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G rey market goods, also known as parallel imports, are genuine products pro-tected by copyright, trade mark or patent rights that are imported into acountry without the authority of the IP rights owner in that country. It is esti-

mated that tens of billions of dollars are lost annually to grey market sales. Theproblem is exacerbated by the expanding and borderless internet marketplace andwill almost certainly worsen as the global economy slips into recession.Notwithstanding this growing problem, a broad base of IP owners, including in thefields of luxury goods, information technology, publishing, software and pharma-ceuticals, persist in their efforts to tackle the grey market, with notable success.

No grey skies for copyrightThe past few months have yielded a series of decisions that have solidified the principlethat the so-called first sale doctrine is not a defence to unauthorised importation and dis-tribution of copyrighted grey market goods that are manufactured and first sold abroad.In September 2008, the US Court of Appeals for the Ninth Circuit affirmed its longstanding precedent in this respect (Omega SA v Costco Wholesale Corp [9th Cir 2008]).This was the Ninth Circuit’s first copyright case concerning grey market goods since theSupreme Court decided Quality King Distributors, Inc v L’anza Research International,Inc (1998). In that case, the Supreme Court held that the first sale defence under § 109(a)of the Copyright Act applied to copyrighted goods made in the United States, exportedabroad, then imported back into the United States, and that the US copyright ownercould not stop the sale of grey market goods under those circumstances. The SupremeCourt did not reach the issue of whether the first sale defence would apply where thegoods were manufactured abroad and then imported into the United States, a point thatJustice Ginsberg took great care to emphasise in her concurring opinion.

The Omega decision is the first US federal appellate court opinion to directlyaddress this issue left open by the Supreme Court in Quality King. Omega, a well-known watch manufacturer, filed suit against discount store Costco for infringing itsdistribution and importation rights under §§ 106(3) and 602(a) of the CopyrightAct. Omega alleged that Costco was selling unauthorised, genuine Omega watchesbearing Omega’s US-copyrighted “Omega Globe Design”. Costco responded thatsuch sales were permitted under the first sale doctrine of § 109(a), which generallylimits §§ 106(3) and 602(a) and states that once a copyright owner has sold a law-fully made copy, the purchaser “is entitled, without the authority of the copyrightowner, to sell or otherwise dispose of the possession of that copy”.

After carefully analysing the Supreme Court’s decision in Quality King, includingJustice Ginsburg’s concurrence, the Ninth Circuit concluded that the Supreme Court“did not address the effect of § 109(a) on claims involving unauthorised importa-tion of copies made abroad”. The Ninth Circuit went on to parse the language ofthe Copyright Act and to conclude that “the application of § 109(a) to foreign-madecopies would impermissibly apply the Copyright Act extraterritorially in a way thatthe application of the statute after foreign sales does not”. Thus, the Ninth Circuitupheld its established precedent, concluding that “the first sale doctrine is unavail-able as a defense” and that Costco could be held liable for its unauthorised impor-tation and sale of copyrighted Omega watches manufactured and first sold abroad.Costco has petitioned for rehearing en banc.

Microsoft Corporation has also had significant success in the past year combat-ing grey market goods. Courts ruled in Microsoft’s favour in at least three separatecases involving claims of unlawful importation and distribution of Microsoft’sStudent Media software that was manufactured abroad and not authorised for sale

Combat grey market goods in the USCase law surrounding grey market goods is still developing in the United States, but Ronald Doveand Hope Hamilton suggest some practical strategies for successfully preventing their importationand distribution

So-called grey marketgoods are imported into acountry without the con-sent of the IP rights ownerand may be manufacturedunder poor conditions and

without employing standard quality controlmeasures. This can harm a company’s reputa-tion and result in substantial lost profits.Although US law is not yet developed when itcomes to enforcing IP rights over grey marketgoods, recent copyright and trade mark caselaw offers hope for IP owners and can beinstructive in considering strategies for dimin-ishing the potentially negative impact of suchproducts. By staying informed and employingthese helpful practice tips, IP owners canavoid falling prey to the gloom often cast bygrey goods.

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or use in the United States. Most recently, in MicrosoftCorporation v Intrax Group, Inc, No (ND Cal, 2008), the USDistrict Court for the Northern District of California grantedsummary judgment in Microsoft’s favour, citing the NinthCircuit’s recent decision in Omega, and rejecting the defen-dant’s appeal to the first sale doctrine. The court also con-firmed that a US purchaser or retailer of grey market goodscan be found liable for copyright infringement even if it wasnot the original importer of those goods.

