Academic journal article The George Washington International Law Review

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

Academic journal article The George Washington International Law Review

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

Article excerpt


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.

While parallel importers repeatedly stress the benefit to consumers arising from allowing a gray market to continue, they have few other convincing arguments. Manufacturers, on the other hand, cite myriad legitimate concerns, many of which have materialized following the Quality King decision. Despite widespread rebellion by discount retailers in Europe, the Silhouette decision will, in the long run, prove the most fair to both consumers and manufacturers and should therefore be followed by U.S. courts. Ideally, an agreement between the United States and the EEA could resolve the conflict that threatens to discourage exports and innovation and to stunt international trade.


A. The U.S. Copyright Act of 1976

1. The First-Sale Doctrine

In Quality King, the Court interpreted several sections of the Copyright Act of 1976, namely, sections 106, 109, and 602. Section 106 lists the exclusive rights conferred upon a copyright owner, particularly, "the exclusive right to . . . distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending."13, Section 106, however, has been expressly restricted by sections 107 through 120 of the Act.14

The restriction that is most significant to the gray market issue is section 109, entitled, "Limitations on exclusive rights: Effect of transfer of particular copy or phonorecord." Section 109 codified the first-sale doctrine, which had previously existed only as a common law exception to a copyright owner's exclusive rights.15 The section states, in relevant part:

Notwithstanding the provisions of section 106(3), the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.16

Stated simply, the first-sale doctrine provides that once copyrighted material has been sold (or the sale authorized) by the copyright owner, that owner relinquishes all control over the locus of or purchaser in the next event of sale.17

Section 602 of the Act complicates the analysis by stating that the importation of "copies or phonorecords of works that have been acquired outside the United States" into the United constitutes an infringement of the copyright owner's exclusive distribution and importation rights under section 106(3).18

District courts have struggled to interpret the Act in a way that gives meaning to both section 106 (which is the subject of the first-- sale doctrine) and section 602 (which does not mention section 109 or any similar limitation on exclusive importation rights).19 Under one interpretation, copyright holders are afforded rights in addition to those described in section 106, rights that are not subject to the first-sale doctrine;20 if a manufacturer first placed its goods on the overseas market, it could rely on section 602's importation prohibition to prevent the resale of those goods in the United States.21 The other interpretation is that section 602 merely provides an example of the copyright holder's rights under section 106(3), rights that are subject to the first-sale doctrine.22 Under this second interpretation, it is irrelevant to a gray market analysis whether the goods were first placed on the market in the United States or overseas; either way, they are subject to section 109 of the Act, and the manufacturer has lost control over future sales.

2. The Quality King decision.

In its claim against Quality King Distributors ("Quality King"), L'Anza International Research ("L'Anza") claimed that section 602's importation prohibition prevented the resale of its goods in the United States once those goods had entered the overseas market.23 L'Anza sold hair care products in the United States and abroad and copyrighted the labels on its products.24 In the United States, it sold only to distributors agreeing to resell the products in certain geographical areas and to certain types of retailers (e.g., hair salons rather than drugstores).25 Abroad, however, L'Anza sold its products at prices thirty-five percent to forty percent cheaper than those in the United States.26 In overseas markets, it did not engage in the extensive promotion and training that it did in the United States.27 One of L'Anza's United Kingdom distributors sold several shipments of L'Anza products to a distributor in Malta, and the products ultimately arrived back in the United States at Quality King.28 Quality King then sold the products to unauthorized retailers in the United States, who sold them to consumers at discounted prices.29 L'Anza sued under the Copyright Act of 1976, alleging that Quality King violated its exclusive rights under section 106 of the Act to reproduce and distribute its copyrighted material in the United States.30

According to Quality King, L'Anza's initial sale to the United Kingdom distributor obviated L'Anza's right to sue under section 106(3) of the Act.31 The Supreme Court agreed, reversing the decision of the Ninth Circuit Court of Appeals:32

[S]ince 602(a) merely provides that unauthorized importation is an infringement of an exclusive right "under section 106," and since that limited right does not encompass resales by lawful owners, the literal text of 602(a) is simply inapplicable to both domestic and foreign owners of L'Anza's products who decide to import them and resell them in the United States.33

United States law with respect to the unauthorized importation of copyrighted material was clarified.

B. First Council Directive 89/104/EEC of 21 December 1988

1. Exhaustion of Rights

The European Economic Area relies on a doctrine similar to the first-sale doctrine in its approach to the gray market. The `exhaustion of rights' doctrine provides that once a trademark holder sells or authorizes the sale of an item that is trademarked within the EEA, the trademark holder has exhausted its right to control future sales of that item within the EEA.34 In Europe, the current debate focused on whether the European Union (EU) will use the doctrine of international exhaustion of rights (as some European countries currently do) to prevent trademark holders from controlling the resale of their products into the EEA from distributors outside it.35 In essence, the European Court of Justice in Silhouette was asked to decide the same question faced by the U.S. Supreme Court in Quality King. in determining whether a manufacturer has exhausted its right to control future sales of its product, is it relevant that the product was initially put on the market outside the jurisdiction in question?36 The Supreme Court said "no," but the ECJ said "yes."37

Silhouette interpreted First Council Directive 89/104/EEC38 of 21 December 1988 to approximate the laws of the Member States relating to trademarks.39 Article 5 of the Directive is the European Community counterpart to section 106 of the Copyright Act of 1976 in that it defines which rights are conferred by a trademark.40 Article 7 of the Directive, like section 109 of the Copyright Act, limits the rights conferred by a trademark by creating the exhaustion doctrine.41

