The Gray Blog

In the recent case of Beltronics USA, Inc. v. Midwest Inventory Distribution, LLC, No. 07-3340 (10th Cir. April 9, 2009), the 10th Circuit ruled that differences in warranty and service terms can constitute a “material” difference which prevents resale despite under the first sale doctrine.  Beltronics is a manufacturer of electronics equipment which it sells under its Beltronics trademark.  Beltronics maintained at least two authorized distributors who agreed to sell the products for a specified minimum price.  Apparently in violation of their distribution agreements, those distributors sold Beltronics radar detectors to Midwest, which in turn resold them as “new” on the internet auction site eBay.

To prevent Beltronics from discovering that Midwest’s inventory had been supplied by the two distributors, the distributors either replaced each radar detector’s original
serial number label with a phony label or removed the original label altogether
before shipping equipment to Midwest.  On rare occasions, when the distributors
supplied Midwest with a radar detector bearing an original serial number label,
Midwest removed the label prior to resale.

In September 2007, Beltronics filed suit against Midwest alleging (1) counterfeiting and federal trademark infringement under 15 U.S.C. § 1114; (2) false designation or origin under 15 U.S.C. § 1125; and (3) trademark infringement, unfair competition, and passing off in violation of state law.  Beltronics also sought a preliminary injunction.  The preliminary injunction was granted and Midwest appealed.

On appeal the 10th Circuit rejected the argument that “material” differences should be limited to physical differences.    The absence of manufacturer warranty service was material difference enough.   While affirming that adequate disclosure could insulate the sale, the 10th Circuit affirmed the lower court’s rulling that the disclosure placed on the product listing by Midwest was insufficient.  Midwest’s disclosure stated:

WARRANTY – WE PROVIDE A 1 YEAR DEFECTIVE
REPLACEMENT WARRANTY.  THE MFG WILL NOT HONOR
THE WARRANTY IF PURCHASED OFF EBAY.  SINCE WE
HONOR THE WARRANTY, THE SERIAL NUMBER HAS BEEN
REMOVED AND RETAINED BY US.

The district court rejected this disclosure as insufficient because no notice was provided on the products themselves and the disclosure failed to address software updates and other support elements.  Evidence of actual confusion by consumers contacting Beltronics for warranty service further sealed the decision.

Costco Wholesale Corporation (”Costco”) has filed a petition for writ of certiorari with the U.S. Supreme Court seeking to revisit and reconsider the proper interpretation of the first sale rule for foreign manufacturing and sales of products.  The Petition arises in Costco v. Omega, S.A. a case out of the 9th circuit.  This action arises out of the efforts of respondent
Omega, S.A. (“Omega”), to prevent petitioner Costco from reselling watches originally sold by Omega to authorized for-
eign distributors.  Omega affixed a symbol to its watches that it later registered under the Copyright Act in order to claim that, as foreign manufactured goods, under the rationale set forth in Quality King Distribs., Inc. v. L’Anza Research Int’l, Inc., 523 U.S. 135 (1998).  The Ninth Circuit upheld that the resale of the products was not protected by the first sale doctrine.  According to Costco: “The words “lawfully made under this title” quite clearly do not mean “manufactured in the United States,
and also manufactured abroad, but only in instances where the copyright holder sells into the United States.”  We will continue to monitor.

The European Commission has enacted a 40% reduction in the official fees required to obtain a Community Trade Mark by merging the application and registration fees.  Previously an application fee was paid at the start of the registration process and an additional fee was paid once the registration was granted.  Effective May 1, 2009, the registration fee portion has been eliminated for all pending and future applications.  The current total official fees for a CTM application are € 1,050.00 for a paper application and € 900 for an electronic application.  Effective August 1, 2009, the official fee for a CTM international application under the Madrid Protocol will be reduced to € 870.00.

This change reflects a desire to encourage great use of the CTM system by small and mid-size firms.  “As a non-profit-making European agency, we have been trying to play our part in providing value for money in this essential service. Taking into account the earlier cut in trade mark fees in 2005, through efficiency measures and greater use of computer technology we have been able to more than halve the cost of Community trade marks over a five year period.”

Justice USA has listed the Gray Blog amongst its top 50 Internet law blogs.  Other popular and well known blogs which also made the list include The TTABlog, The Legal Satyricon, Erik J. Heels, Likelihood of Confusion, Technology and Marketing Law Blog
and the ABA Journal Privacy Law Blog.  Justice USA is a new blog devoted to personal security and law issues.