Look to the Lanham ActTrade mark owners continue to find success inappealing to the US Lanham Act to fight grey mar-ket goods. In Hyundai ConstructionEquipment USA, Inc v Chris Johnson Equipment,Inc, (ND Ill, 2008), a federal court in Illinoisgranted summary judgment in favour of Hyundai,the exclusive distributor of new Korean manufac-tured Hyundai heavy construction equipment inthe United States and Canada. Hyundai sought aninjunction prohibiting Johnson, the defendant,from selling in the United States Hyundai equip-ment that was manufactured for sale in the Koreanand Chinese markets. Johnson argued thatHyundai lacked standing because it did not ownthe Hyundai trade mark in the United States. Healso asserted that there was no evidence of actualconsumer confusion, because his buyers weresophisticated and knew that the equipment theywere purchasing differed from that authorised forsale in the United States.

The court held that Hyundai had standingunder § 43(a) of the Lanham Act, even though itsparent owned the Hyundai trade mark in theUnited States, because it had a reasonable interestto protect against false advertising and the likeli-hood of consumer confusion, particularly whereJohnson was benefiting from Hyundai’s promotionof its products in the United States. The court wenton to conclude that Johnson had infringed theHyundai trade mark due to the likelihood of con-fusion caused by numerous “material differences”in the equipment, including that the unlawfullyimported equipment had altered or defaced serialnumbers, was sold without the standard warrantyavailable in the US, had Korean language safety,

operation, and maintenance instructions, and had non-EPAcompliant engines.

Quality controlEmploying strict quality control measures also has proven tobe an effective tool in combating grey market goods. AlthoughUS courts have been inconsistent in their approach to consid-ering quality control measures – some treat such measures asa factor in the “material difference” test, others treat them as

The recent decision in Tiffany (NJ) Inc v eBay,Inc, (SDNY, 2008) is also instructive for thosebattling the grey market.

Frustrated with the skyrocketing cost oftackling a seemingly endless stream of individ-uals selling counterfeit goods through eBay’sonline marketplace, Tiffany filed a suit againsteBay under theories of direct and contributorytrade mark infringement, unfair competition,false advertising and dilution. With regard tocounterfeit sales, Tiffany argued that eBay wason notice of the illegal activities of its sellersand that by failing to pre-emptively prohibitlistings of certain Tiffany items, eBay engagedin infringing activity. eBay countered that it wasTiffany’s responsibility to police for counterfeits

and report them to eBay – if Tiffany reportedspecific instances of infringement, eBay wouldpromptly act to remove them. The US DistrictCourt for the Southern District of New Yorkagreed with eBay and entered judgment ineBay’s favour.

Although Tiffany has appealed this decision,the case is nevertheless instructive for thosebattling grey market goods for three reasons: 1) It serves to emphasise that courts may put

the burden on IP owners to enforce theirrights, even where there may be strong evi-dence that the “middleman” (such as auc-tioneers, flea market operators or ISPs)know or have reason to know of infringingactivities by their customers.

2) The strength of Tiffany’s arguments wasdiminished by its perceived failure to takesufficient steps and to invest sufficientresources toward combating infringement(for example Tiffany stopped using eBay’sVeRO programme and invested less than0.05% of its net sales in one year for brandenforcement).

3) Finally, the decision reinforces that IP own-ers may prevail on a contributory infringe-ment theory against the “middleman”where the middleman (i) has direct control,(ii) exercises sufficient control and monitor-ing, and (iii) knows of specific instances ofinfringing activity and fails to take steps toprevent it.

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a separate consideration in assessing the genuineness of a good(that is goods that do not meet the trade mark owner’s quali-ty control standards are not considered genuine) -courts haveconsistently found them to be relevant in their analysis of greygoods cases.

The US District Court for the Southern District of New Yorkrecently faced the task of determining whether “anti-counter-feiting systems constitute a ‘quality control procedure’ as pro-tected by the Lanham Act” (Zino Davidoff SA v CVSCorporation [SDNY, 2007]). The grey market goods in that casewere “decoded” Davidoff goods whose unique product code(UPC) code numbers had been removed by various methods,including cutting away portions of the packaging, grinding thebottom of bottles, and using chemicals to wipe away labelling.