Article 5 gives trademark proprietors the exclusive right to import or export the goods bearing the trademark in question.42 Under Article 7, paragraph 1, however, "[t]he trade mark shall not entitle the proprietor to prohibit its use in relation to goods which have been put on the market in the Community under that trade mark by the proprietor or with his consent."43

2. The Silhouette decision

Silhouette International Schmied GmbH & Co.KG (Silhouette) is an Austrian manufacturer of spectacles that owns the trademark to the name "Silhouette."44 Within Austria, the company sold its spectacles only to those opticians and distributors fitting its highend image.45 In 1995 Silhouette sold several thousand of its out-of-- fashion frames to a Bulgarian distributor with the distributor's promise that the frames would be sold only in Bulgaria and the former USSR.46 Despite the promise, the Silhouette frames were acquired by Hartlauer, a low-end Austrian retailer not authorized to sell Silhouette frames, and sold in Austria at discounted prices.47

Silhouette sued Hartlauer under Paragraph 10a of the Markenschutzgesetz (Austria's law on the protection of trademarks), Paragraphs 1 and 9 of the Gesetz gegen den Unlauteren Wettbewerb (Law against Unfair Competition), and Paragraph 43 of the Allgemeines Burgerliches Gesetzbuch (General Civil Code) seeking an order to prevent Hartlauer from selling any of its frames that were not put on the market in the EEA by Silhouette or with its consent.48 According to Silhouette, its trademark rights had not been exhausted under Article 7 of the Directive because the initial sale of the frames had been outside the EEA.49

Prior to implementation of the Directive, Austria had adhered to a doctrine of international exhaustion, whereby the rights of a trademark proprietor were exhausted upon sale of the trademarked goods to a third party, whether the sale took place in Austria or in another country.50 Because the language of the Directive appeared to conflict with Austria's adoption of international exhaustion, the Austrian court asked the ECJ to determine whether-despite the Directive's language-individual countries within the EEA could adhere to the international exhaustion doctrine.51

The Court held they could not.52 As explained in the Opinion of Advocate General Francis Jacobs (which the Court adopted), "[i]f some Member States practise international exhaustion while others do not, there will be barriers to trade within the internal market which it is precisely the object of the Directive to remove."53


Within months of each other, the U.S. Supreme Court and the European Court of Justice made opposite landmark decisions. In the United States, the Supreme Court clarified U.S. copyright law by providing for-to use the terminology of the European Court-- international exhaustion of rights.54 The ECJ, in contrast, clarified the 1988 Directive by prohibiting Member States from opting for international exhaustion.55 Brand owners with products trademarked in the EEA can now trade freely outside the EEA without fear that they later will be left without an infringement remedy for the unauthorized resale of the goods within the EEA.56 U.S. copyright holders, on the other hand, have been said to be without means of enforcing the unauthorized importation of goods into the United States.57

Both decisions have resulted in commentary in the legal and news media addressing expected effects on international trade. Manufacturers in the United States have mounted extensive lobbying efforts, claiming the Quality King decision opposes Congressional intent.58

The predicted and actual fallout of each decision serves as a sort of experiment: when one examines what has happened and is predicted to happen since Quality King and Silhouette, there emerges a comprehensive list of pros and cons with respect to regulating the gray market. That is, while a booming gray market may serve the needs of bargain-hunting consumers (a 'pro'), it tends to hinder the free movement of trade as manufacturers try to avoid an influx of cheap imports (a 'con'). The combined benefits of the U.S. Supreme Court's interpretation of the first-sale doctrine in Quality King weigh significantly less than the harms.

A. The Expected Effects of Quality King

The bottom line of the Quality King decision was that the holders of a product that has been copyrighted in the United States may not control importation and distribution of that product in the United States after it has been sold with the holder's consent-- regardless of where the first sale occurred.59

1. U.S. manufacturers resort to other solutions

a. The Quality King loophole

One caveat to the bottom-line of the Quality King holding to which legal scholars have repeatedly referred, appears in Justice Ginsburg's concurring opinion. The concurrence expressly states that the Court has not yet ruled on the importation of U.S. copyrighted goods that have been manufactured (as opposed to sold) abroad: "[W]e do not today resolve cases in which the allegedly infringing imports were manufactured abroad."60

Justice Ginsburg's concurrence creates one of the few loopholes available to U.S. manufacturers after Quality King. As Justice Ginsburg explains, the phrase "lawfully made under this title" in the first-sale provision means "lawfully made in the United States;" the first-sale doctrine simply does not apply to foreign-made products.61 Therefore, U.S. manufacturers who want to sell their products abroad can move production outside the United States and retain their exclusive importation rights under section 602 of the Copyright Act.62 Section 109 would not apply to goods not lawfully made in the United States.63

While this loophole may prove to be a solution for large manufacturers intent on controlling the sale of their goods in the United States, it will not work for many small copyright holders. Companies without the means to move their production abroad must look for other ways of protecting their interests.64 The loophole does not bode well for employment in the United States. Although one can only speculate about the number of manufacturers that will take advantage of the loophole, the possibility remains that some will shut down U.S. production completely, resulting in job loss for thousands of Americans.65 Such an effect can hardly be seen as positive from the United States' perspective.

