Texas A&M University School of Law Texas A&M Law Scholarship Faculty Scholarship 5-2012 Market Integration and (the Limits of) the First Sale Rule in North American and European Trademark Law Irene Calboli [email protected] Follow this and additional works at: https://scholarship.law.tamu.edu/facscholar Part of the Law Commons Recommended Citation Irene Calboli, Market Integration and (the Limits of) the First Sale Rule in North American and European Trademark Law, 51 Santa Clara L. Rev. 1241 (2012). Available at: https://scholarship.law.tamu.edu/facscholar/362 This Article is brought to you for free and open access by Texas A&M Law Scholarship. It has been accepted for inclusion in Faculty Scholarship by an authorized administrator of Texas A&M Law Scholarship. For more information, please contact [email protected]. MARKET INTEGRATION AND (THE LIMITS OF) THE FIRST SALE RULE IN NORTH AMERICAN AND EUROPEAN TRADEMARK LAW Irene Calboli* I. INTRODUCTION The relationship between exclusive trademark rights and the free movement of goods across international borders has historically represented one of the most heated topics of discussion in the international trademark debate.' In a previous work published a few years ago, I analyzed this topic in the context of European trademark law and the case law of the European Court of Justice (ECJ).2 In this Article I * Associate Professor of Law and Director, Intellectual Property and Technology Program, Marquette University Law School; Spring 2011 CIPLIT Visiting Professor of Law, DePaul University College of Law. I would like to thank Eric Goldman for the invitation to speak at the "Exhaustion and First Sale in Intellectual Property" conference held at Santa Clara University School of Law on November 5, 2010, and for his insightful suggestions during the research and writing of this Article. I also thank the conference participants and my colleagues Michael O'Hear and Josh Sarnoff for useful conversation and comments on earlier drafts of this Article. Finally, I thank Marquette University Law School for research support, Jeremy Hager for research assistance, and the editors of the Santa Clara Law Review, and in particular Mike Foy, Lara Muller, and Farid Zakaria, for their assistance during the editing process of this Article. 1. The literature on this topic is extensive. See, e.g., TIMOTHY H. HIEBERT, PARALLEL IMPORTATION IN U.S. TRADEMARK LAW 1 (1994); Friedrich-Karl Beier, Territoriality of Trademark Law and International Trade, 1 I.I.C. 48 (1970); Christopher Heath, Parallel Imports and International Trade, 28 I.I.C. 623 (1997); John C. Hilke, Free Trading or Free-Riding:An Examination of the Theories and Available Empirical Evidence on Gray Market Imports, 31 WORLD COMPETITION L & EcoN. REV. 75 (1988); Herman Cohen Jehoram, Prohibition of Parallel Imports Through Intellectual Property Rights, 30 I.I.C. 495 (1999); E.C. Vandenburgh, The Problem of Importation of Genuinely Marked Goods is not a Trademark Problem, 49 TRADEMARK REP. 707 (1959); Charles Worth, Free Trade Agreements and the Exhaustion of Rights Principle, 1 E.I.P.R. 40 (1994). 2. See Irene Calboli, Trademark Exhaustion in the European Union: Community-Wide or International? The Saga Continues, 6 MARQ. INTELL. 1241 1242 SANTA CLARA LAW REVIEW [Vol:51 advance this analysis in a larger context: the tension between the national exercise of trademark rights and the free movement of goods within free trade areas (regional trade agreements among sovereign countries) in general, with particular attention to the issues related to differences in product quality. Notably, in this Article I explore the effectiveness, and the limitations, of the principle of "trademark first sale" in promoting the free movement of goods in free trade areas. To this end, I compare the application of this principle and the resulting market integration achieved by two of the most prominent free trade areas in the current international context: the North American countries with the adoption of the North American Free Trade Agreement (NAFTA) and the members of the European Union (EU). Based upon this comparison, I provide some specific suggestions and policy considerations as to the possible approaches that members of existing and future free trade areas can follow to promote and guarantee effective market integration and free movement of goods in their respective territory.3 The principle of "trademark first sale," which is also known as "trademark exhaustion,"4 represents a milestone in PROP. L. REV. 47 (2002) (providing a detailed analysis of the development of the principle of trademark exhaustion under European trademark law). 