Friday, August 11, 2017

The XYZ Affair and a Quasi-War Over Gray Market Imports (Part I)

Every now and then a case shows up at the Court of International Trade that does not fit into the normal baskets of what tends to happen there. One such case is XYZ Corporation v. United States.

Here is some background. U.S. law says that only the trademark owner or someone authorized by the trademark owner can import products into the United States bearing the mark. That makes sense and it is how the law is usually described. But, it is also incomplete.

The law also provides that once someone buys the physical item bearing the mark, that person can do pretty much what he or she wants with it, including resell it and import it. That is the principal of trademark exhaustion. The idea is that through the authorized sale, the trademark owner has been fully compensated and has no lingering rights to control the further disposition of the product.

That creates an opportunity for entrepreneurs. If a company can find a good deal on shampoo, chocolates, or Mexican cola in some foreign market, it can import the goods into the United States and sell them here at a profit. This is the business model on which many discounters and on-line sellers operate. It is perfectly legal . . . up to a point.

The problem for parallel importers (or "gray market" importers) is that U.S. trademark law still does not allow the use of a trademark in a way that that is likely to cause confusion as to the attributes of the product. Assume you go into your local deep discount shop to buy a bar of Shield soap, because that is what you always buy and you expect it to work they way you like it to work. You see the familiar Shield label, grab a bar, and run home for a shower. Unfortunately, your shower is unsatisfying because the soap does not lather properly and maybe smells a little funny. What gives?

What happened is that you bought a perfectly cromulent bar of soap authorized by Lever Bros., the owners of the Shield trademark. It is just that the particular bar you bought at a steep discount was intended for some other country, not the U.S. It was formulated specifically for consumer preferences and conditions in that country and does not work well in the U.S. Lever Bros. never intended for it to be sold in the U.S. But, they lost control over that bar of soap when it was sold in an authorized channel abroad.

Those facts resulted in the famous Lever Bros. Co v. United States, a 1989 decision on the legality of parallel imports of authentic trademarked products. The upshot of that case is that parallel imports are generally legal. But, if the product is materially different than the product authorized for sale in the United States, then consumers may be deceived as to the nature of what they are buying. Consequently, U.S. trademark holders are permitted to seek the exclusion of imports that bear legitimate trademarks but are nonetheless materially different from the local versions. This is the Lever Rule.

Customs has implemented the Lever Rule in a kind of tricky way. First, it defines "restricted gray market goods" as "foreign-made articles bearing a genuine trademark or trade name identical with or substantially indistinguishable from one owned and recorded [with CBP] by a citizen of the United States or a corporation or association created or organized within the United States and imported without the authorization of the U.S. owner." 19 CFR 133.23(a). I say this is "tricky," because you will note that goods meeting this definition are not actually restricted; they will be prevented from entering the U.S. only in limited circumstances. The qualifiers are important.

Restricted gray market merchandise must have a trademark that was:
  1. Applied by licensee independent of the U.S. trademark owner (and, presumably, not under its control);
  2. Applied by the foreign trademark owner or under its authority, provided that the foreign trademark owner is not the U.S. trademark owner, its parent, its subsidiary, or otherwise under common control or ownership (again, note we are talking about a foreign party not under the control of the U.S. trademark owner); or
  3. Applied by the U.S. trademark owner or someone under its ownership or control but applied to goods that are materially different from the articles authorized for distribution in the U.S.
It's that last bit that we are worried about in this case.

A U.S. trademark owner can submit a request to Customs to exclude genuine but materially different restricted gray market goods. See 19 CFR 133.2(e). This is called Lever Rule Protection. But there is a caveat here. Remember that parallel imports of materially different products are restricted because consumers might be deceived (or at least confused) about what they are getting. The way to fix that is to label the product as not authorized for the U.S. market and materially different from the authorized product. No consumer confusion means the goods can be imported.

I am not 100% certain why companies seek Lever Rule Protection. One consequence is that it tells prospective importers to affix labels to the product to get them through Customs. Materially different but genuine products that are unlabeled are subject to seizure. I suspect that most importers don't know about the labeling option or don't bother to label, which makes the Lever Rule valuable. Also, seeking Lever Protection gets the trademark front and center with CBP for enforcement.

OK, all of that, leads up to the modern, as opposed to the historical, XYZ affair

In this case, Duracell asked for Lever Rule Protection for bulk and retail packaged batteries bearing genuine Duracell marks. Customs, following its regulations, published a notice of that request in the Bulletin on January 25, 2017. On March 22, 2017, CBP announced that it had granted Lever Rule Protection to Duracell but did so without permitting public comment. Customs' rationale was only that it determined the batteries to be materially different than their domestic counterparts.

This did not sit well with some company, which we must assume is a parallel importer of Duracell batteries. For purposes of this litigation, that company has a assumed the nom de guerre "XYZ Corporation." XYZ complained to Customs that restricting imports is a serious matter that affects the rights of third parties who should have an opportunity to comment before CBP takes action. XYZ also noted that the bulk batteries are not, in its estimation, materially different than Duracell's U.S. products. XYZ requested that CBP reconsider. XYZ then sued Customs seeking judicial review of the extension of Lever protection and an injunction preventing CBP from enforcing gray market restrictions on Duracell batteries. 

Shots fired.

Given that I still work for a living, I am going to call that Part I. I will finish this up soon.


Anonymous said...

You know what they say, "A noble spirit embiggens the smallest man."

Larry said...

Cowabunga, a comment.