b. Preventing importation before it starts

Manufacturers that do not want to relocate operations outside the United States could decide not to export at all. The problems that U.S. manufacturers associate with the gray market arise from the reimportation into the United States of goods bought cheaply abroad.66 By not selling the goods abroad, manufacturers can simply eliminate the source of discounted products. L'Anza's lawyer illustrated in Quality King: "L'Anza is going to be very reluctant to enter any new foreign markets with its goods .... [Ilt is risking damage or destruction to its domestic market."67 European trademark holders, prior to the Silhouette decision, did in fact curtail exports to the United States to avoid international exhaustion of their rights, despite the accompanying decrease in sales volume. A spokesperson for LVMH, which owns several upscale perfume and cosmetics lines, has said that the company has "tried to cut all export to retailers which were not authorised retailers, especially in the US .... [T] his has meant we have deliberately cut millions of dollars of sales to the US."68 Besides cutting out large segments of a manufacturer's market, if U.S. companies start to eliminate their export market, they will also deplete the supply of those products in developing countries that rely on the cheaper prices.69

There are other ways for U.S. marketers to prevent unauthorized round-trip sales without stopping exports altogether. First, they can eliminate the logic behind a foreign distributor's resale into the United States by making the exported products unsuitable for the U.S. market. Changing the language of a shampoo bottle's label from English to Russian, for example, would make the product undesirable to U.S. consumers.70

Second, U.S. manufacturers could discourage their foreign distributors from breaching restrictive contracts by strengthening available remedies in the event of a breach.71 Quality King only limited the enforcement of the Copyright Act; it did nothing to limit manufacturers' opportunity to sue for breach of contract. Although it might be difficult to measure the damages resulting from unauthorized imports (e.g., how to measure damage to the product's reputation), liquidated damages provide a possible solution.72

Contract restrictions, however, did not work for L'Anza, nor have they worked for other copyright holders that have filed actions under the Copyright Act.73 Products can still be acquired overseas by a third party and then imported into the United States. In that case, the importation may be contrary to the contract provisions, but there is no cause of action for breach of contract due to the importer's lack of privity with the copyright holder.74 Once the goods have left the possession of the original foreign buyer, the U.S. manufacturer has lost control of all further sales.75 Moreover, the contract provisions will not necessarily be enforceable in a foreign court.76

Finally, U.S. manufacturers can prevent importation of their products into the domestic market by decreasing the profits their foreign distributors reap from reselling in the United States.77 A foreign distributor will hesitate before importing unauthorized products if doing so will result in only a small profit. Narrowing the distributors' profit margin, however, means artificially raising the cost of the product to the foreign distributor, and, consequently, the cost to consumers in the foreign country. This tactic may benefit the U.S. manufacturer, but it does not benefit foreign consumers who would pay high prices without the customer service and advertising afforded U.S. consumers.

2. Resulting decrease in lawsuits

The Supreme Court granted certiorari in the Quality King case to clarify U.S. copyright law.78 Before its decision, the Ninth and Third Circuits interpreted the Copyright Act differently, creating confusion for both manufacturers and retailers that often resulted in litigation.79 The Third Circuit in Sebastian held that "a first sale by the copyright owner extinguishes any right later to control importation of those copies,"80.while the Ninth Circuit in Quality King found that section 602 of the Act would be meaningless if an international first sale disposed of the right of exclusive importation.81

The Supreme Court decision is expected to quell gray marketrelated litigation and give retailers some guidance about what they can and cannot sell.82 However, the Supreme Court has been criticized for creating a bright-line rule that opposes Congress's intent in enacting the Copyright Act.83 Anti-gray market lobbyists, particularly those in the cosmetic industry whose fate was addressed directly by Quality King, have been particularly critical.84

Following Quality King, gray market opponents pushed an amendment in the U.S. House of Representatives that would effectively overrule Quality King and redefine the first-sale doctrine.85 Under the new definition, section 109's first-sale provision would mean "first sale in the United States," the position L'Anza took when it argued that its sale of shampoo outside the United States did not invoke the doctrine.86 In October 1998 the House voted to reject the proposal, thereby validating the Supreme Court's decision.87 The parties involved have indicated that they will continue to fight over the result.88

In addition to ongoing quarrels in Congress, courts will continue to face gray-market litigation as manufacturers turn to alternatives to the Copyright Act to protect their distribution rights.89 Legal commentators have repeatedly suggested that manufacturers make use of the U.S. trademark laws90 as is done in the EU, and as manufacturers did prior to their reliance on the Copyright Act.91 Trademark law is invoked when, for example, a foreign distributor imports bottles of Suave shampoo that were meant for the U.K market.92 If a slightly different version of that shampoo is sold in the United States, consumers who see both versions are likely to be confused by the difference. In that situation, Suave could sue the foreign distributor under 15 U.S.C. 1125 (a) (1) (A), claiming the unauthorized importation was likely to cause confusion, and, consequently, damage to the trademark.93 Of course, this type of trademark litigation depends on the existence of some difference between the domestic and imported products. Without it, there will be no consumer confusion as to the brand's quality or identity.94 Savvy manufacturers will alter their exported products just enough that confusion will exist upon the products' resale in the United States, thereby creating a valid cause of action under trademark law. Trademark litigation (and other alternative enforcement avenues) will simply be pushed to the forefront, negating any expected decrease in copyright litigation.

