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Parallel imports in today’s global economics represent great concern for the producers, who are trying to secure their investments and goodwill. These producers are looking for any available tool to prevent parallel importation and keep control over marketing and distribution of their products. One of the appropriate instruments are intellectual property rights that are incorporated in many forms in each product on the market. In particular, trademarks accompanying the products and creating customer recognition of the product and subsequent identification of the producer evolved into powerful weapon. Trademarks of all the intellectual property rights are subject matter of this paper. In the two following chapters the development of judicial doctrines and legislature with respect the use of trademark as a tool to bar the importation will be introduced for the United States and the European Union. In the fourth chapter the practical implications arising from this issue and fact that the United States and the European Union are major trading partners model situations will be drawn on examples from the practice. Finally, the concluding remarks with respect to regulation under TRIPS and policy issues will be provided.
At this point, the meaning of ‘parallel imports’ for needs of this paper should be determined. Parallel imports and in the United States’ terminology ‘gray market goods’ are products bearing legitimately affixed trademark that were distributed in a foreign country, or intended for such distribution, but were re-imported without the consent of the trademark owner. Parallel imports may also be of foreign manufacture. Various relations of the trademark owner combining distribution, affiliation and manufacture could be involved and serve as a basis for the subsequent re-importation.
As will be further explained in more detail, the laws on parallel imports are concerned with the exhaustion of rights principle, which set the extent of the protection afforded by trademarks. The exhaustion doctrines not only vary between our respective jurisdictions but also have also substantially changed over the time. While in the European Union before the Community harmonisation individual Member States followed either domestic or international exhaustion, the United States observed unambiguously the international exhaustion. Insert definitions from case law
II. Parallel Importation as Trademark Infringement under United States Law
A. Doctrine developments
The United States case law of parallel importation has been shaped by decisions in the following landmark cases. The initial adherence to the universality principle as apparent among many from the Circuit Court’s decision in A. Bourjois & Co., Inc. v. Katzel, 275 F. 539 (1920), �under which U.S. trademark owners holding contracts for the exclusive right to import foreign trademarked goods were held powerless as against others who purchased abroad goods genuinely marked abroad and imported them to the U.S. for sale,” was soon reversed by the Supreme Court. Since then the universality principle yielded the principle of territoriality, which �recognizes that a trademark has a separate legal existence under each country’s laws, and that its proper lawful function is not necessarily to specify the origin or manufacture of a good, but rather to symbolize the domestic goodwill of the domestic mark holder so that the consuming public may rely with an expectation of consistency on the domestic reputation earned for the mark by its owner, and the owner of the mark may be confident that his goodwill and reputation (the value of the mark) will not be injured through use of the mark by others in domestic commerce.”
Looking closely on the judicial history of the Bourjois case we can see reasoning behind such development. This case was brought by A. Bourjois & Co., Inc., against Anna Katzel in the first instance to the District Court of the United States for the Southern District of New York.
A. Bourjois & Co. has bought the established business in Java face powder including all trademarks (esp. registered trademark ‘Java’) and trade names, as well as the entire good will of this business in the United States. It also acquired the exclusive right to manufacture and sell all cosmetic products made by the French concern of A. Bourjois & Cie. in the United States. Moreover, due to its successful business methods and extensive advertising A. Bourjois & Co. had not only created a wide market for its products in the United States, but also association in the public mind and excellent business reputation. The defendant, Anna Katzel, was importing the face powder product of A. Bourjois & Cie. in the genuine boxes and packages with attached trademark and labels into the United States.
The court therefore had to answer �whether, because defendant’s box is a genuine article made and sold by the French concern, it can be said to constitute an infringement of the trademarks of plaintiff, when plaintiff is the exclusive owner of these trademarks in the United States.”
The court reasoned that, �defendant’s trademark is genuine, in the sense that it was not spurious at the place of origin, and that no change has been made since it was sold; but it is genuine as matter of law only if defendant has the right to sell within the territory where plaintiff is the exclusive owner of the trademark, and, under the doctrine of the Hanover Star Milling Company, where, also, plaintiff has established a business in the product in connection with the trademark.”
