In a recently filed complaint, battery giant Duracell brought Lanham Act claims against wholesaler JRS Ventures, Inc. (JRS) for importing and reselling batteries bearing the Duracell’s iconic “copper top” mark.  The wrinkle, as is the case in all “gray market goods” (or “parallel import”) cases is that the batteries are genuine Duracell batteries, produced with Duracell’s authorization in China.  Duracell, however, intended to sell the batteries to electronics manufacturers to be included with remote controls and other devices that come out of the box with batteries already installed, not to US consumers at retail stores.

Copyright: rakim / 123RF Stock Photo
Copyright: rakim / 123RF Stock Photo

The goods are “gray market” because they are not stolen goods or counterfeits.  They are however, being sold in a manner that intellectual property owner did not intend.  At its root,  the gray market grows out of a tension between the need to protect the intellectual property inherent in a product and the need to promote free trade of physical goods without the strings of lingering ownership rights.

Generally, the first sale doctrine operates to sever intellectual property rights when a good reaches the market and is sold.  For example, once you buy a DVD containing a copyrighted movie you can sell that DVD or give it away, you own the physical DVD.  You cannot, however, make copies of the content, because the copyright owner still controls the artistic expression that is the film.

First sales in different countries, however, make the gray market even grayer.  Where goods are sold outside the US, US intellectual property holders can use their ownership rights to stop unauthorized goods at the border if those goods are “materially different” from the goods offered to consumers within the US.  In recent years, world-wide producers have taken increased steps to insure that the packaging, instructions, and warranties offered with their products around the world differ so that they can meet the “materially different” standard and stop importation of gray market goods. Critics argue that being able to use intellectual property rights to control importation allows corporations to manipulate prices around the world by keeping goods (at their set individual market price) where suppliers want them.  In the context of pharmaceuticals, which may be donated to developing countries but which sell at a significant cost in more developed countries, the debate about uninhibited trade is an interesting one.

To prevail on its Lanham Act claims, Duracell must demonstrate that the goods are materially different.  As a key material difference, Duracell has argued that the warranty it offers to US consumers is ten times longer than the warranty offered on the batteries sold to electronics manufacturers.

In addition to the Lanham Act, however, one of the strongest mechanisms for fighting the importation of gray market goods comes from contract law.  Gray market goods are often a product of global supply chains in which original producers lose contact with the goods before a ‘genuine’ sale on the market.  Therefore, contracts throughout the supply chain should contain provisions requiring that downstream distributors report and account for all goods and, potentially, impose indemnification or other liability if those goods end up somewhere that the producer did not intend.

From distribution and supply chain contracts to Lanham Act litigation, any producer who sells products abroad should be prepared for the day when their own goods start appearing the domestic market and should take steps now to make sure that they prevail.