A Copyright Weapon Against Gray Market Goods
By William E. Maguire

Oh Dark Thirty

It’s 3 a.m. … your phone rings and your Japanese distributor tells you he heard a rumor that 200 of your snowboards that he sold to a Japanese retail chain last season are now headed back to a national discount store in the U.S., with stores on the West and East Coasts, which will no doubt spoil your sales efforts for this season. What do you do?

The above sequence of events could trigger several responses... from reaching for the Pepto, to calling your lawyer (hopefully not until after 8 a.m. with respect to the latter). The call to your lawyer may have better results in terms of a remedy specific to the reentry into the U.S. of perviously sold hard goods to Japan, however. This is the case because of a recent Federal Court decision which held that the "First Sale Doctrine" found in ß109(a) of the Federal Copyright Statute (17 U.S.C. ß109(a)), does not bar a claim of copyright infringement involving exportation and later importation of copyrighted goods.

This new federal court decision involves a specific fact situation with respect to the journey or trade route of the goods at issue therein, i.e., exportation and later importation of copyrighted goods. This, however, is not the typical trade route with respect to gray market goods. Typically, "Gray-market" goods, or "parallel imports," are genuine products possessing a brand name protected by a trademark or copyright. They are typically manufactured abroad, and purchased and imported into the United States by third parties, thereby bypassing the authorized U.S. distribution channels. Parfums Givenchy, Inc. v. Drug Emporium, Inc., 38 F.3d 477, 481, fn. 6 (9th Cir. 1994). Nevertheless, for the purposes of this article the exportation and later importation of copyrighted goods shall be treated as gray market goods.

The U.S.C.A. 9th

s the margin wars? 9th Federal Judicial Circuit (U.S.C.A. 9th) has jurisdiction with respect to claims in the following states: Alaska, Arizona, California, Idaho, Montana, Nevada, Oregon, Washington, Hawaii, and the territories of Guam and the North Mariana Islands.

If you’re still with me, the U.S.C.A. 9th recently made the above-referenced ruling in the matter of L'Anza Research International, Inc. v. Quality King Distributors, Inc. (hereinafter, L'Anza), U.S.C.A. 9th, No. 95-56447, Oct. 23, 1996. In this case, L'Anza, a manufacturer and distributor of hair care products sued Quality King for copyright infringement based on ß602(a) (17 U.S.C. ß602(a)) of the U.S. Copyright Statute, which prohibits the importation of U.S. Copyrighted goods acquired outside of the U.S. without the authorization of the copyright owner.

Caught In Carmel

In this particular case, L’Anza discovered some of its products being sold to a retailer in Carmel, California. Unfortunately, this product had previously been sold overseas by L’Anza to a foreign distributor for a reduced price which did not factor in costs for marketing, promotion and warranties for the product in the U.S. Fortunately, however, L’Anza was able to discover these products owing to the fact that L’Anza marks some of their products to allow for tracing. In doing so, L’Anza found that the product in Carmel had previously been shipped by L’Anza from the U.S. to L’Anza’s distributor in the United Kingdom. Thereafter, this U.K. distributor resold these goods in their entirety to Quality King, a discount U.S. distributor, who imported the product back into the U.S. without the consent or knowledge of L’Anza. To make matters worse, in doing so, Quality King was able to undercut the U.S. market for the same products sold by L'Anza in the U.S. marketplace, thus spoiling L'Anza's market in the U.S. Copyright Registration

Another important piece of this puzzle is the fact that L’Anza owns the copyright for the labels on many of its hair care products (which is available with respect to both the text and accompanying art on either or both the product container and packaging). The L’Anza copyright registration was issued on January 7, 1994 (Copyright Registration TXU 593-178).

HINT: The savvy snowboard manufacturer is probably already realizing that they too should be incorporating text and artistic elements on their snowboards. In this regard, since most boards are sold without stomp pads, it would be easy to include text specifications and/or rad advertising copy, together with graphic art or photographic elements, on the board prior to lamination (in the same location as the stomp pad, for example). Also, don't forget to register your copyrights with the Copyright Office in Washington, D.C. as the registration (or proof of having filed an application for same) is necessary in order to file a lawsuit in Federal Court for copyright infringement (17 U.S.C. ß411(a)).

