New legislation challenges sellers of gray market goods - imports of goods not intended for sale in the U.S

Discount Store News, April 24, 1989 by Deane Evans

New Legislation Challenges Sellers of Gray Market Goods

WASHINGTON, D.C. -- Legislation has surfaced on Capitol Hill which, if passed, would slam the door on all parallel imports, depriving discounters and their customers of many bargain-priced, name brand products.

Contending that the importation and sale of "gray market" goods infringes on the rights of U.S. trademark holders, Sen. Orrin Hatch, R-Utah, introduced the Trademark Protection Act of 1989.

According to Hatch, the measure would "require customs agents to reject gray market goods at our borders" by specifically barring importation of foreign-made goods bearing a registered U.S. trademark unless the U.S. trademark holder consents to the sale or importation.

"This prohibition would apply regardless of whether the foreign manufacturer of the goods or foreign trademark owner...is related in any way to the owner of the U.S. trademark," Hatch said. Moreover, the ban would be enforced "regardless of whether the owner of the U.S. trademark owns or has registered the trademark abroad," or has authorized the use of the trademark abroad.

If enacted, the measure would allow the registered U.S. trademark owner "to bring action against an importer or seller of gray market goods, to enjoin the importation or sale, and to obtain monetary damages and lost profits" due to such imports.

The Utah Republican, who sponsored similar legislation that failed to pass in 1987, specifically attacked the Supreme Court's 1988 K mart v. Cartier decision which upheld long-standing Customs Service rules permitting gray market imports. The court held that in most cases independent importers can legally import goods into the United States without the express approval of the foreign manufacturer's U.S. subsidiary.

"The court did not address the intellectual property or consumer issues surrounding the gray market, and left the ...situation just as unclear as it had been before the decision," Hatch charged. Therefore, he stated, "clarification of the trademark laws through legislation is necessary."

According to Hatch, gray market goods "often fail to meet the same high quality standards" as U.S.-made products. He contended that gray market cosmetics may contain "banned" ingredients, and that gray market batteries may have shorter lives "simply because of delays and lack of care in transshipment."

In addition, gray market goods may not carry the usual warranties provided by authorized sources. He cited a National Consumers League warning that the failure of imported foods, cosmetics and pharmaceuticals to meet U.S. standards could create serious safety hazards.

The Hatch arguments directly contradict claims by supporters of legal parallel imports. Sen. John Chafee, R-R.I., and Rep. Rod Chandler, R-Wash., sponsored bills during the last two Congressional sessions which would have guaranteed discounter access to foreign-made, U.S. trademark goods.

According to Chafee, U.S. discounters can often sell parallel imports at prices 25 percent to 40 percent below the cost of the same product imported by an "authorized" distributor (a subsidiary set up in the United States by the foreign manufacturer). The Rhode Island senator further contended that "gray market" merchandise is identical to the U.S. subsidiary's product in every way "other than price."