Byline: Julie L. Belcove

NEW YORK--Lawyers for Drug Emporium are expected to file another appeal in federal court in San Francisco today, in an attempt to put the brakes on a lawsuit that ultimately could shut down much of the gray market.
Although it revolves around the prestige fragrance business, the case--Parfums Givenchy Inc. v. Drug Emporium--has implications that reach beyond the beauty industry.
Givenchy's avenue of attack,
lawyers say, potentially could be applied to many imported goods--from apparel to VCRs--to give manufacturers more control over distribution in the U.S.
The stakes are high enough that Givenchy's fellow fragrance manufacturers are cheering its every move in the hopes of finding a court-blessed strategy for squelching diversion, the beauty industry's most nettlesome issue and one that has plagued it for years.
The numbers are immense. COPIAT, the anti-diversion coalition of manufacturers, estimates that 20 to 25 percent of the prestige fragrance business has been diverted. With the department store fragrance market estimated at $4 billion retail, the gray market business could be as much as $1 billion.
In a decision handed down Oct. 21, a three-judge panel on the Ninth Circuit Court of Appeals in Pasadena, Calif., upheld Givenchy's victory in district court barring Drug Emporium from selling Amarige.
Using a novel approach in the fragrance industry, Givenchy had copyrighted the design of the Amarige fragrance box. The company then sued the drugstore chain for selling Amarige, claiming copyright infringement because the fragrance had been imported without Givenchy's authorization and sold to Drug Emporium, again without consent.
Arguments in the case hinged on what is known as the "first sale" doctrine: A dealer is shielded from liability for copyright infringement if the products have been legally made and sold in the U.S. The court rejected Drug Emporium's argument that the doctrine also should apply to legal sales outside the U.S.
The Ninth Circuit based its decision on an earlier case--BMG Music v. Perez--involving the unauthorized importation of recordings.
"Obviously the copyright approach has allowed us to have a success, whereas before, using trademark law, this industry and a lot of other industries were stymied by gray marketeers," said Robert Brady, president of Givenchy.
Drug Emporium attorney R. Lawrence Bonner says the decision favors foreign companies over domestic because of the first-sale doctrine.
"I think it's going to have a serious impact on retailing and discounting in the U.S. because foreign manufacturers will be able to block discounting," Bonner said. He also is representing C&C Beauty Sales of Miami, the distributor that imported Amarige. It is expected to appeal a judgment won by Givenchy.
Drug Emporium, based in Powell, Ohio, still has two chances to get the case overturned. First the company must file a petition for an "en banc" hearing in which at least 10 appellate judges, rather than three, issue a decision. If en banc is denied, as it almost always is, or if Drug Emporium loses that round, the chain can request a review by the U.S. Supreme Court.
Rochelle Dreyfuss, a New York University Law School professor, said that while overall chances for a Supreme Court hearing are slim--the High Court receives thousands of requests a week and hears roughly 100 cases a year--the justices have shown a particular interest in copyright law and in disputes about importation.
Jane Ginsburg, a Columbia University law professor specializing in matters of intellectual property, said that since trademark case law is in Drug Emporium's favor, Givenchy's lawyers were wise to try the copyright route. But she cautioned that the company may be using copyright law as a pretext for something that is "not a copyright problem."
Rather than protecting the actual copyrighted material--in this case, the Amarige box--Ginsburg said Givenchy is "taking advantage of the copyright to protect the thing inside."
"Frequent use of that could call into question the general principle of copyright law," Ginsburg said, adding that foreign importation provisions are already "somewhat controversial."
Dreyfuss, however, said that although the consumer typically throws away the fragrance box, the design is part of the product's cachet, or its "expressiveness of luxury."
"Nothing in the Ninth Circuit decision is keeping the gray market from selling the product without its artistic packaging," noted Curtis Bradley, Givenchy's lawyer, explaining that the box is a significant part of the product. He added that some fragrance boxes are "too plain" to be copyrighted.
But for retailers and consumers, the issue "is one of price competition," said Lee Sandler, a lawyer for the American Free Trade Association, which filed a friend-of-the-court brief in the case, siding with Drug Emporium.
"It's very damaging to consumers because it stifles competition in the marketplace on brand-name products," he said."Our antitrust laws have always dealt severely with controlled distribution schemes to try to make certain that real competition exists in the marketplace."
Givenchy has inspired other foreign-based beauty companies to copyright their own packaging designs.
Richard Hartigan, president and chief executive officer of Lancaster Group USA, said his company is trying to copyright the bottles and boxes of its fragrances, which include Cool Water by Davidoff and Casmir from Parfums Chopard.
"Diversion is a huge problem, obviously, for all of us in the U.S.," Hartigan said.
"Certainly what is very distressing is that the industry is spending an awful lot of money to launch brands in the U.S. that are being manufactured in Europe," he continued. "But in many cases, these brands that we're spending tens of millions of dollars to launch are already here because of the gray market.
"Companies that are international and European-based have got to be extraordinarily careful about policing their own businesses," Hartigan added, noting that Lancaster is working to implement more sophisticated tamper-proof coding devices to mark boxes.
Parfums Boucheron was granted design patents for its Boucheron men's and women's bottles and is now suing to stop the Perfumania chain of discount perfumeries from selling the brand, according to Richard Kohut, senior vice president.
Brady said he feels "very comfortable" that Givenchy's victory will stand. But he noted that the company is investigating other methods of controlling diversion, including working directly with U.S. Customs "to prevent the goods from ever crossing the border."
The U.S. is not the only nation where discounting is under attack. In the U.K., the Monopolies and Mergers Commission ruled last year that although the fragrance industry is a "complex monopoly," manufacturers' refusal to supply discounters, such as the Superdrug chain, does not hurt the public interest.
And in Japan, a discounter, Fujiki Honten Co., lost its court bid to force manufacturers to keep supplying it despite the retailer's price-cutting policies.
It is widely understood in the U.S. industry that some manufacturers sell directly to non-department store retailers. Other manufacturers are lax about policing diversion of their products, particularly mature brands that have long since peaked in volume.
Although mass market merchants have been quoted routinely as saying prestige fragrances are readily available, Robert Lyons, senior vice president of Drug Emporium, said supplies seem to be drying up.
"It's tight as heck," Lyons said. "Boy, would I love to be able to get what I need for the Christmas season. We've got a million-dollar open purchase order."
Lyons, who declined to comment about the ongoing Givenchy case, said manufacturers have been doing a better job of detecting diverters and blocking them. He said companies are also keeping tighter inventories, lessening the likelihood of "dumping" excess product on the gray market.

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