K MART CORP. V CARTIER, INC.: A
BLACK DECISION FOR THE
GRAY MARKET
MICHAEL B. WEICHER
INTRODUCTION
In the crowded discount camera stores of New York City, consumers face not only a confusing selection of cameras and equipment,
but also a choice between two different prices for what appears to be
the same item.' These prices may differ by as much as forty percent. 2 The higher price buys a camera from an authorized distributor with a manufacturer's warranty. 3 The lower price, however,
buys a good that only comes with the store's warranty, and that was
4
imported through the "gray market."
Gray market goods are products manufactured with a genuine
trademark that an independent importer purchases in an authorized
foreign market and resells in the United States, without the express
consent of the trademark owner.5 Unlike the black market, which
6
deals in counterfeit and stolen goods, the gray market is legal.
Gray market importers charge less than authorized distributors be1. See Goodgame, Inside the Gray Market, TIME, Oct. 28, 1985, at 76 (noting that gray
market and authorized goods are often sold in same store); Westerman, The $7 Billion Gray
Market: Where it Stops, Nobody Knows, Bus. WK., Apr. 15, 1985, at 87 (describing success of 47th
Street Photo discount camera store in New York City).
2. See Boyer, The Assault on the Right to Buy Cheap Imports, FORTUNE, Jan. 7, 1985, at 89
(estimating that gray market goods usually sell for 20-40% less than same goods from authorized importers).
3. Goodgame, supra note 1, at 76; Westerman, supra note 1,at 86.
4. Goodgame, supra note 1, at 76; Westerman, supra note 1, at 86.
5. See Olympus Corp. v. United States, 792 F.2d 315, 317 (2d Cir. 1986) (defining gray
market goods); see also 2J. MCCARTHY, TRADEMARKS AND UNFAIR COMPETITION § 30:35 (2d ed.
1984) (discussing gray market goods); Note, Grey Market Goods and Modern InternationalCommerce: A Question of Free Trade, 10 FORDHAM INT'L LJ. 308, 308 (1986-87) [hereinafter Note,
Grey Market Goods] (restating description of gray market goods as set out by court in Olympus).
Gray markets exist worldwide. See generally Takamatsu, Parallel Importation of Trademarked
Goods: A ComparativeAnalysis, 57 WASH. L. REv. 433 (1982) (noting that gray markets exist in
other countries, including Europe and Far East); see also Westerman, supra note 1,at 86 (claiming gray markets are "world-wide phenomenon").
6. See Westerman, supra note 1, at 87 (distinguishing between black and gray markets).
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THE AMERICAN UNIVERSITY LAW REVIEW [Vol. 38:463
cause they are able to take advantage of fluctuating exchange rates. 7
Authorized importers must maintain stable inventories to satisfy
customer demand, and cannot wait for favorable exchange rates. 8
Gray market importers, however, only make purchases when the
dollar is relatively strong. 9 American consumers purchase everything from cameras to cars through gray market channels.' 0 Retail
gray market sales are estimated at six to ten billion dollars per
year.' 1
7. See Osawa & Co. v. B & H Photo, 589 F. Supp. 1163, 1166 (S.D.N.Y. 1984) (pointing
to discrepancy in exchange rates as primary source of gray markets); see also Note, Grey Market
Goods, supra note 5, at 308-09 (noting that exchange rates are one factor explaining existence
of gray markets); Coggio, Gordon & Coruzzi, The History and Present Status of Gray Goods, 75
TRADEMARK REP. 433, 434 (1985) (asserting that gray markets exist primarily because of fluctuations in exchange rates).
Retailers can usually sell parallel imports for 20-40% less than they could sell the same
goods from an authorized distributor. Boyer, supra note 2, at 89. Parallel importers claim that
manufacturers charge artificially inflated prices in the United States. Petition of K Mart Corp.
for a Writ of Certiorari to the United States Court of Appeals for the District of Columbia at i,
6-7, K Mart Corp. v. Cartier, Inc., 108 S. Ct. 1811 (1988) (No. 86-495). Trademark owners
argue that their prices reflect the costs of creating, maintaining, and enhancing the goodwill
of their trademarks. Brief for Respondents at 5-7, K Mart Corp. v. Cartier, Inc., 108 S. Ct.
1811 (1988) (Nos. 86-495, 86-624, 86-625) [hereinafter Brief for Respondents] (arguing that
gray market takes "free-ride" on trademark owners' promotional, marketing, and product
service expenditures); see also Osawa & Co. v. B & H Photo, 589 F. Supp. 1163, 1166-67
(S.D.N.Y. 1984) (noting advertising and other promotional costs incurred by authorized distributor). Trademark owners claim that gray market importers benefit from the goodwill of
the manufacturers' trademarks, but they do not incur the associated costs, Brief for Respondents, supra, at 5-7.
8. See Note, The Seven Billion Dollar Gray Market: Trademark Infringement or Honest Competition?, 18 PAc. LJ. 261, 265 (1986) (stating that because authorized distributor will face adverse competitive effects if it does not maintain steady supply of merchandise, it cannot wait
for dollar to rise before purchasing goods).
