United States: Trademark Rights Vs. Gray Market Drug Imports

The prescriptions drug market is changing. The disparity of prescription drug prices among countries, along with a growing concern about the availability of affordable medicine, has catalyzed the sale of lower-priced drugs outside the authorized distribution channels of branded drug companies. These gray market goods, also known as parallel imports, are goods produced under intellectual property rights held by the owner (or its licensee) for legitimate sale in one market that are then diverted and distributed in a second market without the authorization of the intellectual property rights owner.

The legality and status of these imports varies among jurisdictions. For example, within the European Union parallel imports are prima facie lawful among EU member states. In the United States, federal law and U.S. Food and Drug Administration (FDA) regulations prohibit gray market imports. However, legislation is currently pending that may allow importation from certain overseas markets.¹ Regardless, gray market imports of pharmaceutical products are estimated at more than $1 billion per year in the United States and $7 billion within the European Union with sales expected to increase exponentially around the globe in the coming years.² With the advent of the internet, not only do drug wholesalers and distributors traffic in gray market drugs with impunity, but individuals easily purchase low-cost drugs across borders devoid of any regulatory controls.

With the likely growth of gray market imports in the future, what can intellectual property owners do to control distribution of their products and enforce their valuable rights?

The U.S. trademark statute, the Lanham Act, may offer protection as it prohibits the unauthorized sale of goods bearing a registered trademark where there is a likelihood of confusion, mistake or deception of purchasers.³ While the plain language of the statute does not bar importation of genuine goods, it will preclude unauthorized importation of goods bearing a registered trademark where there is some "material difference" between the foreign gray goods and the authorized domestic goods (see Gamut Trading Co. v. International Trade Commission).⁴ The law concerning what constitutes a "material" difference has evolved over recent years to the benefit of intellectual property holders. Under the recent SKF USA Inc. v. International Trade Commission⁵ decision, the material differences test has expanded to include non-physical differences between genuine and gray market goods—a significant gain for intellectual property owners in combating unauthorized importation and sale of gray market goods.

The purpose of the material difference test is to determine whether the importation of the gray market goods will likely injure the trademark owner’s goodwill. There is no need to protect the consumer against confusion when the imported goods are identical to the goods of the trademark holder. However, where the foreign goods have materially different characteristics, consumers will likely be confused as to the quality and nature of the product bearing the mark, which will in turn erode the goodwill achieved by the U.S. source (see Iberia Foods Corp. v. Rolando Romero, Jr.).⁶ Generally, courts apply a low threshold of materiality, requiring no more than a showing that consumers would likely consider the differences between the foreign and U.S. products to be significant. As consumer preferences are diverse, no definitive list of types of material differences can be compiled, but courts have found differences in quality, composition, packaging and price to be material. In essence, any difference likely to affect a consumer’s perceptions of the desirability of the trademarked goods may qualify. For instance, in Société des Produits Nestlé v. Casa Helvetia, Inc.⁷ the court held that the owner of the U.S. trademark "Perugina" could prevent the importation of "Perugina" chocolate licensed for sale only in Venezuela, as the Venezuelan chocolate differed in a number of ways, including quality control, composition, packaging and price. Similarly, in Martin’s Herend Imports, Inc. v. Diamond & Gem Trading USA⁸ the court found the U.S. trademark holder could prevent the importation of authentic Hungarian "Herend" porcelain that varied in color, pattern or shape from the "Herend" porcelain made for sale in the United States.

In applying the material difference test, courts have not limited the inquiry to solely physical differences. Rather, trademark owners have successfully asserted that differences in the written materials or labeling accompanying the product are "material." In Original Appalachian Artworks v. Granada Electronics,⁹ the court granted an injunction to the U. S. owner of the "Cabbage Patch" trademark against importation of "Cabbage Patch" dolls made and sold abroad under license from the U.S. owner because they were sold with Spanish-language instructions and adoption papers. In Gamut the Federal Circuit went one step further and

upheld a U.S. International Trade Commission (ITC) decision excluding Kubota tractors intended for the Japanese market from importation into the United States. In addition to structural differences and the lack of English-language manuals, the court cited lack of service and maintenance as a material difference. The Gamut court relied upon decisions in which the trademarked goods had physical and non-physical characteristics associated with them, such as Osawa v. B&H Photo.¹⁰ In Osawa the court halted importation of cameras produced outside the United States that had foreign language manuals and were not covered by the service warranty provided to purchasers of U.S.-authorized cameras. Similarly, the court in Fender Musical Instruments Corp. v. Unlimited Music Center, Inc.¹¹ prohibited importation of Japanese guitars that were structurally different and lacked certain services and warranties offered by U.S.-authorized dealers.