The Circuit Court of Appeals was of a different opinion and reversed by saying: �The importation and sale in the United States of an article made in a foreign country, bearing the trademark under which it is known and sold in the country where made, and also in this country, is not an infringement of the American trademark on the same imported article, though that is owned by a competitor.” The Circuit Court reasoned that �it is quite clear that the defendant could not sell face powder manufactured by her or by any other person than A. Bourjois & Cie. under these trademarks. But the article sold by the plaintiff and covered by its registered trademarks is the face powder actually manufactured by the French firm, imported in bulk and packed here by the plaintiff, which is the precise article imported by the defendant in the French firm’s original boxes and sold here. The question is whether the defendant has not the right to sell this article under the trademarks, which truly indicate its origin. We think she has.” Referring to decisions in Apollinaris Co. v. Scherer (C.C.) 27 Fed. 18; Russian Cement Co. v. Frauenhar, 133 Fed. 518, 66 C.C.A. 500; and Gretsch v. Schoening, 238 Fed. 780, 151 C.C.A. 630, the Circuit Court further elaborated: �The analogy between patents and trademarks is not complete. A patent gives the patentee a monopoly to make, sell, and use and grant to others the right to make, sell, and use the subject patented in the United States for the term of the patent. Hence articles lawfully made, used, and sold in foreign countries cannot be sold in this country if they infringe the patent. Trademarks, on the other hand, are intended to show without any time limit the origin of the goods they mark, so that the owner and the public may be protected against the sale of one man’s goods as the goods of another man. If the goods sold are the genuine goods covered by the trademark, the rights of the owner of the trademark are not infringed.”
Circuit Judge Hough was dissenting from the majority opinion by stating that, �a trademark is primarily a protection to the owner’s business. It is attached to the business, is a part of it, and cannot be detached therefrom; there being no such thing as the transfer of a trademark in gross� If, therefore, the primary function of the trademark is to protect this plaintiff’s business in his own country, it makes no difference at all that the genuine French article is the thing offered by defendant. That genuine article has become an infringement because the business of dealing in that article within the United States is the plaintiff’s business.”
The Supreme Court upheld the opinion that the rights of A. Bourjois & Co. were infringed by stating: �After the sale the French manufacturers could not have come to the United States and have used their old marks in competition with the plaintiff… Ownership of the goods does not carry the right to sell them with a specific mark. It does not necessarily carry the right to sell them at all in a given place. If the goods were patented in the United States a dealer who lawfully bought similar goods abroad from one who had a right to make and sell them there could not sell them in the United States. Boesch v. Gr�ff, 133 U. S. 697, 10 Sup. Ct. 378, 33 L. Ed. 787. The monopoly in that case is more extensive, but we see no sufficient reason for holding that the monopoly of a trademark, so far as it goes, is less complete. It deals with a delicate matter that may be of great value but that easily is destroyed, and therefore should be protected with corresponding care. It is said that the trademark here is that of the French house and truly indicates the origin of the goods. But that is not accurate. It is the trademark of the plaintiff only in the United States and indicates in law, and, it is found, by public understanding, that the goods come from the plaintiff although not made by it. It was sold and could only be sold with the good will of the business that the plaintiff bought.”
Coty v. Prestonettes, Inc., 285 F. 501 (1922), presented slightly diverted issue involving the question of repackaging. Mr. Francois Joseph De Spoturno Coty, manufacturer of perfumes and toilet preparations under the trademarks ‘L’Origan’ and ‘Coty’ was suing Prestonettes, Inc., for offering and selling metal containers with label ‘Coty’s L’Origan Face Powder’ containing a compact of face powder that were not manufactured by the plaintiff, and rebottling and selling bottles of perfume under ‘Coty’s L’Origan’ without permission.
The questions raised in this dispute, whether �the name and trademark of a manufacturer of a delicate, volatile product, like a perfume, can be used without his consent, to sell his rebottled perfume, provided the one who thus rebottles and sells places upon each bottle sold a label bearing his own name and announcing that he is not connected with the original manufacturer of the product, but that the contents are those of the original manufacturer, but independently rebottled by the one whose name the label bears;” and accordingly for a face powder compact, stating �that his compact was independently compounded by him from the compound of the original manufacturer, together with his own binder and stating the percentage of each” were both answered in the negative.
The Circuit Court of Appeals referring to doctrine of Coca-Cola Co. v. Bennett, 238 Fed. 513, 151 C.C.A. 449, held: �When a manufacturer sells an article identified by his name, he gives no implied permission to anybody to do anything to that article which may change or injure its quality and still identify it by his name� The protection of the product in the original bottle and in the original package is of vital importance in such a case as this. The proper bottling of a perfume is essential to retaining its quality. If through carelessness, or ignorance, or economy, the rebottling is not according to the plaintiff’s standards, or some unscrupulous person should adulterate the perfume, irreparable injury to the reputation of the plaintiff’s product would result. In the same way the value of a face powder or other toilet preparation may be seriously impaired by the use of improper containers or by using unsuitable ingredients for binders� All this is applicable to the case under consideration. The plaintiff’s name upon the original bottles of his perfume and upon the original packages of his toilet powders is a guaranty of quality and a means of distinguishing them from any other. Neither the plaintiff nor would be purchasers of his adequately protected if any dealer can take them out of the container and rebottle or repack them in a different container and sell them as the plaintiff’s product. To hold otherwise is to open the door to imposition and fraud, and to practices difficult to detect, and it would impair seriously the value of the trademark.”
