United States: Fighting Gray Market Goods At The ITC

Introduction

Gray Market Defined

Gray markets arise from the unauthorized distribution of genuine brand-name products.¹ Unlike black markets which distribute counterfeit goods, gray markets distribute goods authorized for manufacture by the brand owner.² Taking advantage of regional pricing differences, gray market importers export genuine goods from low-priced markets for resale in high-priced markets, thereby competing with the manufacturer’s authorized channel.³ Frequently, gray market goods (also called “parallel imports”) are manufactured for sale abroad and are subsequently reimported for sale in the United States without the brand owner’s permission.⁴ 

Growing Problem of Gray Market Goods

Affecting nearly every market from industrial machinery⁵  to college textbooks,⁶ gray markets cause a broad range of problems for brand-name companies. The first problem is evident—lost revenue. During the mid-eighties, an estimated $7 billion worth of gray market products were sold every year in the United States.⁷ In 2009 alone, the gray market cost brand-name companies up to $63 billion in United States sales (4.5 percent of total sales).⁸ And by 2011, gray market goods were estimated to cost individual high-tech companies, like Samsung and Hewlett Packard, $1.4 billion each year.⁹ 

Other problems are not as evidence but present serious problems. Unable to regulate the influx of gray market goods, brand names cannot prevent the damage to their brand’s reputation caused by lower-quality gray market goods being sold into the wrong market. Gray market goods frequently lack government-regulated labels (e.g., child-safety warnings) and English-language instruction manuals. For many gray market products, replacement parts are unavailable within the United States. And because gray market importers sell products in unauthorized regions, the goods often lack warranties and aftersale services (e.g., customer hotlines).¹⁰ 

ITC’s Attractive Solution

Chosen by many brand-name companies, including Duracell, John Deere, and Phillip Morris, the International Trade Commission (Commission) is well-suited to handle Section 337 investigations involving gray market goods. Although more commonly known as a patent forum, the Commission has jurisdiction to handle a broad array of intellectual property matters, including trademark and copyright claims.¹¹ And in practice, the Commission has many attractive qualities which make it more advantageous than the district court in eliminating gray market goods. 

First, the Commission is fast. District court cases, barring settlements, typically reach adjudication between two and three years after the complaint is filed. Section 337 investigations, in comparison, take between 12 and 16 months from beginning to end.¹² Lower-quality gray market goods can result in irreparable injury to a brand’s reputation; accordingly, speedy resolutions are especially important in these types of cases.¹³ 

Second, the Commission freely offers two injunctive remedies to successful complainants: cease-and-desist orders and exclusion orders. A cease-and-desist order provides a complete injunction against sales-related activity in the United States for the life of the trademark.¹⁴ Also, exclusion orders prohibit the infringing articles from entering the United States.¹⁵ In comparison, district courts must apply the stringent four-part eBay v. MercExchange balancing test before granting injunctive ^relief.16 At the ITC, after finding infringement, the Commission almost always grants injunctive relief, whether in the form of cease-and-desist orders, exclusion orders, or both.¹⁷ 

And third, the Commission offers an efficient and easy way to attain relief against all gray market importers of a certain product. To attain exclusion orders, brandname companies need not establish “minimum contacts” between gray market importers and the Commission.¹⁸ Rather, to establish jurisdiction, brand-name companies need only establish the importation of an infringing good and the existence of a domestic industry or a domestic industry in the process of being established in the United States.¹⁹ Moreover, because the ITC has in rem jurisdiction, brand-name companies can pursue an unlimited number of gray market importers within a single action.²⁰  To attain similar relief in a district court, the brand-name company would be required to assert multiple district court actions against multiple defendants, resulting in duplicitous, time-consuming, and expensive litigation.²¹

Requirements to Bring Section-337 Action Based on Gray Market Goods

To bring a Section 337 action before the Commission and stop the importation of gray market goods, a complainant must establish both the existence of a domestic industry and the importation of foreign goods.²² To prove the existence of a domestic industry, the complainant must satisfy two distinct prongs—a technical prong and an economic prong.²³ To meet the technical prong, the brand-name company must establish that its authorized products are protected by the trademarks at issue in the investigation.²⁴ And to establish the economic prong, the complainant must show significant investments with respect to activities related to the trademark-protected  products in the United States, such as manufacturing, research and development, and engineering.²⁵  Prominent energy-drink company, Red Bull USA (Red Bull), established both prongs of the domestic-industry requirement in its Section 337 gray market infringement suit, In re Certain Energy Drink Products.²⁶ To meet the technical prong, Red Bull established that all of its authorized sales of the article in the United States bore the trademarked word “RED BULL” and the Double Bull Design.²⁷ And to meet the economic prong, Red Bull established that it had made significant investments in plants, equipment, employment, research and development, and licensing with respect to Red Bull energy drinks in the United States.²⁸

In addition to meeting the domestic-industry requirement, a complainant must establish the importation into the United States, the sale for importation into the United States, or the sale within the United States after importation of the gray market goods at issue.²⁹ Proving importation is not particularly difficult, and parties typically enter into a stipulation. 

