The Gray Blog

It has been a while since we’ve seen a material differences case come through the courts.  Thanks to the Eastern District of New York the dry spell is over.  In Zip International Group, LLC. v. Trilini Imports, Inc., 09-CV-2437 (E.D.N.Y. 2011) the court reviewed a claim by a sunflower seed reseller against a parallel market importer.  The Court granted summary judgment in favor of the defendants and ruled that the plaintiff failed to show a material difference in the parallel market product which would justify interfering with the resellers rights.

The Court’s opinion sets forth the following facts:

Since 2007, Zip has sold sunflower seeds processed by OOO Troll Co. (“Troll”) a Russian company. The product is sold in packaging bearing two marks. The larger of the two — a stylized portrait of an old woman in a flowered head scarf, located on the front of the package — is owned by Babkiny Semechki LLC (“Babkiny Semechki”) and is referred to here as the “BABKINY mark.” The second — a small drawing of a troll located on the back of the package near the nutritional information — is owned by Troll (the “TROLL mark”). The marks are referred to here collectively as the “Trademarks.” Babkiny Semechki and Troll are affiliated companies. The seeds are imported in cartons containing consumer-sized packages, and each package of seeds bears the marks described above.

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Although Trilini knows or should know of Zip’s exclusive U.S. license to the Troll mark, Trilini nevertheless buys Troll seeds in Russia and resells them in the United States.  Trilini does not repackage the individual-sized bags of seeds, but sells them in Troll’s original packaging. The packages are identical to the packages in which the Zip-imported seeds are sold.

In its first amended complaint Zip alleged that there was a difference in seasoning between the foreign sold product and the domestic product.  Based on this allegation the Court refused an initial motion to dismiss.  Zip later filed a second amended complaint in which it withdrew its allegation that the seasoning was different and admitted that the parallel market product was identical to the domestic product.  After discovery Trilini moved for summary judgment.

The Court found that Zip produced no evidence indicating that the seeds sold by Trilini were of an inferior quality to those sold by Zip, or that the standards to which Trilini’s products were held are no different from those to which Zip’s own products were held. Furthermore, the Court found that Trilini, an experienced importer and distributor, demonstrated that the seeds it imported were kept in a state of the art warehouse and that it receives storage instructions with each shipment.  This, in fact, exceeded Zip’s own quality control requirements with its own Russian supplier.  The court found that Zip had not shown that there was any material difference between the seeds it imported and those that were imported by Trilini.

A big factor in the Court’s decision was its finding that the party entitled to control the quality of the goods was not Zip but was in fact Trol, the Russian company that processed the sunflower seeds.  Zip was merely its authorized distributor and licensee.  There is therefore no confusion when Trilini sold the seeds in the original packaging since the consumer was getting what was offered from the source that they expected.  The court also rejected several state law claims.

This case is certainly not good news for domestic distributors of foreign products.   One avenue for the distributor would have been to structure an assignment of the US mark with a buy back provision so the mark could be recorded and restricted with Customs.  Such arrangements, however, are rare and hard to structure.

Most people have heard of the parallel market in fragrances, cosmetics and electronics.  Few have heard of a parallel market in wines.  However, the New York State Assembly has and is intent on shutting it down.  Bill No. A06884, a bill introduced by Assemblyman Robin Schimminger and referred to the New York State Committee on Economic Development, seeks to restrict restaurants and retail stores to obtain wine only from a primary source or authorized distributor.  This requirement would effectively forbid the restaurant and retail store use of wines obtained in private sales and auctions.

Supporters of the bill argue that the bill is necessary to stop the distribution of counterfeit wines.  However, detractors suggest that this is special interest legislation which will only hurt consumers and reduced the diversity of available wines in the marketplace.  Opponents of the bill are asking New Yorkers to write to their legislators to voice opposition to the bill.

