Plaintiffs Santa Margherita S.p.A. (“Santa Margherita”) and Paterno Imports, Ltd. (“Paterno”) recently secured a consent judgment in a “gray market” trademark and copyright case, S. Margherita S.p.A. v. Thomas Wine Imports, Inc., Case No. 2:11-CV-00843-GHK-JEM (C.D.Cal. 2011). The Santa Margherita case involved imports of gray market Santa Margherita pinot grigio wine by Thomas Wine Imports, Inc. of Los Angeles. Gray market goods, or parallel imports, are genuine products typically manufactured abroad and then imported into the United States by companies outside a trademark or copyright owner’s normal U.S. distribution channels.

The Santa Margherita Case

Santa Margherita, based in Venice, Italy, makes the pinot grigio wine at issue in the lawsuit in Italy. Paterno, doing business as Terlato Wine International, is the exclusive distributor of the wine in the United States. According to Terlato’s website, Santa Margherita pinot grigio is the most popular imported wine in the United States.

In January 2011, the plaintiffs sued Thomas in the U.S. District Court for the Central District of California, alleging that Thomas purchased Santa Margherita wine in Europe and then resold the wine in California without authorization. The plaintiffs alleged that these unauthorized sales violated their trademark rights and copyrights. The plaintiffs also moved for a preliminary injunction prohibiting the gray market imports.

Under the terms of the Santa Margherita judgment, Thomas is permanently enjoined from importing gray market Santa Margherita wine into the United States and otherwise using Santa Margherita’s trademarks and copyrights. The judgment also requires Thomas to destroy its remaining inventory of gray market Santa Margherita wine and to turn over all of its records concerning the imports.

The Law on Gray Market Imports

Trademarks

Gray market imports infringe a trademark owner’s rights where the goods bear the owner’s mark and are “materially different” from the owner’s U.S. goods bearing the mark. This test is somewhat different from the multifactor likelihood of confusion test used in most trademark cases. Gray market trademark cases focus almost exclusively on the differences between the parties’ products. Infringement does not necessarily depend on the quality of the products in question, but rather on whether there are differences between the products that would be material to a consumer’s purchasing decision.

Various courts have held that material differences can include color differences, the lack of an English-language manual, or the lack of quality-control standards for the foreign-made goods. Similarly, the wine in the Santa Margherita case was materially different from Santa Margherita’s U.S. wine because it was labeled differently and was not subject to the same quality-control standards as the authorized wine. As the Court of Appeals for the Federal Circuit noted in Gamut Trading Co. v. U.S. Intern. Trade Com’n, 200 F.3d 775 (Fed. Cir. 1999), “[t]he courts have applied a low threshold of materiality, requiring no more than showing that consumers would be likely to consider the differences between the foreign and domestic products to be significant when purchasing the product, for such differences would suffice to erode the goodwill of the domestic source.”

Copyrights

Gray market copyright cases apply a different test of infringement. Under § 602 of the Copyright Act, importing copyrighted works acquired abroad without the copyright owner’s consent violates the copyright owner’s distribution right. The same general fact pattern was present in the Santa Margherita case, where Santa Margherita wine bearing Santa Margherita copyrighted labels was manufactured abroad and imported by Thomas without the plaintiffs’ consent.

The first sale doctrine generally protects resellers from claims of copyright infringement. Under this doctrine, once a copyright owner sells a copyrighted work for the first time, the work is no longer under the control of the copyright owner. The work becomes the property of the purchaser. However, as the Ninth Circuit held in Omega S.A. v. Costco Wholesale Corp., 541 F.3d 982 (9th Cir. 2008), the first sale doctrine does not apply to foreign manufactured goods imported into the United States unless the goods are imported with the copyright owner’s permission. The Supreme Court reviewed this decision in Costco Wholesale Corp. v. Omega S.A, 131 S. Ct. 565 (2010), and in a 4-4 decision left the Ninth Circuit’s holding intact.

The Court of Appeals for the Second Circuit recently came to a similar conclusion in John Wiley & Sons, Inc. v. Kirtsaeng, 2011 WL 3560003 (2d Cir. 2011).

Trends in Gray Market Trademark and Copyright Cases

Unlike the Santa Margherita case, most gray market cases do not involve both trademark and copyright issues. However, either claim can be a powerful weapon in a company’s efforts to control the distribution of its products.