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special to the national law journal Raymond A. Kurz is a partner at Washington’s Hogan & Hartson and the director of the firm’s Washington intellectual property group. His practice concentrates in IP litigation and counseling; trademark and copyright prosecution; and technology, trademark, copyright and character licensing. Celine Jimenez Crowson is a partner at the firm and a member of its IP group. Her practice focuses on IP litigation. prosecution and licensing matters. Anna J. Kurian is an associate at the firm and also a member of its IP group. Today, businesses, ranging from high-tech scientific and medical products companies to luxury fashion designers, to food and beverage manufacturers, to everyday consumer products manufacturers, increasingly participate in the global marketplace. In light of different consumer/customer preferences throughout the world, in some instances, goods sold in one country or market may differ slightly or even significantly from those sold in another country or market. In other instances, however, manufacturers are concerned with ensuring that their goods sold throughout the world are essentially identical to one another, not only in appearance and packaging, but also in the manner and custom in which they are sold. Regardless, many businesses are concerned that their distribution channels be maintained, as goods sold outside those distribution channels-i.e., parallel importation-can wreak economic havoc on authorized distributors and indeed on the manufacturers themselves. Some estimates suggest that the market for parallel imports in the United States is well above $5 billion annually. This market of parallel imports competes with authorized goods and can inhibit an authorized seller’s ability to maximize profits and control the distribution and sale of its goods. See John C. Cozine, “Fade to Black? The Fate of the Gray Market After L’Anza Research International Inc. v. Quality King Distributors Inc.,” 66 U. Cin. L. Rev. 775, 777 (1998). Ways to prevent importation Intellectual property laws, specifically the trademark and copyright laws, provide several avenues for businesses to prevent unauthorized parallel imports. Trademark laws are primarily useful in circumstances when the parallel imported goods are materially different from the goods authorized for sale in the United States. Trademark laws can be enforced through resort to the federal courts-and the International Trade Commission (ITC)-and/or through the U.S. Customs Service. Another avenue for enforcement against unauthorized parallel importation is § 526 of the Tariff Act, 19 U.S.C. 1526, which provides for certain relief against parallel importation through Customs; this relief, however, is quite narrow. Most difficult, however, in terms of enforcement, are instances when the parallel imported goods are not materially different from the genuine goods. In those circumstances, the trademark laws are of no avail-under the theory that consumer confusion is the sine qua non of the trademark laws; since the “genuine” and the parallel imported goods are, in fact, the same, confusion is not likely. This lack of consumer confusion in the case of goods that are not materially different, does not, however, lessen the potentially damaging economic effect of parallel importation on both the U.S. distributors and, in certain cases, on the manufacturers themselves. These circumstances, however, sometimes can be addressed through resort to the copyright laws. Section 526 of the Tariff Act provides narrow relief from parallel importation to trademark owners who are U.S. citizens in certain circumstances. Under § 526, when the trademark owner is a U.S. domestic entity and is unaffiliated with the foreign originator of the goods, Customs will stop importation of the foreign-origin goods even without a showing of likelihood of confusion. See K Mart Corp. v. Cartier Inc., 486 U.S. 281, 295 (1988); 4 J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition, § 29:46 (2002). This situation typically occurs, however, only when trademark rights are owned by separate, nonaffiliated entities in different countries of the world. When goods are different A second and more broadly applicable avenue for relief from parallel importation is an action for unfair competition under the Lanham Act, as the Lanham Act may be applicable irrespective of the trademark owner’s citizenship and affiliation. See 15 U.S.C. 1114(a), 1124 and 1125(b). Specifically, courts generally hold that if the parallel imports are “materially different” from the goods authorized by the trademark owner to be sold within the United States, a trademark owner may be able to prevent such importation into the United States. Relief under the Lanham Act can be had either through a federal court (or ITC) action or through Customs under §§ 42 and 