Legal Issues In the News

Grey Market Goods (Re-Broadcast)


Paul Heald

University of Illinois College of Law

Have you ever thought hard about the billions of dollars of consumer goods that are imported into the United States every year?  A lot of factors effect that flow:  the relative strength of the US dollar, the level of tariffs imposed by the US government, the strictness of border control measures that regulate the safety of imports, and the enforcement of security regulations all play a role. 

One factor seldom considered, however, is the level of intellectual property protection that we afford the owners of US trademark, copyrights, and patents. In other words, when can a US rights holder stand at the border and keep out goods?

The answer for counterfeit goods is easy:  Any registered owner can keep out bogus goods.  But what about legitimate goods originally manufactured overseas with the permission of the American owner, what we call gray market goods?  Well, life gets quickly complicated.

Let’s start with copyrighted goods, like books. Two years ago the Supreme Court made this simple in a case involving an enterprising student in Florida who bought up cheap American textbooks in Thailand, imported them into the US, and sold them for much less than the US copyright owner.  No problem, said the Court in Kirtsaeng v. Wiley.  As long as the publisher consented to the Asian press run, the books can be imported here. 

Justice Breyer’s opinion is telling—he worries about the 100’s of billions of dollars worth of goods imported into the United States that contain copyrighted software (think of cars) or that bear some sort of protected artwork in their logo.  Do we want all those goods kept out?

With trademarked goods (which is pretty much all consumer goods), things get a little weird.  If a US owner merely licenses the overseas production of the goods, then he or she can keep them from being imported.  However, if the US owner and the overseas manufacturer have some sort of formal corporate relationship (imagine the overseas manufacturer is a subsidiary or affiliate of the US firm or they are both controlled by the same corporate parent), then the goods get in over the objection of the US rights holder. 

Sound like a trivial exception?  Well, such goods account for more than $50 billion annually in imports.

The story with patents is significantly more twisted, and the US Supreme Court has recently been asked to straighten things out.  In 2005, the Federal Circuit Court of Appeals held that US patent owners could keep out all gray market patented goods made overseas, even if they were legitimately made with the permission of the US patent owner.  And it reaffirmed the holding two months ago - just the opposite of the new rule for copyright goods.

Imagine a Japanese car loaded with dozens or more patented parts. The case gives each owner of each patent the right to prevent importation of the car.  Remember this is precisely the nightmare scenario that led Justice Breyer to deny such a right to copyright owners!

To make matters worse, or at least more inexplicable and annoying, the 2005 decision never discussed or cited the only relevant precedent from the entire 20th Century that found patent owners had no statutory right to keep out legitimate goods.  Why was their only one appellate case on this point in the 20th century, you ask?  Well, because everyone knew what the rule was!  If a patent owner wanted to keep goods out, then he or she would have to write contracts with foreign manufacturers forbidding import into the US.

Now, you might have noticed that we still have plenty of Japanese cars puttering about.  Japanese firms have good attorneys, and they make patentees promise to allow importation or they won’t purchase their technology.  But not all firms are so prescient, and we can only hope that the Supreme Court hears the newly filed appeal and returns us to the former rule which prevents importers from being surprised at the border by a patentee of a tiny component vigorously waiving a patent registration.