#11167 - Gray Market Goods - International Law II

Gray Market Goods

1. A gray-market good is a foreign-manufactured good, bearing a valid United States trademark, that is imported without the consent of the United States trademark holder. K Mart Corp. v. Cartier, Inc. (CB 821).

   1. The gray market arises in any of three general contexts:

      1. (1) The prototypical gray-market victim (case 1) is a domestic firm that purchases from an independent foreign firm the rights to register and use the latter's trademark as a United States trademark and to sell its foreign-manufactured products here. Especially where the foreign firm has already registered the trademark in the United States or where the product has already earned a reputation for quality, the right to use that trademark can be very valuable. If the foreign manufacturer could import the trademarked goods and distribute them here, despite having sold the trademark to a domestic firm, the domestic firm would be forced into sharp intrabrand competition involving the very trademark it purchased. Similar intrabrand competition could arise if the foreign manufacturer markets its wares outside the United States, as is often the case, and a third party who purchases them abroad could legally import them. In either event, the parallel importation, if permitted to proceed, would create a gray market that could jeopardize the trademark holder's investment. K Mart Corp. v. Cartier, Inc. (CB 821).

      2. (2) The second context (case 2) is a situation in which a domestic firm registers the United States trademark for goods that are manufactured abroad by an affiliated manufacturer. In its most common variation (case 2a), a foreign firm wishes to control distribution of its wares in this country by incorporating a subsidiary here. The subsidiary then registers under its own name (or the manufacturer assigns to the subsidiary's name) a United States trademark that is identical to its parent's foreign trademark. The parallel importation by a third party who buys the goods abroad (or conceivably even by the affiliated foreign manufacturer itself) creates a gray market. Two other variations on this theme occur when an American-based firm establishes abroad a manufacturing subsidiary corporation (case 2b) or its own unincorporated manufacturing division (case 2c) to produce its United States trademarked goods, and then imports them for domestic distribution. If the trademark holder or its foreign subsidiary sells the trademarked goods abroad, the parallel importation of the goods competes on the gray market with the holder's domestic sales. K Mart Corp. v. Cartier, Inc. (CB 821).

      3. (3) In the third context (case 3), the domestic holder of a United States trademark authorizes an independent foreign manufacturer to use it. Usually the holder sells to the foreign manufacturer an exclusive right to use the trademark in a particular foreign location, but conditions the right on the foreign manufacturer's promise not to import its trademarked goods into the United States. Once again, if the foreign manufacturer or a third party imports into the United States, the foreign-manufactured goods will compete on the gray market with the holder's domestic goods. K Mart Corp. v. Cartier, Inc. (CB 821).

2. The regulations implementing § 526 of the Tariff Act of 1930, do not outright ban all gray-market goods. K Mart Corp. v. Cartier, Inc. (CB 822).

   1. General Rule: The Customs Service regulation now in force provides generally that “[f]oreign-made articles bearing a trademark identical with one owned and recorded by a citizen of the United States or a corporation or association created or organized within the United States are subject to seizure and forfeited as prohibited importations.” K Mart Corp. v. Cartier, Inc. (CB 822).

   2. Exceptions:

      1. (1) “Common-control exception”

         1. 19 C.F.R. § 133.21(c) provides that “[t]he restrictions . . . do not apply to imported articles when:

            1. “(1) Both the foreign and the U.S. trademark or trade name are owned by the same person or business entity; [or]

            2. “(2) The foreign and domestic trademark or trade name owners are parent and subsidiary companies or are otherwise subject to common ownership or control . . . .”

      2. (2) “Authorized-use exception”

         1. 19 C.F.R. § 133.21(c)(3) permits the importation of gray-market goods where “[t]he articles of foreign manufacture bear a recorded trademark or trade name applied under authorization of the U.S. owner.”

            1. BUT, this regulation was struck down in K Mart Corp. v. Cartier, Inc. (CB 823).

   3. Copyright: Gray-Market Goods and The Copyright Act

      1. 17 U.S.C. § 602(a)(1) provides:

         1. “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.”

            1. However, exclusive rights under § 106 are limited rights. Quality King Distrib. (CB 825).

               1. § 106 rights are limited by §§ 107-120.

            2. Therefore, § 602(a)(1) is subject to § 109(a). Quality King Distrib. (CB 825).

               1. 17 U.S.C. § 109(a) provides:

                  1. “Notwithstanding the provisions of section 106 (3), the owner of a...