43(b) of the Lanham Act. In contrast to the Tariff Act, the Lanham Act provides that in instances when the merchandise is “materially different” from the goods authorized for sale in the United States, Customs is required to deny entry into the United States of any merchandise bearing a registered trademark even in instances when the mark was applied by an entity controlled by the owner of the registered trademark. See Lever Bros. Co. v. U.S., 981 F.2d 1330 (D.C. Cir. 1993). The 9th U.S. Circuit Court of Appeals has held, however, that even when there are material differences, if the genuine goods and the parallel imports come from the same entity, there is no trademark infringement. Philip Morris Inc. v. Cigarettes for Less, 69 F. Supp. 2d 1181 (N.D. Calif. 1999), aff’d, 215 F.3d 1333 (9th Cir. 2000). Consistent with the ruling in Lever, Customs amended its regulations in 1999 to prohibit the importation of parallel imports that are physically and materially different even when “the U.S. and foreign trademark owners are the same, are parent and subsidiary companies, or are otherwise subject to common ownership and control.” See 19 C.F.R. 133.23(a)(3); 4 McCarthy, supra, § 29:50.1. The ‘Lever’ label However, significantly, Customs simultaneously provided a safe harbor for parallel imports under the new regulations. Specifically, when the parallel goods include an appropriate disclaimer-for example, by way of a label-indicating that the goods are materially different from the genuine goods, Customs will not detain such goods. This exception is known as the “ Lever rule” and the label indicating that the goods are materially different from one another has become known as a “ Lever label.” In instances when a Lever label as proscribed under 19 C.F.R. 133.23(b) is affixed to the goods, the parallel imports will not be denied entry into the United States by Customs. It is this Lever label exception that has caused businesses concern-namely, can a parallel importer avoid U.S. trademark laws by simply placing the proscribed label on parallel imported goods? The answer is: not necessarily. The Lever rule disclaimer practice has, therefore, given rise to some confusion and concern by businesses and practitioners alike as to its scope and applicability. Despite Customs’ safe harbor provision for merchandise containing Lever labels, it would appear that federal court decisions-as opposed to Customs’ actions-have continued to assess Lever labels in the same manner in which other labels and disclaimers are often assessed in trademark cases, i.e., courts generally find that one cannot avoid a likelihood of confusion by simply using a “disclaimer.” For example, in In re Certain Agricultural Tractors Under 50 Power Takeoff Horsepower Investigation, 44 U.S.P.Q.2d 1385 (USITC 1997), aff’d, Gamut Trading Co. v. United States International Trade Commission, 200 F.3d 775 (Fed. Cir. 1999), the ITC found that labels or disclaimers that do not prevent a likelihood of confusion are a disfavored remedy. Further, the ITC also noted that in instances when there is a strong likelihood that such a label may be removed or obliterated, labeling is not an appropriate remedy. In sum, it would appear appropriate for courts to continue to analyze circumstances involving Lever labels in the same way as they have analyzed circumstance involving other types of disclaimers-namely, a disclaimer does not serve to cure an otherwise clear case of likelihood of confusion. In fact, some courts have even gone so far as to put the burden on the accused infringer to prove that the disclaimer will be effective in avoiding confusion. See Clinique Laboratories Inc. v. Dep Corp., 945 F. Supp. 547 (S.D.N.Y. 1996). When goods are identical While U.S. trademark owners may be able to seek relief from parallel imports when the goods are materially different, many companies find it important to offer essentially identical goods-i.e., those that are not materially different from one another-in foreign and domestic markets. As such, the trademark laws do not provide relief from parallel imports because the manufacturers of such goods are not in a position to claim that the parallel imported goods are “materially different” from those sold in the U.S. market. However, it may be possible even for owners of such identical goods to obtain relief from parallel imports under the copyright laws in certain circumstances. Under the copyright laws, a copyright owner has the exclusive right to distribute copies of the owner’s work. As such, third parties are not permitted to sell, rent, transfer or otherwise distribute copies of the work without the copyright owner’s consent. See 17 U.S.C. 106(3). For manufacturers of consumer goods, copyrightable material is typically contained in the artwork and text appearing on the labels and packaging for the goods. Further, § 602 of the Copyright Act also provides