Dale F.
Duhan & Mary Jane Sheffet
Gray Markets and the Legal
Status of Parallel Importation
The authors describe how and why gray marketing occurs in the context of legal and illegal (shadow)
marketing activities. The regulatory and judicial decisions relating to gray marketing activities are re-
viewed and the implications of an upcoming Supreme Court ruling on gray marketing are discussed.
Finally, some suggestions are offered to trademark owners who face gray market competition.
G RAY marketing has received considerable atten-
tion in the press in the last few years. The debate
over gray marketing has arisen because of ambiguities
in both the regulations governing trademarks and the
interpretation of those regulations. Many well-known
companies find their products sold in the gray market,
for example, IBM personal computers, Seiko watches,
Olympus cameras. Duracell batteries, and Mercedes-
Benz automobiles (Baldo 1985; Jervey 1983; Ramirez
1985; Slomski 1986; Westerman et al. 1985). Well-
known retailers also are linked to gray market goods
(e.g., K-Mart and 47th Street Photo in New York City).
The attention given to gray marketing typically has
been focused on the problems gray marketers present
to manufacturers and their authorized channel mem-
bers. One reason for this focus is that most, if not all,
of the legal and regulatory appeals about gray mar-
keting practices have been filed by manufacturers and
their authorized channel members. Additionally, they
have formed a trade group called COPIAT (Coalition
to Preserve the Integrity of American Trademarks) to
fight gray marketing practices. Hence, the agenda for
Dale F. Duhan is Assistant Professor and Mary Jane Sheftet is Associate
Professor, Department of Marketing and Transportation, College of
Business, Michigan State University.
Journal of Marketing
Vol. 52 (July 1988), 75-83.
debate of gray marketing activities has been set by
entities seeking to have the practices eliminated. Even
the use of the term "gray market" refiects the point
of view that there is something "almost black market"
or tainted about such practices.
Though the gray market debate is intense among
various distribution channel members, we view the gray
marketing phenomenon from a broader perspective.
We first examine parallel importation as a form of gray
marketing by placing it in the context of a general
framework of legal marketing activities and illegal or
"shadow marketing" activities (Levy and Zaltman
1975). Next, the theories relevant to the legality of
parallel importation are presented. We then review the
cases and rulings that led to the ambiguous legal sta-
tus of parallel importing. Finally, we discuss the im-
plications of an upcoming ruling on cases appealed to
the Supreme Court.
Background
The legitimacy of any marketing transaction can be
viewed in two dimensions, (1) the legality or illegality
of the product (good or service) involved in the trans-
action and (2) the legality or illegality of the means
by which the product is distributed. The delineation
Gray Markets / 75
amguities in what is legal or not
of the shadow system (i.e., what is legal vs. illegal)
can vary across time or across jurisdictions. For ex-
ample, gambling is completely outlawed in many
communities and hence may be in the category of ser-
vices that are illegal for general consumption. Else-
where gambling is allowed in some limited form, such
as state lotteries, and in those situations it is a service
provided within the legitimate marketing system. The
delineation of the shadow system is not clear because
of ambiguities in definitions of legality that create gray
areas between the legitimate marketing system and the
shadow marketing system. These ambiguities are often
due to contradictory definitions of legal and illegal
distribution practices. One such gray area has arisen
as a result of parallel importation of trademarked
products. As a result, parallel importing is commonly
called gray marketing.
Gray marketing involves the selling of trade-
marked products through channels of distribution that
are not authorized by the trademark holder. It can in-
volve unauthorized distribution of goods either within
a market or across markets. Gray marketing occurs
within a market when manufacturer-authorized chan-
nel members sell trademarked goods to unauthorized
channel members who then distribute the goods to
consumers within the same market. This practice is
labeled "channel flow diversion" by Lowe and Rubin
(1986). For example, quantity discounts may moti-
vate certain dealers to enter the gray market because
they can purchase larger quantities of a product than
they need and can sell the extra units at a profit through
gray market channels. This occurred recently in the
personal computer market when IBM was offering 30
to 40% discounts on quantity purchases of its products
(Ramirez 1985).