Well Summer approaches and the Gray Blogger was brought out of his slumber by a new book.  GRAY MARKETS by David R. Sugden, Oxford University Press © 2009, ISBN: 978—0-19-537129-1 (Trade Paperback).   The book jacket describes GRAY MARKETS as “the first comprehensive analysis of the gray market and a blueprint for attorneys and businesses to prevent, detect, and litigate gray market cases.”  To a great extent the book lives up to its description.

But first the caveat.   In approaching this book the reader is warned to be aware of a potential blind spot for the practitioner.   The author, while clearly accomplished and well informed in the area of law, falls prey to the persuasiveness of his own arguments and ignores potentially persuasive rebuttals.   His position is one that sees no good in the parallel market.  A practitioner’s reliance in such arguments without an adequate appreciation of the counter-arguments can undermine the attorney’s credibility with the Court.  Reading the book one often feels that he or she is reading a brief without reading the response.

The author’s clear bias against the parallel market is nowhere more clear than where he lectures manufacturers who knowingly exploit the parallel market as a vehicle for developing brand identity or for selling off excess goods.   Since the manufacturer has a right to control the manner of distribution of his or her brand, it is certainly the height of hubris to preach to them when they themselves exploit the parallel market for their own purposes.  One is left feeling that in the author’s opinion the parallel market is not gray but black.

So after this introduction you might expect a negative review of GRAY MARKETS.  On the contrary, I think that for the attorney or businessman seeking to obtain a good general understanding of strategies and tactics that can be used to discourage and combat parallel market sales, Mr. Suden’s book provides a well informed survey of legal and market strategies.  The book is broad in its coverage if somewhat US centric.  It does not cover all strategies, particularly market techniques that have been employed in Europe to identify regional parallel market sales.   That said, what it does cover is far more comprehensive and well informed than anything that I have previously seen.

I therefore recommend this book to anyone seeking to structure a comprehensive anti-parallel market strategy for his or her company or clients with the caveat that it be read with a clear vision of its obvious bias and with great caution in its mingling of counterfeiting with legitimate parallel market trade.  Likewise, for the parallel market reseller, this book provides a great preview of likely court arguments and legal strategies that need to be anticipated in this challenging trade.

To buy a copy of the book please click the following link: Gray Markets: Prevention, Detection and Litigation

On Friday the Senate approved passage of the PRO-IP act after stripping out provisions which would have given the department of justice the power and obligation to litigate civil suits on behalf of content owners. Initially known as the Enforcement of Intellectual Property Rights Act, s.3325, the bill was recently renamed the “Prioritizing Resources and Organization for Intellectual Property Act.” (PRO-IP) The civil enforcement provision was one of the most controversial about the new law and had induced the Department of Justice to submit a letter to the Senate complaining that the law threatened to turn government attorneys into “pro bono lawyers for private copyright holders regardless of their resources.”

A remaining provision which has drawn fire is the creation of an IP “czar” within the White House. The Bush administration has objected to this as an usurpation of executive authority. Nevertheless this latter provision remains in the act and raises the questions of whether the White House will exercise its veto.

U.S. Customs and Border Protection (”CBP”) has released its mid year intellectual property (”IP”) seizure statistics for 2008.  Patterns that are evident from these numbers are a significant increase in value of goods seized per shipment and the continued growth of China as a source of IP violations.

The domestic value of goods seized for IP violations at the mid-year point of Fiscal Year (FY) 2008 increased by 2.7% to $113.2 million (M) from $110.1M at the mid-year point of FY 2007.  The total number of IP seizures decreased by 1%, from 7,245 to 7,166.   This suggests a higher value per seizure.  It is important to remember that at least some portion of these seizures are genuine parallel market goods which CBP detains under dubious claims that they may be counterfeit.  CBP demands a letter of authorization from the brand owner which is invariably denied and leads to seizure of the merchandise.

China was the source of the largest number of CBP IP seizures at mid-year FY 2008 with a domestic value of $96.7M, accounting for 85% of the total value seized.  In FY 07, China accounted for 80% of seizure value.  Of even greater concern is the fact that China is the source of 90% of “safety & security” IP seizures.  Safety & Securty seizures generally involve pharmaceuticals and other items viewed as dangerous to the health and safety.

As if the China numbers were not already significant, Hong Kong is treated as a separate entity by CBP for statistical purposes.  That said, Hong Kong qualified as the second largest source of IP related seizures.  Total seizures amounted to more than $5.5 million.  No other country amounted to more than $2 million in seized goods or more than 1% of total seizures.

