Trademark owners have relied primarily on three statutes in their attempts to prevent parallel imports (so-called "gray goods") from entering into and/or being sold in the United States--section 526 of the Tariff Act, sections 32, 42 and 43(a) of the Lanham Act and section 602(a) of the Copyright Act. Where the parallel imports have been produced by a company affiliated with the U.S. mark owner, however, courts applying the Tariff and Lanham Act have typically allowed the goods to be imported and sold unless there is a material difference between the foreign and U.S. version of the goods. The Copyright Act, by contrast, has afforded relief in some situations where an aspect of the product or product's packaging is protected by copyright.

I. The Tariff Act

A. Section 526(a)

Section 526(a) of the Tariff Act, 19 U.S.C. §1526(a), provides:

... it shall be unlawful 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.

The statute provides for seizure and forfeiture remedies, id. §1526(b), and for injunctive and monetary relief, id. §1526(c). Unlike trademark infringement remedies under the Lanham Act, there is no requirement to show a likelihood of confusion in order for section 526(a) to be violated.

Congress enacted section 526 in a prompt reaction to the Second Circuit's decision in A. Bourjois & Co. v. Katzel, 275 F. 539 (2d Cir. 1921), rev'd, 260 U.S. 689 (1923). Katzel involved an American company which bought the U.S. business and trademarks (JAVA and BOURJOIS) of a French cosmetics concern. The Second Circuit decision in Katzel rejected a trademark infringement claim by the American owner of the marks against a third party which had purchased goods bearing the marks from the French company and imported them into the U.S. By the time the Supreme Court reversed, Congress had enacted section 526.

B. Customs' Interpretation Of Section 526

By regulation (19 C.F.R. §133.21(c)) the U.S. Customs Service has permitted importation of gray goods in three situations:

  • where both the foreign and U.S. trademark or trade name are owned by the same person or entity;
  • where the foreign and U.S. trademark or trade name owners are parent and subsidiary or subject to common ownership or control; - where the imported goods bear a trademark or trade name applied under authorization of the U.S. owner.

Since these "exceptions" include the situations in which many, if not most, parallel import situations arise, the Customs regulation was the subject of intense lobbying efforts and attack in the courts by U.S. trademark owners, culminating in the Supreme Court's decision in K Mart Corp. v. Cartier, Inc., 486 U.S. 281 (1988).

C. The K Mart Decision

Trademark owners seeking exclusion of parallel imports by Customs under section 526 enjoyed a partial victory and suffered a partial defeat in the K Mart decision. The Court unanimously confirmed that a Katzel-type situation, in which an American company purchases the trademark rights from an independent foreign entity, is covered under section 526. The Customs regulation at issue in K Mart was not to the contrary. Additionally, the Supreme Court (by a 5 to 4 vote) struck down Customs' third exception, i.e. where use of the mark on the imported goods was licensed by the U.S. trademark owner to an unrelated foreign entity, as an unreasonable interpretation of section 526.

The Supreme Court, however, upheld Customs' refusal to apply section 526 where the U.S. and foreign trademark holders are either the same entity or subject to common ownership or control. The end result, therefore, is that Customs will not bar importation of goods under section 526 when the U.S. and foreign trademark owner are the same or affiliated entities.

D. Courts Have Applied Customs' Affiliate Exception In Private Litigation

Although it has been held that Customs' interpretation of section 526 for border enforcement purposes is not necessarily coextensive with remedies a private litigant may obtain under the section, see, e.g., Olympus Corp. v. U.S., 792 F.2d 315 (2d Cir. 1986), cert. denied, 486 U.S. 1042 (1988), courts have tended to adopt the affiliate exception. For example, parallel imports have been permitted in the following cases involving affiliated entities:

  • Weil Ceramics and Glass, Inc. v. Dash, 878 F.2d 659 (3d Cir.), cert. denied, 493 U.S. 853 (1989) (section 526 inapplicable where American trademark owner was owned indirectly by foreign manufacturer of imported LLADRO porcelain).
  • Yamaha Corp. v. ABC Int'l. Traders Corp., 703 F. Supp. 1398 (C.D. Cal. 1988), aff'd mem. in relevant part, rev'd in non-relevant part, 940 F.2d 1537 (9th Cir. 1991) (section 526 inapplicable where imported products were made by Japanese parent of U.S. owner of YAMAHA trademarks).

