A Difference With A Distinction: The Second Circuit Upholds Preliminary Injunction In Parallel Imports Case

twIn Abbott Laboratories, et al. v. H&H Wholesale Services, Inc., et al., the United States Court of Appeals for the Second Circuit affirmed a preliminary injunction issued in a trademark case focused on the parallel importation of diabetes test strips.  One defendant had hoped to overturn the injunction order by arguing that its place in the supply chain shielded it from direct liability for consumer confusion.  The Second Circuit was not persuaded.

Parallel Imports

Parallel imports, sometimes referred to as “gray market” goods, start off as legitimate branded goods produced for and sold in foreign markets.  Because certain goods are less expensive abroad, parallel importers sometimes purchase them in another country at that low price and resell them in the United States for a profit without the authorization of the U.S. brand owner.

This practice is not per se unlawful.  However, goods made for foreign markets often differ from those meant for the United States.  Food items formulated differently to appeal to local tastes, electrical goods manufactured for different power standards, and product packaging tailored to the needs of different regions are but a few examples of differences that may exist.  Differences may also arise when the parallel imports are sold without regard for quality control protocols implemented or utilized by the brand owner.

When such differences are material to a consumer’s purchasing decision, parallel imports can cause harm to consumers and the U.S. brand owner alike. Consumers who buy parallel imports with material differences may mistakenly believe that they are actually goods meant for sale in the United States.  Any subsequent disappointment will reflect negatively on the U.S. brand owner, damaging brand goodwill.  This kind of consumer confusion can give rise to claims for trademark infringement under the Lanham Act.

The Parties and the Goods at Issue   

There are multiple parties to this dispute, but the ones relevant here are plaintiffs Abbott Laboratories and its affiliated companies (collectively, “Abbott”) and defendant H&H Services, Inc. (“H&H”).  Abbott manufactures and markets FreeStyle® diabetes test strips, which are at issue in the case.  The product allows diabetes patients to monitor their current blood glucose level by placing a drop of blood drawn by pin prick onto a test strip inserted into a meter.  H&H is a distributor that imports Abbott’s test strips from abroad and sells them to retailers in the United States.  H&H does not sell Abbott test strips directly to consumers.

The Material Differences 

Normally, the merits of a parallel imports case hinge on whether there are, in fact, material differences between the authorized and unauthorized goods in question.  In this case the parties seem to agree that material differences exist.  While the testing strips sold in the U.S. are actually identical to the strips sold abroad, there are differences in the product packaging.  U.S. consumers that purchased foreign test strips imported by H&H: (1) received information stating that it is permissible to draw blood from test sites on the body not authorized by the FDA; (2) were likely to encounter languages other than English and Spanish; and (3) were not provided a U.S. toll-free number for a U.S. call center for questions and complaints, among other differences.

Purported Supply Chain Defense  

H&H argued to the Second Circuit that the undisputed packaging differences are irrelevant because its customers, which it describes as sophisticated retailers rather than end-user consumers, know the diverted test strips are not authorized for U.S. sale, but want them anyway. H&H claims to expressly inform its retail customers about the different foreign packaging.  These retailers may ultimately sell the unauthorized foreign test strips to consumers in a manner that fosters confusion.  However, H&H maintained that it lacks control over such subsequent transactions and, accordingly, should not be held liable for any ensuing confusion.

Abbott, of course, disagreed, pointed out that distributors are often found to be infringers, and argued that H&H’s position is completely unsupported by precedent.  Abbott also refuted H&H’s factual assertion that its customers willingly purchase diverted foreign test strips.  Abbott had conducted its own test purchase of strips from H&H and, even though Abbott requested only domestic goods, the delivery nonetheless included foreign strips.

What’s Next?

The District Court agreed with Abbott’s arguments, at least on a preliminary basis, and issued an injunction enjoining the defendants from importing, marketing, distributing, or selling the foreign test strips or otherwise using them in commerce.  The Second Circuit’s short summary opinion states that the District Court judge did not abuse her discretion in issuing this relief, but otherwise did not address the merits.

The underlying litigation is still pending.  Abbott has reached settlement with a number of defendants, but H&H remains an active party.  It is clear that the preliminary injunction will remain in force while the case proceeds on the merits until settlement or adjudication.  However, because the Second Circuit did not address the merits of H&H’s supply chain defense, there does not appear to be any impediment to H&H continuing to raise it as the case moves forward.

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