Protecting Against Unauthorized Gray-Market Goods in the Time of COVID-19

8 Min Read By: Paul Tanck, Neal McLaughlin, Darlena Subashi

IN BRIEF

  • The COVID-19 pandemic has provided the potential for unauthorized gray-market goods to flourish in both the short and long term.
  • Given its powerful remedies, practical benefits, and potential to maintain pre-COVID-19 operations, the ITC has shown itself to be a strong and effective partner to protect domestic trademark owners’ rights against unauthorized gray-market importers.

Introduction

The economic shutdowns related to the COVID-19 pandemic (COVID-19) have created both shortages and surpluses in supply chains; in other words, ripe conditions for a surge in unauthorized gray-market goods (products with genuine trademarks sold outside authorized distribution channels). In the short term, for example, shortages and price gouging have inhibited healthcare systems’ and their suppliers’ access to vetted sources of genuine supplies, including for personal protective equipment (PPE) and pharmaceuticals. Although these market conditions may invite the substitution of gray-market goods for genuine ones based on availability, the inherent material differences in gray-market goods can pose serious health risks, often unbeknownst to end users. As another example, in the longer term, retailers may elect to liquidate unsold, out-of-date seasonal inventory, such as apparel, in international markets to mitigate losses, but risk unauthorized gray-market resellers later importing those goods back into the U.S. market to compete with next year’s fashions at a discount.

Although federal and state trademark and unfair competition laws offer protection to trademark holders against the unauthorized resale of gray-market goods, COVID-19-related closures and restrictions of state and federal district courts across the country have all but suspended activity in many of those venues for civil actions. However, owing in part to its relatively quick investigation-resolution timeframe mandates and not needing to empanel juries, the International Trade Commission’s (ITC) potential to maintain its pre-COVID-19 pace of operations adds to its already powerful ability to exclude unauthorized gray-market goods from importation[1] to make the ITC a key resource for trademark holders in today’s environment.

How Has COVID-19 Created the Potential for Gray-Market Problems?

In the short term, COVID-19 has created shortages and price gouging in numerous product categories, from healthcare to daily household essentials to sports and leisure products, as distribution chains adjust to the new “normal” of life in a pandemic. From the earliest days of the pandemic, however, no impact has been as apparent or as impactful as healthcare systems’ and individuals’ inability to access vetted sources of PPE and pharmaceuticals. These shortages and price gouging may tempt healthcare providers and individuals to turn to gray-market goods to fill the gap, but inherent material differences between the goods can pose serious health risks. For example, when third parties purchase gray-market goods and later resell them, there is no way to verify that those third parties have complied with safe storage and handling or restrictions on one-time use. This is particularly important for PPE and pharmaceuticals; dire consequences can result from using poorly handled pharmaceuticals or used N95 masks.

As just one example, 3M has filed multiple suits against companies attempting to sell its N95 masks and other PPE at multiple times the list price, alleging trademark infringement and other claims.[2] Summing up the concerns, one preliminary injunction order obtained by 3M noted that “[t]he public has an interest in avoiding confusion about the source and quality of goods and services” and that “[t]his is especially true during the global COVID-19 pandemic, when consumers, including experienced governmental procurement officials, are relying on the 3M Marks and 3M Slogan to indicate that goods and services offered thereunder originate from 3M, and are of the same quality that consumers have come to expect of the 3M brand.”[3]

In the longer term, large amounts of unsold inventory that accumulated during the shutdowns portends gray-market goods problems for retailers for years to come. For example, with the public staying home and spending less, apparel retailers may find themselves faced with unsold professional, luxury, seasonal, and vacation clothing. This surplus may be liquidated in international markets at steep discounts to mitigate losses. However, even in normal times this practice invites the later unauthorized importation of those goods back into the United States, where they compete at a discount against trademark owners’ latest fashions.

To prevent serious consequences to the public health in the short term, and to protect the trademark holders’ goodwill and ward off dilution and price erosion in the long term, trademark holders must remain vigilant to police and pursue any unauthorized sellers of trademarked goods due to the COVID-19 pandemic.

How Can the ITC Protect against Gray-Market Goods?

Under what is known as the first-sale doctrine, a person who buys a trademarked good may ordinarily resell that product without infringing the mark. However, this doctrine applies only to the resale of genuine goods and does not apply to the unauthorized resale of a trademarked good that is “materially different” from the genuine goods sold by the trademark owner—such a resale is still trademark infringement. Sections 32, 42, and 43 of the Lanham Act allow trademark owners and their exclusive and nonexclusive licensees to stop unauthorized resellers from selling gray-market goods upon showing a material difference between the authorized and unauthorized goods.