9. See Nolan-Haley, The Competitive Process and Gray Market Goods, 5 N.Y.L. ScH.J. INT'L &
COMP. L. 231, 232 (1984) (claiming that parallel importers of cameras watch foreign exchange
rates and make purchases accordingly); Supnik, The Bell and Howell: Mamiya Case - W'here Now
Parallel Imports?, 74 TRADEMARK REP. 1, 2-3 n.7 (1983) (remarking that gray market importers
benefit from fluctuations in exchange rates).
10. Boyer, supra note 2, at 89; see also Sims v. Florida, 832 F.2d 1558 (11th Cir. 1987)
(automobiles), reh 'ggranted,840 F.2d 778 (1988); Original Appalachian Artworks, Inc. v. Granada Elecs., Inc., 816 F.2d 68 (7th Cir.) ("Cabbage Patch" dolls), cert. denied, 108 S. Ct. 143
(1987); NEC Elecs. v. Cal Circuit Abco, 810 F.2d 1506 (9th Cir.) (computer chips), cert. denied,
108 S. Ct. 152 (1987); El Greco Leather Prods. Co. v. Shoe World, Inc., 806 F.2d 392 (2d Cir.
1986) (shoes), cert. denied, 108 S. Ct. 71 (1987);Johnson &Johnson Prods., Inc. v. DAL Int'l
Trading Co., 798 F.2d 100 (3d Cir. 1986) (health and beauty aids); United States v. EightyNine Bottles of "Eau deJoy," 797 F.2d 767 (9th Cir. 1986) (perfume); Premier Dental Prods.
Co. v. Darby Dental Supply Co., 794 F.2d 850 (3d Cir.) (denture impression material), cert.
denied, 107 S. Ct. 436 (1986); Shaw Indus. v. United States, 709 F.2d 46 (Fed. Cir. 1983)
(cloth); Monte Carlo Shirt, Inc. v. Daewoo Int'l (America) Corp., 707 F.2d 1054 (9th Cir.
1983) (shirts); Duracell, Inc. v. Global Imports, Inc., 660 F. Supp. 690 (S.D.N.Y. 1987) (batteries); Dial Corp. v. Encina Corp., 643 F. Supp. 951 (S.D. Fla. 1986) (soap); Weil Ceramics &
Glass, Inc. v. Dash, 618 F. Supp. 700 (D.NJ. 1985) (porcelain giftware); Selchow & Righter
Co. v. Goldex Corp., 612 F. Supp. 19 (S.D. Fla. 1985) ("Trivial Pursuit" games); Vivitar Corp.
v. United States, 593 F. Supp. 420 (Ct. Int'l Trade 1984) (photographic equipment), aff'd on
other grounds, 761 F.2d 1552 (Fed. Cir. 1985), cert. denied, 106 S. Ct. 791 (1986).
11. See Goodgame, supra note 1, at 76 (stating that gray market accounts for $5.5 billion
in retail trade annually); Riley, Gray Market Fight Isn't Black and White, NAT'. LJ., Oct. 28, 1985,
at 70, col. 3 (noting that gray market imports account for as much as $10 billion in merchan-
1989]
K
MART CORP. V. CARTIER, INC.
465
A gray market situation can arise in two ways.' 2 First, an American manufacturer can authorize its subsidiaries or licensees to manufacture its trademarked goods.1 3 A third party could then
purchase these goods in a foreign country and resell them in the
United States. 14 Under a second scenario, an independent importer
could purchase a foreign manufacturer's products and divert them
to the United States.' 5 Diverted goods sold in competition with au6
thorized imports are referred to as "parallel imports."'
The United States Customs Service permits gray market goods to
enter this country when the foreign trademark owner and the
United States trademark owner are the same or are affiliated.' 7 The
Coalition to Preserve the Integrity of American Trademarks, an association of trademark owners, brought suit against the Customs
Service, claiming that the Customs regulations allowing parallel importation violated tariff and trademark laws.' 8 In an unprecedented
opinion, the United States Court of Appeals for the District of Columbia Circuit held that section 526 of the Tariff Act of 193019 prohibited all gray market importation. 20 On appeal, the Supreme
dise per year); Westerman, supra note 1, at 86 (estimating gray market sales at $7 billion
annually); Boyer, supra note 2, at 89 (stating that retail gray market sales were approximately
$6 billion in 1984).
12. See Victor, PreventingImportation of Productsin Violation of Property Rights, 53 ANrrgusT
LJ. 783, 790 (1984) (distinguishing situation where U.S. trademark owner gave license to
foreign manufacturer from that where U.S. company is subsidiary of foreign company).
13. See id. (stating that potential for gray market situation arises when American company
licenses foreign company to produce trademarked goods); Coggio, Gordon & Coruzzi, supra
note 7, at 433 (describing gray market importation).
