The U.S. and Japan Differ in Court Analyses of Gray Market Goods, But Yield Same Results

Article Date: Saturday, June 04, 2011

Written By: Lauren Tozzi

"Gray market goods" or "parallel market goods" carry valid U.S. trademarks, but are imported without the U.S. trademark holder's consent. There are several ways in which this may occur. Three common examples include: (1) a fictional company, American Goods, registers a U.S. trademark for widgets made abroad, but a third party resells them in the U.S.; (2) American Goods purchases the rights to a foreign company's trademark, but a third party imports the trademarked goods into the U.S.; and (3) American Goods licenses a foreign company to sell its widgets abroad, but a third party purchases them and resells them into the U.S. Generally speaking, gray market goods increase competition and lead to lower prices for consumers, but companies are displeased when increased competition cuts into their profit margins. Furthermore, these scenarios threaten intellectual property rights, so many countries have devised means of regulating gray market transactions. One way of controlling gray market trading is to legislate against particular types of relationships, while another is to litigate particular relationships based on their potential for harmfulness. A quick comparison of a landmark decision on gray markets in Japan with three critical cases on the same topic in the U.S. suggests that the two legal systems take strikingly different approaches to these issues, but reach the same end results.

Japanese law has taken a permissive approach to parallel importation ever since the Osaka District Court ruled on the Parker Pen cases in 1970. (N. MC. Co. v. Schulyro Trading Co., Feb. 27, 1970, Osaka Dist. Ct., 234 Hanrei Taimuzu (Law Times Reports) 57, reprinted in English in 16 Japanese Annual of International Law 113 (1972)). In its decision, the court analyzed claims of parallel importation under the criminal law theory of "illegal in substance," and employed several factors in its decision refusing to enjoin a third party from importing Parker pens. These factors included whether the goods had a common origin, whether the goods were of the same quality, whether allowing importation would promote competition, whether the third party importer took advantage of the exclusive distributor's advertising, and whether the third party used unfair trade practices. Origin, quality, competition, and unfair trade practices are factors that focus less on the structure of the relationship between the two litigating parties and more on whether the importation of the goods in question will have harmful effects. This multi-factor, harm-based approach in Japanese law is different from the analysis used in U.S. cases K Mart Corp. v. Cartier, Inc., 485 U.S. 176 (1988) ("K Mart"), Quality King Distribs., Inc. v. L'anza Research Int'l., Inc., 523 U.S. 135 (1998) ("Quality King"), and Lever Bros. Co. v. United States, 981 F.2d 1330 (D.C. Cir. 1993) ("Lever Bros.") because American courts view gray markets issues through the lens of various statutes, including the Tariff Act, the Copyright Act, and the Lanham Act. Despite the different analytical approach that American courts employed in the K Mart, Quality King, and B opinions, American courts seem to reach the same decisions that would result from using the Japanese court's multi-factor test.

In K Mart, the Supreme Court of the United States concluded that the Lanham Act prohibits the importation of goods made in a foreign country by a foreign manufacturer, even if the foreign party has a license from a U.S. firm. In essence, the K Mart court prohibited parallel importation based on the fact that the goods were not all coming from the same origin. The Court reached this conclusion by analyzing what practices Congress intended to prohibit when it drafted the Lanham Act. Although this statutory interpretation is a different analytical approach than the multi-factor analysis employed by the Japanese court in the Parker Pen cases, the Supreme Court could have reached the same conclusion if it had employed the multi-factor analysis. Under the multi-factor analysis, parallel importation of goods from different origins would be harmful because the goods could masquerade under the same trademark but be of different quality, and cause the harm of deceiving and confusing consumers.

In Quality King, the Supreme Court took a permissive approach to gray markets, and held that subsequent purchasers of copyrighted items may resell those items under the Copyright Act. The court used statutory interpretation to conclude that the plain meaning of the statute warranted its holding. Although the approach that the Japanese court used in the Parker Pen cases would require a different style of analysis, it would yield the same result as the decision in this case: the goods were of the same quality and origin, thus, there was no risk that consumers would be deceived into purchasing different products sold under the same trademark.

Lastly, in Lever Bros., the D.C. Circuit Court of Appeals interpreted the Lanham Act in a way that would agree with the multi-factor analysis that the Japanese court employed. In Lever Bros., the parent company, Lever Bros., claimed that its British affiliate was infringing its trademarks by importing similar products into the United States. Ordinarily, the U.S. Customs Service recognizes an "affiliate exception," whereby foreign goods bearing U.S. trademarks are not excluded if the trademark owner and importer are parent and subsidiary companies. However, in Lever Bros., the court declined to apply this exception because the goods in question were physically and materially different. The circuit court reasoned that even if the companies using the same trademark were parent and subsidiary, what really mattered was that different goods being sold under the same trademark would confuse consumers. The circuit court's focus on consumer confusion is in line with an approach to gray market issues that mitigates harmful effects even though the court used statutory interpretation to reach its decision.

In sum, the approach employed in the Japanese court is different from the analytical approaches employed in the K Mart, Quality King, and Lever Bros. opinions, yet the holdings in these cases yield the same results as if the American courts had examined the gray market trade relationships with the goal of mitigating harm. In American courts, it remains essential to analyze the facts of a given case under the relevant statutes; however, it may also be worthwhile to consider the practical implications of those facts under the multi-factor analysis that the Japanese court applied in the Parker Pen cases. Instead of simply analyzing the structure of the relationship between the litigating parties, American attorneys should assess whether importation of the goods will have harmful effects.

Lauren Tozzi is a recent graduate from the Wake Forest School of Law.

Portions of this article originally appeared in the Wake Forest Journal of Business and Intellectual Property Law Blog, which can be found at http://ipjournal.law.wfu.edu/blog/.

Views and opinions expressed in articles published herein are the authors' only and are not to be attributed to this newsletter, the section, or the NCBA unless expressly stated. Authors are responsible for the accuracy of all citations and quotations.