3. Continued effects of the gray market

Aside from the direct effects of the Quality King decision, the gray market, now unthreatened by potential copyright lawsuits, will continue to thrive. Whether that constitutes a positive or negative result depends on one's point of view. Parallel importers hail the gray market as the consumer's best friend.95 Heavily discounted gray goods not only make cheap versions of otherwise upscale products available, they create price wars between cheap gray goods and their expensive counterparts on the U.S. market.96 Seen from the vantage point of Quality King's attorney, "the court basically held that the copyright laws do not allow companies to charge American consumers more than people in other countries."97 Manufacturers, however, believe the Court's opinion reached much further. The Court seemed to put its stamp of approval on a variety of woes associated with the gray market. Among the chief complaints voiced by copyright holders and other opponents of the gray market, American manufacturers are forced into competition with their own products.98 Manufacturers expect that once they have contractually limited their foreign distributors to selling in only foreign markets, they will be able to control the prices of their product on the domestic market.99 Unauthorized imports deflate the manufacturers' expectations and introduce an entirely new element into the U.S. market.100

Additionally, the gray market destroys any incentive U.S. manufacturers might have to invest in the promotion of their products.101 By and large, the reason U.S. manufacturers can sell products so cheaply overseas is that they do not put the amount of capital into promotions abroad that they invest in the American market.102When the exported goods return to the United States and are sold at heavily discounted prices, in order to compete manufacturers must lower the prices of the same goods on which they have spent millions in promotion and advertising.103 To continue making a profit, manufacturers would have to simply stop promoting the product in the United States and stop spending capital on innovations.

Another effect related to the manufacturers' promotional efforts is the `free ride' afforded foreign distributors who resell copyrighted products in the U.S. market.104 In essence, those distributors have paid for the product without the promotion costs, but then benefit from U.S. promotion anyway.105 The cheaply bought goods are sold on the U.S. market, where the manufacturer's promotional campaigns have created a reputation of quality or exclusivity for the product. The "free ride" undermines the manufacturer's entire sales system.

Despite the myriad arguments against gray marketing, the market's proponents cite the benefit to consumers-lower prices in the United States and increased competition-as a justification for the harm done to manufacturers.106 In fact, consumers may benefit less than parallel importers would have the public believe. The stores manufacturers do authorize to sell their products at retail often are contractually obligated to provide extensive customer service with the sale, as well as certain warranties as to its quality.107 In contrast, gray-market goods are sold without the accompanying service or warranties. Promotions and advertisements in the United States lead customers to believe that the product is guaranteed, which would be true in the absence of a gray market. The reality is that customers who have bought from an unauthorized retailer can end up being disappointed not only by the product's quality, but also by the absence of a guarantee to which they believed they were entitled.108

In addition, certain types of products are sold only on the foreign market because slight variations between that product and its U.S. counterpart make the product unsuitable for use in the United States. Honda, for example, might construct a tractor intended for sale in Japan that is specially suited for Japanese rice paddies. If that tractor turns up on the U.S. market, American farmers might find that it easily loses its balance in the Nebraska cornfields. A diesel fuel that requires a certain octane level in cold climates may damage engines if reimported and sold in Florida.109 Consumers can hardly be said to benefit from such unintended resale of the copyrighted product. A manufacturer's knowledge of where and when its product is sold can have purpose beyond mere price control.

B. The Expected Effects of Silhouette

Silhouette was a victory for manufacturers to the same extent that Quality King provided support for the gray market.110 As a result, owners of goods that have been copyrighted in the United States can now point to the EU as evidence of the good that can result from curbing the gray market. The bottom line of the Silhouette decision was that owners of goods trademarked in the EEA can sue distributors for the unauthorized sale of their products, so long as that product was not put on the market in the EEA with the brand owner's consent.111 Therefore, if Levi's sells its jeans to a distributor in Japan and they end up on sale at a British discount supermarket without its consent, Levi's can sue the supermarket for trademark infringement.112 Before Silhouette, countries within the EEA could choose to observe international exhaustion, under which, in the above example, Levi's would have disposed of all right to control the sale of its jeans upon the sale of those jeans in Japan.113 Instead, Levi's can now sue, and has threatened to sue, the supermarket.114 This and other results of the Silhouette decision have retailers and gray market distributors up in arms against manufacturers and threatening rebellion.115 One British supermarket, Tesco, has taken the offensive and sued Levi's for issuing legal threats against The following section discusses in detail the additional real and anticipated effects of the Silhouette decision.

1. Effect on consumers

Retailers, of course, have championed the cause of the consumer, in an effort to disguise their true interest: profit. Allan Leighton, chief executive of British discounter Asda, vehemently stated, "The interests of the consumer should come first. If supermarkets can help drive down the high price of these designer goods and make them affordable, we should be given the power to do so, not confronted by more legal obstacles."117

2. Increase in lawsuits

In the United States, the Supreme Court's clarification of U.S. copyright law is expected to hinder litigation, as manufacturers stop testing their luck in suits against parallel importers.118 Conversely, the ECJ decision has opened a world of new enforcement possibilities for the holders of EU trademarks.

Prior to Silhouette, manufacturers were reluctant to waste time and money in European courts due to the uncertainty surrounding the international exhaustion doctrine.119 Since Silhouette, however, European courts, particularly in England, have been flooded with manufacturers attempting to capitalize on the ruling and crack down on the booming gray market.120 Levi's seems to lead the pack in lawsuits, generating the most media coverage with its suit against discounter Tesco,121 as well as suits against Ivor Male Boutique, Chicmart, and CostCo Limited, all UK retailers.122 Other U.S. clothing manufacturers, such as Nike, Tommy Hilfiger,123 and Ralph Lauren, have made it known that they intend to follow close behind. Such actions do not endear the U.S. clothing manufacturers to European consumers, who resent the subsequent loss of bargain shopping and question the manufacturers' motives. Gary Lux of the Parallel Traders Association expressed this opinion in a letter to the editor several months after Silhouette "Companies such as Levi Strauss are using trademark legislation to protect their exclusive distribution systems, which keep prices high for consumers. Trademark legislation was never intended for this purpose . ."124