14. Coggio, Gordon & Coruzzi, supra note 7, at 433; see also Victor, supra note 12, at 790
(noting that licensee can also import goods without trademark owner's consent).
15. Coggio, Gordon & Coruzzi, supra note 7, at 433; Victor, supra note 12, at 790; see also
NEC Elecs. v. Cal Circuit Abco, 810 F.2d 1506, 1511 (9th Cir.) (holding that independent
importer may sell computer chips in United States that were manufactured by Japanese corporation), cert. denied, 108 S. Ct. 152 (1987).
16. See Comment, Preventing the Importation and Sale of Genuine Goods BearingAmerican-Owned
Trademarks: Protectingan American Goodwill, 35 ME. L. REV. 315, 318 (1983) (defining parallel
importation). This article will use the terms "gray market importation," "parallel importation," and "diversion" interchangeably.
17. See 19 C.F.R. § 133.2 1(c) (1988) (allowing importation of trademarked merchandise
without express consent of American trademark owner when foreign and domestic trademark
owners are same business entity or otherwise subject to common ownership or control).
18. Coalition to Preserve the Integrity of Am. Trademarks v. United States, 598 F. Supp.
844, 845 (D.D.C. 1984), rev'd, 790 F.2d 903 (D.C. Cir. 1986), aff'd sub nom., K Mart Corp. v.
Cartier, Inc., 108 S. Ct. 950 (jurisdiction), af'd in part and reu'd in part, 108 S. Ct. 1811 (1988)
(merits). The Coalition argued that the Customs regulation violated both section 526 of the
Tariff Act of 1930, 19 U.S.C. § 1526 (1982), and section 42 of the Lanham Trademark Act of
1946, 15 U.S.C. § 1124 (1982). COPIAT, 598 F. Supp. at 845.
19. 19 U.S.C. § 1526 (1982) (originally enacted as Tariff Act of 1930, 46 Stat. 741).
20. Coalition to Preserve the Integrity of Am. Trademarks v. United States, 790 F.2d
903, 917 (D.C. Cir.), aff'd sub nom. K Mart Corp. v. Cartier, Inc., 108 S. Ct. 950 (jurisdiction
only), aff'd in part and rev'd in part, 108 S. Ct. 1811 (1988) (merits). Although the District of
Columbia Circuit Court was the first court to hold that gray market imports are prohibited by
law, other courts have provided manufacturers with injunctive relief against parallel importa-
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[Vol. 38:463
Court held that section 526 prohibits only gray market goods that
an independent foreign manufacturer produced under license from
21
an American trademark owner.
This Note analyzes the Supreme Court's opinion in K Mart Corp.
v. Cartier,Inc. 22 This Note focuses on the validity of Customs regulation section 133.21 in light of the Tariff Act of 1930 (Tariff Act) and
the Lanham Trademark Act of 1946 (Lanham Act). Part I reviews
the law which governs gray market importation. Part II examines
the factual background in K Mart as well as the Court's opinion.
Part III offers a critical analysis of the Supreme Court's opinion.
This Note concludes that the holding in K Mart unnecessarily harms
American consumers because it lessens competition and enables
trademark holders to charge artificially inflated prices for their
goods.
I.
HISTORY
An overview of the development of the law governing parallel importation is critical to an analysis of the Supreme Court's decision in
K Mart. The legislative history of section 526 of the Tariff Act does
not conclusively delineate which types of gray market importation
Congress intended to prohibit.2 3 This uncertainty created confu24
sion in the lower courts concerning the legality of the gray market.
A.
Pre-1922 Law
Prior to 1922, the United States permitted gray market importation despite the protests of American trademark owners. 25 The fedtion. See Duracell, Inc. v. Global Imports, Inc., 660 F. Supp. 690, 692 (S.D.N.Y. 1987) (holding that defendant could not import plaintiff's products under earlier consent decree, even if
allowable under law); Osawa & Co. v. B & H Photo, 589 F. Supp. 1163, 1170 (S.D.N.Y. 1984)
(barring gray market importation of trademarked photographic equipment to prevent irreparable harm to trademark owner).
More recently, the District Court for the District of NewJersey barred gray market importation of certain hair care products based on the Copyright Act of 1976, 17 U.S.C. §§ 109, 602
(1982). Sebastian Int'l, Inc. v. Consumer Contact, Ltd., 664 F. Supp. 909, 922-23 (D.NJ.
1987); but see Cosmair, Inc. v. Dynamite Enter., Inc., No. 85-065 1, Slip Op. (S.D. Fla. Apr. 9,
1985) (denying preliminary injunction against parallel importation of "Polo" cologne based
on Copyright Act). See generally Donohue, The Use of Copyright Laws to Prevent the Importation of
"Genuine Goods," I1 N.CJ. INT'L & COM. REG. 183 (1986) (discussing Copyright Act's effect on
parallel importation). This Note will not examine the effect of the Copyright Act on the gray
market.