Substantive Law

To prove a violation of Section 337 based on the importation and sale of gray market goods, a complainant must show that the imported gray market goods are materially different from their corresponding authorized goods. “A material difference is a difference that consumers are likely to find significant when purchasing the [goods] because such differences would erode the goodwill of the domestic source.”³⁰ The rationale that justifies preventing the importation of gray market goods is a public policy one.³¹ As a result of the trademark owner building up its brand, the public associates a trademark with goods having certain characteristics and would likely be confused or deceived by goods bearing the same mark but having materially different qualities.³² This consumer confusion could “erode the goodwill achieved by the United States trademark holder’s business.”³³ Thus, enforcing trademark rights against gray market imports allows a trademark holder to control the qualities and characteristics associated with its trademark in a particular jurisdiction or territory. 

Proving a “material difference” is not difficult as the Federal Circuit has explained that complainants need only meet a “low threshold” of materiality.³⁴ For example, in one investigation, the “materiality” requirement was met where there was only one material difference between the domestic and imported good.³⁵ The Commission, for example, has found differences material when the imported goods lacked English-language labels, lacked accessible replacement parts, and lacked quality control measures (e.g., storage and shipping standards).³⁶ The Commission has even interpreted nonphysical characteristics, such as post-sale services (e.g., ongoing technical support), to constitute a material difference.³⁷ 

While the threshold for proving materiality is low, a complainant must also establish that all or substantially all of its sales are accompanied by the asserted material difference.³⁸ This “substantially all” requirement recognizes that “the sale by a trademark owner of the very same goods that he claims are gray market goods is inconsistent with a claim that consumers will be confused by those alleged gray market goods.”³⁹ The Federal Circuit has held that 87.4% did not constitute “substantially all” of authorized goods.⁴⁰ Thus, the threshold is higher for demonstrating that “all or substantially all of [the] sales” include the asserted material difference. 

Conclusion

In sum, gray market goods present serious problems for brand-name companies. In addition to detracting from brand-name sales, gray market goods can erode the consumer goodwill garnered by trademark holders. To remedy the situation, the International Trade Commission offers an efficient and effective solution. Compared to district courts, the Commission completes such actions in nearly half the time, more freely awards injunctive relief, and is not constrained by the same jurisdictional limitations. 

Footnote1 See Hai Li et al, Analysis of gray markets in differentiated duopoly, 54(13) Int’l J. of Production Research 4008, 4008 (2016).

2 See id.

3 See Romana L. Autrey et al, Organizational Structure and Gray Markets, 33(6) Marketing Science 849, 849 (2014).

4 See Mark Schonfeld, Fight Grey Goods with Trade Mark Law, Managing Intell. Prop. 21 (2010). The Federal Circuit defined “gray market goods” in Gamut Trading Co. v. U.S. Int’l Trade Comm’n as goods “legally acquired abroad and then imported without the consent of the United States trademark holder.” 200 F.3d 775, 778 (Fed. Cir. 1999) (citing K Mart Corp. v. Cartier, Inc., 486 U.S. 281, 286–87 (1987)).

5 See Deere & Co. v. Int’l Trade Comm’n, 605 F.3d 1350 (Fed. Cir. 2010).

6 See Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. 519 (2013).

7 See M. Westerman et al, The $7 billion gray market: Where it stops, nobody knows, Business Week, April 15, 1985.

8 See Carol Wolf, Losing $63 Billion to Gray Market is Sleuth Obsession, Bloomberg, April 9, 2009. A 2008 KPMG study estimated that the information-technology sector alone lost $58 billion in global sales each year. See KPMG LLP, Effective Channel Management Is Critical in Combating the Gray Market and Increasing Technology Companies’ Bottom Line: KPMG Gray Market Study Update, https://www.agmaglobal.org/uploads/whitePapers/7-10-08KPMGWhitePaperGrayMarketStudy.pdf.

9 See Deloitte & Touche LLP, When Channel Incentives Backfire: Strategies to help reduce Gray Market risks and improve profitability, https://www.agmaglobal.org/uploads/whitePapers/AGMA%20Deloittte%20When%20channel%20incentives%20backfire%20FINAL%204-14-11.pdf.

10 See Foaad Iravani, Coping with Gray Markets: The Impact of Market Conditions and Product Characteristics, 24(5) Prod. & Oper Mgt. 762, 765 (2014).

11 See 19 U.S.C. § 1337(a)(1)(B)–(C).

12 See id.; see also 19 C.F.R. § 210.51(b)(1) (“If the target date does not exceed 16 months from the date of institution of an original investigation, the order of the administrative law judge shall be final and not subject to interlocutory review.”).

13 Dean A. Pelletier, Litigating Trademark Cases at ITC vs. District Court, Law 360, July 17, 2012, https://www.law360.com/articles/359626/litigating-trademark-cases-at-itc-vs-district-court.