Davidoff argued that the removal of the UPCs affected itsquality control procedures because it (1) restricted Davidoff’sability to identify and remove counterfeit goods, (2) under-mined its ability to identify, inspect and recall products, and(3) limited its anti-theft systems. The court reserved judgmenton the anti-theft system argument, but concluded thatDavidoff’s anti-counterfeiting system is a “species of qualitycontrol protected under the Lanham Act” where it serves toprevent the infiltration of counterfeit goods that underminethe central goals of the Lanham Act, and serves as a “suffi-ciently legitimate, substantial, and nonpretextual” quality con-trol system that allowed Davidoff to quickly “identify and rec-tify possible quality issues” with its products. Concluding thatDavidoff had shown a likelihood of consumer confusion andthat irreparable harm would result from sales of decodedDavidoff products, the court granted Davidoff’s motion topreliminary enjoin retailer CVS from selling such products.

Practice tips While US law concerning grey market goods is continuing todevelop, particularly with respect to internet-related sales, thestrategies available to IP owners are relatively clear. First, it isimportant to understand the scope of the problem. Regulardue diligence and investigation is central to protecting any IPright. Investigative firms can assist with storefront counterfeitand grey market goods sales. In recent years, a few companiesand law firms have developed sophisticated internet investiga-tion groups, which employ both human resources and techni-cal tools to crawl the internet in search of counterfeit and greymarket goods.

It is also imperative to be aware of your enforcement options.In addition to notice-and-take down procedures, cease-and-desist letters and pursuing claims in federal courts, trade markowners can under certain circumstances register their markswith Customs to prevent the unlawful importation of grey mar-ket goods or litigate their claims before the International TradeCommission, seeking an exclusion order directing Customs toprevent the unlawful importation of such goods.

Another option is to consider building coalitions. Thestruggle to combat grey market goods is common to many, andthe particular interests and challenges facing businesses in sim-ilar markets can be identical.

Finally, educate consumers and potential infringers aboutwhat constitutes illegal conduct, including by publicising suc-cessful enforcement efforts. Such publicity may affectinfringers as they weigh the risks and benefits of their activi-ties. Stay informed of developments in the case law and of thenew and evolving tools to combat the importation and sale ofgrey market goods.

It is important to develop a strategy for com-bating grey market goods that is most suitablefor your needs. Factors that influence suchstrategies include the scope of the problem,budget, business relationships and the type ofIP right underlying any claim. Specific consider-ations and strategies include:• Positioning your business for the great-

est enforcement potential. Maintainingtrade mark registrations and properly regis-tering copyrights is critical. Considerationshould also be given to business relation-ships. The ability to enforce rights in theUnited States may be lost if licences anddistribution agreements in other countriesdo not make clear that right owners,licensees and distributors in those countriesare not authorised to export to or sell thoseproducts in the United States. Likewise, theUS trade mark or copyright holder or itslicensee must unambiguously have exclu-sive rights to sell in the United States.

• Positioning your products for thegreatest enforcement potential. In thecase of trade mark rights, consider insti-tuting quality control standards and anti-counterfeiting systems that will allowtrade mark owners to identify and distin-guish between non-authorised goods (forexample UPCs, serial numbers, batchcodes, expiration dates, unique packagingfor different markets, and use of second-ary trade marks). Trade mark ownersshould also bear in mind that the thresh-old for “material” differences betweenauthorised and non-authorised products isrelatively low. In the case of copyrights,copyright owners will be most successfulcombating grey market goods where thegoods are manufactured abroad andintended for sale abroad. But copyrightclaims only work where the productsthemselves are protected by copyright orcontain packaging or labelling protected

by copyright. If the design is not placed onthe product or the packaging or othermaterial important to the consumer, animporter may evade liability by simplybringing the goods into the US without thecopyrighted elements or removing thecopyrighted element prior to resale.

• Utilising notice-and-take-down proce-dures. Most established marketplace web-sites, including eBay and Amazon, have pro-cedures in place through which IP ownerscan submit notice-and-take down requeststo remove infringing grey market listingsfrom such websites.

• Identifying the target. Identifying andtackling repeat infringers often yields thegreatest success in short order. In someinstances, however, companies may wish toinvestigate suppliers, wholesalers, foreigndistributors, Internet ISPs, and other enti-ties in the chain in an attempt to tackle theproblem at its source.

Chase the grey away

Ronald G Dove Jr Hope Hamilton

© Ronald G Dove Jr and Hope Hamilton 2008. The authors are,respectively, of counsel and an associate in the IP practice atCovington & Burling in Washington

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