Section 337 Update - Gray Market Cigarettes Once Again Excluded Under Section 337

October 16, 2009

Welcome to the October issue of the Section 337 Update. This newsletter is designed to provide you with practical updates and developments on Section 337 proceedings before the U.S. International Trade Commission.

Gray Market Cigarettes Once Again Excluded Under Section 337

A recently released public version of a determination by the International Trade Commission (“ITC”) has given U.S. trademark owners another reason to consider using the ITC as a hospitable forum to prevent the importation of infringing gray market goods -- the decision also highlights certain practices that strengthen the claims of complainants.

In Certain Cigarettes and Packaging Thereof, Inv. 337-TA-643, the ITC issued a general exclusion order banning the importation of gray market cigarettes and their packaging bearing Philip Morris USA’s Marlboro^®, Virginia Slims^® and Parliament^® trademarks and setting bond at 100% of the entered value of gray market cigarettes entering during the Presidential review period. The ITC’s determination is available online.

Facts and Findings

Complainant Philip Morris USA named Alcesia and twelve other companies as respondents, alleging violations of Section 337 (19 U.S.C. § 1337) in the importation of cigarettes bearing its registered trademarks. The gray market goods were manufactured abroad by Philip Morris International and are distributed in Europe. Philip Morris International does not import these goods into the United States. All respondents other than Alcesia were found to be in default. Philip Morris USA accused Alcesia of brokering sales of these gray market goods to customers in the United States through websites.

After the Administrative Law Judge issued an Initial Determination finding a violation of Section 337, Alcesia raised four issues for review by the full Commission: (1) whether its activities are subject to ITC jurisdiction; (2) whether there are material differences between the gray market and U.S. market cigarettes; (3) whether Alcesia’s sales were authorized by Philip Morris USA; and (4) whether Philip Morris USA is entitled to gray market relief.

1. Jurisdiction: Respondent Need Not Be the Owner, Importer or Consignee

The ITC exercised its broad jurisdiction under Section 337 by finding that it had jurisdiction over Alcesia, even though Alcesia (a foreign entity) was not the importer of record or the distributor, and contracted out many segments of its transactions: collection of payments, website hosting, fulfilling orders, and customer services to third parties. Alcesia was nevertheless subject to the ITC's jurisdiction because it brokered the importation and sale by advertising the gray market cigarettes on its websites, taking purchase orders from U.S. customers, and arranging for shipments. (Comm'n Op. at 8-9.)

Statutorily, the ITC determined that these activities fell within Section 337(a)(1)(C), which defines as unlawful, “The importation into the United States, the sale for importation, or sale within the United States after importation by the owner, importer, or consignee, of articles that infringe a valid and enforceable United States trademark registered under the Trademark Act of 1946 [15 U.S.C. § 1051 et seq.]." The ITC found that one need not be an “owner, importer, or consignee” to commit unlawful acts of importation or sale for importation. Thus, because Alcesia was involved in the importation process, despite not being the owner, importer, or consignee, the ITC had jurisdiction.

2. Material Differences: Material to Trademark Infringement

The Trademark Act prohibits the unauthorized use of a registered trademark where such use is “likely to cause confusion, mistake, or to deceive.” 15 U.S.C. § 1114(1). This likelihood of confusion may be as to the source of the goods or to sponsorship or approval of the goods. In gray market goods cases, the ITC uses a “material differences” standard to evaluate whether confusion is likely. If the gray market goods have material differences from the U.S. market goods, consumers may be confused as to the source, sponsorship or approval of the goods. Where there are material differences, confusion is presumed. (Comm'n Op. at 6.) Further, the ITC requires that the material differences be embodied in substantially all of the authorized U.S. market goods.

Here, the material difference that permitted the ITC to presume confusion involved the Surgeon General’s statutorily-mandated warning. The Federal Cigarette Labeling and Advertising Act requires that all cigarette packages bear the English-language Surgeon General’s warning. Genuine Philip Morris USA cigarette packages contain this warning. The gray market goods bear a foreign language warning. The ITC found that consumers of cigarettes would likely consider the lack of the English warning to be significant when purchasing cigarettes and that consumers may be confused as to the source and the quality of the gray market goods. (Comm'n Op. at 12.)

3. Authorization: Actual and Apparent

The ITC concluded that Philip Morris USA provided no authorization—actual or apparent—to Alcesia to sell gray market cigarettes in the United States. The ITC found these facts to be significant:

Philip Morris USA does not authorize third parties to import cigarettes and has no affiliates, subsidiaries or distributors outside of the United States;
Philip Morris International, the maker of the cigarettes abroad, agreed not to promote or facilitate resale of products in the United States;
Philip Morris USA had sent seven cease and desist letters to Alcesia;
Alcesia’s sales manager admitted there was no consent;
Philip Morris USA has trade policies for wholesalers and retailers forbidding involvement with gray market cigarettes; and
Philip Morris USA polices the use of gray market cigarettes, sends cease and desist letters to infringers, and sues where necessary.