that importation into the United States of copies of works that have been acquired outside the United States is an infringement of the exclusive right to distribute and is, therefore, actionable. See Id. at §§ 105, 501 and 602. As such, copyright owners have attempted to use the distribution right to prevent the importation of gray-market goods from abroad. There are limitations, however, on the exclusive copyright right to distribute that can affect its applicability to parallel imports. One such limitation is the first-sale doctrine embodied in 17 U.S.C. 109. See also id. at §§ 107-120. Under the first-sale doctrine, the owner of a copy lawfully made under the copyright laws is entitled to sell or otherwise dispose of the copy without the authorization of the copyright owner. Impact of ‘Quality Kings’ In Quality Kings Distributors Inc. v. L’anza Research International Inc., 523 U.S. 135 (1997), the U.S. Supreme Court held that the copyright laws cannot be used to prevent the importation of goods manufactured in the United States and sold abroad and specifically stated that the first-sale doctrine is an available defense to an importer of goods manufactured in the United States containing copyrighted material but sold abroad. In reaching its decision, the Supreme Court noted that the importation right embodied in § 602 is limited by the first-sale doctrine and that the first-sale doctrine applied only to goods “made lawfully under this title,” i.e., goods made in the United States. The court, thus, left open the question of whether the first-sale doctrine exhausts the rights of copyright owners whose goods are manufactured abroad and sold abroad and then imported into the United States. See id. at 1135. Site of manufacture is key As such, it may be possible for U.S. copyright owners whose goods are manufactured abroad to obtain relief from parallel imports that are identical to the goods authorized for sale in the United States under the copyright laws. As demonstrated in relevant case law prior to the Quality Kings decision, many courts have held that “sales abroad of foreign manufactured United States copyrighted material do not terminate the United States copyright holder’s exclusive distribution rights under § § 106 and 602(a).” See, e.g., Parfums Givenchy Inc. v. Drug Emporium Inc., 38 F.3d 477 at 482 n.8 (9th Cir. 1994) (also noting that “the independence of the U.S. copyright holder from the foreign manufacturer is irrelevant to the concern underlying § 602 of the Copyright Act”), cert. denied, 514 U.S. 1004 (1995); Columbia Broadcasting System Inc. v. Scorpio Music Distributors Inc., 569 F. Supp. 47 (E.D. Pa. 1983), aff’d, 738 F.2d 421 (3d Cir. 1984). Further, the recent decisions in Lingo Corp. v. Topix Inc., No. 01 Civ. 2863, 2003 WL 223454 (S.D.N.Y. Jan. 31, 2003), and UMG Recordings Inc. v. Norwalk Distributors Inc., No. SACV 02-1188 (C.D. Calif. March 13, 2003), have also held that when the copyrighted material is manufactured abroad, the distribution right in the United States is not extinguished. The court in Lingo noted that “[t]he first sale doctrine, ‘applies only to copies that are lawfully made under this title’ ” (quoting Quality Kings, 523 U.S. at 152), and does not necessarily “provide a defense to a Section 602(a) claim where the allegedly infringing copies were manufactured and sold abroad.” See Lingo, 2003 WL 223454, at *4. It appears, therefore, that copyright causes of action in federal court (or the ITC) may be successful in preventing the importation of parallel imports for identical goods when the goods are manufactured and sold abroad. Although the Quality Kings decision has essentially obviated any relief available under the copyright laws when goods are manufactured domestically, domestic manufacturers could consider contractual provisions limiting resale into the United States for foreign distribution. This would preserve, at a minimum, a breach-of-contract claim upon subsequent reimportation of the copies into the United States. Further, although copyright owners may record their copyrights with Customs to prevent the importation of “piratical” goods, Customs (as opposed to a federal court) will not prevent the importation of parallel imports that are “lawfully made,” although such goods may infringe the copyright owners’ exclusive right to distribute and import. See 19 C.F.R. 133.42. In light of the foregoing, it appears that there remain significant remedies for intellectual property owners seeking to prevent parallel importation. Further, depending on the nature of the parallel imports and the citizenship of the intellectual property owners, the manufacturers and distributors seeking injunctive relief should carefully consider what avenues to pursue and what intellectual property rights to rely on in protecting their global markets.

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