Different Shades of Grey in Canadian and US Approaches to Parallel Imports

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 United States 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 New York 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.

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