These days, the reach of fashion extends to nearly every corner of the globe. This is not only due to the movement of much of the fashion world’s manufacturing bases to varied countries such as China, Vietnam, and Bangladesh, but is also due to the emergence of new markets for fashion throughout Asia and beyond. This globalized marketplace for fashion presents its own unique challenges to brand owners. Because each global territory has its own tastes, regulatory regime and economic profile, many brand owners seek to sell different types of licensed goods in different territories. For example, the owner of a prestigious brand might allow licensed apparel made from synthetic materials to be sold in developing markets, but require that all apparel sold in the United States be made entirely with natural fabrics. For this reason, many brand owners place territorial restrictions in their license agreements. Such restrictions specify the countries in which a particular item (or category of items) of branded merchandise may – and may not – be sold.
Brand owners are constantly faced with the challenge of policing the territorial restrictions in their license agreements. One of the greatest areas of concern for such brand owners is the proliferation of “grey market goods” which are now available for purchase in the United States through Internet marketplaces. For these purposes, the term “grey market goods” is generally used to refer to goods that are solely authorized for production and sale outside of the United States, but that are brought into and sold in the United States in violation of such authorization. American trademark and copyright law provide a brand owner with powerful – albeit limited – tools to prevent the sale of grey market goods in the United States. The power and limitation of these tools can be demonstrated by applying the holdings of two recent cases to the hypothetical situation of the owner of a copyrighted and trademarked logo who seeks to prevent the re-sale within the United States of grey market goods. Specifically, this hypothetical owner seeks to prevent the re-sale of goods bearing this logo which were legally manufactured and purchased overseas and were made from inferior materials and with an inferior standard of craftsmanship than goods bearing this logo licensed for sale in the United States. Pursuant to the holdings of these two recent cases, our hypothetical brand owner may not be able to restrict these grey market re-sales under copyright law, but may be able to do so under trademark law.
With respect to copyright law, in Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2013), the Supreme Court recently held that the “first sale” doctrine – which essentially allows any individual who lawfully purchases a copyrighted work to re-sell that work without the consent of the copyright owner – applies to all copyrighted works, regardless of whether such works were created inside or outside of the United States. As a result, our hypothetical brand owner may not successfully prosecute a claim for copyright infringement against a third-party reseller of copyrighted grey market goods, provided that the goods were lawfully manufactured outside of the United States pursuant to license, and were lawfully purchased outside the United States before they were re-sold.
However, trademark law may still provide some degree of protection to our hypothetical brand owner, as illustrated by the recent case of TechnoMarine SA v. Jacob Time, Inc., No. 12 Civ. 0790 (KBF), 2012 U.S. Dist. LEXIS 157994 (S.D.N.Y. Oct. 24, 2012). TechnoMarine SA, a designer and manufacturer of fashionable watches that were meant to be sold only through authorized dealers, alleged that some of its watches were being sold by the defendant, Jacob Time, at discounted prices through the defendant’s website. TechnoMarine alleged the watches available through Jacob Time’s website were “not intended for sale and distribution in the United States,” were missing the “tags and labeling … which accompany genuine TechnoMarine watches,” were missing the “standard warranty card” that accompanies genuine TechnoMarine watches, and did not undergo the post-shipment quality control procedure that applies to TechnoMarine watches sold through authorized channels. After Jacob Time allegedly continued to sell TechnoMarine watches following receipt of a cease and desist letter, TechnoMarine sued for, inter alia, trademark infringement and false designation of origin under the Lanham Act.
In a detailed decision, the Southern District of New York granted Jacob Time’s motion to dismiss TechnoMarine’s trademark infringement claims at the pleading stage. The Court recognized that, at least within the Second Circuit, the sale of grey market goods may give rise to a claim for trademark infringement when the plaintiff can “allege facts to show either interference with quality control procedures or material differences – whether physical or non-physical – from the genuine article” which are likely to lead to consumer confusion. TechnoMarine SA, 2012 U.S. Dist. LEXIS 157994, at *15.
Unfortunately for TechnoMarine, its allegations against Jacob Time were insufficient to fit within this rule, because they did not “suggest that [TechnoMarine] established ‘substantial’ post-sale quality control procedures” or allege any material differences between the plaintiff’s goods and the defendant’s grey market goods. TechnoMarine, 2012 U.S. Dist. LEXIS 157994, at *16-19. Although the Complaint did allege there were slight differences in packaging and labels, including the lack of a warranty card with the watches sold by Jacob Time, the Court found these differences were not material. The Court focused heavily on the fact that TechnoMarine’s warranty would apply to the watches purchased through Jacob Time, even without the warranty card. In addition, the Court noted there were no allegations of physical differences (which are typically found in grey market goods cases), such as alteration of serial numbers or other identifying packaging, that might prevent TechnoMarine from controlling product quality or enforcing its warranty.
Unlike TechoMarine, our hypothetical brand owner might be able to prevent the sale of grey market goods under trademark law if it could establish specific and substantial differences between the grey market goods it seeks to restrict and the goods that it actually licenses for sale in the United States which were likely to lead to consumer confusion. Our brand owner might be able to do so by, for example, proving that the grey market goods at issue are made from distinctly inferior materials (such as synthetic fibers) and with a visibly lower standard of craftsmanship, thereby obviously resulting in consumer confusion, and damaging the brand.
Given the nuances of and frequent developments in trademark and copyright law (of which Kirtsaeng and TechnoMarine SA are but mere examples), it is essential for any brand owner to establish a comprehensive legal strategy to protect its intellectual property rights.