Copyright Collision

The dispute between L’Anza and Quality King placed two different sections of the Copyright Statute squarely at odds, namely, ß109(a) v. ß602(a). The defendant, Quality King asserted that ß109(a), otherwise known as the "First Sale Doctrine" provides that after sale of its goods the copyright owner no longer can control the resale of the physical product sold. In citing ß109(a), Quality King claimed that the "First Sale Doctrine" should be held to be a complete defense against L’Anza's lawsuit for copyright infringement and effort to stop the importation into the U.S. of previously sold product by L'Anza. In addition, Quality King cited the U.S.C.A. 3rd circuit decision in Sebastian Int’l Inc. v. Consumer Contacts Ltd., (hereinafter, Sebastian) 847 F. 2d 1093, (3d Cir. 1988), which ruled against Sebastian in a similar fact situation involving Sebastian hair care products which had been sold by Sebastian to a distributor in South Africa, who had agreed to only distribute said product to professional hair salons in South Africa, followed by the importation back into the U.S. of the same product after resale by the same South African distriubtor to a third party importer (one of whom (coincidentally?) was our friend, namely, Quality King.

Please note that the Third Circuit includes Delaware, New Jersey, Pennsylvania, and the Virgin Islands (not exactly a snowboarding judicial district). Specifically, the Sebastian court held that the "First Sale Doctrine" bars an action under ß602(a) even if the goods were sold outside of the U.S., so long as the goods were manufactured in the U.S. and sold by the copyright owner. As stated previously, ß602(a) prohibits the unauthorized importation of goods acquired outside the U.S. and was cited by L’Anza in support of its position.

Nevertheless, in spite of the Sebastian court ruling, the 9th Circuit in L’Anza declined to adopt the approach taken by the 3rd Circuit. The rationale of the 9th Circuit in ruling that ß602(a), in this instance prevailed over ß109(a), was that to permit the entry into the U.S. of product not authorized by the U.S. copyright owner would render the purpose of ß602(a) meaningless, as the express purpose of ß602(a) was to prevent the unauthorized importation into the U.S. of goods acquired outside of the U.S.

Therefore, what we have now is (apparently) "a failure to communicate" (or agree) between the 9th and 3rd Circuits. Please note that with this split in authority, the time may now be ripe for a decision by the U.S. Supreme Court to provide a uniform decision... Do you think they’re listening in D.C?

The practical implication of the L’Anza decision is that our U.S. snowboard manufacturer reaching for the Pepto may now have a separate remedy—at least in the 9th Cirucit. He will have to buy more Pepto if his boards are shipped to retailers in Pennsylvania, however. On the other hand, if his boards are shipped back to the U.S. and they show up on store shelves in 9th Circuit states (such states as California, Oregon, Washington, Idaho), then our manufacturer may not lose sleep and may be able to rely on the L’Anza decision. Unless, of course, he can’t remember if he registered his copyrights, or worse, his boards are ‘clean’ and only depict his trademark (in this case, DUHÅ Snowboards) and do not include either textual or artistic elements capable of being registered with the Copyright Office. Finally, did he mark or tag his boards for later identification and tracing purposes—it could be a long night!

William E. Maguire is in private practice in the Los Angeles area of Westwood where he specializes in the areas of trademark, copyright, licensing, arbitration and mediation. He has been a member of the California bar since 1981, has an LL.M. degree in Intellectual Property, and was previously Senior Counsel for Malibu Comics Entertainment, Inc., a subsidiary of Marvel Entertainment Group, Inc. He has also served as outside trademark, copyright and licensing counsel for the television series, BAYWATCH. He currently represents clients in the entertainment, publishing, video game, snowboard, skateboard, clothing, cosmetics and restaurant industries. Phone: (310) 470-2929, Fax: (310) 474-4710, or 470-2174; E-Mail: [email protected] Web Site: http://www.copyrightesq.com or http://www.trademarkesq.com