Examples of non-affiliate cases in which section 526 applied include:

  • Premier Dental Products Co. v. Darby Dental Supply Co., 794 F.2d 850 (3rd Cir.), cert. denied, 479 U.S. 950 (1986) (exclusive U.S. distributor and trademark owner of IMPREGUM for dental impression products manufactured by unrelated German company entitled to obtain preliminary injunction against parallel importer of IMPREGUM products where U.S. distributor had separate goodwill in the mark).
  • U.S. v. Eighty-Nine Bottles of "Eau De Joy", 797 F.2d 767 (9th Cir. 1986) (upheld forfeiture of imported French perfume where U.S. trademark owner and exclusive distributor was not related to French manufacturers of products; independent distributor held not within common control exception).
  • U.S. v. Eighty-Three Rolex Watches, 992 F.2d 508 (5th Cir.), cert. denied, 510 U.S. 991 (1993) (forfeiture of imported ROLEX watches upheld; fact that U.S. distributor was subsidiary of Swiss distributor not relevant since U.S. company was unrelated to Swiss owner of ROLEX mark).

II. The Lanham Act

A. Section 42

  • Section 42 of the Lanham Act, 15 U.S.C. §1124, provides:
... no article of imported merchandise ... which shall copy or simulate a trademark registered in accordance with the provisions of this chapter ... shall be admitted to entry at any customhouse of the United States.

As with section 526 of the Tariff Act, Customs and some courts have adopted the affiliate exception with respect to enforcement of section 42.

  • Affiliate exception upheld, see, e.g., Olympus Corp. v. U.S., supra, (affiliate exception upheld; section 42 does not bar importation of OLYMPUS goods made by Japanese parent of U.S. trademark owner), and applied. See, e.g., Weil Ceramics and Glass, Inc. v. Dash, supra (importation of LLADRO porcelain from Spanish manufacturer affiliated with U.S. trademark owner did not violate section 42); Yamaha Corp. v. ABC Int'l. Traders Corp., supra (parallel imports of YAMAHA products made by Japanese parent of U.S. mark owner did not violate section 42). The reasoning of these cases is that the goods are genuine and thus there is no "copy" or simulation of the mark under section 42.

B. Sections 32 And 43(A)

  • Section 32 of the Lanham Act, 15 U.S.C. §1114, provides liability for unauthorized use in commerce of:
... any reproduction, counterfeit, copy or colorable imitation of a registered mark in connection with the sales, 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 ...
  • Similarly, section 43(a) of the Lanham Act, 15 U.S.C. §1125(a), provides liability for use in commerce:
... of any false designation of origin ... which - (A) is likely to cause confusion, or to cause mistake, or to deceive ...
  • As with respect to section 42, courts have frequently reasoned that imported goods are genuine and thus not a copy etc. of a mark or a false designation of origin where the imported goods are made by an affiliate of the U.S. mark owner. See, e.g., NEC Electronics v. CAL Circuit Abco, 810 F.2d 1506 (9th Cir. 1987), cert. denied, 484 U.S. 851 (1987) (sections 32 and 43(a) inapplicable to importation of NEC chips manufactured by Japanese parent of U.S. owner of NEC trademark because goods were genuine); Weil Ceramics and Glass, Inc. v. Dash, supra (section 32 inapplicable where imported LLADRO porcelain was made by Spanish company affiliated with U.S. trademark owner).

C. Material Difference Exception

  • A more recent trend has created an exception to the affiliate rule where the goods of U.S. and foreign manufacture are materially, physically different. For example, the differences between U.K. and U.S. versions of SHIELD soaps, i.e. differences in lather, smell and deodorants, and versions of SUNLIGHT dishwashing soap, i.e. differences in suds and formulas for use in hard versus soft water, motivated the court to enjoin application of the Customs' affiliate regulation as applied under section 42. Lever Bros. Co. v. U.S., 981 F.2d 1330 (D.C. Cir. 1993). The court rejected the "genuine" argument, reasoning that from the viewpoint of the American consumer, the differences in the U.K. products made them not genuine.
  • As was the case under section 42 in the Lever Bros. case, courts have found gray goods to be infringing under sections 32 and/or 43(a) where material differences exist between the foreign and U.S. versions of the product.Examples of cases finding material differences include:

Societe Des Products Nestle, S.A. v. Casa Helvetia, Inc., 982 F.2d 633 (1st Cir. 1992). The court found that PERUGINA chocolate made in Venezuela under license from Italian company differed from Italian PERUGINA chocolates sold in U.S. in quality control, percentage of milk fat and other ingredients, configuration and packaging. Thus, the court reasoned that importation of the Venezuelan chocolates violated sections 32, 42 and 43(a) because of the likely confusion caused among American consumers.