The Supreme Court reversed the judgment of the Circuit Court of Appeals as too extensive, as well as granted mostly upon considerations of �the very delicate and volatile nature of the perfume, its easy deterioration, and the opportunities for adulteration.” Quite to the contrary the Supreme Court held: �The defendant of course by virtue of its ownership had a right to compound or change what it bought, to divide either the original or the modified product, and to sell it so divided. The plaintiff could not prevent or complain of its stating the nature of the component parts and the source from which they were derived if it did not use the trademark in doing so� Then what new rights does the trademark confer? It does not confer a right to prohibit the use of the word or words. It is not a copyright. The argument drawn from the language of the Trademark Act does not seem to us to need discussion. A trademark only gives the right to prohibit the use of it so far as to protect the owner’s good will against the sale of another’s product as his.” It further noted that, �if the name Coty were allowed to be printed in different letters from the rest of the inscription dictated by the District Court a casual purchaser might look no further and might be deceived. But when it in no way stands out from the statements of facts that unquestionably the defendant has a right to communicate in some form, we see no reason why it should not be used collaterally, not to indicate the goods, but to say that the trademarked product is a constituent in the article now offered as new and changed. As a general proposition there can be no doubt that the word might be so used.”
These cases were crucial for shaping the doctrine, which is opposing the general view not placing the parallel imports under the property law. Separating domestic goodwill from that of the foreign source, the protection from confusion or deception is emphasized.
B. First Sale Doctrine
The relevant provisions of the Lanham Act applicable to ‘first sale doctrine’ issues are �32(1) and �43(a)(1). Section 32(1) of the Lanham Act in its pertinent part provides as follows:
�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; or
(b) reproduce, counterfeit, copy or colorably imitate a registered mark and apply such reproduction, counterfeit, copy, or colorable imitation to labels, signs, prints, packages, wrappers, receptacles or advertisements intended to be used in commerce upon or in connection with the sale, offering for sale, distribution, or advertising of 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 by the registrant.”
Section 43 of the Lanham Act, covering false designations of origin and false descriptions, in its respective part guarantees:
�(a) Civil action.
(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 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
(B) in commercial advertising or promotion, misrepresents the nature, characteristics, qualities, or geographic origin of his or her or another’s person 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.”
1. First Sale Exhaustion and the Distribution Control
Following the decision in Prestonettes, the principle limiting producer rights to control distribution of its trademarked products after the first sale was consistently observed by the courts and resale by the first purchaser of the original article was no longer considered neither trademark infringement nor unfair competition.
The attempt to extend the control of the distribution beyond the first sale of a product well provides the case of Sebastian International, Inc. v. Longs Drug Stores Corporation, 53 F.3d 1073 (1995). Sebastian International, Inc., produces hair care products intended for the distribution via professional salons only. In the attempt to secure this from of distribution, Sebastian established the �Sebastian Collective Membership Program.” Longs Drug Stores Corporation is not a member of this membership program, but presumably due to the infringement of the membership agreement by salon or distributor, Longs is being able to purchase and resell Sebastian products in its stores. Sebastian is claiming misrepresentation by Longs and violation of its rights under the Lanham Act.
�The ‘first sale’ rule provides a sensible and stable accommodation between strong and potentially conflicting forces. By guaranteeing that a product will be identified with its producer, it serves the legitimate purposes of trademark law, the producer gains the good will associated with the quality of its product, and the consumer gets exactly what the consumer bargains for, the genuine product of the particular producer. On the other hand, the ‘first sale’ rule preserves an area for competition by limiting the producer’s power to control the resale of its product� The ‘first sale’ rule is not rendered inapplicable merely because consumers erroneously believe the reseller is affiliated with or authorized by the producer. It is the essence of the ‘first sale’ doctrine that a purchaser who does no more than stock, display, and resell a producer’s product under the producer’s trademark violates no right conferred upon the producer by the Lanham Act. When a purchaser resells a trademarked article under the producer’s trademark, and nothing more, there is no actionable misrepresentation under the statute.”
Referring to the decision in Matrix Essentials v. Emporium Drug Mart, 988 F.2d 587 (5th Cir.1993) where the court have refused to found misrepresentation �in the mere act of putting a manufacturer’s product on one’s shelf and offering it for sale,” the Court in this case has consistently determined Longs conduct as mere act of stocking and reselling of genuine products, having found no case of misrepresentation or violation of Sebastian’s rights under the Lanham Act.
