Parallel market goods, also known as gray market goods, are a mainstay of the South Florida economy. They are the inexpensive fragrances and cosmetics that you find in discount drug stores and the cheap electronics that you order online. They are genuine goods sold by brand owners at a lower price overseas, purchased by parallel market resellers and shipped for resale in the U.S. The brand owner makes a sale overseas, the parallel market reseller makes a profit and the U.S. consumer pays a lower price. It seems like everyone wins. So why do many brand owners dislike the parallel market?
Brand owners and particularly luxury brand owners want to control the chain of distribution to assure that a counterfeit product is not inadvertently or intentionally mixed in with its genuine product. Brand owners also have contractual obligations to their distributors who are not happy to see lower price products sold in their markets. As a result, brand owners continue to file lawsuits against parallel market importers under theories of trademark, copyright and even patent law to stop the importation and resale of such goods. Brand owners also resort to bottle coding to try to determine the source of the parallel market goods. Often these codes are hidden or technologically enhanced using holograms. This worked until parallel market resellers learned to find and remove the codes. At first these decoding efforts left marks on the products. When the courts said that such defaced products could not be sold, new laser removal techniques were employed.
Clearly, the battle between the parallel market reseller and the brand owner is not an easy one and it’s not likely to end soon. However, the U.S. government has given brand owners an inexpensive and simple tool to stop the importation of parallel market products.
Once a brand owner has registered its trademark with the United States Patent and Trademark Office, he can record his registration with Customs and Border Protection (CBP). This is relatively inexpensive and can be done electronically. When recording the trademark, the brand owner identifies the entities authorized to import the product and any material difference in foreign sold products. CBP will then monitor imports.
Any time the CBP finds the trademark on products that are being imported it will make an initial assessment whether the product is coming from an authorized source. If CBP suspects that the products are counterfeit it will seize them and initiate forfeiture proceedings. If CBP determines that the products are materially different from the products sold in the United States it will inform the brand owner and require the importer to label the product to notify the consumer with the difference.
However, generally, CBP will not stop genuine parallel market products that enters the country. There is one significant exception. At the time that the brand owner registers its trademark it can declare whether it owns the trademark anywhere else in the world. If it does, then there is no parallel market protection. However, if it does not, then the recorded trademark can be “restricted” and then CBP will stop, seize and forfeit parallel market goods.
If you are a U.S. brand owner that has not registered your trademarks overseas this exception is not terribly significant since any foreign product with the brand is likely to be counterfeit and subject to seizure. However, if you do own trademark registrations overseas but are willing to restructure your ownership interests so that the foreign marks are owned by a different company then you can qualify for this exception.
In order to take advantage of this, some brand owners have assigned their foreign brands to suppliers or companies with contracts that allow them to buy back the brands at will for a nominal amount. The only requirement set by CBP for such arrangements is that the foreign owner cannot be a “related company.” A related company is one which shares at least 30 percent common interest.
Clearly the law regarding the parallel market requires a great deal of caution. Knowing how and when CBP can seize a shipment is important to the importer and the brand owner alike.
Jorge Espinosa is a founding member of the law firm of Espinosa | Trueba, P.L. and focuses his practice on the domestic and international protection of trademarks, patents and copyrights.