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Cross-boarder trade and trademark protection

I. Introduction

Parallel imports in today's global economics represent great concern for the producers, who are trying to secure their investments and goodwill. These producers are looking for any available tool to prevent parallel importation and keep control over marketing and distribution of their products. One of the appropriate instruments are intellectual property rights that are incorporated in many forms in each product on the market.[1] In particular, trademarks accompanying the products and creating customer recognition of the product and subsequent identification of the producer evolved into powerful weapon.[2] Trademarks of all the intellectual property rights are subject matter of this paper. In the two following chapters the development of judicial doctrines and legislature with respect the use of trademark as a tool to bar the importation will be introduced for the United States and the European Union. In the fourth chapter the practical implications arising from this issue and fact that the United States and the European Union are major trading partners model situations will be drawn on examples from the practice. Finally, the concluding remarks with respect to regulation under TRIPS and policy issues will be provided.

At this point, the meaning of 'parallel imports' for needs of this paper should be determined. Parallel imports and in the United States' terminology 'gray market goods' are products bearing legitimately affixed trademark[3] that were distributed in a foreign country, or intended for such distribution, but were re-imported without the consent of the trademark owner.[4] Parallel imports may also be of foreign manufacture.[5] Various relations of the trademark owner combining distribution, affiliation and manufacture could be involved and serve as a basis for the subsequent re-importation.

As will be further explained in more detail, the laws on parallel imports are concerned with the exhaustion of rights principle, which set the extent of the protection afforded by trademarks. The exhaustion doctrines not only vary between our respective jurisdictions but also have also substantially changed over the time. While in the European Union before the Community harmonisation individual Member States followed either domestic or international exhaustion, the United States observed unambiguously the international exhaustion. Insert definitions from case law

II. Parallel Importation as Trademark Infringement under United States Law

A. Doctrine developments

The United States case law of parallel importation has been shaped by decisions in the following landmark cases. The initial adherence to the universality principle as apparent among many from the Circuit Court's decision in A. Bourjois & Co., Inc. v. Katzel, 275 F. 539 (1920), “under which U.S. trademark owners holding contracts for the exclusive right to import foreign trademarked goods were held powerless as against others who purchased abroad goods genuinely marked abroad and imported them to the U.S. for sale,"[6] was soon reversed by the Supreme Court. Since then the universality principle yielded the principle of territoriality, which “recognizes that a trademark has a separate legal existence under each country's laws, and that its proper lawful function is not necessarily to specify the origin or manufacture of a good, but rather to symbolize the domestic goodwill of the domestic mark holder so that the consuming public may rely with an expectation of consistency on the domestic reputation earned for the mark by its owner, and the owner of the mark may be confident that his goodwill and reputation (the value of the mark) will not be injured through use of the mark by others in domestic commerce."[7]

Looking closely on the judicial history of the Bourjois case we can see reasoning behind such development. This case was brought by A. Bourjois & Co., Inc., against Anna Katzel in the first instance to the District Court of the United States for the Southern District of New York.[8]

A. Bourjois & Co. has bought the established business in Java face powder including all trademarks (esp. registered trademark 'Java') and trade names, as well as the entire good will of this business in the United States.[9] It also acquired the exclusive right to manufacture and sell all cosmetic products made by the French concern of A. Bourjois & Cie. in the United States.[10] Moreover, due to its successful business methods and extensive advertising A. Bourjois & Co. had not only created a wide market for its products in the United States, but also association in the public mind and excellent business reputation.[11] The defendant, Anna Katzel, was importing the face powder product of A. Bourjois & Cie. in the genuine boxes and packages with attached trademark and labels into the United States.[12]

The court therefore had to answer “whether, because defendant's box is a genuine article made and sold by the French concern, it can be said to constitute an infringement of the trademarks of plaintiff, when plaintiff is the exclusive owner of these trademarks in the United States."[13]

The court reasoned that, “defendant's trademark is genuine, in the sense that it was not spurious at the place of origin, and that no change has been made since it was sold; but it is genuine as matter of law only if defendant has the right to sell within the territory where plaintiff is the exclusive owner of the trademark, and, under the doctrine of the Hanover Star Milling Company,[14] where, also, plaintiff has established a business in the product in connection with the trademark."[15]

The Circuit Court of Appeals was of a different opinion and reversed by saying: “The importation and sale in the United States of an article made in a foreign country, bearing the trademark under which it is known and sold in the country where made, and also in this country, is not an infringement of the American trademark on the same imported article, though that is owned by a competitor."[16] The Circuit Court reasoned that “it is quite clear that the defendant could not sell face powder manufactured by her or by any other person than A. Bourjois & Cie. under these trademarks. But the article sold by the plaintiff and covered by its registered trademarks is the face powder actually manufactured by the French firm, imported in bulk and packed here by the plaintiff, which is the precise article imported by the defendant in the French firm's original boxes and sold here. The question is whether the defendant has not the right to sell this article under the trademarks, which truly indicate its origin. We think she has."[17] Referring to decisions in Apollinaris Co. v. Scherer (C.C.) 27 Fed. 18; Russian Cement Co. v. Frauenhar, 133 Fed. 518, 66 C.C.A. 500; and Gretsch v. Schoening, 238 Fed. 780, 151 C.C.A. 630, the Circuit Court further elaborated: “The analogy between patents and trademarks is not complete. A patent gives the patentee a monopoly to make, sell, and use and grant to others the right to make, sell, and use the subject patented in the United States for the term of the patent. Hence articles lawfully made, used, and sold in foreign countries cannot be sold in this country if they infringe the patent. Trademarks, on the other hand, are intended to show without any time limit the origin of the goods they mark, so that the owner and the public may be protected against the sale of one man's goods as the goods of another man. If the goods sold are the genuine goods covered by the trademark, the rights of the owner of the trademark are not infringed."[18]

Circuit Judge Hough was dissenting from the majority opinion by stating that, “a trademark is primarily a protection to the owner's business. It is attached to the business, is a part of it, and cannot be detached therefrom; there being no such thing as the transfer of a trademark in gross… If, therefore, the primary function of the trademark is to protect this plaintiff's business in his own country, it makes no difference at all that the genuine French article is the thing offered by defendant. That genuine article has become an infringement because the business of dealing in that article within the United States is the plaintiff's business."[19]

The Supreme Court upheld the opinion that the rights of A. Bourjois & Co. were infringed by stating: “After the sale the French manufacturers could not have come to the United States and have used their old marks in competition with the plaintiff... Ownership of the goods does not carry the right to sell them with a specific mark. It does not necessarily carry the right to sell them at all in a given place. If the goods were patented in the United States a dealer who lawfully bought similar goods abroad from one who had a right to make and sell them there could not sell them in the United States. Boesch v. Gräff, 133 U. S. 697, 10 Sup. Ct. 378, 33 L. Ed. 787. The monopoly in that case is more extensive, but we see no sufficient reason for holding that the monopoly of a trademark, so far as it goes, is less complete. It deals with a delicate matter that may be of great value but that easily is destroyed, and therefore should be protected with corresponding care. It is said that the trademark here is that of the French house and truly indicates the origin of the goods. But that is not accurate. It is the trademark of the plaintiff only in the United States and indicates in law, and, it is found, by public understanding, that the goods come from the plaintiff although not made by it. It was sold and could only be sold with the good will of the business that the plaintiff bought."[20]

Coty v. Prestonettes, Inc., 285 F. 501 (1922), presented slightly diverted issue involving the question of repackaging. Mr. Francois Joseph De Spoturno Coty, manufacturer of perfumes and toilet preparations under the trademarks 'L'Origan' and 'Coty' was suing Prestonettes, Inc., for offering and selling metal containers with label 'Coty's L'Origan Face Powder' containing a compact of face powder that were not manufactured by the plaintiff, and rebottling and selling bottles of perfume under 'Coty's L'Origan' without permission.[21]

The questions raised in this dispute, whether “the name and trademark of a manufacturer of a delicate, volatile product, like a perfume, can be used without his consent, to sell his rebottled perfume, provided the one who thus rebottles and sells places upon each bottle sold a label bearing his own name and announcing that he is not connected with the original manufacturer of the product, but that the contents are those of the original manufacturer, but independently rebottled by the one whose name the label bears;"[22] and accordingly for a face powder compact, stating “that his compact was independently compounded by him from the compound of the original manufacturer, together with his own binder and stating the percentage of each"[23] were both answered in the negative.[24]

