IP Mall ipmall.info			Wednesday, May 23, 2012

Intellectual Property, Commerce, & Technology

Pierce Law Publications & Papers

Recent Developments in Parallel Importation under U.S. Trademark Law - The New "Lever" Rules - 1999

by Prof. William Hennessey

Introduction

In contrast to the patent right and copyright in the United States, under which the right owner may exclude all others from selling or distributing articles covered by the right, the "trademark right" is merely the right to prevent others from confusing one's customers in the marketplace, and not an exclusive right to sell. As Professor Kitch explained in his ATRIP lecture at the 1995 Annual Meeting in Seattle:

"Strictly speaking, there is no doctrine of exhaustion in American trademark law. This is because American trademark law is based on a tort rather than a property theory. The action for trademark infringement is an action for creating a likelihood of confusion harmful to the plaintiff, not an action for trespassing on the exclusive rights of the trademark owner. The purchaser of a trademark acquires no right in the trademark. However, the courts reach the same functional result on the theory that the purchaser of genuine trademarked goods creates no likelihood of confusion by owning, using, and reselling the goods because they are in fact what they purport to be -- genuine goods whose origin is the owner of the trademark." Edmund W. Kitch "Exhaustion of Intellectual Property: A Perspective from the U.S." (ATRIP 1995) p.21

The right of importation of trademarked goods in the United States is grounded both in the trademark law (called the "Lanham Act") and in the trade law (the "Tariff Act"). Section 526 of the Tariff Act, enacted in 1922, prohibits the importation of trademarked goods without the explicit ("written") consent of the owner. The core of Section 526 (Title 19, U.S. Code, Section 1526) reads:

[I]t 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 a trademark is produced at the time of making entry.

This provision was interpreted rather narrowly by the U.S. Supreme Court in 1988 in the case of K-Mart v. Cartier, 486 U.S. 281 (1988). In that case, the Court addressed the regulations of the Customs Service implementing the statute. Those regulations had prohibited imports only where a domestic firm had purchased the right to register and use the trademark from an independent foreign trademark owner, but allowed importation where the goods were manufactured abroad by a foreign manufacturer affiliated with the U.S. trademark owner or where a foreign licensee was authorized by the U.S. manufacturer to register and use the mark abroad (the "authorized use" exception). The Court upheld the regulation in case 2 above, holding that the Customs Service's refusal to limit imports where both the foreign and the U.S. trademark were owned by the same business entity or where the foreign and domestic trademark owners were parent and subsidiary companies or otherwise subject to "common ownership and control" was a permissible interpretation of the statute. Two of the justices went further to state that in the case of articles sold under the trademark produced abroad by a foreign branch or subsidiary of a U.S. trademark owner, the goods when imported were not of "foreign manufacture" under the statute, and that in the case of articles produced abroad by a U.S. subsidiary of a foreign trademark owner, both the foreign "owner" and its U.S. subsidiary were the same for the purpose of granting consent to import. A majority of the Court struck down the regulation providing an "authorized use" exception from prohibition against importation.

Thus, the Supreme Court read the importation exclusion to apply not only where a U.S. licensee had purchased for value the exclusive rights to the use of the trademark from a foreign trademark owner, but also where a foreign trademark licensee had acquired only the right to use the trademark on the goods outside the U.S. But the decision is still narrow. Since modern global distribution more often involves multinational firms with vertically integrated distribution of trademarked goods, the K-Mart decision was seen as a green light to parallel importation of identical goods.

The Lever Case

Trademark owners who remained unable to prevent importation of "gray market" goods using Section 526 of the Tariff Act after the K-Mart decision then turned to the trademark law to limit importation only to identical goods under section 42 of the Lanham Act. That provision states:

� 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 Act 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.

The year after the K-Mart decision, Section 42 was interpreted by the Court of Appeals for the District of Columbia in the case of Lever Bros. v. United States 877 F.2d 101 (D.C. Cir 1989). Lever Bros. the producer of the domestic goods, was a wholly-owned U.S. subsidiary of Unilever United States, Inc., which was itself a wholly owned subsidiary of the Dutch Unilever N.V. The imported goods were produced by Lever UK, a subsidiary of British Unilever PLC, which was affiliated with Unilever N.V. The marks were identical; however, there were material differences between the products produced by the U.S. subsidiary from those produced by the British subsidiary, because they were tailored to specific national tastes and conditions. The dishwashing detergent produced under the "Sunlight" mark in the U.K. was designed for water with a higher mineral content than that found in the U.S. and did not perform as well in the U.S. as the U.S. "Sunlight" product. The deoderant soap produced under the "Shield" mark in the U.K. performed differently from the U.S. version. There were specific findings of fact that consumers were confused as to the qualities of the products and had complained to the U.S. producer. The Customs Service had relied upon the same regulation as in the K-Mart case to refuse to prohibit importation solely because the two companies were under common ownership and control and the products were "genuine", refusing to consider the consumer confusion, the physical differences between the products or the domestic market-holder's non-consent to importation. The federal district court agreed with that interpretation; however, the federal appeals court held that the Customs Service's interpretation of the statute defeated its purpose and was contrary to its intent. The court focused upon the physical differences between the domestic and imported goods and the "misrepresentation implicit in the use of the U.S. trademark."

