Feature By Antonio Turco

Most people think of Las Vegas as a major resort city where people can engage in gambling, shopping, fine dining and various other forms of entertainment. For IP law practitioners, the city’s iconic marketing campaign, “What happens in Vegas stays in Vegas”, Different provides the perfect allegory for grey marketing. If the goods are destined for Vegas, they really should stay in Vegas. Brand owners often design their products, packaging, sales and distribution networks to meet specific cultural, language, shades of environmental and other conditions in specific countries. They may also authorize particular distributors in those countries, which earn royalties on the sales, often on the basis that they provide warranties or after-sales service, or local marketing or informational activities. Grey-market goods, or parallel imports, are branded goods that are grey in imported into a market and sold there without the consent of the trademark owner. The goods are ‘genuine’, in that they have been manufactured by or for the trademark owner, but are imported into a jurisdiction other than that intended by the trademark owner and for which they were formulated or packaged. Trademark owners Canadian subsequently often struggle to ensure that goods targeted for a particular market stay there and do not migrate to other markets, and – as in the case of the and Canada – there can be variations and US in the use of trademark rights as a vehicle to combat grey-market goods. Parallel imports and trademark law In the past, parallel importation was seen by some as a copyright issue. From a trademark perspective, the debate over parallel imports focuses on the extent to which a trademark owner should approaches be able to maintain control over its own brands by using its trademark rights in a jurisdiction to restrict the importation of goods into that jurisdiction, after it has put the goods into the stream of commerce elsewhere. Parallel importation usually occurs because someone can locate to parallel a cheap source of supply in another country, due to either a lower sale price for the product in that country or a favourable exchange rate. The product is then imported and sold at a price which is favourable to the local market price, while still allowing the imports importer to generate a profit. Not long ago, trademark owners could take comfort in traditional barriers to trade – both legal and physical – which hampered the While Canadian and US trademark laws have become distribution of grey-market products. However, thanks to globalization and liberalized trade policies, those traditional barriers have weakened relatively ill suited to preventing parallel imports, and in some cases broken down completely. The Internet has fostered there are still instances where their effectiveness can the creation of millions of back channels through which grey-market be maximized goods can travel – e-tailers and auction sites have made it easier for the distribution of grey-market goods to flourish. Other technological advances have also aided the rise of parallel importation. Courier companies and online payment facilitators have made paying for and shipping products simple. Transportation and logistics advances mean that many grey marketers do not need to maintain a warehouse of inventory. All of the above has contributed to the growing phenomenon of grey-market goods. In order to understand fully the challenges associated with using trademark law to prevent the importation and sale of grey-market goods, it is important to understand the doctrine of exhaustion. Pursuant to this doctrine – sometimes also referred to as the ‘first sale doctrine’ – the first unrestricted sale of an item exhausts the trademark owner’s control over that particular item. In other words, the ability of a trademark owner to control further sales of a product bearing its mark is generally ‘exhausted’ following the initial sale of that product. However, the harmonization of global IP laws has not generated a common approach to the issue of exhaustion. Some countries have adopted a national system of exhaustion, which applies to limit www.WorldTrademarkReview.com April/May 2010 World Trademark Review 25 Feature: Different shades of grey in Canadian and US approaches to parallel imports

trademark rights where the goods were first sold in that country. where the Canadian trademark owner is not the source of the Accordingly, a local trademark owner can prevent the importation foreign product and where the product is somehow different from and sale of products that were first sold in another country. the local product. Typically, only those physical and other In other jurisdictions, such as Canada and the United States, differences that are likely to cause harm to consumers or the public exhaustion is considered internationally, such that the location of good may be sufficient to enable the trademark owner to object the first sale is irrelevant and the trademark owner’s rights are successfully to parallel importation. However, as seen in the Seiko exhausted after the first sale. A hybrid approach is regional Case, as long as the differences in the products are made evident to exhaustion, which means that the doctrine applies only where the potential customers, the trademark owner or licensee will be unable goods were first sold within a particular region. to stop sales in Canada. Further, a trademark owner may have the right to sue an The Canadian approach importer of grey-market goods if those activities are likely to Under Canadian law, the sale of grey-market goods does not damage the goodwill associated with the trademark. Section 22 of typically constitute trademark infringement or passing off. This is the Canadian Trademarks Act provides that no person shall use a rooted in the source theory of trademark – that trademark law is trademark registered by another person in a manner that is likely to intended to protect a consumer from confusion as to the source of have the effect of depreciating the value of the goodwill attaching the product being purchased. By definition, grey-market