 

Are parallel market goods sold in Brazil at a price that is so close to the manufacturer’s price that the consumer gains no price benefit?  Why does the new Brazilian customs law probably have little impact on the parallel market?  How do parallel market goods circulate in Argentina and the southern cone countries?  Does Mercosur have an approach for dealing with transshipment of goods in the tri-border area?  All of these questions and more were discussed at the International Trademark Association Table Topic session Difficulties in Hampering Parallel Import at the Borders of the MERCOSUR countries that was held on Sunday, May 15, 2011, in San Francisco, California.  The panel was moderated by Jose Carlos Vaz e Diaz of Di Blasi, Parente, Vaz e Dias & Associados, a firm based in Sao Paolo, Brazil.  Also present for the discussion were yours truly, Jorge Espinosa of Espinosa Trueba, PL (US), Yamila Solange Etulain and Carolina Lacaze of Obligado & Cia. (Argentina),  Jurgen Romhild of Boehringer Ingelheim (Germany), Leslie A. Dempsey of Feldman Gale (US) and Rosalia Salvia of ISDIN (Spain).

 

Some stories keep coming back to life again and again.  Last month a criminal complaint was sent to the Paris public prosecutor’s office accusing Lindsay Owen-Jones, the former head of the L’Oreal, and two other L’Oreal directors with “abuse of trust.”  The complaint was filed by Janez Mercun, a Slovenian businessman whose company Temtrade had an exclusive license to sell L’Oreal products in Eastern Europe between 1974 and 1999.  Mercun charges that L’Oreal secretly sold fragrances to the parallel market in the territory.  The parallel sales were allegedly made through a company in Dubai to conceal their source and evade French taxes.  Mercun submits that this scheme undermined the value of this exclusive distributorship and unjustly enriched Owen-Jones.

This criminal action is actually a new incarnation of previous civil suits filed by Mercun against L’Oreal.  The civil first suit was settled in 1998 when L’Oreal agreed to pay Mercun’s company twenty (20) million francs.  In 2002 Mercun brought a new action claiming damages of $227 million from L’Oreal’s parallel market scheme but this suit was brought out on the basis of the prior settlement.  A 2007 appeal was refused.

The British newspaper The Guardian reports that L’Oreal denies the merits of the case.  “These unfounded accusations, highly publicized today as they were at each stage of the legal case, are an attempt to falsely reopen a case that has been closed since 2003.” Notwithstanding the merits of the criminal action, L’Oreal’s payment of a twenty (20) million dollar settlement in 2002 certainly gives the underlying claims some credibility.  Furthermore, the criminal complaint opens the door for the prosecutor to explore possible charges for tax evasion that were not part of the civil claim.

One has to wonder what impact this case and the underlying accusations could have in L’Oreal’s own efforts against parallel market resellers. Mr. Mercun may have a career as an expert witness against L’Oreal in such cases.

 

Customs and Border Protection (“CBP”) has added a new function to its recorded trademark intranet which allows brand owners to upload a product identification guides.  Once uploaded, the product identification guide will not be visible on the public CBP intellectual property search website.  It will only be visible on CBP’s Intellectual Property Rights internal Search system (IPRiS), in order to assist CBP officers and import specialists in identifying counterfeit merchandise.

You can submit your product identification guide in word or PDF format although PDF format is preferred. You can update the guide as often as you like by forwarding a new copy to the trade specialists identified at the end of this e-mail.  Your guide should provide photos, schematics and any other information which would assist officers in identifying and seizing counterfeit goods.  Naturally, your submission is subject to standard requirements for providing accurate information so attempts to manipulate the guide to stop otherwise legal goods(parallel market) could land you in hot water.

CBP emphasizes that this service is only available to brand owners who have recorded their registered trademark or copyright with Customs.  If you do not have a  registered trademark or copyright and if you have not recorded it with CBP, your guide will not be accepted.   CBP has also  issued the following guidelines related to product identification training, including the above mentioned guides:

• Product identification training materials from IPR holders should neither address CBP legal authority nor offer legal opinions concerning the course of action that CBP officers should take in any particular situation.
• CBP need not have made an actual determination that a suspect product is “counterfeit” and “piratical” in order for IPR holders to use these terms in their training materials.  However, when developing their training materials, IPR holders are encouraged to use terms such as “suspect” or “allegedly infringing” rather than “counterfeit” or “piratical,” where possible.
• IPR holders shall not instruct CBP officers and import specialists, either verbally or in writing, to examine, detain, or seize goods for IPR violations.
• Field offices and/or ports may exercise discretion when considering any offer of training from IPR holders.  Impact on port operations, such as staffing issues, should always be considered.
• Training is to be declined if an IPR holder has not recorded their rights with CBP.
• IPR holders that address legal authorities or direct action may be barred from future port training.
• A copy of the disclaimer statement (below) is required to be attached to each copy of the product identification training materials before the materials are disseminated to field personnel.