The Circuit Court of Appeals referring to doctrine of Coca-Cola Co. v. Bennett, 238 Fed. 513, 151 C.C.A. 449, held: “When a manufacturer sells an article identified by his name, he gives no implied permission to anybody to do anything to that article which may change or injure its quality and still identify it by his name… The protection of the product in the original bottle and in the original package is of vital importance in such a case as this. The proper bottling of a perfume is essential to retaining its quality. If through carelessness, or ignorance, or economy, the rebottling is not according to the plaintiff's standards, or some unscrupulous person should adulterate the perfume, irreparable injury to the reputation of the plaintiff's product would result. In the same way the value of a face powder or other toilet preparation may be seriously impaired by the use of improper containers or by using unsuitable ingredients for binders… All this is applicable to the case under consideration. The plaintiff's name upon the original bottles of his perfume and upon the original packages of his toilet powders is a guaranty of quality and a means of distinguishing them from any other. Neither the plaintiff nor would be purchasers of his adequately protected if any dealer can take them out of the container and rebottle or repack them in a different container and sell them as the plaintiff's product. To hold otherwise is to open the door to imposition and fraud, and to practices difficult to detect, and it would impair seriously the value of the trademark."[25]

The Supreme Court reversed the judgment of the Circuit Court of Appeals as too extensive, as well as granted mostly upon considerations of “the very delicate and volatile nature of the perfume, its easy deterioration, and the opportunities for adulteration."[26] Quite to the contrary the Supreme Court held: “The defendant of course by virtue of its ownership had a right to compound or change what it bought, to divide either the original or the modified product, and to sell it so divided. The plaintiff could not prevent or complain of its stating the nature of the component parts and the source from which they were derived if it did not use the trademark in doing so… Then what new rights does the trademark confer? It does not confer a right to prohibit the use of the word or words. It is not a copyright. The argument drawn from the language of the Trademark Act does not seem to us to need discussion. A trademark only gives the right to prohibit the use of it so far as to protect the owner's good will against the sale of another's product as his."[27] It further noted that, “if the name Coty were allowed to be printed in different letters from the rest of the inscription dictated by the District Court a casual purchaser might look no further and might be deceived. But when it in no way stands out from the statements of facts that unquestionably the defendant has a right to communicate in some form, we see no reason why it should not be used collaterally, not to indicate the goods, but to say that the trademarked product is a constituent in the article now offered as new and changed. As a general proposition there can be no doubt that the word might be so used."[28]

These cases were crucial for shaping the doctrine, which is opposing the general view not placing the parallel imports under the property law. Separating domestic goodwill from that of the foreign source, the protection from confusion or deception is emphasized.[29]

B. First Sale Doctrine

The relevant provisions of the Lanham Act applicable to 'first sale doctrine' issues are §32(1) and §43(a)(1). Section 32(1) of the Lanham Act in its pertinent part provides as follows:

“Any person who shall, without the consent of the registrant --

(a) use in commerce any reproduction, counterfeit, copy, or colorable imitation of a registered mark in connection with the sale, offering for sale, distribution, or advertising of any goods or services on or in connection with which such use is likely to cause confusion, or to cause mistake, or to deceive; or

(b) reproduce, counterfeit, copy or colorably imitate a registered mark and apply such reproduction, counterfeit, copy, or colorable imitation to labels, signs, prints, packages, wrappers, receptacles or advertisements intended to be used in commerce upon or in connection with the sale, offering for sale, distribution, or advertising of goods or services on or in connection with which such use is likely to cause confusion, or to cause mistake, or to deceive,

shall be liable in a civil action by the registrant."[30]

Section 43 of the Lanham Act, covering false designations of origin and false descriptions, in its respective part guarantees:

“(a) Civil action.

(1) Any person who, on or in connection with any goods or services, or any container for goods, uses in commerce any word, term, name, symbol, or device, or any combination thereof, or any false designation of origin, false or misleading description of fact, or false or misleading representation of fact, which --

(A) is likely to cause confusion, or to cause mistake, or deceive as to the affiliation, connection, or association of such person with another person, or as to the origin, sponsorship, or approval of his or her goods, services, or commercial activities by another person, or

(B) in commercial advertising or promotion, misrepresents the nature, characteristics, qualities, or geographic origin of his or her or another's person goods, services, or commercial activities,

shall be liable in a civil action by any person who believes that he or she is or is likely to be damaged by such act."[31]

1. First Sale Exhaustion and the Distribution Control

Following the decision in Prestonettes, the principle limiting producer rights to control distribution of its trademarked products after the first sale was consistently observed by the courts and resale by the first purchaser of the original article was no longer considered neither trademark infringement nor unfair competition.[32]

The attempt to extend the control of the distribution beyond the first sale of a product well provides the case of Sebastian International, Inc. v. Longs Drug Stores Corporation, 53 F.3d 1073 (1995). Sebastian International, Inc., produces hair care products intended for the distribution via professional salons only.[33] In the attempt to secure this from of distribution, Sebastian established the “Sebastian Collective Membership Program."[34] Longs Drug Stores Corporation is not a member of this membership program, but presumably due to the infringement of the membership agreement by salon or distributor, Longs is being able to purchase and resell Sebastian products in its stores.[35] Sebastian is claiming misrepresentation by Longs and violation of its rights under the Lanham Act.[36]

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“The 'first sale' rule provides a sensible and stable accommodation between strong and potentially conflicting forces. By guaranteeing that a product will be identified with its producer, it serves the legitimate purposes of trademark law, the producer gains the good will associated with the quality of its product, and the consumer gets exactly what the consumer bargains for, the genuine product of the particular producer. On the other hand, the 'first sale' rule preserves an area for competition by limiting the producer's power to control the resale of its product… The 'first sale' rule is not rendered inapplicable merely because consumers erroneously believe the reseller is affiliated with or authorized by the producer. It is the essence of the 'first sale' doctrine that a purchaser who does no more than stock, display, and resell a producer's product under the producer's trademark violates no right conferred upon the producer by the Lanham Act. When a purchaser resells a trademarked article under the producer's trademark, and nothing more, there is no actionable misrepresentation under the statute."[37]

Referring to the decision in Matrix Essentials v. Emporium Drug Mart, 988 F.2d 587 (5th Cir.1993) where the court have refused to found misrepresentation “in the mere act of putting a manufacturer's product on one's shelf and offering it for sale,"[38] the Court in this case has consistently determined Longs conduct as mere act of stocking and reselling of genuine products, having found no case of misrepresentation or violation of Sebastian's rights under the Lanham Act.[39]

The Court further reasoned that “If Sebastian were correct, a producer could avoid the 'first sale' rule and invoke the assistance of the courts in controlling downstream distribution of its trademarked products simply by placing a statement on the container that the product was being resold only by affiliates of the producer."[40] Since decided to the contrary, Sebastian itself is responsible for any confusion resulting from placing the collective mark of “Sebastian Collective Membership Program" on its products.[41] Despite the consumer confusion possibility in this case, the court clearly found no misrepresentation towards Sebastian. The misrepresentation of Lungs being member of the 'Sebastian Collective Membership Program' was more or less interpreted as minor anti-competitive behavior. The court decided that if Sebastian puts label on its products it has to secure this representation, the court will not enforce such declaration.

