Neville Peterson LLP: Customs and International Trade Law

M E M O R A N D U M
To: Clients and Friends of the Firm
From: Neville Peterson LLP
Re: United States Customs Service Enforcement of Trademark Rights; Overview
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     This Memorandum describes the circumstances in which the United States Customs Service will seize and destroy imported goods which infringe registered trademark rights owned by United States corporations and individuals.

I. EXECUTIVE SUMMARY
     Customs Service enforcement of trademark rights is a controversial subject which has prompted substantial recent litigation. Court decisions have prompted frequent changes in Customs' trademark enforcement regulations and policies. However, the current status of Customs' trademark enforcement policies can be summarized as follows:

     1. Section 42 of the Lanham Act [15 U.S.C. Section 1124] and Section 526 of the Tariff Act prohibit the importation of goods which "copy or simulate" registered trademarks owned by United States citizens or corporations. The Customs Service is authorized to exclude infringing merchandise from the Customs territory of the United States, seize it and forfeit it.

     2. In order to obtain Customs Service enforcement of a registered trademark, the mark owner must record the mark with the Customs Service pursuant to 19 C.F.R. Part 133, Subpart A.

     3. Customs will not exclude infringing goods in cases where the United States and foreign trademarks are owned by the same person, or by related corporations or parties subject to "common ownership or control". 19 C.F.R. Sections 133.21(c)(1),(2).

     4. Notwithstanding the above rule, certain courts have recently held that Customs is required to exclude trademarked goods which are physically different from goods sold in the United States under the same trademark, even if the United States and foreign mark owners are under "common ownership and control".

     5. Customs is not obligated to initiate enforcement action in every case of suspected infringement, particularly in cases involving "close" questions of law. Where Customs declines to initiate enforcement, the United States trademark owner retains its full panoply of rights to initiate private actions for trademark infringement.

     (a). Trademark owners can, in many cases, obtain court injunctions directing Customs to exclude goods which infringe a recorded trademark;

     (b). The courts are divided concerning whether trademark owners may obtain an injunction requiring Customs to exclude infringing goods in cases where Customs' refusal to act is based upon the "common ownership and control" provisions of 19 C.F.R. Section 133.21(c).

     6. Customs does have the authority to seize and detain "counterfeit" merchandise, even if the trademark borne on such merchandise has not been recorded with the agency for import protection. For good order's sake, we will first discuss the statutes and regulations governing this issue, and will then consider Customs' enforcement role in three types of situations: (1) importation of spurious merchandise bearing classically "counterfeit" marks; (2) importation of genuine "gray market" goods which are physically identical to goods sold under the same mark in the United States; and (3) importation of genuine "gray market" goods which are which are physically different from goods sold under the same mark in the United States.

II. CUSTOMS ENFORCEMENT OF TRADEMARK RIGHTS: BACKGROUND
     Section 42 of the Lanham Act, 15 U.S.C. Section 1124, provides in pertinent part that:

. . . No article of imported merchandise which shall copy or simulate the name. . . trade-marked [and] registered in accordance with the provisions of this Act. . . shall be admitted to entry at any Customhouse of the United States.

Section 42 provides that United States trademark owners may record their mark with the Secretary of the Treasury in order to obtain exclusion of infringing merchandise by the United States Customs Service.

Section 526 of the Tariff Act of 1930, as amended [19 U.S.C. Section 1526], prohibits generally the importation of merchandise bearing a registered trademark owned by a United States domiciliary, without the trademark owner's consent. Section 526(a) provides:

526. Merchandise bearing American trademark

(a) Importation Prohibited. * * * [I]t shall be unlawful to import into the United States any merchandise of foreign manufacture if such merchandise, or the label, sign, print package, wrapper or receptacle, bears a trade-mark owned by a citizen of, or by a corporation or association created or organized within, the United States, and registered in the [Patent and Trademark Office] by a person domiciled in the United States, under the provisions of [the Lanham Act], and if a copy of the certificate of registration of such trade-mark is filed with the Secretary of the Treasury, in the manner provided in Section 27 of such Act, unless written consent of the owner of such trade-mark is produced at the time of making entry.

