The Gray Blog

The International Trademark Association (”INTA”), a worldwide association of Intellectual Property attorneys has circulated a paper detailing arguments against the parallel market. The paper was presented by Annette Freeman, of Spruson & Ferguson, Sydney, Australia, not as an analysis of the issues but as talking points for persons wishing to advocate “national exhaustion.” The concept of “national exhaustion” suggests that the rights of the trademark owner are only exhausted within the country that the goods are sold. This concept is at variance with current law in the US and Canada which recognize that a sale of a trademarked good anywhere in the world exhausts the trademark owner’s right to control the resale of the work except under certain limited circumstances.

The paper suggests the following consumer expectations dictate against parallel market sales:

1. Reassurance that the branded product is reliable, of a certain quality;
2. Receiving the expected quality and satisfaction from the purchase;
3. Confidence that the branded product is the same as that purchased previously and is equally suitable for their needs;
4. Trust in the quality or value that the brand signifies to them;
5. In many cases, convenience of wide availability; and
6. Expectation that the branded product will be backed by the brand owner with quality guarantees or after-sales service.

The paper also cites numerous frequently used arguments against the parallel market including: consumer savings in purchasing parallel goods are not substantial, packaging of parallel goods is often altered, regional incompatibility in electronics (caused by mfg. region coding), lack of warranty support, risk of hidden counterfeits and material differences in out of region products.

INTA, an organization which is heavily dominated by the attorneys of brand owners, has taken a position that “parallel imports are harmful to brand owners, except in the case of imports between countries that are in recognized regions with truly harmonized markets.” Therefore, the Association supports national exhaustion or, in appropriate cases, regional exhaustion of rights.

Those of you who already have an INTA password can read the paper in the most recent INTA Bulletin

Microsoft Corp has negotiated an undisclosed money settlement with UK parallel market reseller Pyramid Distribution Ltd. The settlement follows a High Court ruling that Pyramid violated Microsoft’s legal rights by importing tens of thousands of copies of Microsoft software from outside of the European Union.

Effective August 8, 2007, new customs regulations came into effect in the Republic of Croatia greatly expanding the rights of Croatian trademark owners to stop, seize and destroy infringing and, potentially, parallel market goods. Based on Article 70, paragraph 3 of the Croatian Customs Law, the new regulation amends the handling of suspect goods.

The new regulation has the following key elements:

• the extension of Customs measures providing protection for IP rights to goods circulating by mail;
• a simplified procedure for seizure and destruction of infringing goods.

The principal impact of the mail change is likely to be on goods purchased over the internet and delivered to the purchaser by mail.

The provisions of the amended Regulation which provide a simplified procedure for the destruction of infringing goods raise greater concerns and confusion. According to Anamarija Stancic of SD PETOSEVIC, an intellectual property practice with offices in Albania and throughout the former Yugoslavia, the rights holder is now able to submit the request for the destruction of detained goods which are under customs surveillance without an obligation to establish that the detained goods are infringing. Previously, the goods would be held by Croatian Customs while the Croatian trademark owner sought and obtained a final decision from a court of law. This process was very time consuming due to Croatian requirements regarding notice to all interested parties to the litigation.

This new regulation raises positive and negative concerns. On the one hand, it greatly enhances the ability of Croatian trademark owners to protect their rights administratively at the border. On the other hand, it raises serious concerns about possible abuses and the due process rights of the importers. Anyone doing business in the Croatian market or transshipping through Croatia would be well advised to monitor how this regulation develops and is enforced.

Thanks for information in this article to Anamarija Stancic at SD PETOSEVIC Croatia.

The Supreme Court of Canada today reversed the lower court’s decision in Euro-Excellence Inc. v. Kraft Canada Inc. The Court explained that “[f]or KCI to succeed, it must show that Euro imported works that would have infringed copyright if they had been made in Canada by the persons who made them.” However, in the case of KCI, the products at issue were Toblerone bars bearing copyrighted works which where first manufactured and sold in Europe by the Licensors and owners of the copyrights. The Court reasoned that under section 27(2)(e) of the Copyright Act KCI as a licensee may not sue the owners of the copyrights for copyright infringement. Its only remedy is for breach of contract. Accordingly, no cause for copyright infringement exists against the legitimate purchaser.

This result is different from that previously reached in the United States in the case of Quality King Distributors, Inc. v. L’Anza Research International, Inc. (a case in which the Gray Blogger was amicus counsel) In Lanza the US Supreme Court ruled that where the manufacturing and sale of a product bearing a copyrighted work takes place abroad, such a sale does not take place under the laws of the US and the sale does not, therefore, constitute a valid first sale so as to exhaust the copyright owner’s rights.

This decision also delineates  a difference between US and Canadian law regarding licensor liability.  Under US law a licensor can be liable to the exclusive licensee for copyright infringement, if the licensor exercises rights that it has previously exclusively licensed.

