The Gray Blog

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.

The Telegraph of Calcutta, India, reported this Thursday that Apple has delayed the release of the now famous iPhone in India until mid 2008. Although India is one of the world’s fastest growing cell phone markets, release of the iPhone is being delayed until a year after US release and half a year after release in Europe. The Telegraph attributes the delay to Apple’s fears of gray market sales and compares the situation to that of the iPod about which it says “official sales of the iPod are dwarfed by indistinguishable lookalikes in the grey market.” Clearly the Telegraph was not referring to gray market sales but to counterfeits and look alike knock offs.  Rumor has it that the iPhone’s activation mechanism will prevent traditional parallel market sales.  Only time will tell.  Unfortunately for Indian consumes that time won’t arrive for a while.

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.

Lets be honest, its been a slow news week for the gray market so I have to dig up some general material. Here are some practice pointers for recording your trademark or copyright with the U.S. Customs service. Although it may be basic to some of you I hope it will be helpful to others.

U.S. Customs and Border Protection (CBP) allows you to record your registered trademarks and copyrights in order to target, intercept, detain, seize and forfeit shipments of counterfeit goods. In the case of trademarks, depending on whether the registered trademark is now owned by the same trademark owner of a related entity abroad, CBP can also take steps to stop parallel market goods from abroad. Here are 10 practice pointers for recording your trademark or copyright with CBP:

• You can record your mark or copyright electronically on the CBP web site.
• If you choose not to record on-line, use the formal a pplication and not your own form — the Customs person inputting the form wants to see a familiar document.
• When you fill out your application for a trademark, if you want parallel market protection, be sure to select whether you are claiming a restriction or not. A mark is only entitled to a restriction if the trademark owner in the US does not own, directly or through a commonly owned entity, the same mark in another country. Document the ownership difference for foreign registrations in your file.
• If you are claiming a restriction, print it out in bold letters so that the examiner does not miss the request. These are busy people going through a lot of paperwork.
• When identifying the authorized importers, try not to list an entity that may change in name or in affiliation to your client’s company. You can always modify the list later but every change incurs a delay and risks a mistake.
• Do not just rely on the recordation. Select your most suspected ports of entry and send the import specialist group at the port a full packet of supporting papers– the packet should include a letter discussing the product and advising them that the mark is recorded, sample photos, sample products and information identifying probable unauthorized importers or sources of counterfeit goods.
• Send periodic follow-up refresher packets like the one described above to each key port of entry.
• Visit the relevant port and speak to the import team, if possible — the better your rapport with the team and agents, the more they will work to police your client’s marks.
• If you have the resources, prepare a presentation for ports that are particularly affected.
• Immediately contact the relevant port of entry if you identify an entity trying to import counterfeits. However, be careful to avoid claims of tortious interference if you do not have credible evidence.
• Get to know the Intellectual Property Rights Branch at CBP headquarters. They can answer questions and help to solve problems when a local port misconstrues the law.
• Be patient. CPB employees work under very heavy workloads. Loosing your temper and alienating the specialist or agent will not help you or your client.
• Be persistent. A call a week when you have a specific matter pending keeps you on the radar.

The British Medicines and Healthcare Products Agency (MHRA) has issued a drug alert and recall regarding the presence of allegedly counterfeit Zyprexa® 10 mg tablets in the United Kingdom. Zyprexa® is an anti-psychotic drug, manufactured by Eli Lilly Company, which is used to treat persons with schizophrenia and bi-polar disorder. The counterfeit pills only contain about 60% of the labeled active ingredient and may contain other degradants. The suspect products being recalled include any parallel distributed stock of Lots A200127, A216454 and A229505 (and lot variants) of Olanzapine tablets 10mg branded as Zyprexa®.

According the the MHRA the counterfeit product entered the British market through parallel market imports from France. The MHRA noted in its alert that the European Medicines Agency (EMEA) has allowed 40 UK parallel market distributors to supply this product to the British market but did not clarify if this counterfeit product entered the market through one of these parallel market distributors.

Parallel medicines and health care products may legally be sold in the parallel market within the European Union. Britain recognizes two forms of parallel trade in such products based on the authorizing agency. Parallel distributed products have a marketing authorization issued by the EMEA and parallel imported products have a marketing authorization issued by the MHRA. In both cases the repacking and relabelling are inspected by the MHRA but the importation and/or distribution takes place outside the original manufacturer’s supply chain.

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.

As with any market, costs govern the price and the profits. The Economic Times of India reports that the Indian government has cut the duty on memory cards, usb drives and memory sticks from 21% to 4%. The three leading memory card vendors in India, Kingston, Transcend and Sandisk are expected to cut their prices by 15% in the coming months. This drop in price is expected to weaken, but not destroy, the thriving parallel market which currently constitute 95% of all memory card sales in India. Due to the restrictive nature of the Indian market, most parallel market memory cards are smuggled into the country thereby evading any payment of duties. The price reduction will more than cut in half the parallel market price advantage.

