Wednesday, February 06, 2008

The Other First Sale

I have been catching up on cases and, frankly, have not seen too much that is particularly interesting.

Here is one to watch for: Gross Kobrick Corp. v. United States, CIT court number 08-0042. The issue is whether Customs and Border Protection properly excluded merchandise and properly refused to permit the importer to segregate admissible from non-admissible merchandise.

The merchandise is compressed remnant sheeting known as "pound goods" sold in bales. I am picturing kids sheets printed with Curious George and Buzz Lightyear, die cut into uniform sizes and compressed into bales for resale. It is not clear to me what one would do with this merchandise, but apparently there is a market for it.

My made up references to cartoon characters is important here. According to the complaint, Customs detained the merchandise on the basis of an alleged violation of a trademark or copyright. But, and this is important, CBP never gave the importer any indication as to what trademark or copyright CBP is trying to protect. Rather, simply CBP asked the importer to get a letter from the rights holder authorizing the importation.

This is, of course, probably impossible. The rights holder generally has no interest in assisting the importation of merchandise bearing its marks where it has nothing to gain. The rights holder, assuming it can be identified, is most likely going to ignore the request. Essentially leaving the importer hanging out to dry.

The problem for the Court is that the importation may well be legal. When a trademark holder freely sells branded merchandise in a foreign country, it is fully compensated for the value of that merchandise. The buyer can (absent contractual restrictions) re-sell that merchandise. In intellectual property circles, that is known as the first sale doctrine and it is what makes garage sales and eBay legal (in most cases). This is also what makes importing genuine gray market goods legal to import in most cases.

Unfortunately, it is almost always impossible for the importer to prove that the merchandise is genuine and gray market (and not materially different from the product in the U.S. market). Customs will ask for proof that the vendor had the right to sell the merchandise to the importer. Often, the vendor is several steps removed from the rights holder. And, as I said above, the rights holder has zero incentive to cooperate. Imaging calling Disney and asking for a letter saying you can import a container load of Mickey ears for which it will not be paid. Often, importers are stuck because Customs has created an insurmountable obstacle.

The situation with copyrights is a little better because CBP will only get involved in the relatively rare circumstance where the imported merchandise was made in violation of the copyright laws. This is because the copyright statute has a first sale exhaustion provision built right into it.

Gross Kobrick has asked the Court to order CBP to release the detained merchandise or to allow it to segregate the allegedly offending merchandise and deal with it separately. It strikes me that the Court has the opportunity to look at the allocation of burdens placed on importers of goods bearing trademarks or copyrights and on Customs in deciding to detain merchandise. Customs needs to keep in mind that the Supreme Court has said that gray market imports are legal imports.

This is going to be very interesting.

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