     Section 526(e) of the Tariff Act provides that any imported goods found to bear a "counterfeit" mark, as defined in Section 45 of the Lanham Act [15 C.F.R. Section 1127], are subject to seizure, and, absent written consent of the United States trademark owner, subject to forfeiture for violations of the Customs laws.

     Part 133, Subpart A of the Customs Regulations sets forth procedures whereby United States trademark owners may record their marks with the Customs Service for import protection. Customs accepts for recordation only marks whose registration is current. 19 C.F.R. Section 133.1 (a). Applications to record must identify the applicant, the classes of merchandise covered by the mark, the manner in which the trademarked goods are manufactured, and the names or addresses of any foreign persons or businesses authorized or licensed to manufacture goods bearing the mark [Id., Section 133.2]. The application must be accompanied by a current status copy of the trademark certificate of registration, and an application fee must be paid. [Id, Section 133.3]. Recordations are valid for a limited time [Id, Section 133.4], and changes in ownership or status of the mark must be brought to Customs' attention. [Id., Sections 133.5, 133.6]. In sum, recordation of a mark with Customs confers ". . . Federal authority to exclude from entry the particular trademarked goods, in effect being exercised or not exercised at the option of the private owner of the trademark". Atwood, Import Restrictions on Trademarked Merchandise - The Role of the United States Bureau of Customs, 59 Trademark Reporter 301, 305 (1969).

     The courts appear to be in unanimous agreement that recordation of a mark with Customs is a condition precedent to agency enforcement. See, e.g., Weil Ceramics & Glass v. Dash, 618 F. Supp. 700 (D.N.J. 1985); providing false information to Customs in conjunction with a trademark recordation for the purpose of obtaining trademark enforcement otherwise not available, can subject the trademark owner to private actions for damages. See., e.g., Shaw v. Rolex Watch U.S.A., Inc., 745 F. Supp. 982 (S.D.N.Y. 1990).

     In 1990, the Customs Service established an Intellectual Property Rights (IPR) Task Force (now known as the Intellectual Property Rights Branch), headquartered in Washington, D.C., which works with Customs field offices to conduct aggressive import enforcement with respect to intellectual property rights recorded with the agency for import protection.

     While Customs has statutory authority to exclude goods suspected of infringing recorded marks, agency enforcement is not a mandatory obligation; the agency may (and should) decline to act in cases involving "close" questions of fact or law, leaving the trademark owner to pursue private remedies against suspected infringers. See, e.g., Olympus Corporation v. United States, 627 F. Supp. 911, 920-921 (E.D.N.Y. 1985), aff'd, 792 F. 2nd 315, 320 (2nd Cir. 1986), cert. den., 108 S. Ct. 2033 (1988).

     To prevent United States trademark owners from excluding genuine "gray market" goods from United States commerce simply to enforce possibly unlawful price discrimination, Section 133.21(c) of the Customs Regulations specifies situations where the agency will not exclude trademarked goods. The regulation provides in pertinent part that:

     (c) Restrictions not applicable. The restrictions set forth in paragraphs (a) and (b) of this section [relating to Customs exclusion of foreign or domestic articles bearing identical, coping or simulating marks] do not apply to imported articles when:

(1) Both the foreign and the U.S. trademark or trade name are owned by the same person or business entity;

(2) The foreign and domestic trademark or domestic trademark or trade name owners are parent and subsidiary companies, or are otherwise subject to common ownership or control. . . .

     The United States Supreme Court upheld these regulations in Kmart Corp. v. Cartier, Inc., 486 U.S. 281 (1988), finding them to be "permissible constructions designed to resolve statutory ambiguities" relating to the intended scope of the import exclusions enacted by the Congress.

