ most popular recordings are in decline in the U.S. –Competition from DACCA European subsidiaries capitalizing on currency differences u European wholesalers selling CDs to K-Market in the U.S. u K-market sells the ROCKERS’ recordings for less than the U.S. produced recordings

Victor H. Bouganim, WCL, American University, Spring 2001 Parallel Import - Gray Market F Parallel Import F Where products manufactured by the trademark (or other IP rights) owner or his licensees for sale in other countries are imported into the U.S., thus competing with the domestically authorized products. F Gray Market F Goods lawfully bearing patents, trademarks or copyrights which originate abroad and which compete without permission in domestic markets

Victor H. Bouganim, WCL, American University, Spring 2001 Exhaustion of IP Rights F When an IP rights owner puts in the market a product subject to IP rights - these rights are ‘exhausted’, and the right-holder cannot further control the circulation of that product in the market. F Copyright - First Sale Doctrine F For the purposes of dispute settlement under this Agreement, subject to the provisions of Articles 3 and 4 nothing in this Agreement shall be used to address the issue of the exhaustion of intellectual property rights. [TRIPS, Article 6]

Victor H. Bouganim, WCL, American University, Spring 2001 Tariff Act 1930, Sec. 526 Materials, p. 501 F Prohibit the importation of any merchandise bearing valid US trademarks, unless written consent of such marks is produced at the time of making entry. F Prohibited merchandise shall be subject to seizure and forfeiture. F Civil actions may be brought by the trademark owners for injunctions and damages. F Exemption: Articles accompanying any person arriving in the US, when such articles are for personal use and not for sale and are within set limits.

Victor H. Bouganim, WCL, American University, Spring 2001 Sec Customs Regulations 19 C.F.R. § (c) F The restrictions set forth … do not apply to imported articles when: –(1) Both the foreign and the US trademark or trade name are owned by the same person or business entity; –(2) The foreign and domestic trademark or trade name are parent and subsidiary companies or are otherwise subject to common ownership or control… –(3) The articles of foreign manufacture bear a recorded trademark or trade name applied under the authorization of the U.S. owner...

Victor H. Bouganim, WCL, American University, Spring 2001 K Mart Corp. v Cartier, Inc. S. Ct F Case involves the court’s analysis of the typical parallel import scenarios and whether gray market goods are legal. F Reviews the validity of the Customs regulations. F Court concludes that the exceptions set forth in clauses (1) & (2) are reasonable and valid, whereas clause (3) is invalid. F Result: importation of gray market goods is allowed subject to the Affiliation Test.

Victor H. Bouganim, WCL, American University, Spring 2001 Gray Market Scenarios - 1 F A US firm purchases from a non-affiliated foreign firm the rights to register and use its foreign TM as a US TM and to sell its foreign-manufactured products in the US. –Parallel import of the same products by others. F Universal versus territorial nature of the trademark. F Parallel importers ‘free-ride’ on the investment in building domestic reputation of the trademark. F Gray market products may erode that reputation.

Victor H. Bouganim, WCL, American University, Spring 2001 Gray Market Scenarios - 2 F A US firm registers the US TM for foreign- made products manufactured by an affiliated foreign-firm. –Others buy those products abroad and importing them to the the US. F Variants –Incorporation of a US subsidiary of the foreign firm. –American-based firm establishes abroad a manufacturing subsidiary or its own manufacturing division.

Victor H. Bouganim, WCL, American University, Spring 2001 Gray Market Scenarios - 3 F The US holder of a US TM authorizes a foreign affiliated or controlled manufacturer to use and register the TM and to sell the manufactured products in the foreign country. –The foreign-made products are imported to the US. F Using TM laws to preserve market segmentation and price discrimination. F Exhaustion of rights versus control by the TM owners.

Victor H. Bouganim, WCL, American University, Spring 2001 K-Mart Decision Results Independent licenseeNot allowed to import gray market goods even if they are genuine. 3. Licensor to independent licensee Commonly controlledAllowed to import gray market goods. 2c. Commonly controlled ParentAllowed to import gray market goods. 2b. Parent of foreign subsidiary SubsidiaryAllowed to import gray market goods. 2a. Subsidiary of foreign parent Seller of US trademarkNot allowed to import gray market goods even if they are genuine. 1. Independent Buyer of U.S. trademark Foreign Manufacturer526 Tariff ActUnited States

Victor H. Bouganim, WCL, American University, Spring 2001 Lever Bros. Co. v United States DC Cir F This case involves the unauthorized import of British goods by a British subsidiary bearing a trademark identical to a valid U.S. trademark F U.S. company claims that the imports create consumer confusion F Court held that –Section 42 of the Lanham Act, 15 U.S.C. § 1124 bars the importation of physically different foreign goods bearing a trademark identical to a valid U.S. trademark –It is so regardless of the trademark’s genuine character abroad or affiliation between the producing firms

Victor H. Bouganim, WCL, American University, Spring 2001 Trademark Act - Lanham Act 15 U.S.C. §1124 F Importation of goods bearing infringing marks or names is forbidden. F “… no article of imported merchandise which shall copy or simulate the name of any domestic manufacture … or which shall copy or simulate a trademark registered in accordance with the provisions of this Act … shall be admitted to entry at any customhouse of the United States…”

Victor H. Bouganim, WCL, American University, Spring 2001 The Materiality Test F Parallel importation is prohibited when the gray market goods are physically and materially different from their U.S. counterparts. F However, importation of the suspect goods will still be possible as long as the gray market products bear a label stating “This product is not a product authorized by the United States Trademark owner for importation and is physically and materially different from the authorized product.” F Following the Lever Case ruling as implemented in new Customs regulation (1999).

Victor H. Bouganim, WCL, American University, Spring 2001 Gamut Trading Co. v USITC Fed. Cir F At issue: Whether used tractors bearing genuine “Kubata” TM are allowed for importation. F Kubata is a Japanese firm, which licensed a US affiliated firm, to sell and to service the Kubata tractors in the US. F The Kubata US trademark is owned by the Japanese firm. F Held: The used tractors are materially different from the models distributed in the US, which may cause consumer confusion.

Victor H. Bouganim, WCL, American University, Spring 2001 Quality King v L’Anza Research S. Ct F Plaintiff is interested in protecting the integrity of its method of marketing by attempting to stop imports of copyrighted labels. F Issue: Whether the copyright owner can control further distribution or whether the first sale doctrine is applicable to imported copies? F Result: Domestic First Sale doctrine applies because production was in the U.S. –Parallel importation question is not covered by the Copyright Act of –The court states that American copyright law requires that the copies be lawfully made. In this case, copies were lawfully made and bought.

Victor H. Bouganim, WCL, American University, Spring 2001 Silhouette International v. Hartlauer European Court of Justice, 1998 F This case involves an Austrian sun glass company, Silhouette, that sold 21,000 out of fashion frames to a Bulgarian company for sale only in Bulgaria –The frames turned up for sale in Austria –Silhouette sought an injunction restraining the sale in Austria of these frames –Silhouette claimed that they had not exhausted their trademark rights because they had not put the frames on the EEA market F Result: Parallel imports may be restricted from entering the European Economic Area (EEA)

Victor H. Bouganim, WCL, American University, Spring 2001 Parallel Import in Japan F Japanese courts did not recognize the territorial nature of trademarks but rather analyzed their function as indicators of source and quality. F Japanese courts pointed out that Antitrust considerations arise when genuine goods are enjoined by law from being imported on trademark infringement claims. F Summary –When the quality is the same - parallel imports should be allowed –When the quality differs there is a stronger argument for blocking parallel imports