The Gray Blog

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.

It is a common misconception amongst those who have a passing knowledge of the parallel market that it is universally despised and opposed by trademark owners/manufacturers. This is far from true. Although the battle between trademark owners and parallel market resellers usually garners the headlines, there is a cooperative relationship between many manufacturers and the parallel market.

This entente cordiale exists for various reasons. In some cases, the manufacturer wants to seed lower market segments that it would normally not service as part of its visible marketing posture. In others, a subsidiary in one region, interested only in their regional sales numbers, turns a blind eye to sales into another territory. Yet in others, the parallel market provides a convenient way of clearing out old or unpopular inventory.

Normally these dealings between the manufacturer and the parallel market reseller are kept fairly private. This is why The Gray Blog was surprised to receive a box marked with Coty Beauty name and address which was clearly labeled on the outside flap with various routing options including “GREY MARKET”:

Coty Beauty, Inc. is a major fragrance reseller based in the US. Coty Beauty markets brands such as adidas, Rimmel, Celine Dion, Miss Sixty, Jovan, Isabella Rossellini, Esprit, and David and Victoria Beckham.