2. First Sale Exhaustion and Quality Control Argument

The dispute over the quality control standards in Shell Oil Company v. Commercial Petroleum, Inc., 928 F.2d 104, was initiated by Shell Oil Company, after finding Commercial Petroleum, Inc., was using its trademarks 'Rotella' and 'Shell Rottela T' for reselling bulk Shell oil and not complying with the stringent quality control standards Shell for its products requires.[42] Shell was invoking “unfair competition and trademark infringement in violation of §32(1) and §43(a) of the Lanham Act, because Commercial falsely indicated affiliation, sponsorship or approval by Shell and created a likelihood of confusion among prospective purchasers."[43]

Commercial objected that, “it resells genuine bulk oil under a true mark,"[44] and the question whether Commercial was reselling 'genuine' product inevitably followed.[45]

The Court elaborated in light of the El Greco[46] case by saying that, “a product is not truly 'genuine' unless it is manufactured and distributed under quality controls established by the manufacturer… The Lanham Trademark Act affords the trademark holder the right to control the quality of the goods manufactured and sold under its trademark… The actual quality of the goods is irrelevant; it is the control of quality that a trademark holder is entitled to maintain… In order to maintain the genuineness of the bulk oil, the quality standards must be controlled by Shell. It is insufficient that Commercial employed its own quality standards. Without Shell's enforcement of its quality controls, the bulk oil sold by Commercial was not truly 'genuine'."[47]

C. Importation of Gray Market Goods

1. §526 of the Tariff Act

Importation of gray market goods was not regulated until 1922, when in reaction to the Court of Appeals decision in Bourjois[48] the Congress enacted §526 of the Tariff Act.[49] This provision prohibits, except the importation of articles for personal use, to import “into the United States any merchandise of foreign manufacture if such merchandise, or the label, sign, print, package, wrapper, or receptacle, bears a trademark owned by a citizen of, or by a corporation or association created or organized within, the United States, and registered in the Patent and Trademark Office by a person domiciled in the United States… unless written consent of the owner of such trademark is produced at the time of making entry."[50]

2. K Mart Corporation v. Cartier, Inc., 486 U.S. 281

Issue of correct interpretation of the regulation 19 CFR §133.21 in the light of the aforementioned §526 of the Tariff Act and description of the three general contexts in which the gray market arises adjudicated the Supreme Court in K Mart Corporation v. Cartier, Inc., 486 U.S. 281.[51] The Supreme Court was asked to declare that the Customs Service regulation, 19 CFR §133.21(c)(1)-(3) (1987), is invalid and that the 'common control' and 'authorized use' exceptions are inconsistent with §526 of the 1930 Tariff Act.[52]

The provision of §133.21 of the Customs Service regulation that was under consideration here provides for restrictions on importations of articles bearing recorded trademarks and trade names and reads as follows:

“(a) Copying or simulating marks or names. Articles of foreign or domestic manufacture bearing a mark or name copying or simulating a recorded trademark or trade name shall be denied entry and are subject to forfeiture as prohibited importations. A 'copying or simulating' mark or name is an actual counterfeit of the recorded mark or name or is one which so resembles it as to be likely to cause the public to associate the copying or simulating mark with the recorded mark or name.

(b) Identical trademark. Foreign-made articles bearing a trademark identical with one owned and recorded by a citizen of the United States or a corporation or association created or organized within the United States are subject to seizure and forfeiture as prohibited importations.

(c) Restrictions not applicable. The restrictions set forth in paragraphs (a) and (b) of this section do not apply to imported articles when:

(1) Both the foreign and the U.S. trademark or trade name are owned by the same person or business entity;

(2) The foreign and domestic trademark or trade name owners are parent and subsidiary companies or are otherwise subject to common ownership or control;

(3) The articles of foreign manufacture bear a recorded trademark or trade name applied under authorization of the U.S. owner."[53]

The general contexts in which the gray market arises were described by the Supreme Court to comprehensibly define situations, which the questioned regulations cover in practice. First, the gray market may occur after domestic firm purchases from the independent foreign firm United States trademark, but the foreign firm or any third party could legally import products under this trademark to the United States.[54] Second case involves more complex issues concerning affiliated and subsidiary companies. The domestic firm registers United States trademark for products that are manufactured abroad, and if this domestic firm is a subsidiary of a foreign company, then the gray market is created by a third party importing foreign products under the same trademark in the United States.[55] Another two variations arise when this domestic firm establishes manufacturing subsidiary corporation or unincorporated manufacturing division abroad in order to manufacture the trademarked goods and then import into the United States.[56] The gray market in this case occurs if the trademarked goods are also being sold abroad.[57] In the third case the domestic United States trademark owner authorizes an independent foreign firm to use the trademark, usually under territory limitation and restriction to import into the United States.[58]

Determining consistency with the language of the statute, the Supreme Court concluded that “subsections (c)(1) and (c)(2) of the Customs Service regulation, 19 CFR §§133.21(c)(1) and (c)(2) (1987), are permissible constructions designed to resolve statutory ambiguities."[59] In other words it allowed blocking the importation in the first case of gray market context as described above and permitted imports in the second case but only when involving subsidiaries.[60] With respect to remaining variations of the second case, the Supreme Court considered possible interpretation of the phrase 'merchandise of foreign manufacture' and found the statutory ambiguity suffices to sustain applicability also to these cases by holding: “Given the imprecision in the statute, the agency is entitled to choose any reasonable definition and to interpret the statute to say that goods manufactured by a foreign subsidiary or division of a domestic company are not goods of 'foreign manufacture'."[61]

Subsection (c)(3) of the Customs Service regulation was held inconsistent with §526 of the Tariff Act since “ this subsection of the regulation denies a domestic trademark holder the power to prohibit the importation of goods made by an independent foreign manufacturer where the domestic trademark holder has authorized the foreign manufacturer to use the trademark."[62]

3. §42 of the Lanham Act

Section 42 of the Lanham Act dealing with the importation of goods bearing infringing marks or names forbidden provides with respect to explicit statutory exceptions that, “no article of imported merchandise which shall copy or simulate the name of any domestic manufacture, or manufacturer, or trader, or of any manufacturer or trader located in any foreign country which, by treaty, convention, or law affords similar privileges to citizens of the United States, or which shall copy or simulate a trademark registered in accordance with the provisions of this chapter or shall bear a name or mark calculated to induce the public to believe that the article is manufactured in the United States, or that it is manufactured in any foreign country or locality other than the country or locality in which it is in fact manufactured, shall be admitted to entry at any customhouse of the United States."[63]

4. Lever Brothers Co. v. United States, 877 F.2d 101

Dealing with the importation of goods that under the same trademark materially differ and affiliated exemption in Lever Brothers Co. v. United States, 877 F.2d 101, turned into the interpretation of the §42 of the Lanham Act.[64] As it is evident from the facts of this case, the United States and United Kingdom affiliated firms used the same trademarks 'Shield' and 'Sunlight' for the same products that were modified to meet different taste and conditions in their countries and comply with the market demand.[65] Following third party unauthorized import of 'Shield' and 'Sunlight' products from the United Kingdom, Lever requested the Custom Service to bar the further importation to prevent consumer confusion and decline of its United States trademark reputation after appearance of a product that does not fit market needs. [66] Custom Services referred to 19 C.F.R. §133.21(c)(2), the affiliate exception, since in its view “goods are genuine, and thus neither copy nor simulate a domestic trademarked good, when they bear trademarks valid in their country of origin and the foreign manufacturer is affiliated with the domestic trademark holder. Where the affiliation between producers exists, Customs regards as irrelevant both physical differences in the products and the domestic mark holder's non-consent to importation."[67] In other words, where the affiliation between producers exists, Custom Services regarded this relation as automatically defining the foreign goods as genuine.[68] Finding the affiliate exception inconsistent with the provision of §42 of the Lanham Act, the Court interpreted the provision as follows: “Inevitable reading of §42 is that it bars foreign goods bearing a trademark identical to a valid US trademark but physically different, regardless of the trademarks' genuine character abroad or affiliation between the producing firms. On its face the section appears to aim at deceit and consumer confusion; when identical trademarks have acquired different meanings in different countries, one who imports the foreign version to sell it under that trademark will (in the absence of some specially differentiating feature) cause the confusion Congress sought to avoid. The fact of affiliation between the producers in no way reduces the probability of that confusion; it is certainly not a constructive consent to the importation."[69]

5. §337 of the Tariff Act

Section 337 of the Tariff Act is dealing with unfair practices in import trade and in its part relevant to trademarks provides that the following practices are considered unlawful:

“(C) The importation into the United States, the sale for importation, or the sale within the United States after importation by the owner, importer, or consignee, of articles that infringe a valid and enforceable United States trademark registered under the Trademark Act of 1946."[70]

6. SKF USA Inc. v. International Trade Commission, 423 F.3d 1307

SKF USA Inc. v. International Trade Commission, 423 F.3d 1307, provides detailed interpretation of 'material difference' between authorized goods and gray market imports. SKF USA Inc., the appellant in this case, sells bearings under the 'SKF' trademark at all levels of the market, i.e. to the equipment manufacturers, authorized and non-authorized distributors, and end users. [71] SKF USA Inc. claimed that §337 of the Tariff Act had been violated by the importation of SKF-marked bearings.[72] SKF USA Inc. further alleged that all or substantially all of its bearings are accompanied by the post sale services and therefore likelihood of confusion between SKF USA Inc.'s goods and the gray market goods to the degree of post sale services existed.[73] The United States International Trade Commission (ITC) in its judgment, which SKF USA Inc. appealed, concluded that the post sale services did not accompany sales made via alternate channels in 12.6% of total sales[74] and held that, “all or substantially all of SKF USA's bearings are not predictably and consistently accompanied by post sale services and there was no likelihood of confusion between SKF USA's goods and the gray market goods."[75]