Clearly the problem with counterfeits originating from China seems to be worsening.  This is not surprising considering the soft glove approach towards China’s IP enforcement policies.
Footwear was the top commodity seized at mid-year FY 2008 with a domestic value of $40.3M, which accounted for 36% of the entire value of infringing goods.

The categories of Handbags/Wallets/Backpacks, Cigarettes, and Sunglasses had significant increases in domestic value at mid-year FY2008 over mid-year FY 2007 values.   Overall the number of footwear seizures has declined by 48% indicating a large increase in the value of the shipments seized.

Finding good books on the parallel market is not an easy task. Despite its long and prominent history in US and European legal practice, the parallel market is usually relegated by most writers to a chapter regarding diversion of goods. It is therefore a treat to find an entire treatise devoted to the parallel market. The fact that it is both readable and intelligent is a plus.

Parallel Trade In Europe, by Christopher Stothers, published by Hart Publishing is just such a treat. As revealed by its title, it explores the history and development of the parallel market trade in Europe. Mr. Stothers, a solicitor working for Milbank, Tweed, Hadley & McCloy LLP, in London, clearly has developed a broad and rich understanding of the topic.

The experience with the parallel market in Europe is very different from that in the US. The difference in how parallel market rights apply “inside the community” versus “outside the community” has no familiar parallel in US practice. Similarly re-packaging restrictions follow unique restrictions. As a result, the book provides European practitioners with a great refresher and non-European practitioners with a very readable introduction.
Sample chapter headings include:

2.I.B. Industrial and Commercial Property
2.IV.A. General Rights to Prevent Repackaging.
2.VI. Rights which are not Subject to Exhaustion
3.I. Art. 81. Anti-compettitive Agreements
5.I.B. International Exhaustion under Community Legislation
5.I.E. Internal Enforcement.

Overall, Parallel Trade in Europe will provide the casual reader with a great overview of the fascinating history and status of parallel market law in Europe and will provide the professional practitioner with an invaluable reference resource. I enjoyed the book and highly recommend it.

Apple, Inc., manufacturer of the well known line of computers and software, filed suit on July 3 in the federal district court for the northern district of California against Florida company Psystar, Inc.   The suit alleges counts for violation of its shrink wrap license, trademark and copyright infringement.  Psystar has been manufacturing and selling a line of computers which sell pre-installed with Apple’s OSX operating system.  Apple’s shrink wrap license which comes with OSX specifically requires that the software be installed only on Apple branded computers.  Psystar has previously expressed defiance at claims that it might be violating Apple’s rights.  Statements that Apple’s license might violate US monopoly law have been attributed to Psystar employees.  We will monitor.

After a devastating ruling from a French Court, reported previously in the Gray Blog, and a user revolt over terms of payment, E-Bay has finally received some good news.  In a sixty page decision District Court Judge Richard J. Sullivan of the  U.S. District Court for the Southern District of New York has ruled against Tiffany on all counts.  The Court vindicated anti-counterfeiting procedures presently employed by eBay and other online auction services and confirmed that the burden of policing online sellers rests squarely on the shoulders of the trademark owner.  The decision in this case is in stark contrast with recent decisions by French courts which seek to obligate the on-line services to serve as gatekeepers, content monitors and policemen for their users.

The lawsuit filed by famous jeweler, Tiffany Inc., sought damages against online auction house dBay for the sale of counterfeit silver jewelry items sold in the service from 2003 to 2006.  The suit alleged counts for direct and contributory trademark infringement, false advertising, unfair competition, and direct and contributory trademark dilution.

Tiffany acknowledged that the users of the eBay service rather than eBay listed and sold the counterfeit articles.  Tiffany argued, however, that eBay was on notice that the problem existed and that this created an obligation to investigate and control the problem.  Tiffany effectively wanted eBay to refuse to post any listing with five or more Tiffany items and to suspend any seller whom Tiffany suspected to be involved in infringing activity.  eBay defended that it was Tiffany’s burden to monitor the site and to bring violations to its attention.

The Court rejected Tiffany’s position on various grounds.  The Court concluded that the generalized allegations of trademark infringement made by Tiffany were insufficient to impute knowledge or a reason to know of trademark infringement to eBay.  Although eBay had a generalized knowledge of counterfeiting activities on its site, “it took reasonable steps to address the wrongdoing through general anti-fraud measures.”

In conclusion the Court stated that while it is not unsympathetic to Tiffany’s plight “the law is clear: it is the trademark owner’s burden to police its mark and companies like eBay cannot be held liable for trademark infringement based solely on their generalized knowledge that trademark infringement might be occurring on their websites.”

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