The Euro-Excellence decision promises to keep different parallel market standards in the two neighboring countries for the foreseeable future.

On July 23, 2007, the Supreme Court of Canada announced that that it will deliver its decision on Euro-Excellence, Inc. v. Kraft Canada, Inc. tomorrow July 26, 2007. This is a case which, if sustained, will allow the exclusion of parallel market products which bear registered copyrights from the Canadian marketplace. Although the reasoning is different, the result would be similar to that of the Lanza decision in the United States. In anticipation of this important decision the Gray Blog felt that it was worth reviewing the issues involved and the history of the case.

The case began in 2004 when Kraft Canada, Inc. (KCI) brought suit against Euro-Excellence, Inc. (Euro), a former exclusive distributor, alleging copyright infringement under section 27(2)(e) of the Canadian Copyright Act. Based on the importation by Euro of Toblerone chocolate bars (the Gray Blogger’s favorite chocolate) bearing registered artistic copyrights. The copyrights at issue were the Toblerone bear in mountain design which was registered by Kraft Foods Schweiz in 2002 and the Cote d’Or elephant design which was registered by Kraft Foods Belgium in 2002. Both of these designs were licensed exclusively to Kraft Canada.

Section 27(2)(e) states in relevant part:

27. (1) It is an infringement of copyright for any person to do, without the consent of the owner of the copyright, anything that by this Act only the owner of the copyright has the right to do.

(2) It is an infringement of copyright for any person to

(a) sell or rent out,

(b) distribute to such an extent as to affect prejudicially the owner of the copyright,

(c) by way of trade distribute, expose or offer for sale or rental, or exhibit in public,

(d) possess for the purpose of doing anything referred to in paragraphs (a) to (c), or

(e) import into Canada for the purpose of doing anything referred to in paragraphs (a) to (c),

a copy of a work, sound recording or fixation of a performer’s performance or of a communication signal that the person knows or should have known infringes copyright or would infringe copyright if it had been made in Canada by the person who made it.

(3) In determining whether there is an infringement under subsection (2) in the case of an activity referred to in any of paragraphs (2)(a) to (d) in relation to a copy that was imported in the circumstances referred to in paragraph (2)(e), it is irrelevant whether the importer knew or should have known that the importation of the copy infringed copyright.

The trial court concluded that the defendant infringed KCI’s copyrights and awarded $300,000 in damages. The Federal Court of Appeal denied the appeal but referred the matter back to the trial court for a re-calculation of damages. The critical language in the Appellate Court’s ruling states:

[R]eproductions of protected works that are made outside Canada, even by the copyright holders KFB and KFS, may not be imported into Canada by Euro Excellence for the purpose of doing anything referred to in paragraphs 27(2)(a) to (c), without there being a secondary infringement of KCI’s copyright, because KCI has an exclusive right of reproduction for Canada, even as against KFB and KFS, and Euro Canada knew that KCIs exclusive rights in the two works had been registered for Canada.

If upheld, the appellate Court’s ruling would allow brand owners to bar parallel market imports by adding copyright content to product packaging. The Gray Blog will watch and report on the Supreme Court’s decision in this important case.

Special thanks to Howard Knopf for information regarding this case. Howard participated in the lawsuit as counsel for the Retail Council of Canada, a pro-parallel market group.

The Gray Blogger just returned for the USPTO China Road Show.  The program was a huge success drawing nearly 400 registrants.  The speakers from various firms and agencies were very well informed and provided useful insight on the complex problems and opportunities of protecting Intellectual Property in China.  The key takeaway lesson was to plan your IP strategy and take steps to protect your intellectual property before you make public disclosure of your intent to do business in China.  If you wait until you have begun production or distribution, you are already too late.

All in all the presentation was very rewarding and I highly recommend that you consider attending if you have any interest in the subject.  The USPTO will be conducting two additional road shows in the coming year in the mid-west and in California.  Special kudos to Susan Anthony and Conrad Wong, both of the USPTO, and to their team, for running a very professional program.

The Second Circuit has published an opinion which was previously filed under seal in Zino Davidoff S.A. v. CVS Corp., 2007 WL 1933932 (S.D.N.Y. July 2, 2007). The court grant international fragrance manufacturer Davidoff & Cie, a Swiss company, preliminary injunctive relief against CVS Corp., the multi-state pharmacy operator, preventing the further sale of parallel market and counterfeit COOL WATER fragrances. The decision, although an interim order, is significant for furthering the position that decoding by removal of UPC codes constitutes a material alteration since “(i) it restricts Davidoff’s ability to identify and remove counterfeit goods; (ii) it undermines Davidoff’s ability to identify, inspect and, if necessary, recall defective product.” The Court found that these considerations were sufficient to establish a likelihood of confusion and stated that “Plaintiff’s witnesses persuasively testified that the decoded gray-market fragrances make detection of counterfeit products far more difficult, as counterfeiters have become more sophisticated in packaging fake COOL WATER products.”