21. K Mart Corp. v. Cartier, Inc., 108 S. Ct. 1811, 1830 (1988).
22. 108 S. Ct. 1811 (1988).
23. See infra notes 35-51 and accompanying text (discussing uncertainty of section 526
legislative history).
24. See infra notes 69-87, 110-125 and accompanying text (examining inconsistency surrounding application of section 526 by lower courts).
25. See, e.g., HunydaiJanos Corp. v. Stoeger, 285 F. 861, 863 (2d Cir. 1922) (permitting
importation of trademarked mineral water despite trademark owner's request); Fred Gretsch
K MART CORP. V CARTIER, INC.
1989]
eral courts concluded that the law of the period only protected
American trademark owners from trademark infringement, and not
from parallel importation.2 6 Congress was initially alerted that gray
market importation could produce inequities because of ongoing litigation against a parallel importer in the case of A. Bourjois & Co. v.
27
Katzel.
The facts in Katzel depicted the typical "gray market victim"' 28 who
purchased the domestic rights to a foreign trademark but later faced
competition, direct or indirect, from the foreign trademark owner
(the "Katzel situation")329 In Katzel, the plaintiff, an American citizen, purchased the United States trademark rights of a French face
powder manufacturer.30 Shortly thereafter, the French manufacturer began to sell its face powder to the defendant, an American
druggist, who imported the powder to the United States.3 1 The
plaintiff sought injunctive relief to protect the value of its trademark.3 2 The United States Court of Appeals for the Second Circuit
concluded that trademarks merely show the origin of the goods and,
therefore, parallel importation of genuine goods was not trademark
infringement. 33 Finding no trademark infringement, the court held
that the United States trademark owner could not prevent the paral34
lel importation.
B.
The Tariff and Lanham Acts
Before the Supreme Court could rule on Katzel,3 5 Congress enacted section 526 as an unrelated amendment to the Tariff Act of
Mfg. Co. v. Schoening, 238 F. 780, 782 (2d Cir. 1916) (holding genuine trademarked violin
strings must be allowed to enter United States under Trademark Act of 1905); Apollinaris Co.
v. Scherer, 27 F. 18, 22 (C.C.S.D.N.Y. 1886) (refusing to grant injunction to prevent parallel
importation of trademarked mineral water).
26.
Hunydaijanos, 285 F. at 863; Fred Gretsch, 238 F. at 782; Apollinaris, 27 F. at 22.
27. 275 F. 539 (2d Cir. 1921), rev'd, 260 U.S. 689 (1923).
28. A gray market victim, unlike other trademark owners, does not benefit directly or
indirectly from the sale of gray market goods, and is powerless to prevent the importation. See
infra notes 89-90 and accompanying text (contending that trademark owners often benefit
from gray market).
29. A. Bourjois & Co. v. Katzel, 275 F. 539, 539 (2d Cir. 1921), rev'd, 260 U.S. 689
(1923).
30.
Id.
31.
Id. at 540.
32.
Id.
33.
Id. at 543.
34.
Id.
35. In a three paragraph opinion, the Supreme Court reversed the appellate court's ruling based on equitable principles. A. Bourjois & Co. v. Katzel, 260 U.S. 689, 689-90 (1923).
The opinion did not mention the newly enacted section 526. Id. Judge Learned Hand later
remarked that section 526 would not have been enacted if the Supreme Court had decided
Katzel before the Tariff Act of 1922 was drafted. Coty, Inc. v. Le Blume Import Co., 292 F.
264, 269 (S.D.N.Y.) (dictum), aft'd, 293 F. 344 (2d Cir. 1923).
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THE AMERICAN UNIVERSITY LAW REVIEW
[Vol. 38:463
1922 to remedy the perceived inequity of the circuit court's decision.36 Congress adopted section 526 in response to the demands
of American trademark owners who had purchased their trademarks
from foreigners. 3 7 The provision requires that American trademark
owners expressly consent to the importation of identically trademarked goods before those goods may enter the United States. 38 It
is unclear, however, whether Congress intended section 526 to apply to all gray market situations or only to the Katzel situation.3 9
Section 526 prohibits importation of foreign manufactured merchandise bearing a United States trademark without the express
36. Fordney-McCumber Tariff Act of 1922, ch. 356, § 526, 42 Stat. 858, 975 (1922) (current version at 19 U.S.C. § 1526 (1982)). The TariffAct revised United States trade and tariff
policy and had no relation to trademarks other than section 526. See W. KELLY, STUDIES IN
UNITED STATES COMMERCIAL POLICY 3-68 (1963) (describing broad changes that Tariff Act
made in United States tariff policy). This provision was a direct response to the Second Circuit's decision in Katzel. See H.R. REP. No. 1223, 67th Cong., 2d Sess. 158 (1922) (stating that
Senate designed amendment to TariffAct to prevent type of importation allowed in Katzel); see
also Note, Grey Market Goods, supra note 5, at 312 (noting that Congress enacted section 526 in
response to Second Circuit's decision in Katzel); Coggio, Gordon & Coruzzi, supra note 7, at
442 n.51, 450 (stating section 526 was enacted to "overrule" circuit court's decision in Katzel).