For any additional assistance or questions, CBP suggests that users contact International Trade Specialists, Mr. Gary Brabant, gary.brabant@dhs.gov , tel: 202-863-6603, or Mr. Marty Canner, martin.canner@dhs.gov , tel: 202-863-6612.  Gary and Marty are very knowledgeable and helpful and will assist you at every step of the process.

 

In Salon Fad, et al v. L’Oreal USA, Inc. et al, 10 Civ. 5063, a United States District Judge for the Southern District of New York has refused to dismiss a class action brought by beauty salon owners against well known brand manufacturers for false advertising of salon-only products.  The salon owner trade organization Salon FAD and the salon operators Cindy’s Hair Salon, Chu’s Hair Salon, Carastro & Company Hair Design, EnV Studio Salon LLC, New Millennium Salons L.L.C. d/b/a Salon 2000, Salon 1325, Sassy & Classy Salon and Spa, The Works Hair and Nail Salon, The Veranda Salon and Spa, Inc., Victoria’s Salon and Spa, William David Salon, and Vida Spa Salon (the “Salons”) brought suit against brand owners L’Oreal Usa, Inc., Conair Corporation, Farouk Systems, Inc., John Paul Mitchell Systems, Sexy Hair Concepts, Llc, The Proctor And Gamble Company, And Tigi Linea, Lp, (the “Brand Owners”)

The Salons filed their initial complaint on July 1, 2010 and amended the complaint on September 10, 2010.  The first amended complaint (the “Complaint”) asserts a class action petition for three causes of action: false advertising and unfair competition under the Lanham Act, and injunctive relief.    These counts are based on the theory that,  because the salon-only products are widely sold by discount resellers through the parallel market, the claims made by the brand owners in their salon-only advertising are false.  Furthermore, the consumer is likely to associate the false claims with the salons thereby harming their reputation.

On September 23 and 24, 2010, the Brand Owners moved to dismiss the first amended complaint.    The motions stated three principal grounds for dismissal.  First that there was no injury that could be traced to the false advertising; and that, in fact, that the false advertising provides the Salons with increased sales.  The damage was caused by the diversion and not by the false advertising.  Second, that the Salons lacked standing since they could not identify a likelihood of injury.   Third, that a claim for false advertising was not shown because the Salons had not demonstrated that consumers relied on the false advertising in making their purchase decision.

The Court rejected these grounds and accepted as plausible the Salon’s argument that their reputation is damaged because customers associate the “salon-only” advertising with the salons and therefore may stop patronizing the salons when they discover the falsity of the advertising.  Furthermore the Court found standing because the Salons have an interest in preserving their reputation with their customers and that reputation can be injured when the consumer finds the salon only products available at discount retailers.  Finally, the court ruled that the facts alleged in the complaint show that false advertising claims are material to consumer’s purchasing decisions.

In Costco Wholesale Corp. v. Omega S.A. (08-1423), the United States Supreme Court, by an evenly split court, has upheld a limited reading of the copyright law’s First Sale Doctrine.   The Court leaves untouched the Ninth Circuit’s refusal to apply the Copyright Act’s first sale doctrine to commercial products bearing copyrighted works were the product was manufactured and first sold abroad.  Accordingly,  Omega can, use the copyright laws to prevent its resale in the domestic parallel market by affixing a small copyrighted design to a principally functional product.

