A parallel import is a genuine good, bearing an authorized trademark, intended for sale in one country, but instead sold without the authorization of the trademark owner in a second country. These goods compete with the trademark owner’s authorized goods in the second country. Often, because of currency exchange rates, taxes, government regulations, logistical expenditures, and market segmentation, the price of the parallel import is actually lower than that of the authorized good. While their prices appeal to consumers, parallel imports cost authorized retailers lost sales. In addition, because parallel imports are not intended for the second country’s market, the products may have different features or meet different quality standards than the authorized goods. Such differences can damage the goodwill consumers associate with the trademark. Because trademarks are protected by national law, different countries address the issue of parallel imports differently. While some countries prohibit them, others encourage them. Under U.S. law, parallel imports can be prevented only under particular circumstances.
I. U.S. Trademark Rights And The Genuine Good
Despite the potential damage to goodwill, as long as the parallel import is the genuine good, a trademark owner cannot rely on its U.S. rights to prevent them. This is for the simple reason that trademark law is designed to prevent consumer confusion as to the origin of the goods. In the case of parallel imports, however, the origin has not changed. The goods are identical to the authorized ones and consumers are not confused.
In NEC Electronics v. CAL Circuit Abco, the defendant purchased NEC branded computer chips in Japan and resold them in the U.S. NEC Electronics v. CAL Circuit Abco, 810 F.2d 1506, 1508 (9th Cir. 1987). The U.S. Court of Appeals for the Ninth Circuit held that because the goods were genuine, the defendant had not infringed NEC’s U.S. trademark rights. Id. at 1509.
Moreover, when the parallel import is identical to the authorized good, courts offer little sympathy to trademark owners. In reaching its decision in NEC Electronics, the court criticized NEC for complaining about a situation that it had brought upon itself: “If [NEC] chooses to sell abroad at lower prices than those it could obtain for the identical product here, that is its business. In doing so, however, it cannot look to United States trademark law to insulate the American market or to vitiate the effects of international trade.” Id. at 1511.
II. First Sale Doctrine
The First Sale Doctrine protects a buyer’s interest in goods he or she has purchased. Under the doctrine, once the trademark owner has sold its goods, it has exhausted its trademark rights in those goods. Thus, the owner cannot rely on its trademark rights to dictate how or where the buyer uses or redistributes those goods.
The doctrine is also designed to balance trademark protection, on the one hand, with principles of free competition, on the other. In Sebastian-International, Inc. v. Longs Drug Stores Corporation, the U.S. Court of Appeals for the Ninth Circuit observed that the doctrine “preserves an area for competition by limiting the producer’s power to control the resale of its product.” Sebastian-International, Inc. v. Longs Drug Stores Corporation, 53 F.3d 1073, 1075 (9th Cir. 1995).
A. Exception to the First Sale Doctrine: Contractual Limitations
Under certain circumstances a trademark owner can contract around the First Sale Doctrine. For example, if the first buyer is a vendor or distributor of the trademarked goods, trademark owners can place contractual restrictions in their distribution agreements to limit distributors to a particular geographic area. In Behr Automotive, Inc. v. Mercedes-Benz of North America, the U.S. District Court for the Eastern District of Pennsylvania considered an antitrust claim against Mercedes-Benz’s practice of placing geographic restrictions in its agreements, and upheld Mercedes-Benz’s right to do so. Behr Automotive, Inc. v. Mercedes-Benz of North America, 1985 WL 6417, *8 (E.D. Pa. 1985).
Subsequent buyers, however, are not contractually bound by the agreement between the trademark owner and the distributor; their purchase is protected by the First Sale Doctrine. Even in cases where the sale between the distributor and the subsequent buyer violates the distributor’s agreement with the trademark owner, the subsequent buyer cannot be held liable for trademark infringement. In McDonald’s Corporation v. Shop At Home, Inc., McDonald’s distributed Beanie Babies® promotional dolls to its franchises. It placed strict limitations on how the franchises, in turn, could distribute the dolls to the public. Nevertheless, some of the franchises allowed the defendant to obtain the dolls in a manner that violated their agreements. McDonald’s Corporation v. Shot At Home, Inc., 82 F. Supp. 2d 801, 805 (M.D. Tenn. 2000). Despite the fact that the franchises’ distributions to the defendant were illegitimate, the court nevertheless ruled that they constituted a “first sale.” Thus, McDonald’s could not enforce its trademark rights against the defendant. Id. at 811.
