Importing “gray market” foods into the United States at a substantial discount is a popular way that unauthorized sellers of food and dietary supplements can turn profits on legitimate foreign products. Gray market goods are products that are manufactured for sale abroad by the trademark holder or its licensee but imported into the U.S. without the consent of the trademark holder (19 C.F.R. 133.23[a]). These products are not counterfeit because they bear a legitimate trademark or trade name. However, they may be different from products manufactured specifically for the U.S. market and sold in compliance with U.S. regulatory requirements.
Gray market sellers can undermine customer trust, reduce profits and destroy brands entirely. Unfortunately for brand owners, U.S. customs regulations permit the importation of gray market goods except under certain conditions. Therefore, understanding the nuances of preventing and challenging gray market products is critical for food and dietary supplement companies as they expand into the global market.
Preventing Successful Gray Market Importations
Brand owners should consider several strategies and best practices to either prevent gray market imports or make it easier to challenge them should they occur.
First, brand owners should identify and register trademarks and copyrights featured on each of their products and develop a system to catalog these products. Once registered, the trademark needs to be recorded with U.S. Customs and Border Protection (CBP) to aid CBP in preventing the importation of products that infringe on registered trademarks.
Second, to the extent possible, brand manufacturers should consider ways in which globally marketed products may be developed so they are “materially different” than similarly marketed products in the U.S. Successful trademark challenges to the importation of gray market goods require a demonstration that the imported goods are materially different than the authorized goods sold in the U.S. Therefore, food manufactures should consider whether it makes sense, for example, to create differences in formulations or labeling, or quality control (QC) of foreign products to establish successful grounds to challenge the importation of these products into the U.S. For example, in Trader Joe’s Co. v. Hallatt (835 F.3d 960, 971 [9th Cir. 2016]), a federal appeals court held, in part, that the defendant’s transportation of perishable goods in a manner that did not meet plaintiff’s QC standards caused the plaintiff reputational harm.
Third, food and supplement companies should focus on having a tight supply chain with foreign manufacturers and distributors of their products. Agreements should be written to the extent possible to create contractual remedies against sellers diverting their products rather than only relying on U.S. trademark law. This might involve establishing geographic limits on manufacturing in supply agreements with foreign manufacturers and distributors or by implementing procedures that require manufacturers and distributors to either report suspicious orders or restrict sales to wholesalers that may be looking to export the goods into the U.S.
Similarly, as brand owners extend into new global markets, they should exercise caution in overproducing products before understanding the demand of the market. Overproduced products are more likely to be sold at discounted prices, and thus they are more vulnerable to gray market importation.
Trademark Protections under the Lanham Act
Once a brand owner recognizes it has a gray market problem, the Lanham Act (Title 15 of the U.S. Code) provides the best remedy for preventing the importation of these products. Under Section 42, CBP will prevent the importation of goods only if the trademark owner applies for so-called Lever rule protection and demonstrates the imported goods are materially different than the authorized products sold in the U.S. The Lever rule protection is available to trademark owners that have recorded their trade name with CBP. The landmark case, Lever Bros. Co. v. United States, (981 F.2d 1330 [D.C. Cir. 1993]) found importation of products that are materially different from products authorized for sale in the U.S. violate the trademark owner’s rights, even when the products originated from an affiliate of the U.S. trademark owner.
Differences in food products considered to be material include differences in packaging and labeling, languages other than those used on U.S. products or different ingredients. The December 2010 CBP ruling in favor of Arla Foods (Vol. 44. No. 50, pg. 1-2) declared the products differed based on the lack of nutrition information, caloric breakdown and serving size, rendering it misbranded under the Federal Food, Drug, and Cosmetic Act (FD&C). The January 2010 CBD decisions for Red Bull GmbH. (Vol. 44 No. 5; pg. 18-19) noted drinks differed with respect to differing language, phrases on the cans, different volumes, nutritional and product information and the absence of U.S. QC information.
Gray market importers may still circumvent the Lever rule, even if the products are materially different. Specifically, CBP regulations state gray market imports shall not be detained when the merchandise bears a disclaimer on the label that the product is not authorized by the U.S. trademark owner for importation and differs from the domestic counterpart (19 C.F.R. § 133.23[b]).
Use of FDA Enforcement
Even without Lever rule protections, CBP may aid agencies such as FDA in preventing the importation of products not in compliance with FDA regulations. For example, if CBP is unable to find a material difference, the product may still be out of compliance with FDA regulations based on the label or several other factors. If this is the case, manufacturers may be able to alert FDA to regulatory violations of imported products. If serious enough, FDA may create an import alert or seize any non-complying products at the retail level. If brand owners are unable to successfully gain Lever rule protection, it may be worth an investigation to determine if these products violate other regulations that could be leveraged to prevent importation.
As companies continue to expand globally, gray market importation will continue to be a problem for even the most vigilant brand owners. However, the recommendations above will put companies in the best position to combat the problem.
Suzanne Bassett, associate, Amin Talati Upadhye (amintalati.com), advises clients on compliance, enforcement and transactional matters subject to overlapping jurisdictions of the FDA, USDA, FTC and the U.S. Consumer Product Safety Commission (CPSC). Bassett’s experience extends to matters involving the DEA, U.S. Customs and Border Protection (CBP) and various state and municipal agencies.