When gray marketing occurs across markets it is
typically in an international setting, hence the term
"parallel importing." Parallel importation arises when
trademarked products arrive in American retail outlets
after being imported into the United States by unau-
thorized distributors. Manufacturers often produce and
sell products in more than one country and establish
a network of authorized dealers in each country. Par-
allel importing occurs when goods intended for one
country are diverted into an unauthorized distribution
network which then imports the goods into another
country (Maskulka and Gulas 1987). The lawsuits we
discuss subsequently all involve parallel importing sit-
uations, but the term "gray marketing" includes both
parallel importation and channel flow diversion within
markets.
Gray marketing is not the selling of counterfeit
products. Counterfeit products have received wide at-
tention in the press lately and the problem seems to
be expanding (Bamossy and Scammon 1985; Cavusgil,
Sikora, and Weinstein 1986; Cohen 1986). Counter-
76 / Journal of Marketing, July 1988
feit goods are a clear violation of the trademark own-
er's rights in that the products are not genuine and do
not originate from the trademark owner. Hence trans-
actions involving counterfeit products are strictly
shadow marketing transactions because the product is
illegal. Such goods are clearly subject to the provi-
sions of the Lanham Act covering trademark infringe-
ment. If the trademark is listed on the Federal Reg-
ister, any counterfeit goods entering the United States
can be seized by U.S. Customs and destroyed. In the
case of parallel importation, the product itself is a
genuine trademarked product. The question of the le-
gitimacy of gray marketing does not involve the le-
gality of the products, but the legality of the means
by which the products are distributed.
Many of the cases discussed in the context of gray
marketing involve manufacturers as the trademark
owners. However, trademaric ownership can reside with
other channel members (e.g., a distributor or a retailer
like Sears). Whether the owner of a trademark is the
actual manufacturer, a licensed producer, a distribu-
tor, a retailer, or other channel member is not im-
portant: gray marketing can affect any trademark owner.
Why Do Gray Markets Develop?
Three conditions are necessary for gray markets to de-
velop. One is that the product(s) must be available in
other markets (e.g., internationally). Gray marketers
must have a source of supply. This condition is readily
met in today's rapidly homogenizing global markets.
The second condition is that trade barriers (tariffs,
transportation costs, legal restrictions, etc.) must be
low enough that parallel importers can move the prod-
uct(s) from one market to another. The legal status of
parallel importation activities is the focus of cases cur-
rently being considered by the Supreme Court. At
present, the barriers are low enough that parallel im-
portation is common. The third condition is that price
differentials among various markets must be great
enough to provide the basic motivation for gray mar-
keting. Such price differentials arise for various rea-
sons, including currency exchange rates, differences
in demand, and segmentation strategies that may be
adopted by marketing managers.
The fluctuating values of currencies among coun-
tries often produce large differences in prices for goods
across markets. Parallel importers can take advantage
of changes in exchange rates by purchasing products
in markets with weak currencies and selling them in
markets with strong currencies. One reason parallel
importing to the United States was particularly prof-
itable in recent years was the strength of the U.S. dol-
lar. For example, gray marketers could purchase Dur-
acell batteries produced by a Belgian subsidiary, import
them into the U,S,, and sell them for a lower price
than could the authorized U.S. distributors (Baldo
1985).
Differences in market demand for a product in
various markets may drive prices in those markets to
different levels. If the authorized channels of distri-
bution are unable to adjust the market supply to meet
the market demand, a price differential may develop
that is large enough to motivate unauthorized diver-
sion of products from one market to another. This type
of situation was an important factor in the Cabbage
Patch Kids case discussed subsequently (Original Ap-
palachian Artworks v. Granada Electronics 1986).