37. K Mart Corp. v. Cartier, Inc., 108 S. Ct. 1811, 1820-2.1 (1988). Many Americans had
recently purchased German trademarks that the United States Government confiscated during World War I. See Note, Grey Market Goods, supra note 5, at 313 (asserting that primary
motive of section 526 proponents was to protect purchasers of German trademarks); Coggio,
Gordon & Coruzzi, supra note 7, at 450 n.109 (maintaining that section 526 was enacted to
protect "property rights" that U.S. trademark-holders purchased from foreigners).
38. Fordney-McCumber Tariff Act of 1922, ch. 356, § 526, 42 Stat. 858, 975 (1922) (current version at 19 U.S.C. § 1526 (1982)). Congress reenacted section 526 in the HawleySmoot Tariff Act of 1930, 46 Stat. 741 (1930) (codified as amended at 19 U.S.C. § 1526
(1982)). Section 526 provides in pertinent part:
(a) Importation prohibited. Except as [otherwise] provided .
it shall be unlawful
to import into the United States any merchandise of foreign manufacture if such
merchandise, or the label, sign, print, package, wrapper, or receptacle, bears a trademark owned by a citizen of, or by a corporation or association created or organized
within, the United States, and registered in the Patent and Trademark Office by a
person domiciled in the United States ... unless written consent of the owner of
such trademark is produced at the time of making entry.
Id.
39. Compare Coalition to Preserve the Integrity of Am. Trademarks v. United States, 790
F.2d 903, 908-13 (D.C. Cir. 1986) (construing section 526 to prohibit all gray market importation), aff'dsub nom. K Mart Corp. v. Cartier, Inc., 108 S. Ct. 950 (jurisdiction only), aff'd in part
and rev'd in part, 108 S. Ct. 1811 (1988) (merits) and Note, The Greying of American Trademarks:
The Genuine Goods Exclusion Act and the Incongruity of Customs Regulation 19 C.F.R. § 133.21, 54
FORDHAM L. REV. 83, 90-98 (1985) [hereinafter Note, Greying] (arguing that Congress intended section 526 to apply to all gray market situations) with Coalition to Preserve the Integrity of Am. Trademarks v. United States, 598 F. Supp. 844, 849-52 (D.D.C. 1984) (stating that
Congress designed section 526 to prevent foreign trademark owners from defrauding American purchasers of trademark rights), rev'd, 790 F.2d 903 (D.C. Cir. 1986), aJ'dsub nom. K Mart
Corp. v. Cartier, Inc., 108 S. Ct. 950 (jurisdiction only), af'd in part and rev d in part, 108 S. Ct.
1811 (1988) (merits) and Gorelick & Little, The Casefor ParallelImportation, I 1 N.CJ. INr'L L. &
COM. REG. 205, 210-15 (1986) (contending that Congress intended section 526 to apply only
in Katzel situation). It is irrelevant to attempt to determine, however, which interpretation is
actually correct. See infra notes 63-68 and accompanying text (noting correct inquiry is not
whether agency's interpretation of statute is "correct," but whether it is reasonable).
1989]
K
MART CORP. V. CARTIER, INC.
469
consent of the United States trademark owner.40 The language of
the statute is ambiguous, however, in a modem context. First, it is
unclear whether Congress intended to include parent-subsidiary relationships in the context of trademark ownership. 4 1 Second, it is
uncertain if Congress would have classified goods that a United
States company manufactured in a foreign country as "goods of foreign manufacture." 42 Third, because trademark licensing was not
widely accepted until approximately twenty-five years after Congress enacted section 526, it is unclear how section 526 applies to
goods manufactured under a trademark license. 4 3 Moreover,
although the statute does not provide any express exceptions, the
Customs Service has consistently recognized "common control"
44
and "authorized use" exceptions to the statute's prohibition.
The language of the statute must be viewed in the context in
which it was drafted. 4 5 The legislative history reveals that Congress
adopted the section as a "midnight amendment," after only a tenminute debate. 4 6 Some commentators argue that the short Senate
debate reveals that Congress intended section 526 to apply to all
gray market situations. 47 Other commentators have characterized
40. Fordney-McCumber Tariff Act of 1922, ch. 356, § 526, 42 Stat. 858, 975 (1922) (current version at 19 U.S.C. § 1526 (1982)).
41. K Mart Corp. v. Cartier, Inc., 108 S. Ct. 1811, 1827-28 (1988).
42. Id. at 1821.
43. Id. Prior to the 1930s, courts and commentators viewed trademarks as representing
only the physical source or origin of the product to the consumer. 1J. MCCARTHY, TRADEMARKS AND UNFAIR COMPETION § 3.3 (2d ed. 1984). Under this "source theory," trademark
licensing was impossible because the licensees were not associated with the "source" of the
goods. Id. (citing Macmahan Pharmacal Co. v. Denver Chem. Mfg. Co., 113 F. 468, 475-76
(8th Cir. 1901) (holding that trademark could not be licensed or assigned without transfer of
entire business)). During the 1930s, commentators began to recognize that trademarks also
serve to "guarantee" the quality of a product. Id. § 3.4. Under this "quality theory," which
Congress adopted in the Lanham Trademark Act of 1946, trademark licensing became acceptable. Id.
