Gray market goods – also known as parallel imports – are typically defined as “genuine branded goods obtained from one market (i.e., a country or economic area) that are subsequently imported into another market and sold there without the consent of the owner of the trademark.” (INTA). They may take the form of “U.S. copyrighted products — from textbooks to watches — that are manufactured in other countries for sale there, then purchased and imported to the U.S. for discounted resale.” (NPR).
Gray marketers use low prices to undersell U.S. distributors, commonly resulting in lost sales. “Likewise, because gray goods often ‘materially differ’ from domestic goods, including quality control, product characteristics, labeling, and other key elements, U.S. consumers may be disappointed by the gray goods, resulting in a loss of the U.S. distributor's goodwill.” (ABA).
Legality of Gray Market Goods
In the U.S., the importation of gray market goods “is not per se unlawful due to the "first-sale doctrine," which provides that once a trademark owner releases its goods into commerce, it cannot prevent the subsequent re-sale of those goods by others.” (Finnegan). However, gray market imports can be unlawful when "material differences" exist between such imports and the authorized goods, based on the core principle in U.S. trademark law of preventing consumer confusion.
Additionally, a number of courts have held that the sale and distribution in the U.S. of goods manufactured and first sold abroad that feature copyrightable subject matter can constitute copyright infringement. Although courts have held that the first sale doctrine does not extinguish a copyright owner’s ability to prevent the importation of gray market goods first manufactured and sold abroad. (INTA).
In the U.S., the sale and distribution of gray market goods that are “materially different” from goods authorized for sale in the United States constitute trademark infringement. In asserting trademark infringement by way of a claim of material difference, a plaintiff must prove the gray goods are "materially different" from their domestic counterparts. In one of the most often cited gray market cases, Socit des Produits Nestl S.A. v. Casa Helvetia, 982 F.2d 633 (1st Cir. 1992), “the federal court of appeals held that a single material difference creates a presumption that the gray goods have a ‘potential to mislead or confuse consumers about the nature or quality of the product.’” (ABA).
Much like in a traditional trademark action, actual confusion is not required. “Any difference that consumers would likely consider to be relevant when purchasing a product constitutes a material difference. Material differences include ‘subtle differences’ that are ‘not blatant enough to make it obvious to the average consumer that the origin of the product differs from his or her expectations,’ and, thus, are likely to confuse and/or disappoint the average consumer.” (ABA).
What are my remedies if my goods are sold on the gray market?
Remedies for gray market goods are country specific. First, check with local counsel to learn whether a remedy is available under trademark law. For example, in some countries, such as Canada and New Zealand, trademark law allows for parallel importation, though other laws (e.g., copyright law) may also provide a remedy. In contrast, in the United States both the Lanham Acts and the Tariff Act provide remedies for gray market goods. Similarly, in Brazil the owner of a trademark can prevent third parties from importing any goods that infringe its rights by pursuing both criminal and civil measures. (INTA).
Keeping Gray Goods Out of the U.S.
To help stem the flow of gray goods into the U.S., manufacturers should closely monitor and implement product control and tracking procedures for their non-U.S. distributors, including using the threat of their business relationship. In addition, upon discovery of a gray market importer in the United States, the U.S. distributor should immediately send a cease and desist letter and, if necessary, file suit under the Lanham Act making sure to seek disgorgement of profits, treble damages, and attorney fees. (ABA).