Though currency exchange rates and differences
in market demand may be beyond the control of mar-
keting managers, segmentation strategies may result
in planned price differentials (price discrimination)
among markets. Segmentation strategies are adopted
for a variety of reasons, such as differences in product
life cycle stage among various markets, customer pur-
chase behavior, and differences in price elasticity. For
segmentation strategies to work, three conditions must
be met. First, marketing managers must be able to
identify large enough differences in elasticities be-
tween segments within a market (or among markets)
to justify segmentation. Second, the firm must face a
downward-sloping demand curve so that a variety of
prices is possible. Third, segments must be success-
fully separated or "sealed off" from each other (Dean
1951; Thompson 1981), If these conditions can be met,
the firm can earn higher profit by engaging in price
discrimination (Thompson 1981). As Maskulka and
Gulas (1987, p. 26) point out, many multinational
corporations have different pricing schedules for dif-
ferent countries.
Costs and Benefits of Gray Marketing
A major argument against gray marketing practices is
that the goodwill established by the trademark owner
is jeopardized because consumers who purchase the
goods in the gray market do not get the same "ex-
tended" product (i.e., pre- and post-sale service). For
example, in the Cabbage Patch Kids case, the mate-
rials accompanying the product, specifically the
"adoption papers," were not printed in English and
consumers complained to the authorized American
distributor, Coleco (Original Appalachian Artworks
V. Granada Electronics 1986). This loss of goodwill
can be accompanied by a loss of strength within the
channel. Channel members may cease to promote the
product, or perhaps drop it altogether, as it becomes
available for much lower prices and through other dis-
tribution channels.
In some instances trademark owners may benefit
from gray marketing activities. Gray marketers often
appeal to more price elastic segments of a market than
do the already established distribution channels. As a
result, the total market may be expanded, giving the
trademark owner greater sales. If the trademark owner
is able to maintain (wholesale) prices in the various
markets, the market expansion may translate into greater
profit. Additionally, price discrimination theory in-
dicates that some individual markets are more prof-
itable if (or perhaps profitable only if) price discrim-
ination can be implemented (Thompson 1981). Thus,
though gray market activities may not be planned, they
can afford trademark owners profit opportunities
through price discrimination.
The lack of a manufacturer's warranty has been
cited as a major disadvantage of gray market goods
for consumers. Some retail stores, notably 47th Street
Photo, offer their own warranty, but a retail store war-
ranty may not be convenient for consumers who pur-
chase through the mail or by telephone order. Though
the lack of a manufacturer's warranty may not be im-
portant for an inexpensive product such as a battery,
it may be very important for an expensive durable
product such as a camera or computer. In many cases
consumers do not realize that the manufacturer's war-
ranty protection is lacking until they have a problem
with the product and seek warranty service. The result
may be higher warranty service costs for a manufac-
turer if such service is extended to the gray market
goods or a loss of goodwill if the service is denied.
Another issue for consumers who purchase goods
on the gray meirket is the possibility of being excluded
from product recalls and notices originating from the
manufacturer. If the consumer does leam of a recall,
the authorized dealers may refuse to perform the needed
repairs or service on the gray market good.
The principal advantage of gray marketing prac-
tices is the consumer benefit of lower prices. Having
a product available from both authorized dealers and
gray marketers may put downward pressure on prices.
In the case of stores with reputations as discounters
of brand name merchandise, consumers often are not
only aware that they are purchasing gray market goods
but also know the amount of the discount. However,
as not all retailers are willing to pass their savings on
to customers, gray marketing activities are not always
advantageous to consumers.
Trademark Law
Early law considered the primary function of a trade-
mark to be an indicator of the product's origin, that
is, to identify who made the product and distinguish
it from those made by others. Additional functions of
a trademark that have developed over time are to in-
dicate a product's quality, to serve as a means of ad-
vertising the product, and to establish goodwill for a
business. Another function of a trademark is deline-
Gray Markets / 77
ated by Cohen (1986), who traces the development of
trademark protection as it relates to the distribution
decisions made by firms. A trademark's "sponsor-
ship" function is discussed as indicating that:
. . . goods . . . emanate from the same maker, or
"have reached the consumer through the same chan-
nels as certain other goods that have given the con-
sumer satisfaction before" (Schechter 1927).
As Cohen points out, it is up to the trademark owner
to protect its trademark by actively monitoring the
marketplace to ensure that its trademark is not mis-
used.