The first issue the Court of Appeal raised was “whether the distinction between domestic goods and gray market goods must be physical in nature in order to satisfy the 'material difference' test."[76] Resolving this issue the court explained that, “physical material differences are not required to establish trademark infringement involving gray market goods. That is because trademarked goods originating from the trademark owner may have nonphysical characteristics associated with them, including services, such that similar goods lacking those associated characteristics may be believed by consumers to have originated from the trademark owner and, lacking such traits, may mislead the consumer and damage the owner's goodwill."[77]

The court followed with the analysis of the material differences between the foreign and domestic products[78] and concluded consistently with the Gamut Trading Co. v. International Trade Commission, 200 F.3d 775 (Fed.Cir.1999)[79] decision that material differences capable to “preclude infringement by gray goods may be physical or nonphysical."[80] Consistently with its analysis the court agreed with the ITC opinion and ruled that, “a plaintiff in a gray market trademark infringement case must establish that all or substantially all of its sales are accompanied by the asserted material difference in order to show that its goods are materially different. If less than 'all or substantially all'[81] of a trademark owner's products possess the material difference, then the trademark owner has placed into the stream of commerce a substantial quantity of goods that are or may be the same or similar to those of the importer, and then there is no material difference… Conversely, then, a trademark owner's argument that consumers would be confused by gray goods lacking an asserted material difference from the authorized goods is inconsistent with the owner's own sale of marked goods also lacking that material difference from its own authorized goods."[82]

III. Parallel Importation as Trademark Infringement under European Union Law

A. Prohibition of quantitative restrictions between Member States

The Treaty Establishing the European Community (ECT) presents among its aims creation of a single market and promotion of harmonious economic activities throughout the Community.[83] According to Article 3 ECT, this shall be accomplished by prohibiting customs duties, quantitative restrictions, and other measures having equivalent effect on the import and export between Member States.[84] Subsequently, the internal market characterized by the abolition of barriers to the free movement of goods between Member States shall be attained.[85] The Article 95 ECT further serves this purpose allowing the Community to adopt measures eliminating future possible obstacles by approximation of provisions laid down by law in Member States, which have as their object the establishment and functioning of the internal market.[86]

The European Court of Justice (ECJ) in its early cases established the doctrine of supremacy of the Community law over a conflicting Member State law,[87] providing foundation for the restriction of differing national intellectual property rights by Community provisions on the free movement of goods.[88]

Ruling on the correlation of the territorial character of intellectual property rights and functioning of the single market, the ECJ had interpreted intellectual property rights in light of Articles 28 to 30 ECT. These provisions intended to prevent barriers to free movement goods read as follows:

“Article 28: Quantitative restrictions on imports and all measures having equivalent effect shall be prohibited between Member States.

Article 29: Quantitative restrictions on exports, and all measures having equivalent effect, shall be prohibited between Member States.

Article 30: The provisions of Articles 28 and 29 shall not preclude prohibitions or restrictions on imports, exports or goods in transit justified on grounds of public morality, public policy or public security; the protection of health and life of humans, animals or plants; the protection of national treasures possessing artistic, historic or archaeological value; or the protection of industrial and commercial property. Such prohibitions or restrictions shall not, however, constitute a means of arbitrary discrimination or a disguised restriction on trade between Member States."[89]

By means of this interpretation, the ECJ established that “an intellectual property rights owner cannot exercise his rights to prevent subsequent circulation of a product that has been placed on the market in the Community by him or with his consent,"[90] and hereby set grounds for the exhaustion of rights doctrine.

B. Exhaustion of rights conferred by trademark

The effect of the exhaustion of rights doctrine with respect to products coming from a third country under an identical mark was first recognized in EMI v. CBS,[91] where the ECJ interpreted exercise of trademark owner right to prevent such importation as not affecting the free movement of goods within the Community and therefore not contravening Article 28 ECT.[92] The ECJ in its opinion recognized that the Community law does not “prohibit the proprietor of a mark in all the member states of the Community from exercising his right in order to prevent the importation of similar products bearing the same mark and coming from a third country."[93] Further, the ECJ made this rule applicable to manufacture and marketing by foreign trademark owner or its subsidiary within the Community.[94]

The Community exhaustion of rights established by ECJ and the exhaustion principles practiced by individual Member States conflicted in Silhouette case, as analyzed below, and called for the needed harmonization.[95]

In the trademark field, the exhaustion of rights doctrine[96] was incorporated into the Directive harmonizing trademark laws of Member States (the Directive).[97] Rights conferred by a trademark are regulated in Article 5(1) that reads as follows:

“The registered trademark shall confer on the proprietor exclusive rights therein. The proprietor shall be entitled to prevent all third parties not having his consent from using in the course of trade:

(a) any sign which is identical with the trademark in relation to goods or services which are identical with those for which the trademark is registered;

(b) any sign where, because of its identity with, or similarity to, the trademark and the identity or similarity of the goods or services covered by the trademark and the sign, there exists a likelihood of confusion on the part of the public; the likelihood of confusion includes the likelihood of association between the sign and the trademark."[98]

Article 5(3) provides non-exhaustive list of practices that may be prohibited by the proprietor under paragraph 1, including, in particular:[99]

“(a) affixing the sign to the goods or to the packaging thereof;

(b) offering the goods, or putting them on the market or stocking them for these purposes under that sign, or offering or supplying services thereunder;

(c) importing or exporting the goods under the sign;

(d) using the sign on business papers and in advertising."[100]

The exhaustion of rights conferred by a trademark doctrine as developed from the jurisprudence of the ECJ is regulated in Article 7(1) and provides as follows:

“The trademark shall not entitle the proprietor to prohibit its use in relation to goods which have been put on the market in the Community under that trademark by the proprietor or with his consent."[101]

Interpreting Article 7(1) of the Directive in Bristol-Myers Squibb & Orrs v. Paranova,[102] the ECJ held that this “provision is framed in terms corresponding to those used by the Court in judgments which, in interpreting Articles 30 and 36 (now Articles 28 and 30) of the Treaty, have recognized in Community law the principle of the exhaustion of the rights conferred by a trademark. It reiterates the case law of the Court to the effect that the owner of a trademark protected by the legislation of a Member State cannot rely on that legislation to prevent the importation or marketing of a product which was put on the market in another Member State by him or with his consent."[103]

1. Silhouette International Schmied v. Hartlauer

In the Silhouette International Schmied GmbH & Co. KG v. Hartlauer Handelsgesellschaft mbH[104] case on re-importation of goods placed on the market outside the Community, the question on the interpretation of Article 7 of the Directive was raised.

This case involved two Austrian companies, producer of the exclusive spectacles Silhouette International Schmied GmbH & Co. KG and low price distributor Hartlauer Handelsgesellschaft mbH.[105] Silhouette marketed its spectacles worldwide under the trademark 'Silhouette', but refused to sell through Hartlauer distribution, believing that would be harmful to its image.[106] In 1995, Silhouette sold 'out of style' spectacle frames to a Bulgarian company under a condition that these would be marketed in Bulgaria or states of the former Soviet Union only.[107] Hartlauer however managed to acquire these spectacle frames and put them back on the market in Austria.[108] Silhouette was seeking an injunction preventing Hartlauer from this re-importation by claiming that it has not exhausted its rights conferred by trademark, because the spectacle frames were not placed on the market in the Community.[109] Hartlauer argued that Silhouette did not make the transaction of the spectacle frames sale subject to any limitation on re-importation.[110]

As already mentioned, Austria was one of the Member States keeping the international exhaustion principle to co-exist with the Community exhaustion principle. The Oberster Gerichtshof in this case said that implementing Article 7 of the Directive into Austrian law, “it was intended to leave the resolution of the question of the validity of the principle of international exhaustion to judicial decision,"[111] but nevertheless asked the ECJ “whether national rules providing for exhaustion of trademark rights in respect of products put on the market outside the EEA under that mark by the proprietor or with his consent are contrary to Article 7(1) of the Directive."[112]

The ECJ decided to clarify the provisions of Article 7 in light of the intended purpose of the Directive, referring to its recitals and emphasizing the intent to harmonize laws of the Member States to ensure the proper functioning of the internal market.[113] Then hold that “Articles 5 to 7 of the Directive must be construed as embodying a complete harmonization of the rules relating to the rights conferred by a trademark. That interpretation, it may be added, is borne out by the fact that Article 5 expressly leaves it open to the Member States to maintain or introduce certain rules specifically defined by the Community legislature. Thus, in accordance with Article 5(2), to which the ninth recital refers, the Member States have the option to grant more extensive protection to trademarks with a reputation."[114] Based on the foregoing considerations the ECJ ruled that “the Directive cannot be interpreted as leaving it open to the Member States to provide in their domestic law for exhaustion of the rights conferred by a trademark in respect of products put on the market in non-member countries."[115] The ECJ further upheld this interpretation as the only capable to safeguard the functioning of the internal market, preventing barriers that would rise if one Member State would provide for international exhaustion while others for the Community one.[116]

It can be therefore concluded that placing a trademarked product on the market outside the Community by the trademark owner or with his consent does not lead to exhaustion of his rights conferred by trademark within Community and this trademark owner is able to prevent importation of the product into the Community.