14 See 19 U.S.C. § 1337(f)(1). See also Joseph H. Heckendorn et al., Gray Market Infringement Actions at the U.S. International Trade Commission: The Benefits of the Forum and Analysis of Relevant Cases, 8 J. Marshall Rev. Intell. Prop. L. 271, 276 (2009).

15 See § 1337(d). The Commission freely issues limited exclusion orders, which prohibit importation by “any person” found violating Section 337. See § 1337(d)(1). General exclusion orders, which are not limited to persons found in violation, can be attained in certain limited circumstances. See § 1337(d)(2).

16 547 U.S. 388, 391 (2006) (requiring the plaintiff to demonstrate (i) irreparable injury; (ii) inadequate monetary remedies; (iii) balance of hardships weighs in favor of plaintiff; and (iv) public interest not disserved). Although eBay dealt specifically with the Patent Act, several circuits have applied it to trademark actions. See e.g., Ferring Pharm., Inc. v. Watson Pharm., Inc., 765 F.3d 205, 206 (3d Cir. 2014); Herb Reed Enters., LLC v. Florida Enter. Mgmt., Inc., 736 F.3d 1239, 1249 (9th Cir. 2013); North American Med. Corp. v. Axiom

Worldwide, Inc., 522 F.3d 1211, 1228 (11th Cir. 2008).

17 See Colleen V. Chien, Patently Protectionist: An Empirical Analysis of Patent Cases at the International Trade Commission, 50 Wm. & Mary L. Rev. 63, 99 (2008).

18 See Sealed Air Corp. v. U.S. Int’l Trade Commission, 645 F.2d 976, 986 (C.C.P.A. 1981) (holding that complainant need not comply with Int’l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945) to attain an exclusion order from the Commission). Complainants must establish personal jurisdiction, however, to attain cease-and-desist orders. See § 1337(f).

19 See § 1337(a)(1)(A).

20 See § 1337(a)(1); see also Sealed Air Corp., 645 F.2d at 985–86 (requiring in rem jurisdiction to maintain action against five respondents).

21 See Heckendorn, supra note 14, at 277.

22 See § 1337(a).

23 See In re Certain Excimer Laser Systems for Vision Correction Surgery and Components Thereof and Methods for Performing Such Surgery, Inv. No. 337-TA-419, Pub. No. 3299, Initial Determination at 132–47 (Dec. 1999).

24 See In re Certain Cigarettes I, 337-TA-643, Order No. 19, Initial Determination at 42–43 (Feb. 2009).

25 § 1337(a)(3) (requiring the complainant to show either (A) significant investment in plant or equipment; (B) significant employment of labor or capital; or (C) substantial investment in its exploitation, including engineering, research and development, or licensing.).

26 Inv. No. 337-TA-678, Order No. 34, Initial Determination at 12–19 (Mar. 2010).

27 U.S. Reg. Nos. 3,092,197 and 2,946,045, respectively. See id. at 12–14.

28 In re Certain Energy Drink Products, Initial Determination at 14–21. For a more detailed discussion of the domestic-industry requirement, see William P. Atkins, Appreciating 337 Actions at the ITC: A Primer on Intellectual Property Issues and Procedures at the U.S. International Trade Commission, 5 U. Balt. Intell. Prop. L.J.103, 113–16 (1996).

29 § 1337(a)(1)(C).

30 Certain Bearings and Packaging Thereof, Inv. No. 337-TA-469, Comm’n Op. at 10–11 (June 2004).

31 Id. see also Heckendorn, supra note 14, at 272–73 (discussing the “material differences” test).

32 Gamut Trading Co. v. U.S. Int’l Trade Comm’n, 200 F.3d 775, 779 (Fed. Cir. 1999).

33 Id.

34 Id. at 779–80.

35 Id.

36 See In re Certain Energy Drink Prods., Inv. No. 337-TA-678, Order No. 34, Initial Determination at 28 (Mar. 2010) (inability to exercise quality control over gray market energy drinks “material”); In re Certain Cigarettes, Inv. No 337-TA-643, Order No. 19, Initial Determination at 28–31 (Feb. 2009) (inability to exercise quality control over gray market cigarettes “material”); In re Certain Agricultural Tractors Under 50 Power Take-Off Horsepower, Inv. No. 337-TA-380, Comm’n Op. at 16–17 (Mar. 1997) (lack of English-language labels and suitable replacement parts for tractors “material”).

37 See SKF USA, Inc. v. Int’l Trade Comm’n, 423 F.3d 1307, 1312–17 (Fed. Cir. 2005) (affirming the Commission’s determination that post-sale services can alone constitute a “material difference”).

38 See id. The asserted material difference was after-sale services, such as ongoing technical support. See id. at 1312–17.

39 Id. at 1315.

40 See SKF USA, 423 F.3d at 1317–18. The Commission has determined 96.6% to constitute “substantially all” authorized goods. In re Certain Agricultural Vehicles and Components Thereof, Inv. No. 487, Comm’n Op. (2d Remand) at 27–39 (Apr. 2012).

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