Original Application Artworks, Inc. v. Granada Electronics, Inc., 816 F.2d 68 (2d Cir.), cert. denied, 484 U.S. 847 (1987) (differences in Spanish CABBAGE PATCH KIDS dolls manufactured under license from U.S. trademark owner from U.S. version of dolls, including Spanish rather than English "adoption papers" and failure to send "birthday" card to purchasers, rendered gray good imports not genuine and their sale a violation of section 32).

  • Not all differences, however, are material. See, e.g. Mavic, Inc. v. Sinclair Imports, Inc., 1994 U.S. Dist. LEXIS 202 (E.D. Pa. 1994) (price differences held not cognizable; inspection, warranty, service and customer service differences found not material).

III. Copyright Act

Copyright protection has afforded an additional weapon in the anti-gray goods arsenal even where imported goods are not materially different from domestic goods and where the affiliate exception may bar relief under trademark or tariff theories. In order to qualify, however, the goods, a part of the goods (such as a fabric design in the case of apparel) or a feature of the packaging of the goods (such as a label) must be copyrightable.

A. Section 602(a)

  • Section 602(a) of the Copyright Act, 17 U.S.C. §602(a) provides:
Importation into the United States, without the authority of the owner of copyright under this title, of copies or phonorecords of a work that have been acquired outside the United States is an infringement of the exclusive right to distribute copies or phonorecords under section 106, actionable under section 501.

The section 106 distribution right referred to is limited by the first sale doctrine of section 109(a) which permits the owner of a "particular copy ... lawfully made under this title" to sell or otherwise dispose of the copy.

The battle over the applicability of section 602(a) to parallel imports has centered on interpretation of the interrelationship between 602(a) and the first sale doctrine, i.e. does the first sale doctrine limit the section 602(a) importation right. Although the reasoning employed has not been uniform, until very recently, courts have found 602(a) applicable where the imported goods are manufactured and sold abroad and inapplicable where the goods are manufactured in the U.S., sold for export, and then reimported. A recent Ninth Circuit decision, however, has created a split in the circuits with regard to the latter situation.

B. Goods Manufactured And Sold Outside U.S.

Examples of success where the goods protected by copyright were manufactured and sold abroad include:

  • Columbia Broadcasting Sys., Inc. v. Scorpio Music Distribs., Inc., 569 F. Supp. 47 (E.D. Pa. 1983), aff'd mem., 738 F.2d 424 (3d Cir. 1984). Owner of U.S. copyright in sound recordings obtained an injunction against sales of Philippine recordings (made under license from foreign parent) which were imported into the U.S. The court reasoned that the first sale doctrine applies only to copies made and sold within the United States because section 109(a)'s language refers to a copy "lawfully made under this title." The 602 importation right was thus not limited on these facts. Additionally, the court indicated that any other interpretation of the first sale doctrine would render the section 602 importation right meaningless.
  • BMG Music v. Perez, 952 F.2d 318 (9th Cir. 1991), cert denied, 505 U.S. 1206 (1992). The Ninth Circuit adopted the reasoning of Scorpio in enjoining defendant record store from importing or selling copyrighted records made abroad. The court distinguished Sebastian Int'l. Inc. (discussed infra) in which the records at issue were manufactured in the U.S. and sold by the U.S. copyright owner for export. The Ninth Circuit expressly declined to express a view of the outcome on the Sebastian facts.
  • Parfums Givenchy, Inc. v. Drug Emporium, Inc., 38 F.3d 477 (9th Cir. 1994), cert. denied, 115 S. Ct. 1315 (1995). The Ninth Circuit affirmed an injunction against sales of AMERIGE fragrance products in packages bearing a copyrighted design owned by the wholly-owned U.S. subsidiary of Parfums Givenchy S.A., a French company. The defendant sold genuine AMERIGE perfume imported from France and argued that the first sale doctrine precluded applicability of section 602(a). The French parent and manufacturer of AMERIGE had assigned the U.S. packaging design copyright to its U.S. subsidiary which was the exclusive U.S. distributor of AMERIGE perfumes imported into the U.S. The Court reasoned that the first sale doctrine applies only to copies legally made and sold in the U.S. The court also explicitly declined importing the affiliate exception from trademark cases. Givenchy represents an example of successfully preventing parallel imports even where there is a parent/subsidiary relationship and where the product sold is the same.

