Excuse the violent metaphor in this article's title, but the Super Bowl just ended and my head still reverberates with all the sounds and grotesque images from the game. You know, concussions, broken wrists, Beast Mode, deflated footballs, and, worst of all, stale guacamole.
Over the past few decades, our courts and legislative bodies have fortified intellectual property rights in a myriad of ways, including at the border. However, there is one notable exception: gray market goods. Gray market goods or parallel imports are imported products bought legitimately in another country on the cheap and then imported into the USA for sale. Manufacturers do not like how gray market goods disrupt and undercut their domestic distribution arrangements. Gray market goods are not knockoffs. We are not talking about piratical products. Gray market goods are genuine. Which begs the question: if a manufacturer loses all proprietary interests when it sells its goods (because someone else now owns them), how can the manufacturer dictate what happens to those goods thereafter? Does the law provide an invisible tether to yank goods back into the manufacturer's lap?
Well, sort of. At least it did until two years ago when the U.S. Supreme Court suddenly realized that, hey, this kind of restriction contravenes the "I bought it, it's mine to do with as I wish" precept that all of us grew up to expect and that powers our economy and disposable culture.
The case was Kirtsaeng v. John Wiley & Sons, and the U.S. Supreme Court decided that copyright law cannot be used to ban imported goods after the first sale.
US Customs and Border Protection still has regulations to keep gray market goods out. Whether the agency continues to enforce those regulations is not clear, but manufacturers are trying to find a way around Kirtsaeng.
With little luck. The Ninth Circuit Court of Appeals, one level down from the U.S. Supreme Court, just decided Omega v. Costco. Isn't that a wonderfully comic book-like title for a court case? You almost expect Thor and Iron Man to represent opposing sides.
The Omega in this case was the manufacturer of luxury watches. Costco is where you likely bought the guacamole that I mentioned earlier. It seems that Costco purchased 117 Omega watches on the gray market and then had the audacity to import and offer them for sale at their stores at a tempting discount, all without first getting Omega's ok, not that an ok would ever have come.
The court dispensed with Omega's challenge, citing to Kirtsaeng: "Thus, application of the first sale doctrine disposes of Omega's claim, resolves this case in Costco's favor, and conclusively reaffirms that copyright holders cannot use their rights to fix resale prices in the downstream market."
Gray market earns another nail in the coffin. Now I'm mixing my metaphors. Must be the stale guacamole.
I cannot proclaim with complete certainty that gray market is dead. Omega engraved its copyrighted design into each of the watches hoping that an infringement claim would be enough to keep the goods out of the country. The strategy didn't fly with the 9th Circuit, but we attorneys are a crafty and insistent lot, like raccoons that somehow find their way into your attic. Lawyers are busily investigating whether trademark or contract law can prop up gray market law. It's an uphill battle, like trying to turn stale guacamole back into an avocado.
June 11, 2012
Businesses employ all manner of legal strategies to protect their intellectual property rights, but some legal departments overlook the potent enforcement tools available at the border. The United States imports an enormous amount of goods from other countries, and pirated products naturally are part of that deluge. In-house counsel should understand how to enlist the federal government's help to stop infringing goods or, alternatively, to defend their companies' rights to import products against claims of infringement.
U.S. Customs and Border Protection (CBP) is the gatekeeper for products entering the United States, with enormous powers and vast resources at its disposal to keep out and confiscate infringing products. Counsel for holders of copyrights, trademarks and patents should enlist CBP to keep infringing products out of the country.
Counsel should record company trademarks and copyrights with CBP at https://apps.cbp.gov/e-recordations/. To do so, the company first must hold a copyright registered with the U.S. Copyright Office or a trademark registered with the U.S. Patent and Trademark Office. The registration fee to record registered rights with CBP is $190.
CBP also can exclude products that infringe patents, but patents cannot be recorded with CBP. Instead, counsel should seek an exclusion order from the U.S. International Trade Commission (USITC). Exclusion orders are called §337 orders, after §337 of the Tariff Act of 1930, now 19 U.S.C. §1337. CBP will enforce exclusion orders.
The USITC initiates a §337 investigation when a complaint is filed. The complaint must identify the parties who allegedly violated §337. After a full evidentiary hearing, an administrative law judge issues an initial determination, and eventually the USITC may issue an exclusion order barring the products at issue from entry into the United States, as well as a cease-and-desist order directing the violating parties to cease certain actions.
CBP has more than 300 ports of entry and thousands of officers trying to enforce a multitude of laws at the borders. A vigilant attorney should visit the relevant ports that infringers are likely to use and instruct examining officers what to look for.
But finding the relevant port is not always simple. Counsel for an importer can use one of the many online subscription services, such as PIERS and Import Genius, to reveal which ports competitors and suspected counterfeiters are using. The CBP website is useful. There, lawyers can find contact information for CBP's intellectual property rights help desk, plus port addresses and contact information.