Although I’m trying to keep this blog centered on news and developments, sometimes it is worth bringing to light little known aspects of parallel market law. Most people are familiar with the application of federal laws in the United States such as the Lanham Act and the Copyright Act in relation to parallel market issues. However, in the United States, we have 50 states (akin to provinces in other countries) that have their own local laws governing statewide trademark registration, unfair competition and other issues. In many lawsuits involving parallel market goods, the complainant alleges violations of state common law trademark and unfair competition laws.
In a handful of cases, however, US states have passed laws specifically directed at parallel market goods. These parallel market laws cover a variety of products including cigarettes, vehicles and even child adoptions. The purpose of this article, however, is to focus on the statutes dealing with general parallel market commercial goods.

Three states, California, Connecticut and New York, have put such statutes into law. These state laws share two things in common.  They apply to the retailer and they try to provide the consumer with adequate notice of what he or she is buying.  Not unlike the line of authority that developed from Coty v. Prestonettes, 264 U.S. 359 (1924) and Champion Spark Plug Co. v. Sanders, 331 U.S. 125 (1947), and Custom’s Lever Brothers regulations, the states try to dispel any confusion by notifying the consumer that the goods, while genuine, may not be fully conforming with the domestic product.

The first and most comprehensive of these laws is set forth in California Civil Code Section 1797.81 titled “Retail Sellers; disclosures; tickets, labels or tags.” The law requires every retailer who sells gray market goods to post a sign at the products’ point of display and to affix to the product or its package a notice setting forth, as appropriate for the product, whether:
• the item is covered by the manufacturer’s warranty in the US (unless the reseller provides his own warranty and provides proper notice thereof);
• the item is compatible with US electrical currents;
• the item is compatible with US broadcast frequencies;
• replacement parts and compatible accessories are not available through the manufacturer’s U.S. distributor;
• the item is accompanied by instructions in English;
• the item is eligible for manufacturer’s rebate(if any);
• the item has any incompatibilities or non-conformities with relevant domestic standards.
A similar disclosure has to be included in any advertisement for the product. California Civil Codes section 1797.82. A violation of these statutes entitles the consumer to return the product and constitutes a violation of the California Unfair Competition and Deceptive Trade Practices Acts.

California law goes further than its two sister states and prohibits the decoding of “personal property.” California Penal Code 537e. Often manufacturers code products in order to track back the source of parallel market goods. Parallel market resellers remove these codes in order to protect their sources. When the removal defaces the products it violates existing case law. This statute reaches to decoding which does not deface. Any removal of a “manufacturer’s serial number, identification number, electronic serial number, or any other distinguishing number or identification mark” is punishable by fine and imprisonment.

Connecticut provides a less intrusive and extensive restriction. Connecticut General Statutes section 42-210 requires every retailer who sells parallel market goods to post a sign conspicuously to the item, the point of sale or the register setting forth whether the product is (1) accompanied by the manufacturer’s warranty valid in the United States; (2) accompanied by instructions in English; or (3) eligible for a rebate offered by the manufacturer. Mail order vendors (but not retailers) must also make these disclosures in any written advertising relating to such product. Failure to abide by the statute entitles the consumer to return the product within 20 days and constitutes an unfair or deceptive trade practice. As in California, the Connecticut retailer can avoid the warranty issue by offering his own warranty of equal or greater coverage.

Finally, the New York statute is focused on the warranty issue. New York General Business Law section 218-aa provides that a retailer who knowingly sells gray market goods shall conspicuously post on a sign attached to the item and on each cash register on from a place visible from each cash register, disclosing whether the product is accompanied by a manufacturer’s warranty, whether it contains instructions in English and whether the product qualifies for a manufacturer’s rebate in the US. As in the case of the Connecticut statute, the New York statute allows the consumer 20 days to return the product in the event of a violation. The New York statute goes further, however, by providing that the attorney general can bring suit for injunctive relief without proof of actual injury and for civil penalty.

The Spanish affiliate of LG Electronics, the Korean electronic manufacturer, has renewed its claims that Spain is losing millions of Euros in taxes as a result of parallel market sales. According to LG Spain, the failure to pay import taxes gives parallel market importers a substantial advantage over the authorized reseller.

In addition, LG Spain and its partners, claim that the country is injured because parallel market importers fail to pay electronic residue fees. Under Spanish law all manufacturers and importers of electronics are obligated to register with the Registry of Industrial Businesses for Residues of Electronic Aparatuses and Electronics [Establecimientos Industriales para Residuos de Aparatos Eléctricos y Electrónicos (REI)] The purpose of the REI is to then determine the percentage of materials that each manufacturer is introducing into the marketplace in order to calculate the electronic residue handling fees that the manufacturer must pay. Of the approximately 10,000 manufacturers in the Spanish market only approximately 10% are allegedly registered.

LG Spain’s battle against parallel market resellers of , principally, CD and DVD players and recorders in Spain has been on-going for several years. In November of 2005, LG Spain reported that it has lost over 10 million Euros to parallel market imports the previous year. In response, LG announced an ambitious two-stage strategy of notifying unauthorized resellers and launching legal actions against those that did not reach amicable settlements. (Under European law importing products bearing copyrighted works without the consent of the copyright owner is actionable. See article regarding CD Wow case earlier in this blog).

There were no subsequent press releases regarding the success or failure of this approach. Clearly, the latest statements suggest that the parallel market sales continue to pose a problem for LG Spain.

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