Three different theories in trademark law have been
applied to parallel importation cases in the United
States: (1) universality or trade identity, (2) exhaus-
tion, and (3) tenritoriality (Wilson 1985). The fate of
gray marketing practices will be determined by which
of these theories prevails. As the following discussion
demonstrates, these theories are not applied consis-
tently.
Universality
Under the theory of universality or trade identity, a
trademark is seen only as an indication of the source
or origin of the product. This theory does not rec-
ognize the additional functions of a trademark men-
tioned before. If the courts apply this theory, gray
marketing practices will be allowed to continue be-
cause the origin of the product remains the same re-
gardless of the specific route of the product through
the channel of distribution. Because there is no at-
tempt to falsify the origins of the product and the good
is a genuine, legally trademarked product, under this
theory no illegality has occurred.
Exhaustion
Under the theory of exhaustion, a trademark owner
relinquishes all rights after a product has been sold
for the first time (e.g., to a licensee or channel mem-
ber). If this theory is applied, gray marketing prac-
tices will be allowed to continue because the trade-
mark owner's rights cease after the product leaves its
control. Regardless of the route the product takes
through distribution channels, the product remains
genuine and therefore nothing illegal has taken place.
Territoriality
The theory of territoriality holds that a trademark is
effective only in the country in which it is registered.
Under the theory of territoriality, the United States
trademark owner can stop gray marketing practices
because owning the trademark in the United States af-
fords the right to control the trademark's distribution.
Hence, products imported into the United States bear-
ing that trademark would be under the trademark own-
78 / Journal of Marketing, July 1988
er's control whenever they are in the United States.
Adjudicating Institutions
Trademark owners seeking to have parallel imports
barred have three options. They can make an appeal
to the United States Customs Service or to the Inter-
national Trade Commission, or can sue in federal court.
United States Customs Service
Section 526 of the Tariff Act of 1930 bars the im-
portation of goods bearing a trademark owned by a
United States citizen without that person's consent,
provided the trademark is registered and recorded with
the U.S. Customs Service for import protection. A
product with a copied or simulated trademark can be
excluded under Section 42 of the Lanham Act. These
two statutes seemingly protect domestic trademark
holders from gray market imports, but the 1972 Cus-
toms Service regulations interpreting and implement-
ing Section 526 provide for some exceptions that lessen
trademark holders' ability to exclude gray market
products. These crucial exceptions arise
if the foreign and U.S. trademarks are owned
by the same person or business entity,
if the foreign and domestic trademark owners
are parent and subsidiary companies or subject
to conunon ownership or control, or
if the imported goods have a trademark autho-
rized by the U.S. trademark owner (19 C.F.R.
133.21).
Should any of these conditions apply, as they usually
do in the case of parallel imports, the imported prod-
ucts will be allowed entry by the U.S. Customs Ser-
vice. The domestic trademark holder then must pursue
one of the other two routes to block them. These Cus-
toms Service exceptions to the broad protection of-
fered under Section 526 are the major legal issues in
the recent gray market cases.
International Trade Commission
Section 337(a) of the Tariff Act of 1930 provides that
a plaintiff may seek relief from the Intemational Trade
Commission (ITC) from acts of unfair competition in
the importation of goods. A U.S. trademark owner
can file a petition with the ITC seeking to have the
importation of goods stopped because such importa-
tion injures a domestic industry. The ITC is concerned
only when the importation in question will substan-
tially harm or lessen competition within an industry.
Hence a plaintiff must prove injury to its industry, not
just to itself. The ITC can issue two kinds of rulings:
an exclusion order, which prohibits importation of all
infringing goods, and a cease and desist order, which
applies only to those respondents named in the order.
Rulings issued by the Commission can be appealed to
the federal circuit court. In addition, the President has
60 days to decide whether or not to veto the ITC's
ruling.
