The Gray Blog

It is a common misconception amongst those who have a passing knowledge of the parallel market that it is universally despised and opposed by trademark owners/manufacturers. This is far from true. Although the battle between trademark owners and parallel market resellers usually garners the headlines, there is a cooperative relationship between many manufacturers and the parallel market.

This entente cordiale exists for various reasons. In some cases, the manufacturer wants to seed lower market segments that it would normally not service as part of its visible marketing posture. In others, a subsidiary in one region, interested only in their regional sales numbers, turns a blind eye to sales into another territory. Yet in others, the parallel market provides a convenient way of clearing out old or unpopular inventory.

Normally these dealings between the manufacturer and the parallel market reseller are kept fairly private. This is why The Gray Blog was surprised to receive a box marked with Coty Beauty name and address which was clearly labeled on the outside flap with various routing options including “GREY MARKET”:

Coty Beauty, Inc. is a major fragrance reseller based in the US. Coty Beauty markets brands such as adidas, Rimmel, Celine Dion, Miss Sixty, Jovan, Isabella Rossellini, Esprit, and David and Victoria Beckham.

Although I’m trying to keep this blog centered on news and developments, sometimes it is worth bringing to light little known aspects of parallel market law. Most people are familiar with the application of federal laws in the United States such as the Lanham Act and the Copyright Act in relation to parallel market issues. However, in the United States, we have 50 states (akin to provinces in other countries) that have their own local laws governing statewide trademark registration, unfair competition and other issues. In many lawsuits involving parallel market goods, the complainant alleges violations of state common law trademark and unfair competition laws.
In a handful of cases, however, US states have passed laws specifically directed at parallel market goods. These parallel market laws cover a variety of products including cigarettes, vehicles and even child adoptions. The purpose of this article, however, is to focus on the statutes dealing with general parallel market commercial goods.
Three states, California, Connecticut and New York, have put such statutes into law. These state laws share one thing in common. They apply to the retailer and they try to provide the consumer with adequate notice of what he or she is buying. Not unlike the line of authority that developed from Coty v. Prestonettes, 264 U.S. 359 (1924) and Champion Spark Plug Co. v. Sanders, 331 U.S. 125 (1947), and Custom’s Lever Brothers regulations, the states try to dispel any confusion by notifying the consumer that the goods, while genuine, may not be fully conforming with the domestic product.
The first and most comprehensive of these laws is set forth in California Civil Code Section 1797.81 titled “Retail Sellers; disclosures; tickets, labels or tags.” The law requires every retailer who sells gray market goods to post a sign at the products’ point of display and to affix to the product or its package a notice setting forth, as appropriate for the product, whether:
• the item is covered by the manufacturer’s warranty in the US (unless the reseller provides his own warranty and provides proper notice thereof);
• the item is compatible with US electrical currents;
• the item is compatible with US broadcast frequencies;
• replacement parts and compatible accessories are not available through the manufacturer’s U.S. distributor;
• the item is accompanied by instructions in English;
• the item is eligible for manufacturer’s rebate(if any);
• the item has any incompatibilities or non-conformities with relevant domestic standards.
A similar disclosure has to be included in any advertisement for the product. California Civil Codes section 1797.82. A violation of these statutes entitles the consumer to return the product and constitutes a violation of the California Unfair Competition and Deceptive Trade Practices Acts.

California law goes further than its two sister states and prohibits the decoding of “personal property.” California Penal Code 537e. Often manufacturers code products in order to track back the source of parallel market goods. Parallel market resellers remove these codes in order to protect their sources. When the removal defaces the products it violates existing case law. This statute reaches to decoding which does not deface. Any removal of a “manufacturer’s serial number, identification number, electronic serial number, or any other distinguishing number or identification mark” is punishable by fine and imprisonment.

Connecticut provides a less intrusive and extensive restriction. Connecticut General Statutes section 42-210 requires every retailer who sells parallel market goods to post a sign conspicuously to the item, the point of sale or the register setting forth whether the product is (1) accompanied by the manufacturer’s warranty valid in the United States; (2) accompanied by instructions in English; or (3) eligible for a rebate offered by the manufacturer. Mail order vendors (but not retailers) must also make these disclosures in any written advertising relating to such product. Failure to abide by the statute entitles the consumer to return the product within 20 days and constitutes an unfair or deceptive trade practice. As in California, the Connecticut retailer can avoid the warranty issue by offering his own warranty of equal or greater coverage.