With the recent case of SKF USA v. International Trade Commission, the U.S. Courts of Appeals for the Federal Circuit faced an issue of first impression—in order to establish trademark infringement by gray market goods, must the differences between the goods be physical in nature? The court held no, thereby expanding the "material difference" test to the benefit of intellectual property owners. In SKF a manufacturer of ball-bearings sold in both U.S. and foreign markets filed suit in the ITC claiming trademark infringement because the imported ball bearings were "materially different" from those authorized for sale in the United States. Although the U.S. and foreign ball bearings were physically identical, the U.S. bearings came with certain service and technical support, including a "help" hotline for customers. The defendants argued that material differences must be physically manifested in the product or its packaging: the test "compares products, not sellers or the services they offer." The Federal Circuit rejected this argument and stated the lack of technical support for the foreign bearings was a "material difference" under the law. The court reasoned "trademarked goods originating from the trademark owner may have nonphysical characteristics associated with them, including services, such that similar goods lacking those associated characteristics may be believed by consumers to have originated from the trademark owner and, lacking such traits may mislead the consumer and damage the owner’s goodwill."

According to the court, the SKF decision simply makes explicit what was implicit in Gamut—material differences need not be physical in order to establish trademark infringement in gray market cases. However, the Federal Circuit also affirmed the ITC’s determination that "all or substantially all" of the U.S. ball bearings must be accompanied by the post-sale services to show the foreign ball bearings were materially different. Because the evidence in SKF established that 12.6 percent of the U.S.-produced bearings were sold without technical services, SKF did not prevail in blocking the importation of the gray market ball bearings.

Currently the Lanham Act is the intellectual property owner’s most useful defense. A number of recent cases involving veterinary medicines demonstrate that the Lanham Act can be used successfully to block the importation of gray market drug products. In Novartis Animal Health US v. LM Connelly & Sons,¹² the manufacturer of veterinary drug products sold under a number of trademarks in the United States and abroad brought suit against an Australian drug distributor and internet company for selling pet medicines made for the Australian market to U.S. consumers. Relying upon the Lanham Act, Novartis claimed the sale of the trademarked Australian goods would likely cause consumer confusion as the goods were materially different from the U.S. version. For instance, the labeling and package inserts did not contain information mandated by the FDA, such as the requirement that the drug be dispensed only by a licensed veterinarian. In addition a number of the Australian drugs had different formulations, some of which were not approved for use in the United States. The Australian package inserts contained different dosage instructions that relied upon metric unit weights of animals rather than pounds, and emergency customer assistance information valid only in Australia.

On the basis of these differences, the district court granted Novartis Animal Health’s motion for a preliminary injunction finding that U.S. consumers would likely be confused and that Novartis would suffer irreparable harm. Similarly, on the basis of the reasoning in Novartis Animal Health, a number of courts have enjoined the sale of gray market medications in the United States—most often over the internet (e.g., Novartis Animal Health U.S., Inc. v. Abbeyvet Export Ltd.;¹³ Novartis Animal Health U.S., Inc. v. Bianjade Enterprises Pty Ltd.;¹⁴ and Bayer Corp. v. Custom School Frames, LLC¹⁵).

"With the likely growth of gray market imports in the future, what can intellectual property owners do to control distribution of their products and enforce their valuable rights?

In Europe the situation, and hence the strategy for control of gray market goods, is more complicated. The lawfulness of gray imports within the European Union is governed by provisions in the EC Treaty concerned with the "free movement" of goods.¹⁶ These rules mean that once companies have placed a product on the market within the European Union, no restrictions can be imposed on the movement of product from one EU country to another EU country. This rule forms an important bedrock of European Community law.¹⁷

The institutions of the European Community (such as the European Commission) supervise the law relating to the free movement of goods. In practical terms, the European Commission is often suspicious of brand owners’ attempts to prevent parallel imports. Some attempts to control gray imports through written contracts with member-state distributors have been met with investigations and fines under European competition (antitrust) laws.¹⁸ Therefore, it is always advisable to adopt a cautious approach to any new distribution arrangements in Europe and to check carefully and in advance the legal and regulatory issues involved.

