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

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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