The appeals court noted with approval the position of the Customs Service that a trademark owner cannot infringe its own mark, stating: "[i]f a United States trademark holder itself imports goods or licenses another to do so, the markholder's conduct or authorization makes the goods authentic, whether they are better, worse, or the same as the United States markholder's domestic products." But in the case where a third party is doing the importation, the policy arguments were made by the importer that importation should still be allowed and that the trademark owner (or its parent company) should deal with the problem "in the boardroom" (perhaps by adopting different marks in different markets.) The court rejected that argument and the further argument that the burden on the Customs Service in making determinations as to the amount of consumer confusion was too onerous. Responding to the latter assertion, the court stated: "[n]o one is suggesting that Customs assess the degree of consumer confusion or loss of goodwill, only that it distinguish between identical and non-identical goods."

Upon remand, the district court enjoined the Customs Service from excepting prohibition of "genuine" gray marked goods which were "materially and physically different" from the domestic goods. 981 F.2 1330 (D.C. 1993).

The Lever Rules

In response to the injunction, the Customs Service appears to have taken the advice of the trial and appeals courts quite literally. Under the new regulations published on 24 February 1999, importation of goods bearing genuine trademarks into the U.S. may be restricted only if they "physically and materially differ" from articles authorized for sale in the U.S. by the U.S. trademark owner. The nature of the restriction is extremely narrow-not a bar to importation, but merely a requirement that the materially and physically different goods be labeled in accordance with the regulation prior to entry, as follows:

"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." 19 Code of Federal Regulations Section 133.23(b)

Importers whose goods are withheld from release by the Customs Service for failure to include the disclaimer are allowed a period of 30 days to affix the required label. The burden is on the U.S. trademark owner to apply for the labelling requirement; and the application must include a summary of the physical and material differences between the two products "with particularity." Once the Customs Service has decided to impose the labeling requirement on the importer at the request of the U.S. trademark owner, the application is published in the Federal Register and interested parties are allowed to comment.

Conclusion

Two countervailing trends will continue to influence the shape of the law of "exhaustion" of trademark rights in the coming years. First is the phenomenon of global brands. Firms seek both to tailor their products to local interests and to benefit from global advertising. At the same time, firms also seek to build local goodwill in foreign markets by licensing their global marks to independent local distributors, and to exploit markets where their products may command lower prices. Local goodwill and local distribution of global brands also reduces the prevalence of counterfeit goods in developing markets. The local distributor may discover and bring instances of counterfeiting to the attention of enforcement authorities more easily than a foreign trademark owner. Laws should encourage global brand owners to establish independent local distributors without the specter of having such entrepreneurs compete in other markets with the brand owner itself or other local distributors. Under current U.S. law, owners of global brands may continue to develop local goodwill by authorizing independent local distributors (in the U.S. or elsewhere) to market products catering to local tastes without having such local goodwill undercut by a blanket rule requiring international exhaustion. The rule also serves to allow manufacturers to reflect varying notions of product liability in the price of their goods. Licensing of local independent distributors and the creation of local goodwill for global brands are legitimate goals of an intellectual property regime. Protection of local licensing activity between trademark owners and independent entrepreneurs cannot be deemed a means of arbitrary and unjustified discrimination or a disguised restriction on international trade under Article XX of the GATT. In this regard, the U.S. law recognizes the importance of trademark rights as private properties which serve an important public purpose.

A second trend is the globalization of retail services under the aegis of new trade agreements and the development of independent goodwill not by brand owners but by large, well-organized multinational retailers which have significant economies of scale in the purchase and distribution of goods, including marketing and sales over the internet. Notwithstanding the desire of brand owners to control the distribution channels of their famous brands through exclusive shops, they should not be able to use intellectual property laws to prevent the importation of genuine trademarked goods which they themselves have placed into circulation in the global stream of commerce. Where the brand owner has not sold its goodwill, it has retained it. The new regulations put into place in the U.S. recognize the realities of global commerce by allowing for unrestricted parallel importation of goods released into the marketplace anywhere in the world by the brand owner -- even where there are material and physical differences between local and foreign goods and even where currency fluctuations alone create price differentials.

<< Return to Pierce Law Publications & Papers

^ page top ^

Pierce Law IP Mall - www.ipmall.info

2 White Street, Concord, NH 03301
v: 603.228.1541 f: 603.228.2322 w: ipmall.info w: piercelaw.edu e: ipmall@piercelaw.edu


			© IP Mall, 1995-2011. All rights reserved.
Prof. Jon Cavicchi, Site Director Powered by: Sitesurfer Pub li lishing LLC