C. Goods Manufactured in U.S. and Sold for Export

The first sale doctrine has been found to limit section 602(a) in the following cases where goods were sold by the U.S. copyright owner for export, and then reimported:

- Cosmair, Inc. v. Dynamite Enterprises, Inc., 226 U.S.P.Q. 344 (S.D. Fla. 1985) (copyrighted variation of polo player design on Ralph Lauren fragrance and cosmetic products did not support issuance of preliminary injunction against reimportation of products; first sale doctrine limits 602(a) when the products are made and sold in U.S., and court had doubt that CIF sales were sales abroad).

- Sebastian Int'l, Inc. v. Consumer Contacts (Pty) Ltd., 847 F.2d 1093 (3d Cir. 1988). Sebastian, which manufactures hair care products, shipped products to a South African company as exclusive distributor in that country. Instead, the company shipped the products back to the U.S. for sale. Although the text of the labels on certain products was copyrightable, the court found that the section 602(a) importation rights were extinguished by the first sale by the U.S. copyright owner. The court reasoned that section 602 does not create a right in addition to the section 106(3) distribution right. Since the distribution right is clearly limited by a first sale, the importation right was also extinguished by that sale.

  • Neutrogena Corp. v. U.S., 7 U.S.P.Q.2d 1900 (D.S.C. 1988). Neutrogena, a personal care product manufacturer, shipped goods to a Hong Kong distributor, and the goods were ultimately reimported into the U.S. Court denied a preliminary injunction against Customs' releasing the goods, reasoning that the first sale doctrine may limit Neutrogena's rights.
  • Summit Technology v. High-Line Medical Instruments, 922 F. Supp. 299 (C.D. Cal 1996). Owner of ophthalmologic system (with copyrightable computer software) could not rely on section 602(a) when systems it sold abroad were reimported as used goods into U.S. because the first sale extinguished its rights.

D. Circuit Conflict Created

The viability of the Givenchy decision in the Ninth Circuit was cast into some doubt by Disenos Artisticos E Industriales, S.A. v. Costco Wholesale Corp., 97 F.3d 377 (9th Cir. 1996). The court noted that burden that would be placed on retailers in determining what imported goods are authorized "gives us pause about whether [plaintiff's] reading of Parfums Givenchy and BMG Music is correct". The court found that authorization by Spanish owner of copyright in LLADRO porcelain to related Spanish manufacturing companies to sell wherever they wanted, even though in fact companies sold only to Spanish parent company, meant importation of porcelain was authorized impliedly by owner of the copyright and thus section 602(a) was inapplicable. See also Denbicare U.S.A. Inc. v. Toys 'R Us, Inc., 84 F.3d 1143 (9th Cir.), cert. denied, 117 S. Ct. 190 (1996) (where U.S. copyright owner had ordered goods from foreign manufacturer which had been shipped to U.S. and held in foreign trade zone pending payment of duties and had consented to sale for distribution outside U.S., first sale doctrine applied because a consented to first sale was made within the U.S., i.e., in the foreign trade zone).

  • The Ninth Circuit, however, recently strengthened and extended the applicability of Givenchy in its decision in L'Anza Research Int'l, Inc. v. Quality King Distributors, 98 F.3d 1109 (9th Cir. 1996). In an explicit rejection of the Third Circuit's Sebastian decision, the Ninth Circuit found that the copyrights in labels for hair care products manufactured in the U.S., sold to a foreign distributor for sale abroad, and then reimported, were infringed. Even goods manufactured in the U.S., if sold for export, can qualify under section 602(a) without application of the first sale doctrine. The court found that any other interpretation would render section 602(a) "meaningless". This section was adopted in response to industry concerns over an inability to control importation of goods. The court noted:
applying the first sale doctrine to actions for unauthorized importation of goods manufactured and first sold abroad would violate [the principle that the copyright owner is entitled to realize the full value of each copy or phonorecord upon its disposition] and defeat Congress' intent, in enacting section 602(a), to expand importation protection for copyright owners so as to avoid circumvention of the distribution right.

There is now a clear conflict between the Third and Ninth Circuits on this point. Future developments in this area are highly likely.

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.