Retailers also claim that, in addition to the higher prices for consumers, the import ban will result in increased costs for the European countries that must now enforce the ruling, devoting judicial resources to hearing more manufacturers' claims in court.125 The ease of enforcement that has befallen manufacturers has incumbent costs, says Asda chief executive Allan Leighton: "Are Eurocrats now going to spend millions of hours policing the ruling, checking on the source of every branded item in every super-market in Europe?"126 Most likely, no. Manufacturers themselves seem up to the challenge, as evidenced by the onslaught of lawsuits. Moreover, the Directive interpreted in Silhouette provides for civil remedies,127 not the type of criminal penalties that would require increased enforcement expenditures.

3. European retailers resort to other solutions

Interestingly, as U.S. manufacturers have lost their right to fight gray marketers in their own country, they are free to proceed against European offenders, and that may constitute the more significant victory. While Silhouette involved two non-U.S. parties, subsequent lawsuits undoubtedly will effect the availability of cheap U.S. designer clothing in Europe. According to one European discount retailer, "[a] bout 80 percent of what we buy comes from the US . . . . [T]he ruling could shut the door on our biggest source."128

Other retailers disagree. Rather than shutting the door on the gray market, the Silhouette decision has only forced greater creativity for some discount supermarkets in getting designer U.S. goods on their shelves. Angered by the ruling, several major stores in England have vowed to either blatantly violate the gray market ban or find loopholes that will allow them to continue selling bargain goods.129 Asda in particular already appears to be flatly defying the ban.130 Since Silhouette, it has sold cheap gray-market goods ranging from toys131 to the status-symbol Champagne Dom Perignon;132 "This ruling is a kick in the teeth for British consumers, and I am tempted to fight it in good old Asda style . . . ... 133 Citing the result ing cost to consumers (due to the legal fees generated by retailers' defiance), however, Leighton also proposes finding legal ways around the court's ruling: "[W]e have found other ways to provide our customers with these goods, because we know the demand is there."134

One such strategy is to continue selling goods on the gray market while supporting that activity with a solid legal argument. At least one legal commentator has put forth the doctrine of "reciprocity" as a possible way around the gray-market ban.135 Under that doctrine, if the country from which goods are being imported (i.e., the United States, for Levi's jeans) has recognized and adopted international exhaustion, then stores like Tesco and Asda can argue that the same doctrine should be recognized in the EU with respect to the sale of those goods.136 In fact, following Quality King, the United States does recognize the equivalent of the international exhaustion doctrine, so British supermarkets could have a valid argument in support of their defiance of the ban. Of course, any European court that accepts such an argument would essentially be nullifying the Silhouette decision, due to the fact that such a large portion of the European gray market is sourced from the United States. Also, 'reciprocity' (per se, not through bi- or multilateral agreement) is a slippery slope which stands in contradistinction to the international use of treaty and reservation

Another way European gray marketers vow to continue selling cheap designer goods is to simply source the goods from within the EEA.137 Silhouette, after all, did nothing to change the rule that a trademark holder exhausted its rights as soon as it put its goods on the market in the EEA.138 Retailers have indicated their belief that, by buying from within the EEA, they will in essence be pushing the liability to whichever parallel importer got the goods inside the EEA initially.139 In actuality, the retailers remain liable for the sale to consumers of those goods: "A retailer is not absolved from infringement merely because the gray market goods were imported into Europe by another. The goods are non-infringing only if the brand owner has consented to their sale in Europe."140

4. Forum shopping and restriction in the free movement of goods

Besides the legal maneuvering threatened by European discounters, there is potential for other negative consequences of the Silhouette decision. While the ECJ interpretation rejected international exhaustion as an option for member countries in the EEA, the court explained that the Directive alone did not entitle manufacturers to injunctions against distribution agreement violators selling goods into the EEA. The court stated, "[I]t is settled case law that a directive cannot impose obligations on an individual."141 Rather, if a manufacturer wants an injunction against a parallel importer, it must bring its suit in a member state providing such a remedy for trademark infringement.142 Forum shopping, then, is inevitable, since member states have differing rules regarding injunctive relief. The United Kingdom, for example, allows injunctions, while Austria does not.143

Commentators seem to disagree on whether the ruling will allow for more movement of goods between member states, or whether it will actually restrict movement. The ECJ itself based much of its decision on the Directive's primary goal of ensuring the free movement of goods throughout Europe: "The ninth recital emphasises that it is fundamental, in order to facilitate the free movement of goods and services, to ensure that registered trade-marks enjoy the same protection under the legal systems of all the Member States . . . ."144 The logic behind the free-movement theory is that trademark holders who know their rights will be protected equally throughout the EEA will not hesitate to export their goods, knowing the goods' reimportation will constitute infringement in any member state. Gray market proponents nevertheless claim that the ECJ ruling will only impede free trade in Europe by limiting price competition and restricting consumer choice.145


The beneficiaries of the Quality King decision and those ill-- advantaged by Silhouette advanced a few weak arguments in support of their position. Namely, the gray market encourages price competition, allows manufacturers free reign over where and how their goods ultimately are sold, and benefits consumers by providing luxury goods at bargain prices.146 Gray marketers in Europe have indicated their intent to adhere to a sort of vigilante justice system, in which consumers will continue to get cheap designer goods despite the ruling in Silhouette. Although this rebellion is an unfortunate result of Silhouette, it will likely be short-lived. For a short period, manufacturers will increase their lawsuits against trademark infringers. The lawsuits may tie up European courts in the short term, but in the long term they will ultimately convince gray marketers that their rebellion is doing little more than costing them-- and consumers-more money. Fighting the ruling "inevitably will mean spending big sums on teams of lawyers when we should be using that money to deliver better value to our customers."147 In other words, a gray market rebellion will continue only as long as it remains cost-effective for retailers. As soon as it no longer is costeffective, European consumers will be left with only the positive results of the Silhouette decision.