     Although Customs will not enforce trademark rights in "common control" situations, the courts have adopted varying views (see discussion below) concerning the extent to which trademark holders may enforce these rights in private litigation.

III. CUSTOMS SERVICE ENFORCEMENT OF TRADEMARK RIGHTS IN PARTICULAR SITUATIONS
     1. Articles Bearing "Counterfeit" (Spurious) Trademarks

     Section 45 of the Lanham Act [15 U.S.C. Section 1127] defines a "counterfeit" mark as ". . . a spurious mark which is identical with, or substantially indistinguishable from, a registered mark." Section 526 (e) of the Tariff Act authorizes Customs to seize and forfeit any imported merchandise bearing a mark which is "counterfeit" within the Lanham Act definition.

     Customs' regulations draw a distinction between imported articles "bearing recorded trademarks and trade names" [see 19 C.F.R. Section 133.21] and "[a]rticles bearing counterfeit trademarks", that is "a spurious trademark which is identical with, or substantially indistinguishable from, a registered trademark" [19 U.S.C. Section 133.23a]. As to the latter class of goods, Customs seizes and destroys all true "counterfeits", without regard to the "common control" exceptions contained in 19 U.S.C. Section 133.21(c). Customs will take enforcement action against imported goods which infringe recorded trademarks owned by foreign corporations or individuals.

     Customs has also taken the controversial position that it has authority to seize "counterfeit" merchandise under Section 596 of the Tariff Act of 1930, as added by the Anti-Drug Abuse Amendments Act of 1986. Section 596 is an extremely broad provision which gives Customs authority to seize and forfeit any merchandise found to be imported "contrary to law". Customs has, in some cases, asserted that imported "counterfeit" merchandise is imported "contrary to law", citing 18 U.S.C. Section 2320, a statute which imposes criminal penalties for trafficking in counterfeit merchandise, as the basis for the seizure. However, in Ross Cosmetics Distribution Centers, Inc. v. United States, 18 CIT ___, Slip Op. 93-161 (October 11, 1994), Customs upheld Customs' authority to act against counterfeits under these statutes.

     2. "Gray Market" Goods - Physically Identical

     As noted above, Customs declines to exclude genuine "gray market" goods in cases where United States and foreign trademark rights are owned by the same person, or by entities under "common ownership or control".

     Although the Supreme Court in Kmart v. Cartier, supra, upheld the Customs regulations denying government enforcement under the "common ownership or control" situation, the extent to which parties can bring private actions to restrain imports of gray market goods produced by related parties remains the subject of some dispute. For instance, in Olympus Corporation v. United States, 792 F.2nd 315 (2nd Cir. 1986), cert. den., 108 S.Ct. 2033 (1988), the Second Circuit held that Customs' interpretation of its statutory enforcement authority "does not limit the reach of protection of Section 526" of the Tariff Act. 792 F.2nd 315, 320. "Specifically, the Second Circuit has determined that notwithstanding the interpretation used by Customs, a U.S. trademark holder may still pursue private remedies under Section 1526(c) [of the Tariff Act]". Disenos Artisticos e Industriales, S.A. v. Work, 676 F. Supp. 1254 (E.D.N.Y. 1987). Following the Supreme Court's Kmart v. Cartier decision, The United States District Court for the Southern District of New York ruled that:

It is the unchanged law of the [Second] Circuit (1) that the "common control exception" regulations are valid, and (2) that the U.S. trademark owner nonetheless retains its private remedies against the importer under the Lanham Act and Section 526 (c) of the Tariff Act of 1930 . . . .

* * *
     Importation of goods, though genuine and covered by the "common control exception", may still have a likelihood of confusing consumers in violation of the Lanham Act by virtute of the foreign language packaging and instructions used, as well as disparities in warranty protection and possible disparities in quality.