The outcome of the Silhouette case would be opposite, if the trademark owner had consented to the re-importation into the Community. According to commentaries, if the trademark owner “had expressly consented to such importation, he would not have been able to enforce his rights, because Article 7 specifically provides a defense where the goods have been marketed in the Community with the consent of the proprietor."[117]

2. Interpretation of 'Consent'

The issue of 'consent' was another difficulty that needed to be resolved on the Community level. Especially in cases where the express consent of the trademark owner to the importation was missing and parallel importers argued with consent implied in various circumstances.

The ECJ dealt with the meaning of 'consent' shortly after Silhouette case in Sebago Inc. v. GB-UNIC SA.[118] This case was concerning parallel importation and sale of shoes manufactured in El Salvador in the Community without the consent of the trademark owner.[119] One of the questions referred to the ECJ asked for clarification of conditions under which the consent of the trademark owner may be deemed given.[120] Facing two opposite arguments, first of the parallel importer, that marketing of similar products bearing the same trademark in the Community with the consent of the trademark owner is sufficient to satisfy the requirement of consent, and the other of the trademark owner claiming that its consent has to be given to importation of each consignment.[121] The ECJ concluded that “Article 7(1) of the Directive does not give a direct answer to that question. Nevertheless, the rights conferred by the trademark are exhausted only in respect of the individual items of the product, which have been put on the market with the proprietor's consent in the territory there defined. The proprietor may continue to prohibit the use of the mark in pursuance of the right conferred on him by the Directive in regard to individual items of that product which have been put on the market in that territory without his consent."[122]

3. Zino Davidoff v. Costco

In these joined cases between Zino Davidoff SA, Levi Strauss & Co., Levi Strauss (UK) Ltd and parallel importers of their trademarked goods, the ECJ was asked to clarify the manner in which the consent may be expressed.[123]

In the first case, Zino Davidoff SA enters into exclusive distribution agreement with a trader in Singapore modifying distribution of its trademarked products within defined territory outside the Community and imposing prohibition of resale outside that territory.[124] All Davidoff products bear batch code numbers to demonstrate compliance with the Community requirements on cosmetic products.[125] A & G Imports Ltd acquired these products and imported them into the United Kingdom, having the batch code numbers removed during this process.[126] A & G considered the circumstances in which the Davidoff products were placed on the market in Singapore as implying Davidoff's consent.[127]

In the two other cases, Levi Strauss & Co. as the proprietor of the trademarks 'LEVI'S' and '501', and Levi Strauss (UK) Ltd as the holder of a trademark license in the United Kingdom, wish to preserve a selective distribution system, and refused to sell Levi's 501 jeans to Tesco and Costco for distribution.[128] Tesco and Costco, therefore obtained genuine Levi's 501 jeans from traders who imported them from countries outside the Community.[129] Pointing out that Levis had neither given notice of any restriction to run with the product nor reserved any rights, they were not bound by any contractual restriction and free to import Levi's 501 jeans into the Community.[130]

The national court in all cases with respect to the issue of the 'consent' basically asked, “whether, on a proper construction of Article 7(1) of the Directive, the consent of a trademark proprietor to the marketing within the EEA of products bearing that mark which have previously been placed on the market outside the EEA by that proprietor or with his consent must be express, or whether it may also be implied."[131]

Establishing that the concept of 'consent' to the placing of goods on the Community market must be interpreted uniformly,[132] the ECJ explained:

“In view of its serious effect in extinguishing the exclusive rights of the proprietors of the trademarks in issue in the main proceedings (rights which enable them to control the initial marketing in the EEA), consent must be so expressed that an intention to renounce those rights is unequivocally demonstrated… Such intention will normally be gathered from an express statement of consent. Nevertheless, it is conceivable that consent may, in some cases, be inferred from facts and circumstances prior to, simultaneous with or subsequent to the placing of the goods on the market outside the EEA which, in the view of the national court, unequivocally demonstrate that the proprietor has renounced his rights."[133]

In light of these considerations the ECJ ruled that “the consent of a trademark proprietor to the marketing within the EEA of products bearing that mark which have previously been placed on the market outside the EEA by that proprietor or with his consent may be implied, where it is to be inferred from facts and circumstances prior to, simultaneous with or subsequent to the placing of the goods on the market outside the EEA which, in the view of the national court, unequivocally demonstrate that the proprietor has renounced his right to oppose placing of the goods on the market within the EEA."[134] The ECJ went on by expanding its guidelines by holding that consent must be expressed positively and cannot be inferred from the mere silence or fact that a trademark proprietor has not communicated his opposition to marketing within the Community by placing notice on the product or otherwise.[135] Further, implied consent cannot be inferred from the fact that no contractual reservations were placed while transferring ownership to the products or that law governing the contract permits so.[136] The ECJ also clarified that “A rule of national law which proceeded upon the mere silence of the trademark proprietor would not recognize implied consent but rather deemed consent. This would not meet the need for consent positively expressed required by Community law."[137] Finally, the ECJ imposed the burden of proof on parallel importer alleging consent; it is therefore “not for the trademark proprietor to demonstrate its absence."[138]

The 'implied consent' has to be distinguished from the 'deemed consent' as “the proprietor is deemed to have consented to the subsequent marketing of branded goods in the Community which he has placed on the market in the Community regardless as to whether he has actually consented."[139]

4. 'Consent' determinations

As a result of the ruling in Davidoff case the consent to renounce the rights conferred by trademarks does not have to be in form of express statement. It may be inferred from the facts and circumstances at the time of placing the product on the market outside the Community, as long as it satisfies the condition that “intention to renounce those rights is unequivocally demonstrated."[140] The following cases were determining such intention from legal or economic connection with the trademark owner. In Ideal Standard was the exhaustion of rights doctrine held applicable “where the owner of the trademark in the importing State and the owner of the trademark in the exporting State are the same or where, even if they are separate persons, they are economically linked."[141] This according to the ECJ involved “products put into circulation by the same undertaking, by a licensee, by a parent company, by a subsidiary of the same group, or by an exclusive distributor."[142]

License seems to be very straightforward in this respect. Once the trademark owner grants license to use his trademark to a manufacturer outside the Community, the licensee is free to export trademarked products into the Community.[143] As the ECJ held in Ideal Standard this principle stands on the function of a trademark as an origin guarantor securing that “all goods bearing it have been produced under the control of a single undertaking which is accountable for their quality".[144] It further provided that “the licensor can control the quality of the licensee' s products by including in the contract clauses requiring the licensee to comply with his instructions and giving him the possibility of verifying such compliance,"[145] and stressed that it is the 'possibility of control over the quality of goods' that matters.