In August 1983 Duracell, Incorporated filed a
complaint with the ITC charging that the importers of
Duracell batteries who sold them at prices below that
charged by Duracell in the U.S. violated Section 337
of the Tariff Act of 1930 (i.e., constituted unfair com-
petition). Batteries were manufactured by Duracell-
Belgium and after they had entered the European
channel of distribution they were being purchased and
imported into the United States.
The ITC majority ruled in favor of Duracell and
found that its loss of sales was damaging to the U.S.
battery industry and, further, that such gray market
goods deprived Duracell of the goodwill it had built
up over the years. In its opinion, the ITC majority
specifically supported the theory of territoriality and
rejected that of universality. In reference to Section
526 of the Tariff Act, the ITC did not find a violation
because it argued that Congress had intended that sec-
tion to apply only in the instance of a foreign com-
pany having sold trademark rights to a U.S. company.
That interpretation deferred to the lower court's Viv-
itar ruling (discussed subsequently). The ITC then is-
sued a general exclusion order.
On January 4, 1985, President Reagan disap-
proved the ITC's order. In his letter to the Chair of
the ITC, the President said that the Departments of
Treasury and Commerce were reviewing the issue of
gray market goods and would be formulating a policy
in that area. He indicated that if he did not disapprove
the Duracell ruling, it could be interpreted as a policy
change done before the review was complete.
Federal Courts
The issue of parallel imports or gray market goods is
not a new one for the legal system. An 1886 lower
court decision (Apollinaris Co.. Ltd. v. Scherer), which
allowed the importation of gray market products, set
judicial precedent that was followed for almost 40 years.
The case involved the sale of trademarked mineral water
by an importer who had purchased the product from
a source in Germany and, despite the manufacturer's
grant to another U.S. distributor of exclusive U.S.
distribution rights, this importer sold the water in the
United States. The court's opinion stressed that the
product was genuine and hence no infringement of the
trademark had occurred. The opinion did not recog-
nize any function of a trademark except that of de-
noting the source of the product and thus its authen-
ticity. Neither the issue of "goodwill" established by
the plaintiff nor the manufacturer's grant of exclusiv-
ity in distribution was recognized in this decision. As
Coggio, Gordon, and Coruzzi (1986) observe, the
court's opinion stressing the genuineness of the goods
was seemingly more appropriate to antitrust issues than
to trademark law.
A. Bourjois & Co. v. Katzel (1923). This reason-
ing prevailed until the Bourjois v. Katzel case involv-
ing the sale of French face powder, trademark named
Java. Bourjois had purchased the exclusive right to
sell Java in the United States. Defendant Katzel bought
the powder in France and began importing and selling
it in the U.S. In its decision, the lower court estab-
lished the principle of territoriality, which meant that
Bourjois had the exclusive right to the use of the
trademark Java within the United States. The Second
Circuit Court of Appeals, however, reversed this de-
cision and found for the defendant on the grounds that
the powder was genuine.
After the appeals court decision was released, but
before the Supreme Court's ruling was issued. Con-
gress passed Section 526 of the Tariff Act of 1922
banning the importation of foreign goods bearing a
trademark registered by a United States owner. This
section was included in each revision of the Tariff Act
and its meaning is still being debated.
The Supreme Court, however, reversed the ap-
peals court and held that the plaintiff had advertised
and established in the eyes of the public that it was
the source of Java in the United States even though it
did not manufacture it but only distributed it. Thus
the Court specifically recognized the territoriality of
the trademark and granted the plaintiff the exclusive
right to sell the powder in the U.S.. Had the principle
of territoriality espoused in Bourjois v. Katzel (1923)
been applied consistently in the years that followed,
there would be no current controversy. However, con-
sistent application of any one theory of trademark law
has been lacking in the United States.
Bell & Howell: Mamiya Co. v. Masel Supply Co.
