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How leagues, licensees can guard against gray market intrusion
Published October 11, 2010
Last April, a collective gasp could almost be heard from copyright owners everywhere when the U.S. Supreme Court decided to review the 9th U.S. Circuit Court of Appeals’ decision in Costco Wholesale Corp. v. Omega, S.A. The 9th Circuit held that if you buy authentic products in a foreign country, you cannot import and sell them in the United States without authorization from the copyright owner.
Say, for example, authentic FIFA World Cup jerseys made in Taiwan are sold at a discount in South Africa and you want to sell the jerseys in the U.S. below market. Importing and selling these jerseys in the U.S. without authorization of the copyright owners, like FIFA, is considered infringement, or so says the 9th Circuit.
As a result, a line in the sand was drawn between companies like eBay (who appear to thrive on the sale of foreign-made products sold in the U.S., like sports memorabilia) and companies like NFL Enterprises and its authorized U.S. resellers and licensees (who want to preserve their bottom line).
In fact, even the relationship between licensors and licensees can become strained with the introduction of such authorized imports (otherwise known as “gray market” products). A common scenario is when a sports memorabilia company threatens to sue a sports team or league when it finds out that a gray market importer is selling a noticeable volume of trading cards in the company’s exclusive territory.
The pendulum may swing back to the gray market importers, depending on what the Supreme Court decides later this year, but, in the meantime, what should teams, leagues, athletes and their licensees do to monitor and prevent the importation of such gray market products?
Record and subscribe
Team and athlete names, logos, product designs, artwork, and other trademarks and copyrights should be recorded with U.S. Customs and Border Protection (CBP). Recording can easily be done, once names and logos are federally registered with the U.S. Patent and Trademark Office and artwork and designs are federally registered with the U.S. Copyright Office.
While recording is more commonly thought of as a tool for preventing the importation of knock-offs, the CBP also monitors the importation of gray market products, based on the information provided on the recording form (e.g., country in which genuine products are manufactured, names of authorized licensees, etc.). Although the CBP enforces both recorded and non-recorded trademarks and copyrights, enforcement of recorded trademarks and copyrights takes precedence.
According to the CBP’s website, in 2009, there were 14,841 seizures of counterfeit and pirated goods, intercepted at U.S. ports of entry. For the fourth year in a row, footwear was the top product seized, accounting for 38 percent of the entire domestic value of infringing goods, followed by consumer electronics, handbags/backpacks and apparel — the bread and butter of most sports licensing deals.
In addition to the CBP, there are several third-party vendors that offer watch services that help monitor brand names and logos. This includes monitoring the Web for unauthorized uses and monitoring online auction and e-commerce sites for the sale of gray market or counterfeit products.
Secure supply chain
But if monitoring is not enough, what then? Intellectual property owners should secure their supply chain contractually. For instance, they may consider prohibiting the exporting, selling or reselling of licensed products to foreign countries, or removing/modifying any labels or packaging, and requiring that resellers’ records and inventory be open to investigations and audits.
Despite their best efforts, sometimes weaknesses in the supply chain may become too many and too great such that the proliferation of gray market products seems unstoppable and, depending on what the Supreme Court decides, solely relying on copyrights may not be the safest bet. Instead, companies should consider adding to their defenses by implementing a country-specific branding strategy, i.e., systematically organizing and employing a certain set of packaging for U.S.-made products and a different set of packaging for the same but foreign-made products.
Under the Lanham Act, if there is a material difference between the gray market products and U.S. products or its packaging and other like materials, this will likely cause confusion among customers.
So, for instance, while it’s highly unlikely that the San Diego Chargers would create an entirely new thunderbolt design on baby pink helmets sold in South Korea, they may consider altering the box enclosing the helmet sold in Asia versus the same helmets sold in the United States. Because of this inconsistency in product packaging, if gray market importers attempted to sell in the U.S. authentic Chargers helmets made in South Korea, this would cause consumer confusion and thus, infringe on the Chargers’ trademark rights, giving them a basis for a federal court action.
The rationale is that material differences in the products and packaging will weaken trademark owner’s good will and their ability to establish and maintain customer loyalty.
While opinions vary as to what constitutes a “material difference,” the threshold is low. Courts have determined that differences in packaging and labeling (such as using a foreign language) or differences in the product itself (such as using a different configuration of patterns and colors or different ingredients, both as to the type and strength) are material enough that the sale of such gray market products would infringe upon the rights of a trademark owner.
So while intellectual property owners everywhere are waiting with bated breath for the Supreme Court’s decision in Costco, they may want to consider hedging their bets and shoring up exposure by subscribing to a watch service, registering and recording their trademarks and copyrights, and revisiting how they manage their brands internationally.
Jennifer Craft (JCraft@LRLaw.com) is a partner in Lewis and Roca LLP’s intellectual property and sports and entertainment practice groups.