Crucial point for other legal arrangements between the trademark owner and unrelated party is presence of the owner's consent with placing his trademarked product on the market in Community by this party.[146] Consent with placing trademarked product on the market outside the Community is not sufficient.[147] For instance, subcontracting manufacturing agreement as such is not sufficient to prove consent with placing manufactured products on the market, also import agreement limited to particular consignment in light of the Sebago case will not cover consent to market all consignments.[148]

The exhaustion of rights of the trademark owner with respect to economically linked parties is drawn from the ruling in Ideal Standard above. Therefore, where the economically linked party placed trademarked product on a market, this linkage unequivocally demonstrates the consent of the trademark owner with such conduct.[149] Similarly to a license the decisive factor in case of economically linked parties “is the possibility of control over the quality of goods, not the actual exercise of that control… if the manufacture of products is decentralized within a group of companies and the subsidiaries in each of the Member States manufacture products whose quality is geared to the particularities of each national market, a national law which enabled one subsidiary of the group to oppose the marketing in the territory of that State of products manufactured by an affiliated company on grounds of those quality differences would also be precluded. Articles 30 and 36 (now 28 and 30) require the group to bear the consequences of its choice."[150]

The economical relationship brings question of practical importance as to the factual ownership of the trademark, in particular, whether subsidiary possessing the trademark is able to oppose marketing of the trademarked product by its parent company.[151] It is more plausible to imagine the parent company forcing the subsidiary to the consent, than subsidiary giving the express consent.[152]

The consent therefore can be inferred where the trademark owner had the power to control the ability of the entity to place trademarked product on the market or contrary where this entity has the ability to control the activities of trademark owner, but as the authorities provide minority cross-shareholding in each other's companies is not sufficient to establish the economic linkage.[153]

More complicated is the assignment, where according to the case law the function of trademark as quality identifier is at stake. The ECJ considered this question in Ideal Standard case by saying that “the consent implicit in any assignment is not the consent required for application of the doctrine of exhaustion of rights. For that, the owner of the right in the importing State must, directly or indirectly, be able to determine the products to which the trademark may be affixed in the exporting State and to control their quality. That power is lost if, by assignment, control over the trademark is surrendered to a third party having no economic link with the assignor."[154] It continued by holding: “free movement of the goods would undermine the essential function of the trademark: consumers would no longer be able to identify for certain the origin of the marked goods and the proprietor of the trademark could be held responsible for the poor quality of goods for which he was in no way accountable."[155]

Since trademarks not only represent reputation of their products, but serves as quality identifier enabling customers to make informed purchase choices, the consumer confusion is likely to occur when two products of different quality are marketed under the same trademark by assignor and assignee.[156]

5. Repackaging and Reaffixing of a trademark

Importing a product with a strong trademark, it may be desirable to keep it even at the expense of costs inferred by repackaging required by national legislation on labeling or consumer preferences.[157] The ECJ was considering permissibility and the extent of repackaging and reaffixing within Articles 28 to 30 before the Directive was adopted in C-102/77 Hoffman-LaRoche & Co. v. Centrafarm [1978] E.C.R. 1139.[158] In this landmark case the following conditions to claim non-infringement were set:

“It is established that the use of the trademark right by the proprietor, having regard to the marketing system which he has adopted, will contribute to the artificial partitioning of the markets between Member States;

  • - it is shown that the repackaging cannot adversely affect the original condition of the product;
  • - the proprietor of the mark receives prior notice of the marketing of the repackaged product; and
  • - it is stated on the new packaging by whom the product has been repackaged.“[159]

Later, in Case 1/81 Pfizer Inc. v. Eurim-Pharm Gmbh [1981] E.C.R. 2913 the ECJ in conformity elaborated that the trademark owner cannot prevent[160] the importer from placing on a market product, where “parallel importer has re-packaged a pharmaceutical product merely by replacing the outer wrapping without touching the internal packaging and by making the trademark affixed by the manufacturer on the internal packaging visible through the new external wrapping,"[161] since “in such circumstances the re-packaging in fact involves no risk of exposing the product to interference or influences which might affect its original condition and the consumer or final user of the product is not liable to be misled as to the origin of the product."[162]

Article 7(2) of the Directive dealing with the question of repackaging and reaffixing of a trademark was enacted to codify this case law and provides that the exhaustion of rights: [163] “shall not apply where there exist legitimate reasons for the proprietor to oppose further commercialization of the goods, especially where the condition of the goods is changed or impaired after they have been put on the market."[164]

Dealing with the interpretation of Article 7(2) of the Directive in C-427/93, C-429/93, C-436/92 Bristol-Myers Squibb & Orrs v. Paranova [1996] ECR I-3457, the ECJ referred to the conditions established in the Hoffman-LaRoche case by saying that previous case law under Article 30 “must be taken as the basis for determining whether, under Article 7(2) of the Directive, a trademark owner may oppose the marketing of repackaged products to which the trademark has been reaffixed."[165] The condition concerning the 'adverse affect on the original condition of the product' was clarified to refer to the 'condition of the product inside the packaging'.[166] The ECJ made the opposition by the trademark owner additionally subject to condition that “the presentation of the repackaged product is liable to damage the reputation of the trademark and of its owner; thus, the packaging must not be defective, of poor quality, or untidy."[167]

The issue of damage to the reputation of the trademark or its owner arises next to defective packaging frequently in connection with advertising and promotion of the products legitimately purchased by vendors through parallel importers.[168] In C-337/95 Parfums Christian Dior v. Evora [1997] ECR I-6013, dealing with selective distribution system established by Parfums Christian Dior and luxurious and prestigious image of the Dior marks, the ECJ had to decide whether marketing of Christian Dior perfumes obtained by means of parallel imports and advertising them in leaflets was capable to harm its luxurious and prestigious reputation.[169] The ECJ provided that “If the right to prohibit the use of his trademark in relation to goods, conferred on the proprietor of a trademark under Article 5 of the Directive, is exhausted once the goods have been put on the market by himself or with his consent, the same applies as regards the right to use the trademark for the purpose of bringing to the public's attention the further commercialization of those goods;"[170] and followed by saying that “if the right to make use of a trademark in order to attract attention to further commercialization were not exhausted in the same way as the right of resale, the latter would be made considerably more difficult and the purpose of the 'exhaustion of rights' rule laid down in Article 7 would thus be undermined."[171] As an exception to this rule, the ECJ allowed the damage done to the reputation of a trademark as a legitimate reason and explained that in cases concerning “prestigious, luxury goods, the reseller must not act unfairly in relation to the legitimate interests of the trademark owner. He must therefore endeavour to prevent his advertising from affecting the value of the trademark by detracting from the allure and prestigious image of the goods in question and from their aura of luxury."[172] Ruling that “the fact that a reseller, who habitually markets articles of the same kind but not necessarily of the same quality, uses for trademarked goods the modes of advertising which are customary in his trade sector, even if they are not the same as those used by the trademark owner himself or by his approved retailers, does not constitute a legitimate reason, within the meaning of Article 7(2) of the Directive, allowing the owner to oppose that advertising, unless it is established that, given the specific circumstances of the case, the use of the trademark in the reseller's advertising seriously damages the reputation of the trademark,"[173] the ECJ basically said that “the trademark proprietor could not exercise his rights unless the use of the trademark seriously damages the reputation of the trademark."[174]

The previously mentioned Davidoff case comprised also an issue under Article 7(2) of the Directive regarding the removal or obliteration of the bar codes attached to the products in compliance with the Council Directive 76/768/EEC on the approximation of the laws of the Member States relating to cosmetic products.[175] However, the ECJ found unnecessary to rule on this matter.[176]

C. Implications to Article 81 ECT

Trademark owners wishing to prohibit parallel imports into the Community frequently impose sales bans, export bans and other territorial restrictions when marketing product outside the Community.[177] These restrictions though may be considered as distribution agreement contrary to Article 81 ECT.[178] According to C-306/96 Javico International and Javico AG v. Yves Saint Laurent Parfums SA [1998] E.C.R. I-1983 it has to be examined whether “the contested provisions designed to prevent direct sales of the contractual products in the Community and re-exports of them to the Community entail any risk of an appreciable effect on the pattern of trade between the Member States such as to undermine attainment of the objectives of the common market."[179] In this respect the ECJ ruled that “Article 85(1) (now 81) of the Treaty precludes a supplier established in a Member State of the Community from imposing on a distributor established in another Member State to which the supplier entrusts the distribution of his products in a territory outside the Community a prohibition of making any sales in any territory other than the contractual territory, including the territory of the Community, either by direct marketing or by re-exportation from the contractual territory, if that prohibition has the effect of preventing, restricting or distorting competition within the Community and is liable to affect the pattern of trade between Member States."[180] From the foregoing considerations as well as the difficulty to imply consent in light of the Davidoff decision, the conclusion to rely on rights under trademark law instead of imposing void contractual obligations can be drawn.[181]

IV. Analysis and comparison from the practical and global perspective

Based on the legal grounds introduced in the previous chapters many model situations may arise in practice. For instance, how can the trademark owner use these doctrines to maintain different prices in the European Union and the United States? What amounts to the right of control and what equals to restrictions of the competition? When are the rights exhausted and what equals to consent with such exhaustion?