Those results can be best understood from a fairness context. It is not fair, for example, that discount supermarkets in the United Kingdom have been benefiting from clothing manufacturers' extensive promotions and advertising without paying those manufacturers accordingly. Consumers who buy luxury goods cheaply on the gray market can eventually learn the hard way that, despite the language in the manufacturer's ads, those goods have been bought without the accompanying guarantees or are inappropriate for consumers in that particular country. Contrary to the parallel importers' arguments (and to misguided consumers' beliefs), the gray market does not benefit everyone, it only benefits the gray market retailer, who profits from the manufacturers' efforts.

Although Silhouette did much to advance the interest of manufacturers who hold trademarks in the EEA, those interests were dealt a cruel blow by the Supreme Court in Quality King. Manufacturers can only truly reap the rewards of Silhouette if its principles are adopted in a uniform international agreement that applies equally in the United States and Europe. An American manufacturer currently can export cosmetics to Japan, for example, without worrying that it will be unprotected should those cosmetics find their way into the EEA. Such reassurance seems hollow, however, when one considers that the cosmetics could easily, and legally, end up back in the United States at cut-rate prices. In short, Quality King has ruined whatever protection U.S. manufacturers can now expect to receive in the EEA.

Elin Dugan

1. Parfums Givenchy, Inc. v. C&C Beauty Sales, Inc., 832 F. Supp. 1378, 1382 n.1 (C.D. Cal. 1993).

2. John Griffiths & Peggy Hollinger, Trading on Another's Name, FIN. TIMES, Aug. 1516, 1998, at 7.

3. Parfums Givenchy, 832 F. Supp at 1382 n.1.

4. Charles Bremner & Stephen Farrell, European Court Outlaws Designer-Label Discounts, TIMES (London), July 17, 1998, at 13.

5. See, e.g., Sebastian Int'l, Inc. v. Consumer Contacts (PTY) Ltd., 847 F.2d 1093, 1094 (3d Cir. 1988); Parfums Givenchy, 832 F. Supp. at 1382; Case C-337/95, Parfums Christian Dior SA & Parfums Christian Dior BV v. Evora BV, 1997 E.C.R. 1-6013, 1-6038, [1998] 1 C.M.L.R. 737, 759 (1997).

6. Michael L. Brody & Darren C. Baker, Trademarks May Thwart Gray Market Importers, NAT'L LJ., May 18, 1998, at C6.

7. Id.

8. See Bob Van Voris, Gray-Goods Decision Roils Companies, NAT'L LJ., Mar. 23, 1998, at Bl.

9. Quality King Distributors, Inc. v. L'Anza Research International, Inc., 523 U.S. 135 (1998).

10. Case C-355/96, Silhouette Int'l Schmied GmbH & Co. KG v. Hartlauer Handelsgesellschaft mbH, 1998 E.C.R. 14799, [1998] 2 C.M.L.R. 953 (1998).

11. See Quality King, 523 U.S. at 146-48.

12. See Silhouette, 1998 E.C.R. at 1-4810, [1998] 2 C.M.L.Il at 963.

13. Copyright Act of 1976, 17 U.S.C. (sec)(sec) 106(3) (1998).

14. See id.(sec)(sec) 106.

15. See generally Bobbs-Merrill Co. v. Isidor Straus, 210 U.S. 339 (1908) (applying the first-sale doctrine as common law).

16. Copyright Act of 1976, 17 U.S.C. 109(a) (1998).

17. Sebastian Int'l Inc. v. Consumer Contacts (PTY) Ltd., 847 F.2d 1093, 1096 (3d Cir. 1988); see also Columbia Pictures Indus. v. Aveco, Inc., 800 F.2d 59, 63-64 (3d Cir. 1986); Columbia Pictures Indus. v. Redd Horne, Inc., 749 F.2d 154, 159 (3d Cir. 1984).

18. Copyright Act of 1976, 17 U.S.C. 602 (1998).

19. Sebastian Into, 847 F.2d at 1098.

20. Id. at 1097.

21. See Parfums Givenchy, Inc. v. C&C Beauty Sales, Inc., 832 F. Supp. 1378, 1387 (C.D. Cal. 1993) (holding that the application of the first-sale doctrine to section 602's importation prohibition would render the prohibition meaningless).

22. Sebastian Int'l, 847 F.2d at 1097.

23. Quality King, 523 U.S. at 139-40

24. Id. at 138-39.

25. Id. at 138.

26. Robert W. Clarida, U.S. Supreme Court Removes Bar to Parallel Imports, IP Worldwide, July/August 1998, at 24.

27. Quality King, 523 U.S. at 139.

28. Id.

29. Id.

30. Id. at 139-40.

31. Id. at 140.

32. L'Anza Research Int'l, Inc. v. Quality King Distribs., Inc., 98 F.3d 1109 (9th Cir. 1996).

33. Quality King, 523 U.S. at 145.

34. Bernard A. Whyatt, Do Tesco and Asda Know Something That We Don't?, TIMES (London), Aug. 10, 1998, at 42.

35. Id.

36. Case C-355/96, Silhouette Int'l Schmied GmbH & Co. KG v. Hartlauer Handelsgesellschaft mbH, 1998 E.C.R. 1-4799, 1-4828, [1998] 2 C.M.L.R. 953, 975 (1998).