3. Because of the complexity of this topic and the limited scope of this Article, this Article focuses on the analysis of the principle of trademark first sale, or trademark exhaustion, only within trademark law and policy. This Article does not address other relevant issues related to the relationship between the free movement of goods and international trade in general, nor elaborate on the economic aspects, positive and negative, of parallel imports for corporations and national economies. Likewise, this Article does not address the frequent antitrust issues that can arise as a result of the monopolistic exercise of trademark rights with respect to gray market goods nor other means to control product distribution, such as licensing clauses, contracts, or torts. This Article also does not extensively elaborate on the differences between the theories of "universality" and "territoriality" of trademark protection and the preference for a system of "trademark territoriality" that has characterized the harmonization of trademark laws among members of the International Community. Finally, this Article does not explore the effect of the Internet and e-commerce on the traditional territorial interpretation of the principle of trademark exhaustion. 4. See FREDERICK M. ABBOT, THOMAS COTTIER & FRANCIS GURRY, INTERNATIONAL INTELLECTUAL PROPERTY IN AN INTEGRATED WORLD ECONOMY 270 (2007). This Article uses the terms "trademark first sale," "trademark exhaustion," and "exhaustion of trademark rights" interchangeably as synonyms. 2011] MARKET INTEGRATION AND FIRST SALE 1243 trademark theory. Trademark law grants trademark owners the right to prevent third parties from using identical or similar signs to identify confusingly similar products in the market.' Nevertheless, once a trademark owner has introduced into the market a product, or a batch of products, these rights are considered "exhausted" with respect to those products, and the trademark owner can no longer rely on trademark rights to control the products' future circulation.' This principle was developed by the courts in the nineteenth century to balance the rights of trademark owners to prevent the inappropriate use of their marks with the rights of retailers, second-hand dealers, and consumers to freely display, advertise, and resell the products that they lawfully purchased in the market, even if those actions directly compete with the trademark owners' business activities in the same market.' Since then, courts have invariably repeated and confirmed this principle, which has also been incorporated in most national trademark legislations.' Traditionally, there has been little dispute about the application of the principle of trademark first sale within national markets-once distributed for sale in a national market, products are generally free to move within the domestic territory despite trademark owners' desires to control future product distribution in that market.' In contrast, fierce disputes have characterized the application of this principle in the context of international trade with 5. See discussion infra Part II.A. 6. Id. 7. See Apollinaris Co. v. Scherer, 27 F. 18 (C.C.N.Y. 1886); John A. Young, Jr., The Gray Market Case: Trademark Rights v. Consumer Interests, 61 NOTRE DAME L. REV. 838, 840 (1986). 8. See discussion infra Parts II.A, III.A-B. 9. One exception to this principle, however, is the case of countries allowing concurrent registration owned by different entities in separate parts of the country as, for example, in the United States. In such a case, the goods carrying one of the concurrently registered marks can circulate only in the specific part of the United States covered by the registration and cannot be marketed in the part of the United States designated for the other concurrent registration. Trademark (Lanham) Act of 1946 § 2(d), 15 U.S.C. § 1052(d) (2006) [hereinafter Lanham Act]. Another exception to this principle is the coexistence of non-registered and registered marks in the same jurisdiction. This Article does not analyze these issues, nor the relationship between state and federal trademark registrations in countries permitting the registration of marks under their state law and not only at a federal level, as for example in the United States. 1244 SANTA CLARA LAW REVIEW [Vol:51 respect to the parallel imports of "gray market goods"-i.e., genuine (originally manufactured) products, which are imported into a country from unauthorized third party importers after their first authorized sale by trademark owners in another part of the world. 0 To some extent, the surge in global trade over the past two decades has heightened these disputes," particularly in the developed world economies, driven primarily by the concerns expressed by multinational corporations against the arbitrage of consumer goods from low-cost to high-cost jurisdictions.12