     However, this liberal view of private enforcement rights is not shared by all circuits. Recently, in Yamaha Corporation of America v. United States, 961 F. 2nd 245 (D.C. Cir. 1992), a United States trademark holder sought an injunction requiring Customs to exclude gray market goods covered by the "common ownership or control" exception. The Court denied the injunction, and, echoing an earlier decision of the Ninth Circuit decision, rejected Yamaha's argument "that it had private rights under Section 526 to exclude the gray-market goods that were greater than those encompassed by the [Customs Regulations]." The Court's rationale was that Congress, in promulgating Section 526, could not have reasonably intended that it be utilized by a United States trademark holder, even in the context of private litigation, to enforce price discrimination in international markets.

     Accordingly, although the Customs Service's regulations preclude governmental enforcement of trademarks with respect to gray market goods in cases where the United States and foreign marks are owned by the same or related parties, the courts remain divided concerning whether, in such cases, markholders may exclude "gray market" goods using private actions.

     3. Gray Market Goods - Not Physically Identical

     In several recent decisions, the United States Circuit and District Courts for the District of Columbia have ruled that, notwithstanding the "common control" exceptions appearing at Section 133.21(c) of the Customs Regulations, the Customs Service is required to exclude "gray market" goods which are physically different, in a material way, from goods sold under the same trademark in the United States.

     In Lever Brothers Co. v. United States, 877 F. 2nd 101 (D.C. Cir. 1989), the United States manufacturer of "Shield" soap and "Sunlight" dish detergent sought an injunction directing the Customs Service to exclude from importation certain genuine "gray market" versions of these goods which were produced in England by a related foreign corporation. However, the English and United States versions of the trademarked goods were physically different: the English version of "Shield" soap had different oil and fatty-acid content and lathering characteristics (reflecting the British preference for baths over showers), while the English "Sunlight" dish detergent had a significantly different composition from its United States counterpart. The Circuit Court, in a "tentative" determination, overturned a District Court order denying the injunction, holding that:

Because of the differing conditions in the United States and the United Kingdom, and the . . . affiliates' response to these conditions in the design of their products, Shield and Sunlight likewise have different meanings in the two countries. Thus, the use of the trademark for the UK versions in the United States is simply not truthful.

The Court concluded that:

We think the natural, virtually inevitable reading of Section 42 [of the Lanham Act] is that it bars foreign goods bearing a trademark identical to a valid U.S. trademark but physically different, regardless of the trademark's genuine character abroad or affiliation between the producing firms. On its face the section appears to aim at deceit and consumer confusion; when identical trademarks have acquired different meanings in different countries, one who imports the foreign version to sell it under that trademark will (in the absence of some specially differentiating feature) cause the confusion Congress sought to avoid. The fact of affiliation between the producers in no way reduces the probability of that confusion; it is certainly not a constructive consent to the importation.

     Subsequently, the District Court issued its amended remand determination, Lever Brothers Co. v. United States, 1992 U.S. Dist. LEXIS 7876, appeal pending, and entered an injunction requiring Customs to exclude physically different gray market goods which infringe a recorded trademark. The Court found that:

     Neither the legislative history of the statute nor the administrative practice of the Customs Service clearly contradicts the plain meaning of Section 42. The Court therefore concludes that Section 42 of the Lanham Act prohibits the importation of foreign goods that bear a trademark identical to a valid United States trademark but which are physically different, regardless of the validity of the foreign trademark, or the existence of an affiliation between the U.S. and foreign mark holders.

     On April 28, 1992, the Court denied the Government's motion to stay the injunction pending appeal, finding that "[a]s defendants' likelihood on success on the merits is particularly poor, there is no basis for a stay".

     On May 18, 1992, the District Court denied a motion by Lever Brothers to amend the Court's injunction to delete a condition therein requiring excluded goods to be "materially" different from their domestic counterparts.

     More recently, the D.C. Circuit refused to entertain a trademark owner's attempt to show physical differences between the merchandise which its sells in the United States, and "gray market" goods whose importation it sought to enjoin, on the ground that the markholder had not availed itself of opportunities to present evidence to the trial court establishing the alleged physical differences.