Corp. (1983). In this case the plaintiff, BHMC, owned
the U.S. rights for the trademark and had been granted
exclusive U.S. distribution rights for a foreign-made
product, Mamiya cameras. A third party, Masel Sup-
ply Co., purchased the Mamiya cameras in a foreign
market, imported them into the United States, and sold
them at lower prices than did the authorized U.S. dis-
tributor, BHMC. Suit was filed by BHMC seeking an
injunction prohibiting Masel from importing and sell-
ing the cameras under the principle of territoriality as
espoused in Bourjois v. Katzel (1923). The district
court granted the injunction upon determining that there
was substantial likelihood of confusion on the part of
consumers as to the source of the warranty and qual-
ity. Further, the district court specifically rejected the
universality principle and the U.S. Customs interpre-
tation of Section 526 of the Tariff Act whereby com-
Gray Markets / 79
 panies of common ownership were exempt from pro-
tection. Masel appealed and the Second Circuit Court
of Appeals set aside the injunction on the ground that
the district court did not have proof of actual con-
sumer confusion to support its conclusion. BHMC,
now called Osawa & Co., went to another district court
in New York and presented the same arguments but
with substantial evidence that the gray market goods
had caused consumer confusion and that such goods
had damaged its sales and caused extra expense for
the authorized dealers. That district court ruled in fa-
vor of Osawa, saying that there was ample evidence
of damage to the Mamiya trademark by gray market-
ers and that their activities should be curtailed. The
judge adopted the principle of territoriality and spec-
ified that within a particular country a trademark may
develop its own goodwill separate from that devel-
oped in another country {Osawa & Company \. B &
H Photo, Tri State Inc. and John Does 1-10 (1984),
p. 1171-4).
Vivitar Corporation v. U.S. (1985). Another ap-
proach was used by Vivitar Corporation, which filed
suit in the Federal Circuit Court of Appeals asking
that the Customs Service be required to bar importa-
tion of any goods with a domestically registered trade-
mark unless the trademark owner bad given written
consent. This issue had gone before the Court of In-
ternational Trade (CIT), which had upheld the Cus-
tom Service's regulations. Vivitar had argued that
Customs' interpretation should be invalid because it
allowed importation of gray market goods that un-
fairly exploited the plaintiff's domestic goodwill. The
appeals court said that Vivitar could file suit in district
court for a ruling about the trademark issue. If Vivitar
won such an action. Customs would be required to
bar the importation of such gray market goods.
Original Appalachian Art\x'orks, Inc. v. Granada
Electronics (1986). In July 1986 the U.S. District
Court, S. D. New York, ruled that the domestic owner
of the trademark for Cabbage Patch Kids, Original
Appalachian Artworks, Inc. (OAA), could prevent the
sale of dolls produced by a foreign licensee and sub-
sequently imported into and sold in the U.S. In this
case OAA had registered its trademark witb the Cus-
toms Service and its foreign licensees were named in
the application. In accordance with its regulations, the
Customs Service permitted the foreign-made dolls to
be imported and they subsequently were sold during
December 1984 when there was a shortage of the do-
mestically produced dolls made by Coleco, the exclu-
sive U.S. manufacturer and distributor of the dolls.
OAA provided ample evidence of consumer confu-
sion and complaints based primarily on the fact that
the foreign dolls came with "adoption papers" written
in Spanish, not English. The court said Coleco's large
80 / Journal of Marketing, July 1988
advertising expenditures for the dolls and associated
products had made tbe Cabbage Patch Kids trademark
famous and the public associated Coleco as tbe source
for the dolls in tbe United States. The foreign-made
dolls ". . are materially different from tbe Coleco
CPK dolls witb Englisb language papers" (Original
Appalachian Artworks v. Granada Electronics 1986,
p. 933) and because tbe contract with tbe foreign li-
censee specified tbat sucb dolls were to be sold only
in a specific territory outside tbe U.S., tbe district court
issued a permanent injunction barring furtber impor-
tation of tbe foreign dolls. Thus, OAA and its U.S.
licensee, Coleco, could prevent tbe importation of gray
market goods.