The impact of this decision or non-decision could be significant.  Parallel market goods provide lower cost luxury goods to consumers  by forcing the manufacturer to compete against the lower priced, genuine, parallel market product.  This genuine product is usually purchased and imported from countries where the manufacturer has chosen to sell the product at a lower price.    As Costco expressed in its briefs, this rule “creates perverse incentives” for outsourcing the manufacturing of goods overseas in order to escape the limits of the first sale doctrine, as applied to U.S.-made goods.  If manufacturers take advantage of this rule, the declining availability of parallel market goods could lead to substantially higher prices for many luxury goods in the US market.

From the manufacturer’s perspective, this decision gives them an additional tool with which to control the sale and pricing of its products in commercial channels.   By curtailing third party resales of genuine product, the manufacturers can also prevent the commingling of counterfeit goods with the genuine parallel market goods.   Many luxury products are already manufactured abroad and may be able to easily take advantage of this ruling.

It is important to note that there was no published decision in the case to explain the thoughts of the justices.  The effect of a 4-4 court is that the lower court decision is upheld without a decision which would create unwarranted or undesired precedent.  There was no tie breaker since Justice Elena Kagan recused herself from the case because of her prior submission of a brief recommending against review, while Solicitor General.   Now it will be interesting to see how other circuits interpret and apply the Ninth Circuits reasoning.

The US Patent and Trademark Office has instituted a “Data visualization Center” which provides a graphic dashboard to show department statistics.  The site is repleat with dial graphics and charts to illustrate the different statistics.  Interesting information to glean from the site includes the following statistics:

• First office action pendency 26 months.
• Total backlog 728,055 applications.
• Number of patent examiners 6,038.
• Pendency from filing to board decision 76.1 months.

The United States Court of Appeals for the Ninth Circuit in Timothy S. Vernor v. Autodesk, Inc., 2:07-cv-01189-RAJ, vacated the summary judgment ruling of the lower court and held that the first sale doctrine does not apply to software sold pursuant to shrink wrap licenses that prohibit resale. This ruling binds software users in the ninth circuit to  shrink wrap license terms and invites legislative clarification.

This case arises from the purchase and resale of AutoCAD Release 14, a popular vector drawing software package used by architects, manufacturers and designers. In March 1999, Autodesk transferred to Cardwell/Thomas & Associates, Inc. (“CTA”) 10 copies of Autodesk 14 subject to a shrink wrap license agreement (“SLA”).

Autodesk’s SLA imposed a significant number of transfer restrictions: it stated that the software could not be transferred or leased without Autodesk’s written consent, and the software could not be transferred outside the Western Hemisphere. More specifically Autodesk’s license provides:

YOU MAY NOT: (1) modify, translate, reverse engineer, decompile, or disassemble the Software . . . (3) remove any proprietary notices, labels, or marks from the Software or Documentation; (4) use . . . the Software outside of the Western Hemisphere; (5) utilize any computer software or hardware designed to defeat any hardware copy-protection device, should the software you have licensed be equipped with such protection; or (6) use the Software for commercial or other revenue-generating purposes if the Software has been licensed or labeled for educational use only.
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[Y]ou must destroy the software previously licensed to you, including any copies resident on your hard disk drive . . . within sixty (60) days of the purchase of the license to use the upgrade or update . . . . Autodesk reserves the right to require you to show satisfactory proof that previous copies of the software have been destroyed.

CTA later upgraded to version 15 of the software for a reduced price subject to a new SLA which required the prior version of the software be destroyed. Instead of destroying the prior version, CTA sold the 10 copies of Autodesk 14 to Vernor at an office sale. Vernor then offered the software for sale on Internet reseller eBay.

Autodesk filed a Digital Millennium Copyright Act (“DMCA”) take-down notice with eBay claiming that Vernor’s sale infringed its copyright, and eBay terminated Ver- 2Autodesk brought suit in federal district court against CTA for these sales. The parties stipulated to entry of a permanent injunction against CTA from directly or contributorily infringing Autodesk’s copyrights. Autodesk advised Vernor that it conveyed its software copies pursuant to non-transferable licenses, and resale of its software was copyright infringement. Vernor filed a DMCA counter-notice with eBay contesting the validity of Autodesk’s copyright claim. Autodesk did not respond to the counter-notice. eBay reinstated the auction, and Vernor sold the software to another eBay user.

