Often the bane of U.S. trademark holders, parallel imports or “gray market” goods are goods bearing a genuine trademark and sold into a market outside of the US, and then subsequently imported into the US without the authorization of the trademark owner. The goods might be manufactured in the US and exported, or produced in a foreign country by the owner or licensee of the trademark rights. In the words of CBP, gray market goods are genuine products bearing a trademark/name which has been applied with the approval of the right owner for use in a country other than the United States. Gray market goods might also involve other intellectual property rights such as patents or copyrights.
Because of differences in pricing policies, marketing strategies, or differences in the goods themselves, the price of the goods sold into the non-U.S. market may be significantly lower than the price for the same or a similar item bearing the same trademark in the U.S. Often this pricing disparity can make it profitable for a party to legitimately purchase trademarked products abroad and subsequently import them into the U.S. for resale.
Gray market goods are distinguishable from counterfeit goods as counterfeit goods are never genuine since they involve the application of a trademark without the authority of the trademark/trade name owner. CBP has unqualified authority to restrict the importation of counterfeit merchandise; however the importation of gray market goods under many circumstances is not prohibited.
In the US, gray market protection is conferred under 19 CFR 133 where (1) the U.S. and foreign trademarks are not owned by the same person, and (2) the U.S. and foreign trademark owners are not a parent or subsidiary, or otherwise subject to common ownership or control. “Common ownership” means individual or aggregate ownership of more than fifty percent of the business entity. “Common control” means effective control in policy and operations, and is not necessarily synonymous with common ownership.
Only trademarks and trade names that are properly registered with the US Patent and Trademark Office, and subsequently recorded with CBP, are entitled to gray market protection. Also current CBP rules generally extend only to products manufactured abroad, and not to goods produced in the US solely for export, and subsequently imported back into the US, provided they are not materially different than products intended for sale in the US market.
Protection from gray market imports can also be sought under the “Lever-rule”, named after Lever Bros. Co. v. United States, 981 F.2d 1330 (D.C. Cir. 1993), which provides that even if the U.S. and foreign trademark owners are under common ownership of control, CBP can prohibit the goods from entry if they are determined to be “physically and materially different” from the articles authorized by the U.S. trademark owner for importation or sale in the U.S.
CBP guidance provides that “physical and material” differences between merchandise authorized for sale in the United States and those intended for other markets may include, but are not limited to:
- The specific composition of both the authorized and gray market product(s) (including chemical composition);
- Formulation, product construction, structure, or composite product components, of both the authorized and gray market product;
- Performance and/or operational characteristics of both the authorized and gray market product;
- Differences resulting from legal or regulatory requirements, certification, etc.;
- Other distinguishing and explicitly defined factors that would likely result in consumer deception or confusion as proscribed under applicable law.
An important exception to the Lever-rule codified under 19 CFR §133.23(b) provides that even if CBP determines that the goods are physically and materially different, the goods shall not be detained provided the merchandise or its packaging bears a conspicuous and legible label designed to remain on the product until the first point of sale to a retail consumer in the United States stating that: “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.” The label must be in close proximity to the trademark as it appears in its most prominent location on the article itself, retail package, or container. Other information designed to dispel consumer confusion may also be added.
While the importation of gray market goods can be profitable for the importer and offer US consumers the opportunity to often obtain comparable goods at discounted prices, gray market goods can present problems for both the US consumer as well as the U.S trademark holder. Material differences in gray market products can reduce the value or functionality of the goods to the US consumer, and often a US trademark holder may refuse to honor the warranty extended to US products or refuse to service the goods. Further the unauthorized sale of gray market goods can impact the profit potential of goods intended for the US market, or erode good will in a trademark when US consumers are dissatisfied with materially different goods bearing a valid trademark.
For these reasons trademark holders in the US with exposure to gray market imports need to be constantly vigilant and know their rights and the steps that can be taken to protect their US market. Furthermore, importers of gray market goods need to understand and comply with all applicable regulations and restrictions, or face the consequences at the border, as well as the ire of US trademark holders and potentially dissatisfied customers.