Finally, the New York statute is focused on the warranty issue. New York General Business Law section 218-aa provides that a retailer who knowingly sells gray market goods shall conspicuously post on a sign attached to the item and on each cash register on from a place visible from each cash register, disclosing whether the product is accompanied by a manufacturer’s warranty, whether it contains instructions in English and whether the product qualifies for a manufacturer’s rebate in the US. As in the case of the Connecticut statute, the New York statute allows the consumer 20 days to return the product in the event of a violation. The New York statute goes further, however, by providing that the attorney general can bring suit for injunctive relief without proof of actual injury and for civil penalty.

The Spanish affiliate of LG Electronics, the Korean electronic manufacturer, has renewed its claims that Spain is losing millions of Euros in taxes as a result of parallel market sales. According to LG Spain, the failure to pay import taxes gives parallel market importers a substantial advantage over the authorized reseller.

In addition, LG Spain and its partners, claim that the country is injured because parallel market importers fail to pay electronic residue fees. Under Spanish law all manufacturers and importers of electronics are obligated to register with the Registry of Industrial Businesses for Residues of Electronic Aparatuses and Electronics [Establecimientos Industriales para Residuos de Aparatos Eléctricos y Electrónicos (REI)] The purpose of the REI is to then determine the percentage of materials that each manufacturer is introducing into the marketplace in order to calculate the electronic residue handling fees that the manufacturer must pay. Of the approximately 10,000 manufacturers in the Spanish market only approximately 10% are allegedly registered.

LG Spain’s battle against parallel market resellers of , principally, CD and DVD players and recorders in Spain has been on-going for several years. In November of 2005, LG Spain reported that it has lost over 10 million Euros to parallel market imports the previous year. In response, LG announced an ambitious two-stage strategy of notifying unauthorized resellers and launching legal actions against those that did not reach amicable settlements. (Under European law importing products bearing copyrighted works without the consent of the copyright owner is actionable. See article regarding CD Wow case earlier in this blog).

There were no subsequent press releases regarding the success or failure of this approach. Clearly, the latest statements suggest that the parallel market sales continue to pose a problem for LG Spain.

U.S.Customs and Border Protection is in the midst of a crackdown against portable music players that contain a variation on the game Tetris. Dozens of seizures have already taken place involving thousands of such players many of them in-transit to Latin America. The basis for the seizures has generally been “counterfeit version of Tetris software.” It appears from some reports, however, that in some cases the software may be infringing but not necessarily counterfeit. Due to the large number of seizures, Customs still has not issued decisions on pending petitions. If your client is purchasing MP4 or MP3 music players abroad, have them confirm that the players do not contain a Tetris variation before importing into the U.S. for domestic consumption or transshipment.

In one of the largest awards ever rendered against a parallel market importer in Europe, CD Wow has been ordered to pay more than 41 million pounds (approx. $80 million) to the British Phonographic Industry (BPI) . The award issued this past month after a five year battle by BPI against the Hong Kong based diverter. CD Wow purchased CD’s which sold at a lower price in the far east, and resold them to retailers in the United Kingdom. The case centered on a European Union law which prohibits the importation into the Union of goods bearing copyrighted works without the consent of the copyright owner. In 2004, CD Wow entered into a settlement agreement with BPI in which CD Wow agreed to cease future sales. The harsh ruling was based on the High Court’s decision that CD Wow violated the terms of this agreement.
The players can be found at:
http://www.bpi.co.uk/
http://www.cdwow.com/

Many countries in Latin America have laws on the books requiring “registros sanitarios” or “sanitary certificates” for products which are ingested or which come in contact with the human body. Such products generally include drinks and food products but also perfumes and cosmetics. These laws are generally administered by the department of sanitation for the country. The stated purpose of the sanitary certificate is to provide a vehicle to track a product back to its source in the event of adverse reactions. A side effect is that, where these regulations are enforced, they provide an effective tool against parallel market products. In order to obtain a sanitary certificate you must be the manufacturer of the product or his authorized agent. Furthermore, you must disclose ingredient information for the products. Once the sanitary certificate is issued, only products imported by the owner of the sanitary certificate are generally allowed to circulate in the country. Although traditionally lax enforcement has rendered the sanitary certificate an unsatisfactory tool, in recent years various Latin American governments such as Venezuela and Peru have breathed new life into their respective laws. With stronger enforcement the sanitary certificate may prove an effective tool against the grey market.

Microsoft has filed or threatened dozens of lawsuits nationwide and internationally against parallel market resellers of diverted Microsoft software products. Relying principally on the U.S. Supreme Court’s decision in Lanza, Microsoft alleges in its pleadings that diverting software products, first sold abroad, and bringing them back into the U.S. for resale. Under the reasoning in Lanza, although genuine Microsoft products, the first sale rule may not apply since the product was first sold outside of the U.S. and the products may therefore be deemed infringing.