44. See infra notes 58-62 and accompanying text (discussing Customs regulation).
45. See United States v. Dotterweich, 320 U.S. 277, 280 (1943) (stating that statutory
language of Federal Food, Drug, and Cosmetic Act must be viewed in its legislative and historical context (citing McDermott v. Wisconsin, 228 U.S. 115, 128 (1913); Hipolite Egg Co. v.
United States, 220 U.S. 45, 57 (1911))); see also United Steelworkers v. Weber, 443 U.S. 193,
201 (1979) (declaring that argument may be within letter of law, but not within spirit (citing
Holy Trinity Church v. United States, 143 U.S. 457, 459 (1892))); Fort Smith & W.R.R. v.
Mills, 253 U.S. 206, 208 (1920) (reasoning that strict reliance on statutory language may
"make more trouble.., than ... allay it").
46. 62 CONG. REC. 11,602-05 (1922). There were no legislative hearings or reports on
the amendment, and the debate was limited to ten minutes. Id.; see also, Gorelick & Little,
supra note 39, at 214 (describing legislative history of section 526). Senator Moss referred to
section 526 as a midnight amendment because of the speed with which it was thrust upon
Congress. 62 CONG. REC. 11,603 (1922) (statement of Sen. Moss).
47. See Coalition to Preserve the Integrity of Am. Trademarks v. United States, 790 F.2d
903, 910-12 (D.C. Cir. 1986) (noting objections made by Senators over broad property rights
that proposed amendment purportedly granted), aff'd sub nom. K Mart Corp. v. Cartier, Inc.,
108 S. Ct. 950 (jurisdiction only), aff'd in part and rev'd in part, 108 S. Ct. 1811 (1988) (merits);
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section 526 as a "hastily drafted provision designed to prevent an
48
inequity sanctioned by Katzel."
Several of the Senators debating the legislation erroneously believed that the importer in Katzel was the manufacturer and not a
third party. 49 It is, therefore, difficult to ascertain whether or not
Congress intended to limit the coverage of section 526 to the Katzel
situation. 50 Moreover, it is unclear how Congress perceived the
facts in Katzel. 5 1
The other major piece of legislation that applies to importation of
trademarked goods is the Lanham Trademark Act. 52 Section 42 of
the Lanham Act is less controversial than section 526 of the Tariff
Act as applied to gray market goods. 5 3 Although the Lanham Act
provides for registration and protection of trademarks, it does not
deal specifically with diverted goods.5 4 Originally enacted as section 27 of the Trademark Act of 1905, section 42 bars importation
of merchandise that copies or simulates a registered trademark. 5 5
Congress designed this provision to prevent trademark infringement and unfair competition. 5 6 Because gray market goods are genNote, Greying, supra note 39, at 91-92 (concluding that Senate debate shows that section 526
should be broadly construed).
48. Gorelick & Little, supra note 39, at 215; see also Coggio, Gordon & Coruzzi, supra note
7, at 450 n.109 (asserting that Congress enacted section 526 to protect property rights of
United States citizens who purchased trademarks from foreigners); Note, Grey Market Goods,
supra note 5, at 313 n.23 (stating that Congress intended section 526 to protect purchasers of
foreign trademarks confiscated during World War I).
49. See 62 CONG. REC. 11,603-05 (1922) (mischaracterizing facts of Katzel) (statements of
Sens. Sutherland and McCumber). None of the other Senators corrected the misstatements.
Id.
50. See Victor, supra note 12, at 793 (noting controversy over limits of section 526); Note,
ParallelImportalion - Legitimate Goods or Trademark Infringement?, 18 VAND. J. TRANSNAT'L L. 543,
548-49 (1985) (discussing uncertain application of section 526 to circumstances other than
those in Katzel).
51. See supra note 49 and accompanying text (discussing Senators' confusion about facts
in Katzel).
52. See Lanham Trademark Act of 1946, § 42, 60 Stat. 440 (codified as amended at 15
U.S.C. § 1124 (1982)) (prohibiting importation of goods that bear trademark that copies or
simulates registered domestic trademark).
53. See Gorelick & Little, supra note 39, at 224-26 (discussing history of Lanham Act as
being applied only to counterfeit or unauthorized trademarks that "copy or simulate" genuine
trademarks).
54. Act of Feb. 20, 1905, ch. 592, 33 Stat. 724, 724-31 (codified as amended in scattered
sections of 15 U.S.C. (1982)).
