Parallel Imports: Trademarks, Copyrights, and the Supreme Court

A pending Supreme Court case may affect prevention of parallel imports, which is an important concern for trademark owners who wish to maintain their right to control the sale of goods developed for use in a particular market. Parallel imports, also known as “gray market” goods, are goods bearing a trademark protected in the United States that have been purchased through legal channels abroad and imported for unauthorized sale into the United States.   These goods often can be sold by the unauthorized importer for a profit and, at times, a lower price than the trademarked goods authorized for sale in the United States because of international pricing differences.

It is common for trademark owners to manufacture goods differently for the various global markets in which they sell them, often to satisfy local consumer taste or regulatory requirements. For example, a soft drink sold under the same trademark in the United States and Europe may be made with less sweetener for the European Market to satisfy local taste and without high fructose corn syrup because of regulations against its use. The owner of the soft drink trademark in the United States may wish to prevent beverages manufactured for the European consumer from being sold in the U.S. without authorization.

The good news is that a U.S. trademark owner has tools at their disposal to prevent parallel importation. For example, under U.S. customs regulations, if goods bearing a U.S. registered trademark are brought to the U.S. and are materially different than the U.S. product (such as the less sweet soft drink) the U.S. trademark owner can prevent them from being granted clearance by customs. The bad news, however, is that the unauthorized importer may circumvent the exclusion of the product if they affix a disclaimer to the product warning consumers that their sale is not authorized by the U.S. trademark owner. (See 19 C.F.R. §§ 133.2 to 133.27, available at GPO Access.)

Some trademark owners have found another way to protect themselves from parallel importation – Unites States copyright law. The first sale doctrine of the Copyright Act, 17 U.S.C. §109(a), provides U.S. copyright holders a means to prevent unauthorized sale in the United States of copyrighted material manufactured and first sold abroad. Generally, the owner of a copyright may exercise control over how copies lawfully made under the protection of the Copyright Act may be sold. However, after an authorized sale, the first sale doctrine then allows the subsequent owner of the copyrighted product to sell or dispose of it free from the copyright owner’s control or interference, so long as no unauthorized copies are made.

But how does the owner of a trademarked good like a soft drink use copyright law to avoid parallel imports? By use of a copyrighted design on their product. The Copyright Act, which we think of as protecting things like books, music recordings, movies and television programs, also can protect original designs.   If an original design protected by copyright, such as a logo, is affixed to a commercial product, then the product bearing the design will receive the same protections under the law as the design itself. Importantly, the first sale doctrine of the Copyright Act does not allow for a parallel importer to use a disclaimer in the manner allowed by customs regulations. If copyrighted goods have been manufactured abroad and heretofore only sold abroad, the first sale doctrine of the Copyright Act acts as an absolute bar to unauthorized, parallel importation, at least for now.

On April 19, 2010 the Supreme Court granted certiorari in the case of Costco Wholesale Corporation v. Omega, S.A., No. 08-1423. In this case, the justices will consider whether the first sale doctrine of the Copyright Act should be interpreted to provide a defense for parallel importers bringing into the U.S. copyrighted material manufactured and first sold abroad. If the Court rules that such a defense should be allowed, the means by which copyright owners prevent parallel imports would disappear.

In the lower court case, Omega S.A. v. Costco Wholesale Corp., 541 F.3d 982 (9th Cir. 2008), the Ninth Circuit held that Costco infringed upon Omega’s copyright by selling, without authorization, watches bearing Omega’s copyrighted design which had been manufactured in Switzerland and first sold by authorized distributors outside the United States. The Ninth Circuit ruled that the Copyright Act could not extend beyond United States borders to cover goods manufactured abroad and that a U.S. copyright holder reserved their rights to control the first sale of these goods taking place after domestic importation.

Costco, citing the Supreme Court case Quality King Distributors, Inc. v. L’anza Research International Inc., 523 U.S. 135 (1998), had argued that recognizing the occurrence of sales abroad for the purposes of addressing copyright disputes does not itself raise the issue of extraterritorial application of U.S. law. In Quality King  the Court determined that hair care products bearing a U.S. copyrighted design manufactured in the U.S. and then first sold abroad had received their “first sale” under copyright law and, therefore, the U.S. copyright owner could not prevent their subsequent parallel importation back into the U.S. The important distinction between these two cases is where the goods were manufactured. In Quality King, manufacture took place in the U.S. and in Costco, manufacture took place in Switzerland. Costco wants this distinction to disappear.

Costco had argued that the Supreme Court’s Quality King decision stood for the proposition that recognition of first sales abroad does not raise issues of extraterritorial application of U.S. law. The Ninth Circuit disagreed, holding that while recognition of a foreign sale for the purposes of a factual analysis may not raise extraterritorial issues, applying the Copyright Act to goods manufactured outside the U.S., and therefore outside the reach of the statute, does. In essence, it held that the “first sale” which could be governed by U.S. law, and therefore controlled by the copyright holder, was the importation into the U.S.

Justice Ruth Bader Ginsburg, in her concurrence in Quality King, stated that the Court was contemplating “round-trip” importation of goods made in the U.S., sold abroad, and then brought back to the U.S. She specifically stated that the Court was not considering how the first sale doctrine applied to copyrighted goods first manufactured and sold abroad.   The time, however, has come to consider this very question, and copyright holders who use the first sale doctrine to prevent parallel imports have a lot riding on the answer.

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