This year marks the 10th anniversary of the ABA’s publication “Combating gray market goods,” which provided helpful insights on how to use the Lanham Act to protect clients. Since that publication, manufacturers and their distributors have continued to utilize the Lanham Act to protect against the gray market with a particular focus on enforcement at the U.S. International Trade Commission (ITC). As a result, the ITC has emerged as the go-to venue in the fight against the importation of gray-market goods, in part due to its simple in rem jurisdiction, quick schedules, ability to join many respondents, and broad exclusionary powers.
What Is the Gray Market and What Causes It?
Gray-market goods include products with genuine trademarks that are intended for sale and use in markets outside the United States but are imported and sold in the United States without the consent of the trademark owner.
Gray markets exist wherever unauthorized resellers are able to take advantage of pricing disparities and make money by importing goods from cheaper markets into more expensive markets. In our increasingly interconnected world, this kind of activity is becoming easier and more pervasive. Economic growth in less developed and less regulated markets, combined with the exponential boom in internet commerce and online marketplaces, have provided unauthorized resellers with bountiful sources of lower-priced products and open access to customers eager to buy them.
The pricing disparities that enable gray markets arise from numerous inescapable business realities. For example, local competition and currency fluctuations may serve to drive prices lower. At the same time, manufacturers in those markets may take advantage of lower labor and rent costs, fewer labor and environmental regulatory restrictions, lower costs of raw materials, lower taxes, and other considerations that may enable manufacturers to meet the need for lower prices while still maintaining profitability.
How Does the Gray Market Affect Manufacturers and Distributors?
Lost margins are often just the tip of the iceberg. A whole host of harms can follow from gray-market sales, including price erosion when customers in higher-price markets become accustomed to the presence of cheaper gray-market products. However, the effects are much broader than pricing. Products often differ in physical and nonphysical ways from market to market. When customers are initially unaware of these differences and discover them only after their purchase, manufacturers and their authorized distributors may bear the blame, albeit unfairly. For example, customers may be surprised to find that a gray-market product that they purchased has no warranty, was stored improperly, or is not entitled to important software updates. In these circumstances, customers’ dissatisfaction may result in harm to the goodwill associated with the manufacturer and its brand.
Effects of the gray market can also manifest in increased liability risk if, for example, a product recall must be issued, and gray-market customers do not receive recall notices because they did not purchase through authorized channels, or if a product fails in a safety-critical application due to the poor shipping and handling practices of unauthorized resellers. Manufacturers and their distributors also face liability risk in situations when unauthorized gray-market products have labels and safety warnings in a foreign language or that are otherwise unsuited for a particular market. Manufacturers and their distributors also often find themselves in a lose-lose dilemma when unhappy customers learn that their unauthorized gray-market products are not entitled to a warranty or technical support. Do they live with unhappy customers and take the chance that they leave for a competitor, or do they grant exceptions to their policies and expend uncompensated support costs?
How Does the Gray Market Affect Consumers?
Gray markets are not harmful to only manufacturers and distributors. Customers also often (unknowingly) pay a “hidden” price for cheaper gray-market goods. Price is usually not the only difference between genuine goods and their unauthorized gray-market counterparts. For example, products may exhibit physical differences, such as different formulations and composition, product labeling and packaging, instruction manuals, and product age and freshness, as well as differences resulting from the poor quality control in shipping, handling, and storage that is typical of unauthorized resellers. Product differences may also be nonphysical, such as differences in warranty, pre- and post-sale support, recall information, entitlement to software updates, and even applicability of environmental, safety, or supply-chain traceability certifications.
What Steps Can Be Taken to Stop Gray Market Goods?
Under Sections 32, 42, and 43 of the Lanham Act, both trademark owners and their exclusive and nonexclusive licensees may stop unauthorized resellers from selling gray-market goods upon showing a difference between the authorized and unauthorized goods.
Gray marketers hitch a free ride on manufacturers’ goodwill and reputation to have customers believe that the unauthorized goods are the same as the genuine articles, simply at a fraction of the price. When those gray-market goods have physical or nonphysical differences, such as not including the manufacturer’s warranty, courts have found those goods illegal.
Under what is known as the First Sale Doctrine, someone who buys a trademarked good may ordinarily resell that product without infringing the mark. However, this doctrine applies to only the resale of genuine goods and does not apply to the resale of a trademarked good that is “materially different” from the genuine goods sold by the trademark owner.
Trademarks serve to protect consumers from confusion just as much as they do trademark owners from erosion of goodwill. Accordingly, where there is a material difference between a genuine good and a gray-market good, the First Sale Doctrine does not prevent a trademark owner from blocking the resale of those gray-market goods. In evaluating differences between foreign gray-market goods and genuine domestic goods, “courts have applied a low threshold of materiality, requiring no more than showing that consumers would be likely to consider the differences between the foreign and domestic products to be significant when purchasing the product, for such differences would suffice to erode the goodwill of the domestic source.” Gamut Trading Co. v. United States ITC, 200 F.3d 775, 779 (Fed. Cir. 1999). The differences must also be present in “all or substantially all” the authorized goods. SKF USA Inc. v. Int’l Trade Commission, 423 F.3d 1307 (Fed. Cir. 2005). In the case of gray-market goods, confusion is presumed to exist in the presence of even a single material difference between the manufacturer’s genuine goods and unauthorized reseller’s gray-market goods.