B. Exception to the First Sale Doctrine: The Tariff Act Section 526(a)
The Tariff Act provides a small exception to the First Sale Doctrine. Section 526(a) empowers the United States Custom Service to seize parallel imports, but only if the imports meet particular requirements:
- The parallel good must have been manufactured outside of the United States;
- The authorized good must have been manufactured in the United States;
- The trademark owner must be an American citizen or corporation; and
- The trademark must be registered.
Tariff Act of 1930, 19 U.S.C., 1526(a).
A trademark owner cannot rely on Section 526(a), however, if the parallel import was manufactured by an entity related to the owner, such as a subsidiary. Id. In these cases the parallel import is considered to be the genuine, authorized good and the trademark owner will not have grounds to request that U.S. Customs seize the goods.
III. When Parallel Imports Violate Trademark Rights: The Material Alteration Doctrine
Trademark law is designed to assure product consistency for the benefit of consumers. Whenever a consumer buys a good bearing a particular trademark, the consumer expects that good to have particular characteristics. Because a parallel import is the genuine good, normally its sale does not constitute trademark infringement. The consumer is not confused as to the original source of the product.
One exception to this general rule, however, is when the parallel import is materially different from the authorized good. A material difference is one that consumers would notice and consider relevant in the buying decision. If a consumer purchases a familiar product, and then notices that the product’s characteristics are inconsistent with his or her previous purchases, the consumer may become confused as to the source. The material difference leads the consumer to believe that he or she has not purchased a genuine product.
In Original Appalachian Artworks, Inc. v. Granada Electronics, Inc., Original Appalachian Artworks (“OAA”) licensed the right to manufacture and distribute its famous Cabbage Patch® Dolls in Spain to one company and the U.S. rights to another. The Spanish Cabbage Patch Dolls came with birth certificates, instructions and adoption papers written in Spanish, the U.S. dolls came the same documents, but in English. Purchasers of the U.S. dolls could also fill out the adoption papers and send them to OAA. OAA then entered the information into its customer database and on the first anniversary of the doll’s adoption OAA would send a birthday card to the purchaser. Granada Electronics began distributing the Spanish dolls in the U.S. and purchasers began complaining to OAA because they did not understand the Spanish documents and did not receive the birthday cards. In finding that Granada Electronics had infringed OAA’s trademark rights, the U.S. Court of Appeals for the Second Circuit reasoned that these differences upset the settled expectations U.S. purchasers had about what they would receive when they purchased Cabbage Patch Dolls. Original Appalachian Artworks, Inc. v. Granada Electronics, Inc., 816 F.2d 68, 76 (2nd Cir. 1987). In short, the Spanish dolls were not genuine Cabbage Patch Dolls to U.S. purchasers.
While the difference must be material, the difference need not be great. For example, in Davidoff & CIE, S.A. v. PLD International Corporation, the defendant etched out the batch codes from bottles of plaintiff’s fragrances. See Davidoff & CIE, S.A. v. PLD International Corporation, 263 F.3d 1297, 1299 (11th Cir. 2001). While the etching was slight, it was nonetheless material because consumers might think that the fragrance bottles had been tampered with or otherwise damaged. Id. at 1303.
Because consumers consider a number of features in their purchasing decision, the threshold for finding a material difference is rather low. What constitutes that difference depends on the specific facts of a case. In some cases, the difference in only one feature is deemed to be material. In other cases, it is the totality of differences that is material. Among the product features that have been found to be material, either alone or in combination, are:
- differences in the way a product smells;
- differences in packaging including the addition or absence of marking;
- differences in product shape or appearance;
- instructions or other documents in a language other than English;
- differences in ingredients;
- differences in labeling or noncompliance with U.S. government or state nutrition or labeling laws; and
- the absence of promotional materials so that the buyer cannot participate in the same advertising and promotional strategies offered by the authorized good.
Differences in price, however, usually do not constitute a material difference.
Conclusion: Protecting Authorized Goods
A trademark owner has limited recourse if the parallel import is identical to its authorized U.S. good. A trademark owner should place geographic and resale restrictions, as well as penalties for breaching these restrictions, in its distribution agreements. These contractual restrictions will provide the trademark owner grounds for breach of contract against its distributors. If the distributor breaches the contract, the trademark owner, however, will not be able to rely on the contract to enforce trademark claims against subsequent distributors and other third parties.
Thus, if an owner wishes to discourage parallel imports or ensure that it has grounds for a claim against an importer, it should add features (even small ones) that make its U.S. product materially different from its foreign equivalent. The owner can change the products appearance; add labeling or designs to the U.S. packaging; include instructions only in the local language where the product is intended for distribution; or offer coupons, rebates, special customer service or other promotional items for the U.S. product. Not only do these promotional items help a trademark owner fight parallel imports, they also enhance the goodwill the owner builds with its customers.