United States of America, Home of the Cheap and the Gray: A Comparison of Recent Court Decisions Affecting the U.S. and European Gray Markets

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I. INTRODUCTION

Although most people are familiar with the term `black market goods,' few can readily define the `gray market.' So-called `gray goods' are neither legal nor illegal. They have not been smuggled or stolen; rather, they have been placed in a particular market without the approval of the company or individual who owns the copyright.1 For example, when a clothing designer wants customers to associate her product with exclusivity, she will try to prevent it from being sold at low-end discount retailers. If the clothing somehow ends up at such a retailer against her wishes, the clothing has become gray market goods. For example, when Christian Dior's Poison perfume, which has been marketed as a luxury item, is sold in a Dutch supermarket next to "Fantasie Panties," one can presume that the supermarket obtained the perfume on the gray market. As Dior would (and did) argue, the product's placement-- both initially in the supermarket and then next to tacky novelty items-undermined years of exhaustive marketing efforts and ruined the perfume's reputation.2

Examples aside, a federal District Court in California has defined gray goods (also called `parallel goods') in the United States as "goods that are intended to be sold outside the United States but which are imported into this country without the consent of the owner of the United States trademark or copyright associated with the good."3 In Europe, the term `gray market' applies to goods sold outside the European Economic Area (EEA) and then reimported against the wishes of their copyright holder.4

The gray market has the potential to harm more than just the reputation of the goods being sold, although that particular harm has served as the basis for copyright holders' arguments.5 When a manufacturer sells goods to distributors abroad, it often does so at prices far cheaper than those in its own country (or in the EEA, as the case may be), based on the differences in the two markets.6 An overseas distributor can then sell the goods back into the United States at prices that remain much lower than those at authorized retailers, while still making a large profit.7 This practice forces manufacturers into competition with their own products and restricts their ability to control discounts within the United States or the EEA.8

During 1998 the gray market in both the United States and Europe received a great deal of attention as the result of two landmark court decisions intended to clarify rules regarding the importation of gray goods. The U.S. Supreme Court decision in Quality King Distributors, Inc. v. LAnza Research International, Inc.9 was a victory for gray marketers, while the European Court of justice (ECJ) decision in Silhouette International Schmied GmbH & Co. KG v. Hartlauer Handelsgesellschaft mbH10 worked to the benefit of trademark holders. In each case, the courts' holdings turned on their interpretation of the "first sale" doctrine,11 or the European equivalent, "exhaustion of rights."12

These two decisions have spawned endless discussion regarding the positive and negative effects of the gray market. More importantly, they have created a sort of experimental laboratory whereby legal scholars can see which path-that of the U.S. Supreme Court or that of the ECJ-has a net positive effect on the respective rights of manufacturers and parallel importers. This Note argues that the European Court's decision was fairer and wiser.

The Discussion section explains the legal doctrines forming the backdrop for the two pivotal 1998 court decisions: the first-sale doctrine and the exhaustion doctrine. In addition, the discussion summarizes the facts and opinions of each case as a foundation for the Analysis section. The analysis moves beyond the cases themselves to examine some of the expected effects of the Quality King and Silhouette decisions on consumers, copyright holders, and parallel importers. In the end, these expected consequences support the conclusion that restricting the gray market, as the European Court of Justice did in Silhouette, is the best course of action for both the United States and Europe. …