Venues Available to Bring a Claim Against Unauthorized Resellers
Trademark infringement claims against unauthorized resellers may be brought in either a U.S. district court or the ITC. In federal district court, trademark owners may recover money damages for past infringement in addition to injunctive relief to try and prevent future infringement. However, because district court remedies are exercisable against only those entities properly brought into the court’s in personam jurisdiction, trademark owners must first identify and effectively serve process on any unauthorized reseller it wishes to stop—a task that may not be practical depending on the size or location of the unauthorized resellers. Unauthorized resellers also may evade actions in a district court by simply changing business names or locations. In many countries throughout the world, and particularly in online marketplaces, such changes are trivial to make yet require substantial investigatory effort to detect. Thus, a district court action to stop unauthorized resellers can devolve into a frustrating game of whack-a-mole in cases involving other than the largest and most deeply rooted infringers.
The ITC solves many of these potential district court issues and provides an alternative to pursue Lanham Act claims against unauthorized resellers. The ITC is empowered by statute to protect American industries from unfair methods of competition and unfair acts in the importation of articles as well as from importation into the United States of articles that infringe a valid and enforceable U.S. trademark. 19 U.S.C. § 1337. In contrast with federal district courts, however, the ITC exercises in rem jurisdiction over imported articles, which enables the ITC to issue general exclusion orders in certain circumstances that block the importation of all infringing articles, regardless of whether importers participate in the ITC’s investigation. In addition, service of process against accused importers is less rigorous—attempted service by regular mail is all that is required. Finally, unlike in district court, one investigation in the ITC can name many different unauthorized reseller respondents, consolidating resources and avoiding unnecessary multiplication of efforts.
The ITC’s available remedies include general exclusion orders against all infringing imports, limited exclusion orders against certain importers, and cease and desist orders against certain importers to prevent the sale of already imported articles. The work of enforcing exclusion orders issued by the ITC is accomplished at ports of entry by Customs and Border Patrol, which works closely with trademark owners to identify and block infringing articles.
In addition to the powerful remedies and simple service of process at the ITC, investigations conducted by the ITC are completed quickly and with a broad scope of permitted discovery. ITC investigations are typically completed within 12 months of institution. In addition, the broad scope of permitted discovery, combined with such a compressed investigatory timeframe and, in some cases, the involvement of a neutral, third-party staff attorney participating in the investigation on behalf of the Office of Unfair Import Investigations (OUII), often results in fewer, less hotly litigated discovery disputes than in typical district court actions.
In addition to these practical benefits, the ITC has proven itself to be a strong protector of domestic trademark owners’ rights against unauthorized gray-market importers. Several recent cases highlight the ITC’s important and effective role.
Recent Gray Market ITC Investigations
The maker of Red Bull energy drinks successfully petitioned the ITC to block unauthorized imports of its drinks sold in foreign markets on the basis of physical differences in formulation and ingredients between those drinks sold in the United States and those sold abroad. Certain Energy Drink Prods., ITC Inv. No. 337-TA-678.
Philip Morris also obtained a general exclusion order against unauthorized importation of Marlboro, Parliament, and Virginia Slims branded cigarettes because the unauthorized imports lacked English-language warning labels. Certain Cigarettes and Packaging Thereof, ITC Inv. No. 337-TA-643.
Most recently, Rockwell Automation, the largest company in the world dedicated to industrial automation, obtained a general exclusion order barring the unauthorized importation of its industrial control products. Certain Industrial Automation Systems and Components Thereof . . ., ITC Inv. No. 337-TA-1074. The ITC found that the existence of various material, nonphysical differences between Rockwell’s genuine goods sold through its authorized distribution network in the United States and those being imported from overseas, combined with strong evidence that importers had the ability to mask their identities and use online marketplaces to pass off gray-market goods as “new,” supported the issuance of the general exclusion order.
The material differences highlighted by the ITC included the gray-market products’ lack of a manufacturer’s warranty and lack of entitlement to pre- and post-sale customer support. The ITC also found that the lack of probable cause investigation and reporting that Rockwell offers its customers of genuine products when their product is returned under warranty to be a material difference in the eyes of consumers. In addition, the ITC noted that purchasers of genuine Rockwell products are notified of important product safety advisories and product notices because their contact information is maintained by Rockwell’s authorized distributors, whereas purchasers of unauthorized gray-market products have no such safety net. Finally, the ITC found that unauthorized gray-market importers of Rockwell’s products did not adhere to the same quality-control protocols that Rockwell’s authorized distributors did for the sale, shipping, handling, installation, and support for and marketing of Rockwell products.
Leveraging these precedents, manufacturers continue to seek protection in the ITC against unauthorized resellers. For example, just last month, Hyundai petitioned the ITC to investigate and block gray-market imports of auto parts that have materially different warranties, quality-control standards, and labeling.
The ITC can be a strong and effective partner in manufacturers’ battles against unauthorized gray-market imports if it is presented with evidence of the differences in those articles from genuine articles. Recent investigations have made it clear that creative analysis and compelling explanation of the importance of those differences are key to a successful campaign to convince the ITC to block harmful gray-market imports at the border. Given a proper understanding of gray-market challenges faced by American manufacturers and their distributors, the ITC has shown itself to be an eager partner in protecting the goodwill of those industries as well as the consumers they serve.