The Court further reasoned that �If Sebastian were correct, a producer could avoid the ‘first sale’ rule and invoke the assistance of the courts in controlling downstream distribution of its trademarked products simply by placing a statement on the container that the product was being resold only by affiliates of the producer.” Since decided to the contrary, Sebastian itself is responsible for any confusion resulting from placing the collective mark of �Sebastian Collective Membership Program” on its products. Despite the consumer confusion possibility in this case, the court clearly found no misrepresentation towards Sebastian. The misrepresentation of Lungs being member of the ‘Sebastian Collective Membership Program’ was more or less interpreted as minor anti-competitive behavior. The court decided that if Sebastian puts label on its products it has to secure this representation, the court will not enforce such declaration.
2. First Sale Exhaustion and Quality Control Argument
The dispute over the quality control standards in Shell Oil Company v. Commercial Petroleum, Inc., 928 F.2d 104, was initiated by Shell Oil Company, after finding Commercial Petroleum, Inc., was using its trademarks ‘Rotella’ and ‘Shell Rottela T’ for reselling bulk Shell oil and not complying with the stringent quality control standards Shell for its products requires. Shell was invoking �unfair competition and trademark infringement in violation of �32(1) and �43(a) of the Lanham Act, because Commercial falsely indicated affiliation, sponsorship or approval by Shell and created a likelihood of confusion among prospective purchasers.”
Commercial objected that, �it resells genuine bulk oil under a true mark,” and the question whether Commercial was reselling ‘genuine’ product inevitably followed.
The Court elaborated in light of the El Greco case by saying that, �a product is not truly ‘genuine’ unless it is manufactured and distributed under quality controls established by the manufacturer� The Lanham Trademark Act affords the trademark holder the right to control the quality of the goods manufactured and sold under its trademark� The actual quality of the goods is irrelevant; it is the control of quality that a trademark holder is entitled to maintain� In order to maintain the genuineness of the bulk oil, the quality standards must be controlled by Shell. It is insufficient that Commercial employed its own quality standards. Without Shell’s enforcement of its quality controls, the bulk oil sold by Commercial was not truly ‘genuine’.”
C. Importation of Gray Market Goods
1. �526 of the Tariff Act
Importation of gray market goods was not regulated until 1922, when in reaction to the Court of Appeals decision in Bourjois the Congress enacted �526 of the Tariff Act. This provision prohibits, except the importation of articles for personal use, to import �into 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 by a person domiciled in the United States� unless written consent of the owner of such trademark is produced at the time of making entry.”
2. K Mart Corporation v. Cartier, Inc., 486 U.S. 281
Issue of correct interpretation of the regulation 19 CFR �133.21 in the light of the aforementioned �526 of the Tariff Act and description of the three general contexts in which the gray market arises adjudicated the Supreme Court in K Mart Corporation v. Cartier, Inc., 486 U.S. 281. The Supreme Court was asked to declare that the Customs Service regulation, 19 CFR �133.21(c)(1)-(3) (1987), is invalid and that the ‘common control’ and ‘authorized use’ exceptions are inconsistent with �526 of the 1930 Tariff Act.
The provision of �133.21 of the Customs Service regulation that was under consideration here provides for restrictions on importations of articles bearing recorded trademarks and trade names and reads as follows:
�(a) Copying or simulating marks or names. Articles of foreign or domestic manufacture bearing a mark or name copying or simulating a recorded trademark or trade name shall be denied entry and are subject to forfeiture as prohibited importations. A ‘copying or simulating’ mark or name is an actual counterfeit of the recorded mark or name or is one which so resembles it as to be likely to cause the public to associate the copying or simulating mark with the recorded mark or name.
(b) Identical trademark. Foreign-made articles bearing a trademark identical with one owned and recorded by a citizen of the United States or a corporation or association created or organized within the United States are subject to seizure and forfeiture as prohibited importations.
(c) Restrictions not applicable. The restrictions set forth in paragraphs (a) and (b) of this section do not apply to imported articles when:
(1) Both the foreign and the U.S. trademark or trade name are owned by the same person or business entity;
(2) The foreign and domestic trademark or trade name owners 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 authorization of the U.S. owner.”
