NINTH CIRCUIT STRIKES ANOTHER BODY BLOW TO GRAY MARKET PROTECTION

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. 

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