55. Act of Feb. 20, 1905, ch. 592, § 27, 33 Stat. 724, 730 (current version at 15 U.S.C.
§ 1124 (1982)). Section 42 provides in pertinent part:
[N]o article of imported merchandise which shall copy or simulate the name of the
[sic] any domestic manufacture, or manufacturer, or trader, or of any manufacturer
or trader located in any foreign country ...or which shall copy or simulate a trademark registered in accordance with the provisions of this chapter ...shall be admitted to entry at any customhouse of the United States. ...
15 U.S.C. § 1124 (1982).
56. See Gorelick & Little, supra note 39, at 226 (noting Congress' intent to prevent trade-
1989]
K MART
CORP. V. CARTIER, INC.
471
uine by definition, they fall outside of the statute's scope. 5 7
C. Customs Service Regulation and the StandardforJudicial Review
The Customs Service is responsible for enforcing the Tariff and
Lanham Acts and may establish regulations which reasonably interpret the Acts. 58 Since 1936 Customs has consistently interpreted
the statutes to allow parallel importation of trademarked goods
when the foreign and domestic trademark owners are the same or
affiliated-the "common control" exception. 59 Similarly, since the
time trademark licensing became an acceptable practice, Customs
has excluded from the statutes' prohibition foreign goods made
under license from a United States trademark owner-the "authorized use" exception. 60 The current regulation, section 133.21, prohibits importation of articles bearing a trademark identical to a
domestic trademark, unless the foreign and domestic trademark
owners are the same or subject to common control or ownership, or
the domestic trademark owner authorized a foreign manufacturer to
use its trademark. 6 1 During the fifty year period since Customs
mark infringement and unfair competition); Victor, supra note 12, at 792 (stating that section
42 is basic trademark infringement statute and nothing more).
57. See Olympus Corp. v. United States, 627 F. Supp. 911, 920-21 (E.D.N.Y. 1985) (holding that section 42 does not bar importation of genuine goods); Coalition to Preserve the
Integrity of Am. Trademarks v. United States, 598 F. Supp. 844, 848 (D.D.C. 1984) (finding
that section 42 applies only to fraudulent goods and, therefore, cannot apply to gray market
goods), rev'd on other grounds, 790 F.2d 903 (D.C. Cir. 1986), aff'd sub nom. K Mart Corp. v.
Cartier, Inc., 108 S. Ct. 950 (jurisdiction only), aff'd in part and rev'd in part, 108 S. Ct. 1811
(1988) (merits).
58. 19 U.S.C. § 1624 (1982) (granting Treasury power to enforce Tariff and Lanham
Acts). The Customs Service is an agency of the Treasury Department.
An administrative agency may reasonably interpret the statutes it enforces. See B.
SCHWARTZ, ADMINISTRATIVE LAW § 10.31 (1984) (stating that administrative construction of
statutory term is conclusive unless arbitrary); 5 K. DAVIS, ADMINISTRATIVE LAW TREATISE
§ 29:16 (1984) (asserting that administrative construction of enabling statute is entitled to
"great deference" particularly when it has been followed consistently over long period of
time); 5 STEIN, MITCHELL & MEZINES, ADMINISTRATIVE LAW § 51.01[l] (1988) (recognizing
that as practical matter courts often defer to agency's interpretation of its enabling statute); see
also Federal Election Comm'n v. Democratic Senatorial Campaign Comm., 454 U.S. 27, 39
(1981) (holding that Federal Election Commission may take actions which reasonably interpret Federal Campaign Act); Zenith Radio Corp. v. United States, 437 U.S. 443, 450 (1978)
(holding that Treasury may reasonably interpret Tariff Act of 1930); Buckley v. Valeo, 424
U.S. 1, 111 (1976) (noting agency's enforcement power is "wide ranging"); Train v. Natural
Resources Defense Council, Inc., 421 U.S. 60, 75 (1975) (declaring that agency's construction
of statute must be reasonable, but does not have to be only possible interpretation).
59. Brief for the Federal Petitioners at 36, K Mart Corp. v. Cartier, Inc., 108 S. Ct. 1811
(1988) (Nos. 86-495, 86-624, 86-625) [hereinafter Federal Brief]. The first interpretive Customs regulation was adopted in 1936. Id. at 37 (citing T.D. 48537 (1936)). It stated that
goods which copy or simulate a domestic trademark would be prohibited from entering the
country. Id. It further provided that genuine foreign trademarks would be deemed to copy or
simulate a domestic trademark, unless the trademarks had a common owner. Id. The regulation, therefore, allowed parallel importation of goods. Id.