Coalition to Preserve the Integrity of American
Trademarks (COPIAT) v. U.S. (1986). Tbe Court of
Appeals, District of Columbia Circuit, overturned a
ruling by tbe D. C. District Court. Tbe case was brought
by COPIAT, a trade association representing manu-
facturers and distributors of a variety of trademarked
products, and sougbt to bave tbe Customs Service
probibited from enforcing its current regulations on
parallel imports (i.e., allowing tbeir entry into the
U.S.). COPIAT charged tbat tbe Customs Service's
1972 regulations, wbicb effectively permitted gray
market goods to enter tbe U.S. over tbe protests of
tbe domestic trademark owners, were not a valid
interpretation of Section 526. Tbe district court had
ruled against COPIAT and supported tbe current Cus-
toms Service regulations.
In bis lengthy decision overturning the lower court
ruling. Appeals Court Judge Silberman agreed that such
actions could properly be brougbt in federal district
court and did not need to be initiated in tbe Court of
International Trade and tben appealed in the federal
circuit. In judging tbe validity of tbe Customs Service
regulations, tbe opinion explicitly overturned tbe lower
court's ruling and found that tbese regulations " . . .
simply cannot be squared witb Section 526 and are
thus mvalid . . . " {COPIAT v. U.S. 1986, p. 907)
" . . . because tbey do not constitute a reasonable
interpretation of Section 526" (p. 908). Tbe opinion
reviewed tbe legislative bistory of the statute and tbe
interpretation of tbat bistory by tbe district court and
rejected botb tbe district court's ruling in tbis case and
tbe otber appeals courts' rulings supporting the Cus-
toms Service's 1972 regulations. Tbougb refusing to
issue tbe blanket injunction sougbt by tbe plaintiffs,
which would bave required tbe Customs Service to
stop tbe importation of all goods bearing domestically
registered trademarks witbout tbe trademark owners'
consent, tbe court did remand tbe case ". . . to tbe
district court witb instructions to issue a declaratory
judgment tbat tbe Customs regulations . . . are con-
trary to Section 526 of tbe Tariff Act of 1930 .
and hence unlawful" {COPIATv. U.S. 1986, p. 918).
Olympus Corporation v. U.S., K-Mart Corpora-
tion, and 47th Street Photo, Inc. (1986). While the
D.C. Circuit was hearing COPIAT, the Second Cir-
cuit Court of Appeals was hearing another gray mar-
ket case, Olympus Corporation v. U.S. This case had
been appealed from the U.S. District Court for the
Eastem District of New York, where the judge had
upheld the regulations permitting the importation of
trademarked products without the permission of the
American trademark holder if that company is a par-
ent or subsidiary of, or in common ownership with,
the foreign manufacturer. The facts in this case are
similar to those in the other gray market cases dis-
cussed. Olympus Corporation is an American subsid-
iary owned by Olympus Optical Company, Ltd., the
Japanese manufacturer of Olympus cameras and re-
lated products. Olympus Corporation is the exclusive
U.S. distributor of Olympus products and has the rights
to the Olympus trademark in the U.S. Olympus prod-
ucts were being purchased abroad, imported, and sold
by retailers, specifically 47th Street Photo (which joined
in the case as an intervenor-appellee), that were not
part of the Olympus Corporation authorized distri-
bution system. Olympus Corporation then filed suit
asking that the court declare the Customs Service reg-
ulations permitting parallel importation to be invalid.
In his opinion. Judge Oakes agreed with the dis-
trict court's finding that the regulations were valid,
but did not seem to be in complete agreement with
the substance of the regulations. "While we find the
regulation of questionable wisdom, we believe that
congressional acquiescence in the longstanding ad-
ministrative interpretation of the statute legitimatizes
that interpretation as an exercise of Customs' enforce-
ment discretion" (Olympus Corporation v. U.S. 1986,
p. 320). The opinion further stated that any change in
the regulations was to be made by Congress or the
President, not the judiciary. In a footnote following
this statement, the D C . Circuit's COPIAT (\9S6) de-
cision was noted and its reasoning rejected.
This was not a unanimous decision by the three-
judge panel. Judge Winter filed a dissent in which he
stated his agreement with Judge Silberman's discus-
sion in COPIAT and dismissed the purported admin-
istrative difficulties theoretically involved if the Cus-
toms Service were to exclude parallel imports. Judge
Winter stated that such difficulties " . . . appear to be
recently created justification to defend litigation in the
1980s'' (Olympus Corporation v. U.S. 1986, p. 322).
