Wednesday, December 07, 2005

Customs Does Gucci a Solid

Customs maintains an active enforcement program relating to intellectual property laws. This is the job of the Intellectual Property Rights Branch at headquarters. The job of the IPR branch is to prevent the illegal importation of goods bearing infringing trademarks, trade names, or unauthorized reproductions of copyrighted works. As I mentioned previously, they are also responsible for the enforcement of laws relating to traffic in cultural properties. I have always thought that heading up that branch would be a great job. In law school, I was very interested in intellectual property law and actually went to the trouble of getting an LL.M. in the field. It comes in handy now when clients have IPR related issues come up at the border.

The easy cases for Customs to deal with involve counterfeit merchandise. This is what happened with Gucci (plus Coach and Burberry) at the port of Norfolk. Customs seized a shipment of almost 2,000 boxes of counterfeit handbags, wallets, and backpacks bearing these trademarks. Unfortunately for the importer, the manufacturer was not authorized to apply the trademark and just went ahead and did it. That is counterfeiting. It is illegal. Don't do it. And, if you happen to be looking for merchandise to sell in your shop and get an outrageously good deal on Nike shoes from a seller in Vanuatu or Moldova, ask to see a copy of their agreement with Nike. After that, you are on your own.

Counterfeit cases get tricky is when there is a real dispute over whether the mark is counterfeit or just infringing. To be counterfeit, it has to be essentially identical. It needs to be a simulation of the official mark. Anything less than that is trademark infringement, but not counterfeiting. This matters because the penalties and procedure is different.

The real tricky cases for Customs involve so-called gray market or parallel importation goods. These are legitimate products (i.e., not counterfeits or copy cat products) that the U.S. trademark holder did not want sold in the U.S. Sometimes, they were produced under license in a foreign country exclusively for sale in that country. Another scenario is goods produced in the U.S. that are exported for sale in another market. If the merchandise is purchased abroad and independently imported to the U.S., the officially licensed seller ends up competing against itself and is usually very annoyed. This happens with all sorts of goods but is very common in cosmetics and small electronics.

The reason these cases are tricky is that the courts have generally decided that once a company sells something, it can't control resales because it has been fully compensated through the goods. In other words, when Apple (as a random example) sells an iPod in England, it has been paid exactly what is expected to be paid for that unit. If the new owner figures out that she can ship it to the U.S. and sell it here at a profit, that is her business. Apple, if it wants to prevent that activity, needs to write better contracts with its distributors or deal with its pricing discrepancies. At least that is what the courts have generally held.

But, as with most things in the law, there are exceptions. The main one comes out of a case called Lever Bros. Co. v. United States, 981 F.2d 1330 (D.C. Cir. 1993)(sorry, I can't find a free link). In that case, the D.C. Circuit was asked to determine whether Customs had properly passed a regulation exempting from gray market protection goods imported without the authorization of the U.S. trademark holder where the party that applied the trademark abroad was somehow affiliated with the U.S. trademark holder. That exception was based on the idea that the two related companies should somehow work it out themselves.

In Lever the question involved soap made specifically for the UK market. Across the pond, they have harder water and that are less inclined to smell flowery than is the average American. So, Lever made the soap for the UK market a bit different. That means that when some enterprising person imported the soap to the US and consumers said, "Hey, good deal on my favorite Lever soap," they were bound to be disappointed by the weak lather and lack of flowery smell. Under those circumstances, the Court held, the consumer is not getting what they paid for and Lever is probably being damaged in terms of good will. So, Customs was ordered to seize the merchandise despite the affiliate exception in the regulation.

Now, the issue in all these cases is whether the imported goods are materially different than the goods sold in the foreign market. Things courts have considered materially different include physical characteristics, packaging, labeling and warranties. This can be tricky and might require some arguments for or against depending on whether you are the importer or the rights holder.

One side point, Customs tried to improve protection by creating something called Lever Protection. Under this program, U.S. rights holders can register their products and characteristics with Customs. When a gray market product is imported and the U.S. rights holder has secured Lever Protection from Customs, the goods will be detained unless they are properly marked to indicate that the goods differ from the genuine product intended for U.S. sale. Apparently, only a handful of companies have opted for this protection. Possibly that is because it essentially tells parallel importers how to get materially different products into the country.

Copyrighted works are a whole other deal. Basically, there is no copyright protection for parallel imports. That is, if the goods are not "piratical." But, if their production would have been copyright infringement had it taken place in the U.S., then they can be seized. The real issue in these cases is whether the imported work is infringing.

Class dismissed.

ADDENDUM (12/13/2005):
Here is another article. It involves Nike shoes and Burberry handbags.

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