Philip Morris USA did permit certain duty-free sales of gray market cigarettes bearing its trademarks to travelers outbound of the United States (also, duty-free sales destined for foreign embassies in the United States were made through the end of 2006). The ITC found the former sales irrelevant because they were sold “for immediate exportation only” and had little to no impact on U.S. commerce (the latter sales were also found to be irrelevant).

4. Entitlement to Gray Market Relief

Alcesia argued that there was no gray market goods trademark violation because there was no proof that Philip Morris USA authorized the use of its trademarks by Philip Morris International outside of the United States. The ITC rejected this argument, noting that gray market law is concerned only with whether the gray market goods are authorized for sale in the United States—not whether the U.S. owner of the marks authorized use of the marks somewhere outside the United States. (Comm'n Op. at 21.)

Conclusion: General Exclusion Order and Bond Set at 100% Entered Value

The ITC determined that the following circumstances warranted a general exclusion order, rather than a limited exclusion order.

The ITC found undisputed evidence that widespread unauthorized use, or a pattern of violation, existed whereby hundreds of websites engaged in the sale of gray market cigarettes bearing Philip Morris USA’s registered trademarks. Further, the ITC noted that the source of the infringing products is difficult to identify because of the volume of websites and the ability of companies to create and change their websites and corporate identities. A limited exclusion order would also be simple to circumvent because Alcesia and other respondents could create new entities or new websites to avoid a limited exclusion order.

The ITC noted that a general exclusion order would be in the public interest because it would help curb sales of cigarettes to minors, combat tax evasion, ensure that consumers obtain the Surgeon General’s warning, and protect sales of U.S. manufactured products. (Comm'n Op. at 28-29.)

Finally, the ITC set a bond that would permit entry of the infringing products during the 60-day Presidential review period. The ITC must set the bond at “a level sufficient to protect complainants from any injury.” (Comm'n Op. at 29.) Because the ITC could not obtain reliable price information on gray market products sold on websites, it determined that the bond must be set at 100% of the entered value to protect Philip Morris USA from injury during Presidential review.

Takeaways

A respondent may be liable regardless of whether it is the importer of record or distributor – if there is a nexus between its actions and the importation, the ITC may have jurisdiction.
Material differences between gray market goods and U.S. market goods create a presumption of confusion sufficient for finding trademark infringement.
To avoid a finding of actual or apparent authorization for importation, trademark owners should consider policies banning the importation of gray market goods by wholesalers and retailers and penalties for violations, and they should police the mark through cease and desist letters and lawsuits where appropriate and necessary.
Gray market law does not require that a U.S. trademark owner authorize the sale of its trademarked goods outside of the United States. It requires only that the sale of the gray market goods within the United States is not authorized.
Expect to see more general exclusion orders where goods are imported using websites due to the sheer volume of websites selling various goods and the ease of changing websites and corporate identities.

Request for Reconsideration

On October 5, 2009, Alcesia filed a petition for reconsideration with the ITC arguing that the ITC misapplied gray market law, that the ITC should not have exempted duty-free sales to foreign embassies in the United States, that there was actual and apparent authorization to import the cigarettes, and that the ITC erred in its reliance upon federal law in determining that material differences existed between the gray market goods and the U.S. market goods.

General Exclusion Orders for Gray Market Goods

Below please find examples of other investigations in which the ITC issued a general exclusion order against infringing gray market goods:

Certain Cigarettes and Packaging Thereof, Inv. No. 337-TA-424 (general exclusion order issued against gray market cigarettes). The Commission Opinion is available online.

Certain Agricultural Tractors Under 50 Power Take-Off Horsepower, Inv. No. 337-TA-380, aff’d, Gamut Trading Co. v. U.S. Int’l Trade Comm’n, 200 F.3d 775 (Fed. Cir. 1999) (general exclusion order issued against infringing tractors due to widespread pattern of unauthorized use). The Commission Opinion is available online.

We will periodically provide you updates on developments relating to Section 337 litigation. If you have any questions or for further information, please feel free to contact Charles Schill at 202.429.8162; Alice Kipel at 202.429.6743; or Steve Barber at 202.429.6430. Special thanks to Rachel M. Hofstatter for assisting in writing this edition of the Section 337 Update.