GOODS MARKET PROTECTED BY SUPREME COURT DECISION;
Copyrights Do Not Protect Manufacturers
viability of a multibillion-dollar gray market in unauthorized
imports was assured by the U.S. Supreme Court's March 1998 ruling
in the case of Quality King Distributors Inc. v. L'anza Research
International. In a unanimous decision, the Court decided that
a copyright owner loses control over a product once it enters
the stream of commerce.
case drew the interest of some large U.S. retailers. A brief of
amici curiae supporting what turned out to be the winning side
was joined by Costco Companies Inc., Target stores, Wal-Mart Stores
Inc. and the National Association of Chain Drug Stores.
ruling overturned a 1996 decision by the 9th Circuit. That court
had ruled that L'anza, a shampoo manufacturer, had not received
full value for its copyright when products it sold at a discount
to Quality King for overseas distribution showed up in California
drug stores. The label on L'anza's shampoo is copyrighted ["Did
Shampoo Manufacturer Get Soaked in Gray Market?" U.S. Business
Litigation, November 1997, p. 18].
Retailers Rely On Gray Goods
gray market exists because U.S. manufacturers routinely sell consumer
goods at deep discounts, through distributors, for foreign markets.
price differential is often so large that a distributor can re-import
the goods at a price that undersells the domestic market. Many
products on American retail shelves arrive there via the gray
a store like Sam's Club or Price Club, for example, all the high-end
fragrances are diverted product," says Michael G. Kessler,
a New York-based corporate investigator who specializes in
intellectual property matters.
the Waterford crystal is diverted product. Much of the jewelry
is diverted. Those items are meant to be sold in upscale stores,
but they wind up in discount clubs through diversion."
Supreme Court decision was hailed as a victory for consumers,
but there is a downside that manufacturers prefer to stress.
L'anza's argument before the 9th Circuit, it claimed that quality
control goes out the window when gray goods come through the door.
Kessler says many perishable commodities languish on foreign shelves
for an extended period before they are re-imported.
it would be hard to convince consumers that they are being victimized
by the presence of bargain-priced goods in domestic stores. For
retailers, the decision puts an end to an uncertain situation
that frequently resulted in litigation. Costco, for example, has
been sued four times since 1994 on claims that its sale of gray
market goods violated U.S. copyright statutes.
gray market creates big problems for manufacturers," says
Bernard R. Sorkin, senior attorney at Time Warner Inc., New York.
our case, a good example would concern the promotion that accompanies
release of a new CD. We arrange concert tours and buy advertising
to raise public awareness of the artist, and all of it is timed
to coincide with the new release. What if a European distributor
floods the domestic market with the CD right in the middle of
the promotion? It cuts the legs out from under our efforts."
loss of manufacturers' profit associated with gray-marketing varies,
says Sorkin. For his company, the marketing implications are more
serious than the economic impact of underpricing.
takes pains to point out a serious misconception about the Supreme
did not abolish protection under U.S. law," he says. "Justice
Ginsburg's concurrence is very precise and specific in stating
that this ruling does not resolve cases in which allegedly infringing
imports were manufactured abroad."
is an important loophole, in Sorkin's view, and one that needs
seen articles in the foreign press indicating that this ruling
wipes out all U.S. protection against parallel imports, and that
notion is being used in some countries to support elimination
of their own protections against diversion of products back to
not only creates problems for the manufacturer. It creates problems
for the foreign country. "Especially if it's a developing
country with a low-level economy," says Sorkin. "Normally
in that situation we would price our goods for sale there at a
level commensurate with the economy. All manufacturers do that.
You have to. Otherwise there would be no market for the product.
But if all the gray goods protections in country X disappear,
it becomes economically impractical for Time Warner to sell its
CDs there. So we will just withdraw from that market."
Is Key For Small Manufacturers
loophole for goods manufactured abroad only works for companies
big enough to set up facilities in foreign countries. "I
don't know what smaller manufacturers can do," say Sorkin.
"You can write protections into a contract, of course, but
that doesn't work very well."
order to prevail in a breach-of-contract action, a plaintiff has
to show the amount of damages suffered, but the losses that result
from re-importing goods are hard to quantify. Doing so would require
speculation about what would have happened if the gray goods were
not available, how many sales might have occurred at a higher
price and so on. Also, the distributors who divert product to
the gray market are often good customers. Thus, enforcing the
contract becomes problematic.
there are some simple steps small manufacturers can take.
you are going to sell your goods in Russia, label them in Russian,"
suggests Donald E. deKieffer, a partner at deKieffer & Horgan,
Washington, D.C. "It costs a few cents more per label, but
it's effective. Generally speaking, try to prevent diversion before
it gets started. Identify your distributors. Check them out. Often,
the people who supply the gray market are crooks, and you're better
off not doing business with them."
of product, Kessler adds, often involves underlying fraud and
can be prosecuted. An example would be the fraudulent alteration
of a manifest to indicate that products have left the United States
when in reality they remain in domestic warehouses until the time
is ripe for diversion.
has developed software that searches the Internet for both counterfeit
and diverted products. "Many diverters," he says, "have
started using the Web as the venue of choice for gray market goods."