     Thus, it appears that, notwithstanding the limits on Customs Service enforcement of the Lanham Act and Section 526, a United States mark holder can, for the time being at least, effectively exclude "gray market" goods which are materially physically different from the trade marked goods sold in the United States.

IV. CUSTOMS ENFORCEMENT OF COPYRIGHTS
     Customs also has statutory authority to exclude imported merchandise which infringes trade names or copyrights recorded with the agency for import protection. While an extended discussion of copyright enforcement is beyond the scope of this letter, it is appropriate to mention the subject briefly.

     Conditions precedent to obtaining Customs enforcement of a copyright are (1) registration of the copyright with the U.S. Copyright Office, and (2) recordation of the registered copyright with Customs for import protection, under procedures set out at 19 C.F.R. Part 133, Subpart D.

     When a suspected infringing article is imported, the District Director of Customs withholds delivery of the shipment, and notifies the importer of his action. The importer then has an opportunity to file a statement with Customs denying that the imported article infringes a copyright.

     When the importer files this notice of denial described above, Customs then provides the copyright owner with a sample of the imported article. The copyright owner may then (within 30 days) file with Customs:

     (1) A written demand for exclusion of the merchandise; and

     (2) A penal bond designed to hold the importer harmless, in the event it is determined that the imported merchandise does not infringe the recorded copyright.

     The importer and copyright owner may the submit briefs and other information to Customs concerning whether the imported merchandise infringes the recorded copyright.

     If Customs rules in favor of the copyright owner on the issue of infringement, the detained merchandise is forfeited, and the bond returned to the copyright owner.

     However, if Customs rules in favor of the importer, the merchandise is released, and the copyright owner's bond is paid over to the importer. Thus, utilizing the procedure set forth in the Customs Regulations is not without risk to the copyright owner.

     In addition to these administrative procedures, a copyright owner may of course pursue his ordinary remedies in the courts, to seek damages and an injunction against importation or distribution of infringing articles. If a copyright owner obtains an injunction against the importation of infringing articles, the Customs Service will, upon notice, enforce the judgment.

V. CONCLUSION
     In sum, the United States Customs Service will always exclude spurious merchandise bearing a "counterfeit" trademark, and, under certain circumstances, will exclude genuine "gray market" merchandise which simulates or copies a mark which (1) is owned by a United States citizen or corporation, (2) is registered with the Patent and Trademark Office, and (3) has been recorded with Customs for import protection. While Customs declines to initiate "gray goods" enforcement in cases where the United States and foreign mark holders are under "common ownership" or control, United States mark holders may be able to pursue private remedies.

     Finally, Customs may be required to exclude gray market goods, notwithstanding the "common ownership or control exception" where the imported merchandise is materially physically different from goods sold in the United States under the same trademark.

     Note: This memorandum is intended for general informational purposes only, and is not given or intended as advice pertaining to any specific case or circumstances. Readers having questions concerning particular situations should consult counsel.

     Entire contents copyright 1998 by Neville Peterson LLP.

     For additional information concerning the subjects discussed in this Neville Peterson LLP background memorandum, please call Martin Neville, John Peterson, Maggie Polito or Arthur Purcell at (212) 635-2730 or George Thompson, Mike Tomenga or Larry Bogard at (202) 861-2959, or e-mail using the mailbox on this Website.

     Under a recent amendment to the law, seized merchandise determined to be counterfeit must be destroyed, and cannot be donated, sold at Government auction, or put to other uses.

     Although questions of "common ownership" can generally be determined according to well-established principles of corporate law, Customs has provided very little in the way of rulings concerning when United States or foreign trademark owners may be said to be subject to "common ownership or control". [It does not appear to be sufficient that the United States and foreign manufacturers simply have contractual relationships with the trademark owners]. . .

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