In an Interim Rule published in the April 20 Federal Register, CBP?? made the startling admission that, "[d]ue to the development of sophisticated techniques of some counterfeiters and the highly technical nature of some imported goods, it has become increasingly difficult for CBP to determine whether some goods suspected of bearing counterfeit marks in fact bear counterfeit marks." This is CBP's plea for intellectual property rights holders' help to determine whether particular imported shipments are piratical. CBP is barred from revealing an importer's shipment information (deemed a trade secret) to other parties, including the holders of intellectual property rights. But CBP now will be able to share serial numbers, universal product codes and SKU numbers with intellectual property rights holders. By helping CBP inspect imported boxes and goods to determine whether a trademark is being violated, in-house counsel becomes an active partner in making sure fewer infringing products enter the country.
If CBP refuses to enforce a company's rights, even when counsel has properly recorded them and obtained an exclusion order from the USITC, counsel may need to consider filing suit against CBP to enforce the exclusion order from the USITC.
The Other Side
CBP's recordation procedure is designed to avoid the typical protracted legal battles over who controls intellectual property rights. While speedy exclusion and seizure are ideal if CBP is stopping truly infringing products, the expedited system is less advantageous if CBP or the purported rights holder errs. The facts and law in this area are complex. Not only is it possible that CBP could exclude goods that do not infringe on recorded intellectual property rights, but it is possible CBP did not follow proper procedure when excluding or seizing clearly infringing goods. Counsel may need to take action.
Counsel will know that there is a problem at the port when the importer receives a formal notice from CBP, perhaps a request for information or a notice of seizure or penalty. Sometimes, the notice is sent to an importer's customs broker.
Importers may challenge a penalty or seizure notice or an exclusion order through administrative procedures and, ultimately, through the courts. It is becoming increasingly common to invoke CBP's procedural protections to keep out infringing products while simultaneously seeking a court's injunctive relief. Parties sometimes rush to sue or to get before an administrative agency as leverage, even when the merits are dubious.
Companies may feel like walking away from a confrontation with CBP even when they are convinced they are not infringing upon anyone's intellectual property rights, thinking it all not worth their time and money. The problem is that the record is likely to haunt an importer in perpetuity. I know of no way to expunge CBP's records. If counsel's company has a record of infractions, CBP will detain and examine its shipments for weeks, disrupting the "just in time" business imperative under which most importers work.
A company may not even know that it is importing infringing goods and will only discover a problem when CBP flags a shipment or when CBP audits the company. A company can request an advisory opinion, known as a ruling, from CBP to find out if a particular good is infringing. In-house counsel may want to set up procedures to audit the company's supply chain periodically. An experienced eye should be able to detect the clear red flags and subtleties that indicate possible infringement issues.
Oscar Gonzalez is a principal in Gonzalez Rolon Valdespino & Rodriguez in Dallas. His practice focuses on business/ corporate litigation and transaction law, international trade law and nonprofit organization law.
Reprinted with permission from the June 11, 2012 edition of Texas Lawyer. © 2012 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited.
Assume you pour money, sweat, and tears into developing a nifty new technology. You want to make sure no one steals your hard work, so you file for and receive a patent from the US Government. You find out that one of your competitors is infringing your patent. You file a complaint with the International Trade Commission (ITC) under 19 USC § 1337(a)(1)(B). That section makes unlawful “[t]he importation into the United States, the sale for importation, or the sale within the United States after importation by the owner, importer, or consignee, of articles that ... infringe a valid and enforceable United States patent.” The ITC finds merit in your complaint and orders a formal investigation. You are confident that the ITC will order (upon the President’s approval) US Customs and Border Protection (CBP) to exclude the infringing merchandise. Then your competitor (the company importing the infringing merchandise) files for bankruptcy. You are stunned when the bankruptcy judge orders the ITC to immediately stop its investigation. While the automatic stay in bankruptcy stops collections activities against the bankrupt debtor, it normally cannot stop federal agencies from doing their job. However, this bankruptcy judge views the ITC investigation as different because it was initiated at the request of a private party, so it was not really the federal government that was being restrained.
Do you think the bankruptcy judge was correct?
The federal court from the Eastern District of Virginia did not in ITC v. Jaffe, a decision rendered on June 28, 2010. The court concluded that the bankruptcy judge made a mistake. The automatic stay in bankruptcy could not prevent the ITC from continuing to investigate the bankrupt debtor. While the patent owner filed the complaint with the ITC, it was the ITC that initiated the investigation pursuant to its police and regulatory power. That the patent holder stood to inherit the bond posted by the infringing importer did not mean the patent holder was a creditor, the court reasoned.
The lesson is that bankruptcy can give companies and individuals valuable breathing room and keep bill collectors at bay, but it does not prevent the ITC from investigating whether the bankrupt debtor is violating someone’s intellectual property rights and it does not prevent CBP from excluding the debtor’s infringing merchandise.
Principal and a founding member of GRVR Attorneys.