goods thereto. It is clear that grey-market activities have the potential to originate with, or are ultimately authorized by, the trademark damage a trademark’s goodwill – for example, where the foreign owner. Accordingly, there can be no confusion as to the source of the product is somehow different from the local product. product and, by consequence, no infringement or passing off. Canadian jurisprudence has clearly established that products The US experience manufactured in Canada displaying a trademark authorized by the Traditionally, the approach in jurisprudence in the United States was owner of Canadian trademark rights can be exported from Canada to resolve the question of parallel importation by reference to whom without infringing any trademark rights. Similarly, the importation the potential customer identified as the source of the goods bearing and distribution of products manufactured outside Canada with the the trademark: the foreign manufacturer or the US importer. authority of the Canadian trademark owner does not infringe For example, looking back to 1886 in one of the first grey-market Canadian trademark rights. cases decided by a US court, Apollinaris Co v Scherer, the plaintiff, The Supreme Court of Canada first began eroding the ability of the exclusive US distributor of HUNYADI JANOS-branded mineral trademark owners to use trademark law as a means of preventing water, brought an action for trademark infringement against the parallel imports in its decision in Consumers Distributing Co v Seiko defendant, who had imported into the United States the trademark Time Canada Ltd ([1985] 1 CPR (3d) 1). owner’s bottled water sold in Europe. The Circuit Court The case involved the sale of SEIKO brand watches by grey rejected the claim, reasoning that there could be no infringement marketers. The Canadian distributor argued that the watches should because the water offered by the defendant was genuine water be considered different from, and therefore confusing with, the associated with the trademark. watches it offered, since they came with a different warranty. The However, the modern approach focuses more on the nature of court noted that since the grey marketer offered for sale genuine the goods themselves. In an important 1987 decision in Original Seiko watches and gave notice to potential customers that the Appalachian Artworks, Inc v Granada Electronics Inc (816 F 2d 68, warranty was different from that offered by the Canadian April 7 1987), the Second Circuit Court of Appeals affirmed an distributor, there was no confusion and thus no foundation for an injunction restraining the importation into the United States of action for passing off. Cabbage Patch Kids dolls manufactured in Spain under licence from The principle of international exhaustion of trademark rights the trademark owner. In that case, the foreign licensee was under Canadian law was again clearly enunciated by the Federal contractually restricted from selling in the United States and the Court of Appeal some dozen years later in Smith & Nephew Inc v Spanish-made dolls were “materially different” from those Glen Oak Inc ([1997] 68 CPR (3d) 153). In that case the Canadian manufactured in the United States. This difference allowed the court distributor of (and licensee of the trademark) Nivea facial cream to conclude that the imported dolls were not “genuine” and created, attempted to rely on its licensor’s registered trademark rights to in the mind of the court, likely confusion as to source. prevent the parallel importation into Canada of genuine Nivea facial In assessing confusion as it specifically relates to grey-market cream which was intended for the Mexican market. The formulation goods, US courts will now examine: of the grey product was different from that used for Canada. • whether “material differences” exist between the goods sold by Nonetheless, the court determined that if the trademark associated the trademark owner and its authorized dealers and those sold with an imported product is owned by the foreign maker of the by the unauthorized dealer; and product (which is the most common scenario), neither the • whether the unauthorized dealer sells the materially different trademark owner nor any licensee can validly complain about the goods in a manner which would be likely to cause confusion parallel importation of genuine products which were put in the and/or dilute the strength of the trademark. stream of commerce somewhere in the world by, or with the authority of, the trademark owner. If there is a material difference between the grey-market good Therefore, unless the Canadian entity responsible for imported into the United States and the good authorized for sale in distributing the product in Canada is also the owner of the the United States, confusion of potential customers and trademark trademark in Canada and the public recognizes the Canadian entity infringement can occur. The trademark owner may therefore stop as the source of the product, a Canadian licensee/distributor has no parallel imports if they differ materially in relation to, among other legitimate course of action in trademark law to prevent the parallel things, formulation, ingredients, packaging, guarantees, post-sale importation of genuine goods. services, labelling or instructions. Trademark owners can still, in theory, restrain parallel imports The recent decision in Tiffany (NJ) Inc v eBay Inc (576 F Supp 2d