37. Quality King, 523 U.S. at 154; Silhouette, 1998 E.C.R. at 1-4832, [1998] 2 C.M.L.R. at 977-78.

38. Council Directive 89/104/EEC, 1989 Oj. (L 40) 1 [hereinafter Directive].

39. Silhouette, 1998 E.C.R. at 1-4824 to 1-4825, [1998] 2 C.M.L.R. at 973.

40. Directive, supra note 39, art. 5; Silhouette, 1998 E.C.R. at 1-4829, [1998] 2 C.M.L.R. at 975.

41. Directive, supra note 39, art. 7; Silhouette, 1998 E.C.R. at 1-4829, [1998] 2 C.M.L.R. at 975-76.

42. Directive, supra note 39, art 5.

43. Id, art 7, Para 1.

44. Silhouette, 1998 E.C.R. at I-4826, [1998] 2 C.M.L.R. at 973.

45. See id.

46. Id.

47. See id.

48. Silhouette, 1998 E.C.R. at I-4827, [1998] 2 C.M.L.R. at 974

49. Id.

50. Silhouette, 1998 E.C.R. at I-4827, [1998] 2 C.M.L.R. at 974-75.

51. Silhouette, 1998 E.C.R. at 14828, [1998] 2 C.M.L.R. at 975.

52. Silhouette, 1998 E.C.R. at 1-4832, [1998] 2 C.M.L.PR at 977-78.

53. Case C-355/96, Silhouette Int'l Schmied GmbH & Co. KG v. Hartlauer Handelsgesellschaft mbH, 1998 E.C.R. 14799,1-4812, [1998] 2 C.M.L.R. 953, 964-65 (Opinion of Advocate General Jacobs, Jan. 29, 1998) [hereinafter Advocate General Opinion].

54. Quality King Distributors, Inc. v. L'Anza Research International, Inc., 523 U.S. 135 (1998).

55. Silhouette, 1998 E.C.R. at 14832, [1998] 2 C.M.L.R. at 977-78.

56. See Rebecca Harrison, Silhouette v. Hartlauer. The End of the Discounted Designer Labels?, BRAND STRATEGY, July 24, 1998, at 23.

57. See Clarida, supra note 26, at 24.

58. See AFTA Warns Higher Prices for US Consumers; if Congress reverses Supreme Court ruling in L'Anza v. Quality King Distributors, DRUG & COSMETIC INDUSTRY, Sept. 1998, at 70; Jennifer Owens, Bill's Section Would Dent Gray Market, WOMEN'S WEAR DAILY, Sept. 15, 1998, at 10.

59. See Clarida, supra note 26, at 24.

60. Quality King, 523 U.S. at 154 (Ginsburg, J., concurring).

61. See id.

62. See Brody & Baker, supra note 6, at C6.

63. See id.

64. See id.; Bruce Rubenstein, Gray Goods Market Protected by Supreme Court Decision, CoRPORATE LEGAL TIMES, July 1998, at 30.

65. See Brody & Baker, supra note 6, at C6.

66. See Lawrence M. Friedman, Business and Legal Strategies for Combating Grey-Market Imports, 32 INT'L LAw. 27 (1998).

67. Van Voris, supra note 8, at B1; see also Brody & Baker, supra note 6, at C6; Clarida, supra note 26, at 24; Rubenstein, supra note 64, at 30.

68. Francesca Newland et al., Grey Matter: How did Tesco get its hands on f8m worth of Nike merchandise that the manufacturer itself refused to supply?, MARKETING WEEK, Feb. 5, 1998, at 29, 31.

69. See Parallel imports: A grey area, EcoNomIST, June 13, 1998, at 61.

70. See Rubenstein, supra note 64, at 30.

71. See Carla B. Oakley, Supreme Court Limits the Reach of Copyright Laws Over Imports, NAT'L L.J., May 18, 1998, at A21.

72. See id.

73. See Sebastian Int'l, Inc. v. Consumer Contacts (PTY) Ltd, 847 F.2d 1093, 1099 (3d Cir. 1988).

74. See Brody & Baker, supra note 6, at C6.

75. Id., see also Van Voris, supra note 8, at B1.

76. See Brody & Baker, supra note 6, at C6; see also Clarida, supra note 26, at 24.

77. See Clarida, supra note 26, at 24.

78. Quality King Distributors, Inc. v. L'Anza Research International, Inc., 523 U.S. 135, 140 (1998).

79. Rubenstein, supra note 64, at 30 (pointing to the four lawsuits in four years that were filed against gray market retailer Costco).

80. Sebastian, 847 F.2d at 1099.

81. L'Anza Research Int'l, Inc. v. Quality King Distribs., Inc., 98 F.3d 1109,1114 (9th Cir. 1996); see also Parfums Givenchy, Inc. v. C&C Beauty Sales, Inc., 832 F. Supp. 1378, 1385 (C.D. Cal. 1993).

82. See Rubenstein, supra note 64, at 30.

83. Owens, supra note 58, at 10.

84. See id.; see also Jennifer Owens, House Votes to Block Peril to Gray Market, WOMEN'S WEAR DAILY, Oct. 14, 1998, at 19.