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.[4] 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 than in district courts in that 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.

There are also potential advantages to the ITC as an enforcement forum in the COVID-19 environment. First, the ITC has a speedy schedule and time to final determination, which is important when considering the cumulative and continuous loss of goodwill that results from the sale of gray-market goods. The average time to a final decision for 2019 was 14.1 months.[5] The ITC can also grant a form of temporary relief “to the same extent as preliminary injunctions and temporary restraining orders” when the time period until a final determination is only 90 days in most cases and 150 days in “more complicated” cases.[6]

The ITC may also be more suited to maintain its pre-COVID-19 pace of operations than other forums, particularly considering its statutory obligation to conclude section 337 proceedings “at the earliest practicable time.”[7] In fact, a review of investigations that have been instituted since mid-March (Nos. 1192–1202) shows that the target dates have remained on a fairly typical schedule of 15–19 months, showing no significant slowdowns due to COVID-19. For example, in Investigation No. 1200, the respondents proposed that the target date be set for 19 months to allow for flexibility due to COVID-19, and the judge declined, setting the target date for 16 months.[8]

Moreover, because the ITC does not offer jury trials, it has more flexibility in conducting virtual bench trials as well as virtual hearings. Even before the pandemic, the ITC regularly held telephonic hearings and conferences when other courts may have more frequently required in-person attendance. The ITC may also be uniquely prepared to handle remote and alternative formats for trial because it already often uses written witness statements. For example, in Investigation No. 1162, the judge issued a notice and order regarding alternate hearing procedures suggesting that the parties could take depositions of witnesses regarding their written witness statements, and the parties could use that deposition testimony in lieu of live cross-examination. The judge stated that “there is a possibility of conducting the evidentiary hearing without any real-time participation by me at all,” showing the creative solutions the ITC is proposing to keep cases proceeding as quickly as possible.[9] Finally, although the ITC initially suspended in-person hearings, that restriction is set to lift on July 10, 2020.

Overall, the ITC has proven itself to be a speedy and highly adaptable forum. The ITC may be uniquely positioned to help trademark holders end gray-market problems, both generally and in view of the COVID-19 pandemic.

Conclusion

COVID-19 has unfortunately provided the potential for unauthorized gray-market goods to flourish. In the short term, such goods can threaten public health and safety when they affect the supply and quality of PPE and pharmaceuticals. In the long term, trademark holders may be battling against unauthorized gray-market goods sales and damage to their goodwill for years to come. Given its powerful remedies, practical benefits, and potential to maintain pre-COVID-19 operations, the ITC has shown itself to be a strong and effective partner to protect domestic trademark owners’ rights against unauthorized gray-market importers.


[1] See Paul Tanck & Neal McLaughlin, Combating Gray Market Goods: Using the ITC to Solve the Gray Market, Bus. L. Today, July 2, 2019 (explaining that “[t]he International Trade Commission has emerged as the go-to venue in the fight against the importation of gray-market goods”).

[2] Bill Donahue, 3M Sues Amazon Seller Over Fake N95 Masks, Law360, June 8, 2020.

[3] 3M Co. v. Performance Supply, LLC, No. 1:20-cv-02949-LAP (S.D.N.Y. May 4, 2020) (Dkt. 22).

[4] 19 U.S.C. § 1337.

[5] U.S. International Trade Commission, Section 337 Statistics: Average Length of Investigations (last accessed June 9, 2020).

[6] 19 U.S.C. § 1337(e)(2)–(3).

[7] 19 U.S.C. § 1337(b)(1).

[8] In the Matter of Certain Electronic Devices, Inv. No. 337-TA-1200, Order No. 6 (June 17, 2020); id., Joint Discovery Statement, EDIS Doc. No. 712615 (June 12, 2020).

[9] In the Matter of Certain Touch-Controlled Mobile Devices, Inv. No. 337-TA-1162, Order No. 54 (June 5, 2020).

ABOUT THE AUTHORS

Paul Tanck

Paul Tanck is a partner in the Intellectual Property Litigation Group at Alston & Bird LLP.

Neal McLaughlin

Neal McLaughlin is a senior associate in the Intellectual Property Litigation Group at Alston & Bird LLP.

Darlena Subashi

Darlena Subashi is a senior associate in the Intellectual Property Litigation Group at Alston & Bird LLP.

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