NEW CUSTOM REGULATIONS COULD HAMPER DIVERSION

Byline: CAROL EMERT

WASHINGTON — Two long-awaited Customs Service rulings expected this year could play a significant role in the battle between U.S. fragrance manufacturers and unauthorized importers.
In the first ruling, based on the ground-breaking Lever Bros. decision of 1993, Customs could outlaw many parallel imports, or gray goods — name-brand products brought into the U.S. without authorization from the American manufacturer or authorized importer.
Parallel imports are usually sold by discounters, at up to 40 percent less than official goods. Authorized manufacturers and importers, who complain that gray goods erode the market for their products, have been battling unauthorized imports for years on grounds that they violate the U.S. companies’ trademark and copyright protections.
The second Customs proposal involves giving U.S. Intellectual Property Rights (IPR) holders the names and addresses of companies believed to be distributing products that infringe upon the U.S. companies’ copyrights and trademarks.
In the first ruling, Customs is expected to spell out what constitutes a “material difference” between gray goods and authorized products. It is related to the Lever Bros. ruling, written by Judge Harold Greene in the Federal Court of Appeals here, which mandated that “materially different” imports with the same trademark as U.S. products violate U.S. law and should be barred by Customs from entering the country.
The case involved imported Sunlight dish-washing liquid, which had a less effective chemical formulation than the Sunlight made in the U.S. But the judge’s decision did not clarify whether such a distinction would ban gray goods from the U.S.
Curtis Bradley, an attorney representing the Coalition to Preserve the Integrity of American Trademarks (COPIAT), said, “Our view is that any difference that might matter to consumers is material. For example, there might be no warranty on gray-market goods, but there is a warranty on our goods.”
The issue has come to a showdown: IPR holders such as Parfums Givenchy are one side, and importers and discount retailers such as Kmart are on the other.
According to Bradley, an attorney with Covington & Burling here, various drafts of the proposed rule have circulated several times between Customs and the Treasury Department, which oversees Customs.
Phone calls to Treasury and Customs inquiring about the status of the rule were not returned. As a matter of procedure, government agencies do not discuss pending decisions.
Bradley said the ruling has been so long in coming — the Lever Bros. decision came down in January 1993 — that “I wouldn’t be surprised…if someone gets impatient and gets an injunction ordering Customs to do something.”
Even before it makes a decision, Customs may block the import of gray goods that are in some way different from U.S.-made products “because they know if they don’t do it, people can sue them immediately in the District of Columbia,” Bradley said.
Robert Brady, president of Parfums Givenchy, said he has already successfully used this tactic. In late December, he said, Customs officials in Los Angeles barred “a major shipment of gray goods” based on information Brady had filed saying that his authorized products had been “chemically altered” to distinguish them from other fragrances with the name Givenchy.
Under the second Customs proposal, a trademark holder would be sent samples of a seized product. If the product was believed to be counterfeit, Customs would release the names and addresses of the importer, exporter and manufacturer. Copyright holders, who under current law are sent samples of products believed to infringe, also would receive the name and address of the manufacturer.
IPR holders, including Brady, say a ruling in their favor would help them quickly locate and sue companies trading in illegal goods. Allowing U.S. manufacturers to look at samples would be a more efficient way to identify counterfeit merchandise than relying on Customs officers, they argue.
Under current law, when a shipment believed to violate a U.S. company’s trademark is seized at the border, the trademark holder is told only the size of the shipment. If the holder wishes to litigate, he or she must file a Freedom of Information Act request to get the names of the involved parties.
Some in the parallel imports industry have claimed that if the second proposal is approved, and if Customs mistakenly seizes a shipment of legal gray goods — which is not uncommon — the shipment’s release would be delayed and confidential business information could be wrongfully passed to the importer’s U.S. competitor.
Release of such information “would be tantamount to an invitation to [an IPR holder] to commence litigation,” said Morrison Cain, vice president of legal and public affairs at the International Mass Retail Association, in a letter to Customs. “Indeed, the threat of litigation tying up perishable or time-sensitive merchandise on entry would give rights holders new leverage in litigation and commercial disputes.”
Cain also said in the letter that such a ruling would allow “extraordinary action based on far too low a standard — nothing more than a Customs official’s suspicion, with no clearly articulated grounds identified, that merchandise may somehow infringe.”
But Louis Santucci, vice president of international affairs at the Cosmetic, Toiletry and Fragrance Association, fired back in a letter to Customs: “Even for unrestricted parallel-market goods, any information related to the product is the property of the trademark owner. Irrespective of whether the importer has done anything improper, the trademark owner has a legitimate right to information concerning his own product.”
An initial version of the rule was proposed in August 1993 and, according to Bradley, Customs officials would like to promulgate a final version with little change. But like the Lever Bros. ruling, this one appears to be delayed by Treasury Department review.
The years of fighting over the legality of parallel imports would end immediately if Congress passed legislation outlawing such imports. Senator Orrin Hatch (R., Utah), now chairman of the Senate Judiciary Committee, and other lawmakers have introduced such legislation in the past, but it has never gotten far.
Currently, the U.S. fragrance industry is unwilling to take on such a project because of the enormous expense, Bradley said. Still, he added, “If I can get clients to finance that, I think it would be a great route,” better than the alternative of individual companies’ lawsuits.
Another major roadblock to such legislation this year is the Republicans’ promise to pass their Contract With America before considering other issues, Bradley added.
— Fairchild News Service

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