Just so you know, this isn’t a sexy article.  It’s about recent legal developments concerning grey market goods; not some pervy tycoon and his obsession with nubile coeds.  Sorry!

Now then, what are Grey Market goods?  In a nutshell they’re legally made products that are sold through unauthorized channels.  For example, drugs imported from Canada can cost a fraction of what you’d pay your local CVS under your fabulous health care plan.  They’re the same meds in the same packaging, but the price is far less than what Pfizer can charge domestically for them.  Their ”greyness” is determined not by their authenticity, but by the fact that they’re distributed unofficially, or in a manner that the manufacturer did not foresee or intend.

Black Market goods, by contrast, are products that may not be sold legally, either because they’re counterfeit (think $50 Rolexes) or of a type that may be genuine but are officially verboten to traffic in.  Weapons of Mass Destruction, say.  There are also Green Market goods, which used to mean recycled or refurbished products, but the term has taken on new connotations now that certain laws have gone into effect in Colorado.

"One of each, please."

“One of each, please.”

What happens when the grey market bangs up against American intellectual property laws?  Does it violate a copyright holder’s interests if you import their merch into the country without their permission?  Answer: No.  Buyers are protected by the First-Sale Doctrine, which is a fundamental exception to a copyright holder’s rights of distribution. Under the right of first sale, once a copy of a work is sold, the copyright owner’s interest in that particular copy terminates.  In other words, after you buy your copy of Fifty Shades of Grey it’s yours to read, re-sell, give to a friend, or use as a doorstop.  E.L. James and her publisher have no ability to control what you do with that copy – that’s why we have used bookstores.  James’s right of reproduction remains intact, though, meaning you can’t take your dirty book to Kinko’s and print copies of it to peddle in a dark, seedy alley.  (Note to self: Are there any bright, pleasant alleys?  Find out.)

"One thousand of each, please."

“One thousand of each, please.”

Now, let’s say you buy not one, but thousands of copies of a book.  Let’s also say the book is a foreign edition of a textbook legally produced for sale outside the U.S.  Let’s further say that the book cost 70% less to buy in Thailand than it costs to buy in America, so you bought them there.  Now let’s say your homies in Thailand shipped all those books over to your dorm room at Cornell, and that you hawked them on eBay for a million dollar profit.  Would that violate the publisher’s copyright?   As it turns out, that was what our boy Supap Kirtsaeng did and he was promptly sued for copyright infringement by the publisher, John Wiley & Sons, Inc.  The Second Circuit sided with the publisher, ruling that copyrighted textbooks could not be imported without its permission.  This conflicted with contrary positions of other Circuits, so the decision was appealed and It Went All The Way to the Supreme Court, as the saying goes.

"Stop! In the name of free trade!

“Stop! In the name of free trade!

The Supremes sided in favor of the enterprising Kirtsaeng.  The decision elevated the buyer’s Right of First Sale over the copyright holders’ right to control imports of their works.  The opinion focused on whether the textbooks were legally made, not where they were made.  Publisher Wiley argued that since the books were manufactured overseas they were not made under U.S. copyright laws.  6 of the Big 9 weren’t buying that argument because Wiley had indisputably authorized the production of the books, meaning that they were ”lawfully made” under the Copyright Act.  In short, the law of the land is that the first-sale doctrine applies to all books, wherever made, and you don’t need the author or publisher’s permission to resell one whether you bought it at a Barnes & Noble in Bangkok or a garage sale in Brooklyn.  Or in a dark alley.

What about trademarks?  Can manufacturers prevent the importing of their own foreign-made products on trademark grounds?  According to a decision handed down by the 9th Circuit last month, the answer is: maybe.  This case didn’t involve books, but mushrooms. Hmm, mushrooms…could this article be any less sexy?

Back to our steamy tale.  Hokuto is a Japanese company that grows organic mushrooms in the U.S. and sells them here under the Hokto USA brand.  It also grows nonorganic mushrooms in Japan.  American company Concord Farms imported Hokuto’s nonorganic mushrooms from Japan and sold them alongside the U.S.-grown toadstools of its American subsidiary, Hokto.  The foreign produce was encased in Japanese-language packaging but bore the same Hokto trademarked logo as the domestic produce.  Classic grey market situation: same producer, legally grown.  Legal to import?  Not in this case.

USA Shrooms

USA Shrooms

Shrooms Nippon

Shrooms Nippon

Just as the First-Sale Doctrine is an exception that trumps copyrights, the Genuine Goods exception trumps trademark rights.  Under this law, an imported good that does not ”materially differ” from the U.S. trademark owner’s product is considered ”genuine,” i.e. it does not create a likelihood of confusion among consumers.  (Remember, copyrights are about the right to make copies; trademarks are about identifying the source of a product.)  But the exception didn’t apply in the Hokto Kinoko Co. v. Concord Farms, Inc. case.  Why?  Because the subject fungi was materially different: the imported produce was non-organic, was grown under less stringent quality control standards and was packed in Japanese-language containers.  Based on these factors, the court determined that consumers would consider the differences between the two products relevant when deciding what to buy, and declined to apply the Genuine Goods exception.

"Violate American IP laws, will you?!"

“Violate American IP laws, will you?!”

The morals of our story: if a product was legally made overseas you can bring it here and sell it without infringing anyone’s copyright.  And if it’s the same product that’s on the U.S. shelves you won’t infringe anyone’s trademark, either, because consumers won’t be misled about what they’re buying.  On the other hand, try to import something that was made without authorization or which does differ significantly from the genuine article, and you will be severely punished!





About the Author

Jonny Balfus

I was supposed to be a rock star but, through no fault of my own, ended up an intellectual property lawyer in Los Angeles. I'm not saying that's your fault, but I'm not not saying it, if you know what I mean.

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