As we learned, the principle that trademark lawfully affixed to goods in one country could be lawfully carried wherever it goes, i.e. universality principle, was overturned in the United States by both the Congress adopting §526 of the Tariff Act and the Supreme Court ruling in Bourjois upholding a trademark as a domestic goodwill indicator rather than symbol of origin.[182] Saying that “ownership of the goods does not carry the right to sell them with a specific mark or sell them at all in a given place"[183], the Supreme Court recognized separate legal existence of trademark in each country's laws and gave precedence to the territoriality principle.[184] The court identified trademark as a symbol of the domestic goodwill, that consumers can rely on expecting consistency with the domestic reputation and trademark owners expecting protection of goodwill and reputation against use by others.[185] Later in Lever the Court remarked upon this decision, stating that trademarks “having specific territorial scope, protects a domestic trademark holder from goods genuinely trademarked abroad but imported here (the United States) by parties hoping to exploit consumer confusion between the domestic and foreign products."[186]

In Europe the individual member states applied individual approaches, some followed international and other domestic exhaustion.[187] This disparity changed with the Community-wide harmonization and the ECJ rulings in cases involving intellectual property and free movement of goods. In particular, Silhouette introduced the Community exhaustion of rights conferred by a trademark and prohibited its coexistence with the international exhaustion provision in legal orders of member states.

While both the United States and the European Union provide trademark owners with rights to prevent importation of goods that have been marketed under their trademarks outside these territories, they also consistently provide for trademark right exhaustion after first sale within their territories. 'First sale exhaustion' in the United States and 'Community Exhaustion' in the European Union were both developed to preclude further distribution control, obstacles to free movement of goods respectively, while preserving the rewarding and source identifying function of a trademark.[188]

Guidance through the doctrines developed in the United States and European Union may provide following examples.

First, imagine a US trademark owner manufacturing GOODS in the European Union, wanting to maintain lower prices in EU than in the US. The issue of cheaper GOODS imports into the US is in question. The permission of such import under the US law would be subject to the 'common control' considerations. When not being present, the US trademark owner can prevent such import. In cases where the trademark owner in EU and the US will be subject to common control than such ban to importation won't be permissible. Exception to this rule was formulated in Lever and concerned the physical and material difference of goods.

In cases where the trademark owner imports the goods himself or grants a license, the goods are considered authentic, no matter the factual difference from domestic products.[189] The affiliate exception extends this principle to goods imported into the US by companies affiliated with the US trademark owner, and third parties importing goods produced abroad by company affiliated to the US trademark owner, i.e. companies under common control.[190] Limitation to the affiliate exception, as applied by the US Customs according to 19 C.F.R. § 133.21(c)(2)[191] was set in Lever. The court of appeal in Lever II confirmed that “the natural, virtually inevitable reading of section 42 is that it bars foreign goods bearing a trademark identical to the valid U.S. trademark but physically different, without regard to affiliation between the producing firms or the genuine character of the trademark abroad."[192] The court further elaborated by saying: “Trademarks applied to physically different foreign goods are not genuine from the viewpoint of the American consumer… When identical trademarks have acquired different meanings in different countries, one who imports the foreign version to sell it under that trademark will (in the absence of some specially differentiating feature) cause the confusion Congress sought to avoid. The fact of affiliation between the producers in no way reduces the probability of that confusion."[193] In light of this decision, it is possible to bar importation of “any foreign goods bearing a valid United States trademark but materially and physically differing from the United States version of the goods."[194] At this point we have to consider provision of the Section 133.23 that would allow importation of the physically or materially different goods produced by the affiliated company bearing the valid US trademark and a label stating: “This product is not a product authorized by the United States trademark owner for importation and is physically and materially different from the authorized product."[195]

For the closer explanation of 'material difference' we can turn to the ruling in SKF USA. It was determined that “physical material differences are not required to establish trademark infringement involving gray market goods. That is because trademarked goods originating from the trademark owner may have nonphysical characteristics associated with them, including services."[196] The 'material difference' can be found present and importation opposed, where English language labels, operator or service manuals are missing.[197] Another issue of 'material difference' was pointed out in Osawa, identifying warranties of “significant importance on the subject of irreparable harm and confusion as to the assurance that a responsible organization stands behind and guarantees the equipment.[198] To conclude, we can turn to the concurrent interest of the US courts to prevent likelihood of confusion and deceit of consumers by goods bearing the same trademark but being materially different.[199] The courts turned to apply rather low threshold for finding material difference in order to protect consumers.[200] For instance Ferrero case involved parallel importation of TIC TAC breath mints originally intended for the UK market.[201] Ferrero U.S.A., Inc. (Ferrero), as a member of the 'Ferrero family', has the exclusive distribution rights in the United States and undertakes all activities relating to marketing of TIC TAC breath mints in the United States.[202] The marketing was targeted on the adult market and advertising emphasized the fact that TIC TAC breath mints contain only 1 and ½ calories per mint.[203] The imported mints intended for the British market contained two calories per mint and the question whether this represents substantial material difference arose.[204] Taking account of size, caloric content, packaging, labeling and composition the court found material difference and hold that Ferrero “developed a successful brand image around a 1 1/2 calorie breath mint and there exists the likelihood of and potential for significant consumer and distributor confusion through the sale of a two calorie product that does not conform to the same labeling and content specifications. Moreover, the sale of a product under the same trade name, TIC TAC, with virtually an identical outward appearance, that is materially different than the product consumers and distributors expect to receive, creates customer confusion, usurps the good will created by Ferrero U.S.A.'s marketing efforts and constitutes false advertising. This is especially true in a weight-conscious society where products with reduced calories are exalted and secure a competitive advantage over other higher-caloried products."[205] This opinion was unconditionally followed in Nestlé, where the court expressed the concern for recognizing even the lowest differences capable of consumer confusion by saying that “the threshold of materiality must be kept low enough to take account of potentially confusing differences -- differences that are not blatant enough to make it obvious to the average consumer that the origin of the product differs from his or her expectations."[206] In this respect the court here allowed for differences in presentation, chocolate shape and ingredients origin, and found these material.[207] Though the courts have set the low threshold of materiality, no specific guidance have been provided and therefore the material difference between genuine and gray market goods will continue to be determined on case by case basis.[208]

In the second, reverse example, the EU trademark owner wants to maintain higher prices in the EU and prevent cheaper imports from the US. According to the EU law, the trademark owner can prevent re-importation of his cheaper GOODS placed on the market outside the EU, concretely based on the Community regional exhaustion as evolved from the ECJ decisions and regulation in Article 7 of the Directive. Resulting from the ruling in Silhouette, “national rules providing for exhaustion of trademark rights in respect of products put on the market outside the EEA under that mark by the proprietor or with its consent are contrary to Article 7(1) of the Directive."[209] The rights conferred on the trademark owner by Article 5 of the Directive entitling him to prevent all third parties not having his consent from importing goods bearing his trademark are subject to an exception in the Article 7(1) of the Directive providing that the trademark owner's rights are exhausted “in relation to goods which have been put on the market in the Community under that trademark by the proprietor or with his consent."[210] In this regard, the ECJ in Davidoff determined the 'consent' equivalent to “renunciation of exclusive right under Article 5 of the Directive, i.e. constituting decisive factor in the extinction of that right."[211] The ECJ set the 'consent' definition with the community wide validity, stating: “If the concept of consent were a matter for the national laws of the Member States, the consequence for trademark proprietors could be that protection would vary according to the legal system concerned. The objective of 'the same protection under the legal systems of all the Member States' set out in the ninth recital in the preamble to Directive 89/104, where it is described as 'fundamental', would not be attained."[212] The consent in its opinion “must be so expressed that an intention to renounce those rights is unequivocally demonstrated."[213] This could be communicated by means of express consent or inferred from facts and circumstances of placing goods on market outside EU, which unequivocally demonstrate that the trademark owner renounced his rights.[214]