85. AFTA Warns Higher Prices for US Consumers; if Congress reverses Supreme Court ruling in L'Anza v. Quality King Distributors, supra note 58, at 70.

86. Owens, supra note 58, at 10; see also Quality King, 523 U.S. at 145-46.

87. Owens, supra note 84, at 19.

88. See id

89. See Brody & Baker, supra note 6, at C6.

90. Id.

91. David A. Gerber, Gray Market Becomes Less of an IP Grey Area, NAT'L L.J., Oct. 19, 1998, at C20.

92. See Brody & Baker, supra note 6, at C6, Suave is a copyrighted trademark of Helene Curtis.

93. See 15 U.S.C. (sec)(sec) 1125 (a)(1)(A) (1998).

94. Brody & Baker, supra note 6, at C6.

95. See Allan Leighton, The European Brand of Injustice, SUNDAY TELEGRAPH (London), July 19, 1998, at 6B.

96. See Brody & Baker, supra note 6, at C6; see also Clarida, supra note 26, at 24.

97. Van Voris, supra note 8, at Bl.

98. See Brody & Baker, supra note 6, at C6; see also Clarida, supra note 26, at 24.

99. See Brody & Baker, supra note 6, at C6.

100. See id.

101. See id.; see also Jeremy Dickerson, Litigator's View, THE LAWYER, July 28, 1998, at 20 (applying same argument to pre-SiLhouette law in the EU); Friedman, supra note 66, at 27.

102. See Brody & Baker, supra note 6, at C6; see also Clarida, supra note 26, at 24.

103. See Brody & Baker, supra note 6, at C6; see also Clarida, supra note 26, at 24.

104. Friedman, supra note 66, at 28.

105. Id.; see also Clarida, supra note 26, at C6.

106. See Rubenstein, supra note 64, at 30.

107. Friedman, supra note 66, at 27.

108. Id. at 28-29; see also Charles Bremner & Stephen Farrell, European Court Outlaws Designer-Label Discounts, TIMES (London), July 17, 1998, at 13.

109. Brian March, Brand Names Bite Back, THE LAWYER, Aug. 11, 1998, at 19.

110. See Dickerson, supra note 101, at 20.

111. March, supra note 109, at 19.

112. See id.

113. See id.

114. Gary Lux, Leo Move Wrong Use of Trademark Legislation, FIN. TIMES (London), Oct. 6, 1998, at 26; Fraser Nelson, Warning Over Grey Levi's, TIMES (London), Oct. 1, 1998, at 29.

115. Camillo Fracassini, Victory for Nike in Shirts Wrangle, SCOTSMAN, Aug. 28, 1998, at 22.

116. Eileen Murphy, Supermarket Takes on Levi's in Attempt to Keep Designer Labels on Shelves, BIRMINGHAM POST, Oct. 17, 1998, at 7.

117. Leighton, supra note 95, at 6B

118. See Rubenstein, supra note 64, at 30.

119. Branded Goods Fenced in by EU Verdict, SoAP PERFUMERY SC COSMETICS, Aug. 1, 1998, at 3.

120. Sarah Cunningham, Ralph Lauren Sues Littlewoods, TIMES (London), Dec. 14, 1998, at 39.

121. See, eg., Lux, supra note 114, at 26; Murphy, supra note 116, at 7; Stephen L. Sidkin, Letter, Fresh Focus in Grey Market Battle, TIMES (London), Oct. 7, 1998, at 29; Tesco Casts Light Onto a Grey Area, MKTG. WEEK (London), Oct. 29, 1998, at 5 (all discussing recent action taken by both Levi's and Tesco based on the Silhouette decision).

122. Fraser Nelson, Levi Eyes Yorkshire Chain in Dispute, TIMES (London), Oct. 19, 1998, at 48.

123. Fracassini, supra note 115, at 22.

124. Lux, supra note 114, at 26.

125. Leighton, supra note 95, at 6B.

126. Id.

127. Advocate General Opinion, supra note 53, 17.

128. Griffiths & Hollinger, supra note 2, at 7.

129. Fracassini, supra note 115, at 22; see also Peggy Hollinger, Tesco Challenges Levi's Ban on Selling Cheap Jeans, FiN. TIMES (London), Oct. 17-18, 1998, at 24.

130. Bill Caven, Supermarket Giant Claims It Will Save Callers Up To 180 Pounds, DAILY RECORD (Scotland), Oct. 22, 1998, at 15; Leighton, supra note 95, at 6B.

131. Asda Starts Cut-Price Toy Offensive, MKTG. WK. (London), Oct. 15, 1998, at 10.

132. Steven Day, Asda Shows Bottle With Cut-Price Dom Perignon, ExPREss ON SUNDAY (London), Nov. 15, 1998, at 60.

133. Leighton, supra note 95, at 6B.

134. Id.

135. Whyatt, supra note 34, at 42.

136. Id.

137. Barbara E. Cookson, EU Court Rules Against Parallel Imports, IP WORLDWIDE, Sept.Oct. 1998, at 9.

138. Id.

139. Id.

140. Id.

141. Id.

142. Id.

143. See Cookson, supra note 137, at 9.

144. Case C-355/96, Silhouette Int'l Schmied GmbH & Co. KG v. Hartlauer Handelsgesellschaft mbH, 1998 E.C.R. I-4799, I-4830, [1998] 2 C.M.L.R. 953, 976-77 (1998).

145. See Parallel Imports: A Grey Area, ECONOMIST, June 13, 1998, at 61.

146. See Leighton, supra note 95, at 6B.

147. Id.

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