Barring the Importation of Gray Market Goods by Demonstrating “Material Differences”

p>Many U.S. distributors have faced the problem of the importation of gray goods into the United States (i.e., goods of foreign manufacturer, legally acquired abroad, bearing a legally affixed foreign trademark identical to a mark registered in the United States, and then imported without consent of the U.S. trademark holder). The importer purchased these goods innocently, with no knowledge of the U.S. distributor’s trademark rights or exclusive territory in the U.S. The U.S. distributor is then faced with a problem it did not expect to have when it registered its mark or bargained for exclusivity – competition with foreign sources who seemingly have the absolute right to sell products wherever they wish, including in the United States.

These U.S. trademark owners and distributors have attempted to cease the importation of gray goods through trademark infringement actions. In these lawsuits, plaintiffs have successfully argued that, although the goods bear a genuine trademark and were legally and innocently obtained by the defendant, the foreign goods are “materially different” than the products sold in the United States, such that sale of the gray goods could cause consumer confusion and could damage the U.S. party’s independent good will which it established through sales of products bearing the registered trademark.¹ A “material difference” has been interpreted broadly and found where the foreign products and the products sold by the U.S. distributor differ in packaging, manufacture, design, attendant repair services and warranties, variety or presentation.² Material differences have been found based on seemingly slight variations, including the use of a foreign language on the gray goods or the use of one or two different ingredients in the production of the foreign goods as opposed to the production of the U.S. goods.³

Recently, the Federal Circuit affirmed the International Trade Commission’s broad application of the “material difference” test in barring the importation and sale of gray market tractors in the United States. In Gamut Trading v. US ITC,⁴ the defendant legally purchased and imported used tractors manufactured in Japan bearing the trademark “Kubota”. The plaintiffs were the Japanese parent company and the exclusive licensee of the “Kubota” trademark in the United States. By agreement, the U.S. plaintiff had the exclusive right to purchase and sell Kubota tractors in the United States and any good will associated with the Kubota trademark was the exclusive property of the U.S. plaintiff. The defendant claimed that there was no trademark infringement since the tractors purchased by it were genuine goods legally bearing the Kubota trademark and legally purchased by the defendant in Japan. The plaintiffs argued that the defendant’s tractors purchased in Japan were “materially different” from those purchased and sold by it in the U.S, pointing to the following factors: (1)  the defendant’s tractors were used; (2) they were designed for a particular use (rice paddy farming in Japan) and, as such, had smaller tire separation in order to make tight turns and were designed to function with rice paddy tillers; (3) the plaintiff did not sell a corresponding model in the U.S.; (4) the tractors sold by the U.S. plaintiff were specially constructed for lifting and transporting earth and rocks, and to function with rear cutters that contained heavy blades capable of cutting rough undergrowth; (5) there was no corresponding model sold in Japan; and (6) the U.S. plaintiff’s tractors were sold bearing English language controls, warnings and user manuals, whereas the defendant’s corresponding items were written in Japanese.

The court affirmed the International Trade Commission’s finding for the plaintiff, prohibiting the defendant’s importation and sale of the gray market tractors in the U.S. The court applied the “material differences” test and held that the differences advanced by the plaintiff were sufficient to constitute “material differences.”  U.S. consumers, the court reasoned, associated the Kubota trademark with the tractors marketed and sold by the U.S. plaintiff and, as a result, consumers might be confused, since they would likely be unaware of the structural differences between the U.S. models and the Japanese models. Also, differences in labeling and written materials, including a difference in the language utilized on manuals and warning labels, constituted a “material difference.” The court rejected the defendant’s argument that the simple use of Japanese labels would not likely confuse a consumer into believing that he or she is buying a new tractor designed for the United States market. Most importantly, the court stressed the fundamental policy of trademark law; to protect the consumer and safeguard the goodwill of the producer.⁵ Because of the differences between the U.S.plaintiff’s and defendant’s goods, the Federal Circuit affirmed the finding that the importation and sale of the gray market goods could injure the U.S. plaintiff’s goodwill and reputation for safety, reliability, and service that U.S. consumers associated with the Kubota mark.

The Gamut case reaffirms the importance of the “material differences” doctrine and underscores the low threshold necessary to successfully maintain an action when gray goods enter the U.S. market without the U.S. distributor’s permission. It provides U.S. companies and distributors with a remedy when, at first glance, there appears to be none. Despite the absence of contractual privity between the U.S. party and the gray goods importer, the importation and sale of the gray goods can be enjoined simply by pointing to a few differences between the products, including seemingly slight differences in the packaging, price, variety, manufacture or presentation of the goods. The U.S. party can successfully enjoin such sales even though the importer of the gray goods legally and innocently purchased the products with no knowledge of the U.S. party’s exclusive trademark or distribution rights.