Implied consent cannot be inferred from the fact that the trademark owner did neither communicate his opposition to marketing within EU, place any warning on the goods, nor impose any contractual reservations when transferring ownership of the trademarked products, even if the governing law imposes such requirement for this type of contracts.[215] At the same time it is not relevant that the importer is not aware of these oppositions.[216] The mere silence is also not sufficient.[217] Further, derived from the economic relations and affiliations the intention to provide consent with the exhaustion of rights is unequivocally demonstrated, when a licensee, a parent company, a subsidiary of the same group, or an exclusive distributor, places products on the market within the EU.[218] Similarly to the US doctrines, this issue involves quality considerations. Presenting the trademark as symbol of origin, goodwill and quality should remain undistorted, since the trademark owner still has the possibility through his affiliations to control the quality.[219]

One of the later cases, the Class International BV. v. Colgate-Palmolive Company brought the import opposition and 'import' determinations to the context of transit and transit trade.[220] The ECJ, in short, had to answer whether “the trade mark proprietor is entitled to oppose the introduction into the Community, under the external transit procedure or the customs warehousing procedure, of original goods bearing that mark which had not already been put on the market in the Community previously by that proprietor or with his consent."[221] Since the trademark owner may in the light of Article 5(1) of the Directive prevent importation that leads to the trademark 'use in the course of trade', the ECJ had to determine at which point the goods can be deemed placed on the Community market.[222] Release for free circulation and entry for customs procedures, i.e. external transit or customs warehousing, have to be distinguished.[223] The imported trademarked product to be put on the Community market have to be released for free circulation, therefore being subject to another customs treatment equals only to “the mere physical introduction of those goods into the territory of the Community and does not entail 'using [the mark] in the course of trade' within the meaning of Article 5(1) of the Directive."[224] The ECJ in this respect concluded that “a trade mark proprietor cannot oppose the mere entry into the Community, under the external transit procedure or the customs warehousing procedure, of original goods bearing that mark which had not already been put on the market in the Community previously by that proprietor or with his consent. The trade mark proprietor cannot make the placing of the goods at issue under the external transit procedure or the customs warehousing procedure conditional on the existence, at the time of the introduction of those goods into the Community, of a final destination already specified in a third country, possibly pursuant to a sale agreement."[225] The ECJ continued by saying that since these goods are not considered 'imported' they can be offered for sale to a third country.[226] The trademark owner would be able to oppose the offer, proving the offer will result in placing those goods on the Community market.[227]

Shifting the place of manufacture another examples follow. In the third model situation, the US trademark owner is manufacturing GOODS in the US and is marketing these both in the US and the EU. Wanting to keep higher prices in the US, he would like to prevent imports from the EU, where the GOODS are cheaper due to currency fluctuation or marketing strategy. The first sale doctrine will be at stake, but the trademark owner will be able to prevent such imports in limited number of cases involving quality issues and material differences in particular.

As we learned from the US case law, the right of a trademark owner to control further distribution of its trademarked goods does not extend beyond first sale.[228] In Sebastian the court held that “it is the essence of the 'first sale' doctrine that a purchaser who does no more than stock, display, and resell a producer's product under the producer's trademark violates no right conferred upon the producer by the Lanham Act."[229] The question of mere reselling was supplemented by limits to what extent could the product still be considered as a product of the trademark owner and when it looses authenticity. The necessary limits to save the 'genuine' character of goods were set in Shell Oil, considering as 'genuine' only such goods that were manufactured and distributed under trademark owner's quality controls, no matter how low or high the actual quality of goods was.[230] Using own quality controls and standards by the reseller would not suffice the requirement for 'genuine' character and the trademark owner will be able to prevent marketing of such goods under §32 of the Lanham Act.[231] The conclusion drawn from these doctrines in fact excludes application of trademark law in cases of genuine goods resale under true mark, even if undertaken without the consent of the trademark owner.[232]

In the exactly opposite situation, wanting to maintain lower prices in the US and sell the GOODS at higher price in the EU, the trademark owner will be able to prevent importation of cheaper goods into the EU, only when not placing the GOODS on the market in the EU by himself. This is the result of the Community exhaustion of rights doctrine established by the ECJ. Trademark owner cannot prevent parallel importation within the EU once the goods were placed on the market within the Community by him or with his consent.[233] However, placing the goods on the market outside the EU does not exhaust his rights within the EU. Further as found in Sebago “rights conferred by the trademark are exhausted only in respect of the individual items of the product, which have been put on the market with the proprietor's consent in the territory there defined."[234] Scenario of the United States trademark owner, who markets product in the United States and the European Union through exclusive distribution system, brought couple of disputable issues with respect to the Community exhaustion and prohibition of unauthorized distribution in Van Doren + Q. GmbH v. Lifestyle sports + sportswear Handelgesellschaft mbH and Michael Orth.[235] The Silhouette and Sebago principles providing that the trademark owner's rights are not exhausted with respect to particular goods within the Community, when these goods were first marketed outside the Community, are in a need of clarification when facing the importer alleging obtaining goods from the authorized distribution chain.[236] The ECJ was in particular dealing with 'burden of proof' uncertainties, since the established principles did not seem to fit presented dispute over first placement of goods, i.e. whether within or outside the Community.[237] The ECJ found that distribution via exclusive distribution system is raising risk of partitioning of markets and keeping the former rules on evidence would lead to obstructions from trademark owner's side preventing third party from obtaining supplies from the authorized distributors within Community.[238] The ECJ therefore revised and supplemented existing rules by ruling that “where a third party succeeds in establishing that there is a real risk of partitioning of national markets if he himself bears that burden of proof, particularly where the trade mark proprietor markets his products in the EEA using an exclusive distribution system, it is for the proprietor of the trade mark to establish that the products were initially placed on the market outside the EEA by him or with his consent. If such evidence is adduced, it is for the third party to prove the consent of the trademark proprietor to subsequent marketing of the products in the EEA."[239]

In case of manufacture outsourcing outside the US or the EU, trademark owners attain their rights in both cases and the respective exhaustion rules applies, i.e. territorial exhaustion in the US and the Community exhaustion in the EU. Trademark owners thus will be able to prevent imports from third countries of manufacture into the US or the EU. In the United Sates law, basis for this conclusion can be found in Nestlé opinion. The Court of Appeal was dealing with the importation of chocolate bearing PERUGINA mark manufactured by independent company in Venezuela under the license previously granted by Nestlé.[240] The license agreement explicitly prohibited the Venezuelan manufacturer to export directly or indirectly into third countries without Nestlé's consent.[241] The imported chocolate therefore was not authorized for sale in the United Sates. As the court clarified, the place of manufacture is not of the essence it is the trademark owner authorization that matters.[242] The court in this regard uphold the 'consent' as determinant and reasoned that “the relevant consent is not the registrant's consent to a third party's use of the mark abroad but the registrant's consent (or lack thereof) to the defendant's sale of the gray good in the domestic market."[243] With respect to the fact, that Nestle has not authorized the sale of chocolate manufactured in Venezuela to any third country, the court with reference to Lever concluded that “the mere licensing of production abroad does not support an inference of consent to import the licensed products into the United States."[244]

Insert repackaging?

Cases from Kmart case - nahradit 4 & 5 example.

V. Conclusion

The picture won't be complete without mentioning the regulation under TRIPS. Provisions regarding importation and exhaustion

Article 51 - boarder measures required only for counterfeit trademark goods and pirated copyright goods FN to Art 51 - “It is understood that there shall be no obligation to apply such procedures to imports of goods put on the market in another country by or with the consent of the right holder or to goods in transit."

Article 3 - national treatment - must treat citizens of other treaty parties at least as well as you treat your own citizens, i.e. can treat own citizens worse

Article 4 - most-favoured nation treatment - any advantage extended to one nation must be extended to all nations that are treaty parties, i.e. cannot treat other nations better or worse

Article 6 - “For the purposes of dispute settlement under this Agreement, subject to the provisions of Articles 3 and 4 nothing in this Agreement shall be used to address the issue of the exhaustion of intellectual property right." - cannot discriminate with respect to exhaustion based on nationality, otherwise TRIPS left out from this problem

  • - incorporates by reference previous IP treaties such as the Berne Convention and Paris Convention
  • - Additional substantive IP law requirements
  • - Requires enforcement measures
  • - Establishes dispute resolution mechanism and body that can authorize trade sanctions

Private measures - contractual measures e.g. stussy:

“Regardless of whether source confusion is present, many opponents of parallel imports object to parallel importers' free riding on the advertising, warranty, and service efforts of the U.S. company, while selling the same product at lower price."[245] Add Lipner, Legality of parallel imports