26 World Trademark Review April/May 2010 www.WorldTrademarkReview.com Consider whether the party with the right to sell its products in either Canada or the United trademark owner to prevent parallel importation into Canada, any States should also be the owner such differences will, at the very least, permit the trademark owner to make such an argument. For this reason, a trademark owner may of the local trademark rights be well served to take steps to ensure that any Canadian and US products are different from each other and from those sold in other jurisdictions. For example, a trademark owner may use variations on its packaging design, product formulations or national warranty programmes, or jurisdiction-specific post-sale services. Trademark owners will also want to consider whether the party 463 (SDNY 2008)) may also prove instructive for those battling grey- with the right to sell its products in either Canada or the United market goods, particularly on the Internet. Frustrated with States should also be the owner of the local trademark rights. It is individuals selling counterfeit Tiffany products through eBay’s online not clear whether this will assist, given the current state of the law; marketplace, seller of luxury goods Tiffany commenced an action but where such an ownership structure is not possible or practical, against eBay for, among other things, direct and contributory the local distributor or licensee should at least have some form of trademark infringement. Tiffany acknowledged that individual exclusive arrangement for the jurisdiction. sellers, rather than eBay, are responsible for listing and selling counterfeit TIFFANY-branded products on eBay’s marketplace. Beyond the limits of trademark law Nonetheless, Tiffany took the position that eBay was on notice of the As discussed above, there are significant hurdles for a trademark owner illegal activities of its sellers and, by failing pre-emptively to prohibit in attempting to use trademark law to curtail the distribution of grey- listings of certain Tiffany items, was engaged in infringing activity. market goods. However, recourse may be available in other ways. For eBay countered that Tiffany was solely responsible for policing example, copyright law has been used effectively in both Canada and counterfeits and reporting any such items to eBay, and noted that the United States to challenge the importation of grey-market goods. any specific instances of infringement reported to it by Tiffany Other avenues to consider include patent law and regulatory law, would be promptly removed from eBay’s online marketplace. The US especially as it relates to potential improper registration, packaging District Court for the Southern District of New York agreed with or labelling. For example, certain products may be required to eBay and entered judgment in its favour. adhere to unique legal requirements regarding the information that An appeal brought by Tiffany was heard in July 2009, but a is displayed on product packaging. In addition, Canadian-language decision has yet to released. Nevertheless, the case is instructive for legislation may provide some avenues for recourse, especially in the those battling grey-market goods for two reasons. province of . First, it serves to emphasize that courts may put the burden on Trademark owners may also be able to rely on non-compliance trademark owners to enforce their rights, even where there may be with other regulations, such as requirements for certain approvals, strong evidence that an intermediary (eg, auctioneers, flea market to cause government authorities to block the sale and importation operators or internet service providers) knows or has reason to know of the product, or to demonstrate to a court that the imported goods of infringing activities by its customers. For example, the strength are sufficiently different from the local goods. of Tiffany’s arguments was diminished by its perceived failure to Further, several US states (notably , and take sufficient steps and to invest sufficient resources towards New York) have statutes which address parallel importation, while combating infringement. Specifically, the court noted that Tiffany Michigan and the District of Columbia have statutes that specifically stopped using eBay’s Verified Rights Owner programme and deal with the problem of grey-market cigarettes. invested only limited time and money in the online counterfeiting Alternatively, trademark owners can attempt to use their problem with respect to eBay. distribution or licence agreements to restrict the ability of Second, the decision confirms that trademark owners may distributors or licensees to sell products outside of a particular prevail on a contributory infringement theory against jurisdiction. Contractual provisions designed to ensure that intermediaries where the intermediary: distributors respect territorial rights may limit the supply of • has direct control; potential grey-market goods. • exercises sufficient control and monitoring; and In certain circumstances trademark owners can also register • knows of specific instances of infringing activity and fails to take their trademarks with US Customs and Border Protection to prevent steps to prevent them. the unlawful importation of grey-market goods or litigate their claims before the International Trade Commission, seeking an Maximizing trademark law exclusion order directing customs officials to prevent the unlawful As seen, Canadian and, to a lesser extent, US trademark laws have importation of such goods. become relatively ill suited to preventing parallel imports. However, Finally, several non-legal avenues are available to trademark there are some strategies which trademark owners can successfully owners, such as education in promoting grey-market abstinence to employ. employees and distributors, as well as to consumers through Obviously, trademark owners will want to ensure that any industry associations. Trademark owners can also monitor and audit relevant trademark is registered in both Canada and the United their supply chain to pinpoint vulnerabilities, audit their States. Registration confers many benefits and provides certain distributors, monitor the Internet for sales of grey-market goods presumptions which assist in enforcement. For example, an action and eliminate price discrimination. WTR for depreciation of goodwill under the Canadian Trademarks Act is available only to owners of a registered Canadian mark. Product differences between local and foreign products are key to any attempt to restrain parallel importation into the United Antonio Turco is an associate in the office of Blakes States. While there is no guarantee that such differences will allow a [email protected] www.WorldTrademarkReview.com April/May 2010 World Trademark Review 27