In April 2007, Vernor purchased four more authentic used copies of Release 14 at CTA’s office sale. The authorization codes were handwritten on the outside of the box. He listed the four copies on eBay sequentially, representing, “This software is not currently installed on any computer.” On each of the first three occasions, the same DMCA process ensued. Autodesk filed a DMCA take down notice with eBay, and eBay removed Vernor’s auction. Vernor submitted a counter-notice to which Autodesk did not respond, and eBay reinstated the auction.

When Vernor listed his fourth, final copy of Release 14, and again went through the DMCA take down notice process. This time eBay terminated his account due to the repeated claims by Autodesk. In response, Vernor brought this declaratory judgment action against Autodesk to establish that his resales did not infringe Autodesk’s copyright. The district court issued the requested declaratory judgment, holding that Vernor’s sales were lawful because of two of the Copyright Act’s affirmative defenses that apply to owners of copies of copyrighted works, the first sale doctrine and the essential step defense.

The first sale doctrine, codified at 17 U.S.C. § 109, allows the “owner of a particular copy” of a copyrighted work to sell or dispose of his copy without the copyright owner’s authorization. The first sale doctrine does not apply to a person who possesses a copy of the copyrighted work without owning it, such as a licensee. The essential step defense states that a software user who is the “owner of a copy” of a copyrighted software program does not infringe by making a copy of the computer program, if the new copy is “created as an essential step in the utilization of the computer program in conjunction with a machine and . . . is used in no other manner.” 17 U.S.C. § 117(a)(1). Based on these arguments the District Court entered summary judgment in favor of Venor. Autodesk appealed to the 9th Circuit.

On appeal the 9th Circuit overturned the decision of the trial court and ruled: “We hold today that a software user is a licensee rather than an owner of a copy where the copyright owner (1) specifies that the user is granted a license; (2) significantly restricts the user’s ability to transfer the software; and (3) imposes notable use restrictions. Applying our holding to Autodesk’s SLA, we conclude that CTA was a licensee rather than an owner of copies of Release 14 and thus was not entitled to invoke the first sale doctrine or the essential step defense.”

The Court recognized that there were significant policy issues raised by its decision. However, it refused to be swayed by the policy arguments. Instead the Court passed the ball to the legislative branch stating: “Congress is free, of course, to modify the first sale doctrine and the essential step defense if it deems these or other policy considerations to require a different approach.”

The latest allegedly unauthorized leak of the secretively negotiated Anti Counterfeiting Trade Agreement (“ACTA”) has revealed a steady weakening of the some key Internet related provisions.  This comes as a blow to US efforts to force adoption of broader mandatory standards.

The US already applies domestically the Digital Millennium Copyright Act (“DMCA”) which sets severe penalties on reverse engineering, cracking and unauthorized distribution of copyrighted works.  The US sought to build into ACTA a super DMCA which would require enforcement even beyond that authorized by the DMCA and the rulings of various US courts.

Key elements which have been dropped from the draft include mandatory liability for internet service providers (the companies that give you access to the internet) for materials transmitted on their networks and a “three strikes you’re out” rule which would effectively ban a person from the Internet after three file sharing violations.

In addition to these key Internet terms several issues remain in dispute and may not survive to the final draft:

• The US wants to limit the treaty to trademarks and copyrights while the European Union wants the treaty to apply to all intellectual property.
• The US wants to prohibit all circumvention technology, subject to exceptions which do not undermine the technology.  This system is no unlike the current DMCA method of granting limited exceptions such as for personal phone unlocking.
• The US wants courts to have discretion and not be required to assess legal costs against infringer.
• The US wants criminal penalties for unauthorized copying of films shown in a public forum.
• The US wants to prohibit digital rights management circumvention technology even when its use does not constitute copyright infringement (a position rejected by US courts).  This would effectively create a new right of non-circumvention delinked from any traditional intellectual property concept.  In this respect the US seems to be seeking a way of overturning US legal precedent by enactment of the treaty thereby avoiding internal debate on the implications of the change.

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