However, there is a specific carve-out for trademark rights in the rules relating to the free movement of goods.¹⁹ A proprietor of a national trademark within a member state may assert rights against goods that have been repackaged by a parallel importer and to which the trademark has been re-applied without the trademark owner’s permission. Nonetheless, if a trademark proprietor wishes to exercise rights in this way, it must do so for legitimate reasons connected with the protection of the mark. Put another way, the exercise of trademark rights against a parallel importer must not be an artificial (or disguised) attempt to prevent trade between European member states. If trademark rights are used solely to frustrate parallel trade and not for reasons related to harm caused to a registered trademark, the exercise of those rights may constitute a disguised restriction on trade, which is not allowed under the rules relating to the free movement of goods.

European case law has evolved in a similar fashion to the United States. In recent years the boundaries of what is permissible under trademark law against gray imports have expanded. This is particularly true in the field of pharmaceutical products, where language issues (for example, on drug information leaflets) and differing member state prescription systems in the EU have necessitated special treatment.

The lawfulness of a number of practices adopted by parallel importers of pharmaceutical products has been (and continues to be) litigated in the European courts. One such practice is to "over sticker" boxes of tablets bearing a registered trademark with the name of the parallel importer, with the original writing and the trademark left visible. Another practice is to repackage the drugs completely in boxes designed by the gray market trader on which the trademark has been reproduced. Yet another practice is simply to "re-box" without the trademark and just use the generic name of the product on the new box.

As in the United States, repackaging that leads to an impairment of the goods and/or damage to the reputation of the trademark may provoke claims of trademark infringement.²⁰ However, the precise boundaries of the law remain unclear, and questions such as the extent to which a parallel importer can physically alter the original packaging of a drug product (for example, by over stickering) have still not been conclusively resolved in Europe.

It is possible to discern the following rules from the cases:²¹

• The overriding principle is that a trademark proprietor may rely on its trademark rights to prevent the repackaging of pharmaceutical products, unless the exercise of those rights contributes to artificial partitioning of markets among EU countries.

• The repackaging must not affect the original condition of the product.

• The name of the manufacturer and the name of the importer must be clearly stated on the packaging.

• The repackaging must not damage the reputation of the trademark, i.e., the presentation of the product must not be untidy or of poor quality.

• A parallel importer must give prior notice to the brand owner of an intention to import repackaged product and provide samples, although the precise timeframe for doing this has not been determined.

However, replacement packaging of pharmaceuticals is permissible if it is "objectively necessary" to effectively access the target market; for example, re-boxing is permissible in order to overcome strong consumer resistance to over-stickered boxes bearing foreign language wording. Recent cases have sought to clarify the circumstances in which a gray market trader may maintain repackaging is "necessary." In the case of Upjohn,²² the European Court of Justice decided that repackaging merely to secure a commercial advantage in the market was not a "necessity" in accordance with the rules. In the more recent case of Boehringer,²³ the UK Court of Appeal referred a number of questions on the meaning of "necessity" to the European Court of Justice for clarification, and the court’s decision is expected later this year.²⁴

A number of avenues exist for trademark owners to challenge the importation of gray market pharmaceutical products, but the key is to properly register and maintain trademarks. In order to successfully implement the "material differences" test in the United States, pharmaceutical companies must adopt clear distinctions in the labeling and packaging of products intended for non-U.S. markets. If possible, manufacturing drugs intended for international distribution with different specifications is advisable as any difference in composition has been found to be a material difference. Non-physical differences, such as quality inspection procedures or the availability of after-sale assistance or service, like a customer "hotline," will also support a finding of trademark infringement by the gray market goods in the United States. Further, in light of the SKF decision, a trademark holder can preclude gray market goods that are "materially different" from the U.S. goods only where the different characteristics are evident with "all or substantially all" the U.S. goods.

Duncan Curley, a partner in the Firm’s London office, is experienced in all aspects of IP protection, exploitation and dispute resolution. He represents clients in a wide variety of sectors, including large and small companies, individuals, universities and charities.

Lisa M. Ferri, a partner in the Firm’s New York office, focuses her practice on patent and other complex intellectual property litigation including trademark, unfair competition, trade secret and copyright in a variety of businesses and technologies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.