The Court also rejected CVS’s argument that the UPC system should not be protected because there are superior alternatives, such as date stamping the products. The Court disagreed and ruled that the law does not require that Davidoff adopt the most effective quality control procedures possible, as courts are reluctant to inject themselves into such business judgments. It is not clear whether CVS offered its own track back scheme for these products.

The goods at issue involved allegedly commingled counterfeit and parallel-market bottles of COOL WATER fragrance. Pursuant to a TRO, beginning in January 2007, Davidoff conducted inspections of CVS’s inventory of COOL WATER products. In total, Davidoff’s inspectors examined 33,369 units of COOL WATER fragrances. Of these, 836 units were identified as counterfeit and 16,600 units were found to be decoded gray-market products.

From the brand owner’s perspective, this decision constitutes an important victory since it prevents decoding. Decoding is a key element in preventing the brand owner from retaliating against the original reseller who sold the goods into the parallel market.

From the parallel market perspective, this decision could effectively undermine distribution of genuine coded products in the parallel market. Moreover, by rejecting the availability of alternative product tracking schemes, the Court does not seem to allow much room for maneuvering.

We will continue to monitor.

The Moscow News Weekly reports on a crackdown by the government of the Russian Federation against gray market electronics. In an effort to re-engineer the current market, the government is temporarily discontinuing import duties on digital cameras and cellular phone components while, on the other hand, Russian Customs begins recording the serial numbers of all laptops and other digital devices imported into Russia. The goal is to encourage domestic assembly and to discourage cheap parallel market imports which presently constitute a substantial majority of Russian imports.

In an effort to show their support for this new policy initiative, some of the largest chain stores in the nation have signed a declaration circulated by the Russian Association of Trading Companies and Manufacturers of Consumer Electronics and Computers (RATEK),committing to purchase goods from authorized suppliers.  Some experts have expressed doubt in the policy’s effectiveness.
For the full article click here.

Approximately 900,000 of tainted allegedly counterfeit toothpaste which are being recalled from public institutions in Georgia, Florida, North Carolina and South Carolina.   Similar finds have been made in other parts of the country, including Puerto Rico, and abroad in Panama, the Dominican Republic and Australia.  Although initial reports stated that the product entered the US through parallel market sales, it is now unclear whether the case involves tainting of an entire supply chain including authorized and unauthorized resellers.

According to a report in the New York Times, drug distributor McKesson Corp said it was recalling its China-made EverFresh brand after it was identified as containing trace amounts of the chemical known as diethylene glycol, a compound used in anti-freeze. Officials from the FDA say that even a trace amount of this chemical could present potential health problems for young children and individuals with kidney conditions.

The manufacturers of these products were identified as Goldcredit International Enterprises Limited, Goldcredit International Trading Company Limited, and Suzhou City Jinmao Daily Chemicals Company Limited.   The counterfeit toothpaste is labeled made in China or, in the most recent finds, as “manufactured in South Africa”, with several misspellings such as ‘South Afrlca’ and ‘Dental Assoxiation’ on the packaging.  The product is sold under several brands including PACIFIC, Dentakleen, BrightMax, DentaPro, Dentakleen Junior and EVERFRESH.

More recently, tainted COLGATE brand toothpaste was also found.  In a press release last week Colgate categorically stated that it does not use, nor has ever used, diethylene glycol as a toothpaste ingredient.

Microsoft Corporation continued its aggressive campaign against parallel market importers and against companies that pre-installed unlicensed copies of their well known operating system and office packages by filing six nine new lawsuits in Florida:

MICROSOFT CORPORATION v. AMERICAN BEGONIA CORPORATION ET AL, 1:07-CV-21642
MICROSOFT CORPORATION v. COMPUTERS & LAPTOPS CENTER, INC. ET AL, 1:07-CV-21643
MICROSOFT CORPORATION v. COMPUGLOBE, INC. ET AL, 0:07-CV-60900
MICROSOFT CORPORATION v. KEN’S COMPUTERS INC. ET AL, 5:07-CV-00258
MICROSOFT CORPORATION v. PC TOUCH OF FLORIDA, CORP. ET AL, 1:07-CV-21644
MICROSOFT CORPORATION v. TAKE A BYTE COMPUTERS, INC. ET AL, 0:07-CV-60901
MICROSOFT CORPORATION v. CRUZ ET AL, 8:07-CV-01117
MICROSOFT CORPORATION v. GUNTHER, 3:07-CV-00596
MICROSOFT CORPORATION v. NETFX PRO, INC. ET AL, 3:07-CV-00597

The suits filed in the Middle and Southern Districts of Florida set forth claims of copyright and trademark infringement as well as state counts for unfair competition. This wave of lawsuits principally seems to focus on pre-installers of unlicensed software. Much of this software is purchased overseas and enters the country in through the parallel market. They add to the growing number of lawsuits recently filed in other parts of the country by Microsoft against parallel market software importers.

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