The Gray Blog

Within two weeks of an alleged leak we have another bigger and better document allegedly stepping through the internet terms of the highly secretive Anti-Counterfeiting Trade Agreement (ACTA).  The new document appears to be a European Union (EU) paper outlining the Internet and Civil Enforcement chapters, and setting forth proposals from the U.S. and responses from the EU, Japan, and other negotiating countries.  Highlights include:

• US advocacy of anti-circumvention controls and opposition from the EU, Japan and New Zealand.
• Arguments for internet service provider liability for knowing facilitation of infringement.
• US advocacy of global implementation of a Digital Millennium Copyright Act (DMCA) style enforcement protocol.
• Advocacy by some countries of limiting ACTA civil enforcement provisions to trademarks and copyrights and not to all intellectual property.
• The EU is seeking injunctive powers against infringing intermediaries.

For more information check out the article on Michael Geist’s Blog.

An alleged excerpt of the secretive Anti-Counterfeiting Trade Agreement (ACTA) has been disseminated as a PDF on a Google file share site.  The PDF is allegedly the proposed language for Article 2.17 of the act providing for internet and digital transmission restrictions.  The file is titled  “Enforcement procedures in the digital environment” and is divided into 7 numbered paragraphs and subsections.

The key provisions revealed in the document include:

• a duty to technology firms to shut down infringement where they have “actual knowledge” that such is taking place;
• a trademark takedown procedures similar to the current copyright takedown procedures;
• an expansion of the DMCA’s injunction against breaking digital locks;
• civil and criminal remedies to be supplemental and cumulative to other remedies;
• a provision for forcing ISPs to implement procedures to monitor for infringements and to address violations. (a footnote suggests that terminating user accounts for repeat infringers)

If genuine, this excerpt discloses many of the concerns with the Act that Internet advocates have been condemning.  For example, the duty to shut down infringement on actual knowledge that infringements may be occurring has previously been suggested in legal arguments.  Critics have characterized the argument as equivalent to requiring a Xerox to stop selling copiers to Kinkos because it has actual knowledge that infringements take place at Kinko’s outlets.  Likewise the termination of accounts are criticized because an entire family’s account is cancelled because of acts which may have been committed by third parties or by a child.  Furthermore, denial of service would arise without legal process and without a specific guaranteed appeal process.

There has been no confirmation that the document is genuine.

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

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.

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 Gray Blogger (a.k.a me) will be speaking on July 24 on a panel at the United States Patent and Trademark Office (USPTO) China IP Road Show in Philadelphia, PA. The Road Show will take place at the Marriott Philadelphia Downtown on July 23-24, 2007. The subject of my panel will be U.S. border protection strategies against counterfeits and restricted imports. I look forward to meeting any of you who can attend.

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