This case was accepted for review by the Supreme
Court, Docket No. 86-757, in 1986 and certiorari filed
in the COPIAT (19S6) case on October 16, 1986, was
accepted for review on December 8, 1986, Docket No.
86-625. Neither case was heard during the 1986-1987
term of the Supreme Court, but both remain on the
calendar for scheduling during the upcoming term.
Strategies for Trademark Owners
Though the controversy surrounding Section 526 and
the Customs Service regulations implementing it re-
mains unresolved, trademark owners do have some
strategic options in combating gray marketing prac-
tices. The trademark owner facing the reality of gray
marketing activity in its market can take some actions
to preserve its goodwill. Gray marketing of a product
within a market usually is done because the channel
structure and margins offered make it attractive for
channel members, or even consumers. When this type
of pricing activity or gray market dealing occurs, the
manufacturer can restructure its pricing and discount
policies to eliminate the potentially profitable gray
marketing activity.
In the case of parallel imports, however, the trade-
mark owner has a more difficult task. Should the Su-
preme Court rule that the U.S. Customs Service must
uptiold the broad interpretation of Section 526 (i.e.,
bar the importation of trademarked goods unless the
domestic trademark owner consents to their entry), a
legal remedy will be available to solve the problem.
Then the only remaining problem for the trademark
owner would be to know of potential imports that vi-
olate its trademark rights and to alert the U.S. Cus-
toms Service.
Should the Supreme Court rule to uphold the cur-
rent U.S. Customs Service interpretation of Section
526, however, and allow parallel importation, the
marketing manager's job will be much more complex.
In the case of a nondurable, low price product like an
alkaline battery there are few options. Importation of
such products probably will depend on the currency
exchange rates, which are beyond one manufacturer's
infiuence. Appeal to the Intemational Trade Com-
mission is an available legal option but, as Duracell
discovered, even when the ITC rules in favor of bar-
ring the imports, its order can be nullified by the Pres-
ident.
In the case of an expensive, durable product such
as a camera, a trademark owner must make major
strategic decisions. If the gray market goods gain
widespread distribution, the authorized dealers will be
hurt. Their sales and/or margins will decline as con-
sumers purchase from gray marketers. The manufac-
turer will have to decide whether to provide warranty
service for the gray market goods or risk the potential
loss of goodwill when consumers find that warranty
protection will not be given. One option for the man-
ufacturer is to try to alert consumers to the potential
problems of buying gray market goods. This option
may be expensive, but it may be the most effective
Gray Markets / 81
 way for manufacturers to keep their authorized dis-
tributors and their goodwill intact.
In the case of a product originating in the United
States, the manufacturer faced with a severe threat from
parallel imports may have to decide whether to con-
tinue to market that trademarked product outside the
United States. Developing a separate trademark for
each country in which a product is sold would be an
expensive strategy, but would offer protection against
parallel imports. Where the manufacturer licenses for-
eign production, however, this option is not availahle.
Production options would have to be evaluated care-
fully against the magnitude of the gray market threat.
For the domestic trademark owner who imports a
foreign-made product, the options are even more re-
stricted. Mounting an advertising campaign to alert
consumers to the potential problems of buying from
an unauthorized dealer is one possibility, but it does
not afford much short-term relief for the authorized
dealers suffering a decline in business. It also may not
have enough impact to protect the domestic trademark
owner s goodwill. The domestic trademark owner's
only option may be to alert the foreign manufacturer
to the potential long-term problems, such as the loss
of authorized dealers willing and able to service the
product and the corresponding loss of goodwill for the
trademark, and hope the manufacturer will take steps
to prevent the gray market activity. Maskulka and Gulas
(1987) state that manufacturers being hurt by gray
marketing have basically lost control and must reas-
sert control if they want to end gray marketing of their
products.
Conclusions
Parallel importation of trademarked products in the
United States occurs for several reasons. First, many
trademarked products are available in markets
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Gray Markets / 83