The general contexts in which the gray market arises were described by the Supreme Court to comprehensibly define situations, which the questioned regulations cover in practice. First, the gray market may occur after domestic firm purchases from the independent foreign firm United States trademark, but the foreign firm or any third party could legally import products under this trademark to the United States. Second case involves more complex issues concerning affiliated and subsidiary companies. The domestic firm registers United States trademark for products that are manufactured abroad, and if this domestic firm is a subsidiary of a foreign company, then the gray market is created by a third party importing foreign products under the same trademark in the United States. Another two variations arise when this domestic firm establishes manufacturing subsidiary corporation or unincorporated manufacturing division abroad in order to manufacture the trademarked goods and then import into the United States. The gray market in this case occurs if the trademarked goods are also being sold abroad. In the third case the domestic United States trademark owner authorizes an independent foreign firm to use the trademark, usually under territory limitation and restriction to import into the United States.
Determining consistency with the language of the statute, the Supreme Court concluded that �subsections (c)(1) and (c)(2) of the Customs Service regulation, 19 CFR ��133.21(c)(1) and (c)(2) (1987), are permissible constructions designed to resolve statutory ambiguities.” In other words it allowed blocking the importation in the first case of gray market context as described above and permitted imports in the second case but only when involving subsidiaries. With respect to remaining variations of the second case, the Supreme Court considered possible interpretation of the phrase ‘merchandise of foreign manufacture’ and found the statutory ambiguity suffices to sustain applicability also to these cases by holding: �Given the imprecision in the statute, the agency is entitled to choose any reasonable definition and to interpret the statute to say that goods manufactured by a foreign subsidiary or division of a domestic company are not goods of ‘foreign manufacture’.”
Subsection (c)(3) of the Customs Service regulation was held inconsistent with �526 of the Tariff Act since � this subsection of the regulation denies a domestic trademark holder the power to prohibit the importation of goods made by an independent foreign manufacturer where the domestic trademark holder has authorized the foreign manufacturer to use the trademark.”
3. �42 of the Lanham Act
Section 42 of the Lanham Act dealing with the importation of goods bearing infringing marks or names forbidden provides with respect to explicit statutory exceptions that, �no article of imported merchandise which shall copy or simulate the name of any domestic manufacture, or manufacturer, or trader, or of any manufacturer or trader located in any foreign country which, by treaty, convention, or law affords similar privileges to citizens of the United States, 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.”
4. Lever Brothers Co. v. United States, 877 F.2d 101
Dealing with the importation of goods that under the same trademark materially differ and affiliated exemption in Lever Brothers Co. v. United States, 877 F.2d 101, turned into the interpretation of the �42 of the Lanham Act. As it is evident from the facts of this case, the United States and United Kingdom affiliated firms used the same trademarks ‘Shield’ and ‘Sunlight’ for the same products that were modified to meet different taste and conditions in their countries and comply with the market demand. Following third party unauthorized import of ‘Shield’ and ‘Sunlight’ products from the United Kingdom, Lever requested the Custom Service to bar the further importation to prevent consumer confusion and decline of its United States trademark reputation after appearance of a product that does not fit market needs.  Custom Services referred to 19 C.F.R. �133.21(c)(2), the affiliate exception, since in its view �goods are genuine, and thus neither copy nor simulate a domestic trademarked good, when they bear trademarks valid in their country of origin and the foreign manufacturer is affiliated with the domestic trademark holder. Where the affiliation between producers exists, Customs regards as irrelevant both physical differences in the products and the domestic mark holder’s non-consent to importation.” In other words, where the affiliation between producers exists, Custom Services regarded this relation as automatically defining the foreign goods as genuine. Finding the affiliate exception inconsistent with the provision of �42 of the Lanham Act, the Court interpreted the provision as follows: �Inevitable reading of �42 is that it bars foreign goods bearing a trademark identical to a valid US trademark but physically different, regardless of the trademarks’ genuine character abroad or affiliation between the producing firms. On its face the section appears to aim at deceit and consumer confusion; when identical trademarks have acquired different meanings in different countries, one who imports the foreign version to sell it under that trademark will (in the absence of some specially differentiating feature) cause the confusion Congress sought to avoid. The fact of affiliation between the producers in no way reduces the probability of that confusion; it is certainly not a constructive consent to the importation.”
5. �337 of the Tariff Act
Section 337 of the Tariff Act is dealing with unfair practices in import trade and in its part relevant to trademarks provides that the following practices are considered unlawful:
�(C) The importation into the United States, the sale for importation, or the sale within the United States after importation by the owner, importer, or consignee, of articles that infringe a valid and enforceable United States trademark registered under the Trademark Act of 1946.”
6. SKF USA Inc. v. International Trade Commission, 423 F.3d 1307
SKF USA Inc. v. International Trade Commission, 423 F.3d 1307, provides detailed interpretation of ‘material difference’ between authorized goods and gray market imports. SKF USA Inc., the appellant in this case, sell
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