60. K Mart Corp. v. Cartier, Inc., 108 S. Ct. 1811, 1818 (1988).
61. 19 C.F.R. § 133.21 (1988). The regulation provides in pertinent part:
472
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[Vol. 38:463
promulgated the regulation, Congress has never expressed any disagreement with the Customs Service policy.62
Customs Service regulations are subject to limited judicial review
under the Federal Administrative Procedure Act. 6 3 The Supreme
Court has long held that a reviewing court must give substantial deference to an agency regulation." A reviewing court must uphold an
agency regulation if the regulation is a "sufficiently reasonable" interpretation of the statute it enforces. 65 This reasonableness stanb) Identical trademark. Foreign-made articles bearing a trademark identical with one
owned and recorded by a citizen of the United States or a corporation or association
created or organized within the United States are subject to seizure and forfeiture as
prohibited importations.
c) Restrictions not applicable. The restrictions set forth in paragraph[] . . . (b) of this
section do not apply to imported articles when:
(1) Both the foreign and the U.S. trademark or trade name are owned by the
same person or business entity; [or]
(2) The foreign and domestic trademark or trade name owners are parent and
subsidiary companies or are otherwise subject to common ownership or control
(3) The articles of foreign manufacture bear a recorded trademark or trade name
applied under authorization of the U.S. owner....
19 C.F.R. § 133.21(b)-(c) (1988).
62. Federal Brief, supra note 59, at 4 1. See also Gorelick & Little, supra note 39, at 219-22
(arguing that Congress has impliedly accepted Customs Service's interpretation of sections
526 and 42).
63. Administrative Procedure Act, 5 U.S.C. § 706 (1982). The Administrative Procedure
Act provides in pertinent part:
The Reviewing Court shall...
(2) hold unlawful and set aside any agency action, findings, and conclusions found
to be(A) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance
with the law; [or]
(B) contrary to constitutional right, power, privilege or immunity; [or]
(C) in excess of statutory jurisdiction, authority, or limitations, or short of statutory right....
5 U.S.C. § 706(2)(A)-(C) (1982).
64. See, e.g., Federal Election Comm'n v. Democratic Senatorial Campaign Comm., 454
U.S. 27, 37 (1981) (contending that Congress vested agency with primary responsibility for
administering and enforcing statute); Zenith Radio Corp. v. United States, 437 U.S. 443, 450
(1978) (stating that Court shows substantial deference to agency's interpretation of statute
(citing Udall v. Tallman, 380 U.S. 1, 16 (1965) (quoting Unemployment Compensation
Comm'n v. Aragon, 329 U.S. 143, 153 (1946)))); NLRB v. Bell Aerospace Co., 416 U.S. 267,
275 (1974) (holding that administrative agency's interpretation of statute is entitled to deference); American Trucking Ass'ns v. United States, 344 U.S. 298, 309 (1953) (arguing that
Court cannot act as "super-commission" ); Edward's Lessee v. Darby, 25 U.S. (12 Wheat.)
206, 209 (1827) (asserting that interpretation of law by those charged with carrying it out is
entitled to "very great respect").
65. See, e.g., Young v. Community Nutrition Inst., 476 U.S. 974, 980-81 (1986) (holding
that agency regulation must be sustained if statutory provision is ambiguous and agency interpretation is "reasonable"); Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc.,
467 U.S. 837, 843 (1984) (noting that proper inquiry for reviewing court is whether agency's
construction of statute is permissible); Democratic Senatorial Campaign Comm., 454 U.S. at 39
(asserting that proper test for upholding regulation is narrow inquiry of whether it is "sufficiently reasonable" (citing Zenith, 437 U.S. at 450; Train v. Natural Resources Defense Council, Inc., 421 U.S. 60, 75 (1975))); Red Lion Broadcasting Co. v. FCC, 395 U.S. 367, 381
(1969) (stating that reviewing court should follow agency's construction of statute unless
1989]
K
MART CORP. V. CARTIER, INC.
473
dard is an objective test and, therefore, the reviewing court cannot
substitute its judgment for the administrative agency's judgment. 66
Moreover, the agency's interpretation need not be the only reasonable interpretation of the statute. 67 Accordingly, the reviewing
court cannot set aside a regulation merely because it disagrees with
68
the agency's interpretation of the statute.
D. Lower Court Opinions
Trademark owners have tried to enjoin parallel importation of
their goods based on trademark, copyright, contract, and criminal
law principles. 69 For example, manufacturers and authorized disthere are compelling indications that it is wrong); Thorpe v. Housing Auth., 393 U.S. 268,
280-81 (1969) (arguing that courts should not set aside regulations that are reasonably related to statute they enforce); Arkansas Pharmacists Ass'n v. Harris, 627 F.2d 867, 870 (8th
Cir. 1980) (noting that under Administrative Procedure Act, reviewing court may only examine whether regulation is "arbitrary, capricious, an abuse of discretion, or otherwise not in
accordance with the law" (citing 5 U.S.C. § 706(2)(A))); United States v. Ekberg, 291 F.2d
913, 921 (8th Cir. 196 1) (recognizing that regulation must be "sustained unless unreasonable
and plainly inconsistent with the statute" it enforces), cert. denied, 368 U.S. 920 (1962). The
United States Court of Appeals for the District of Columbia Circuit has recognized this test.
See Loyola Univ. v. FCC, 670 F.2d 1222, 1226 (D.C. Cir. 1982) (holding that court must uphold regulation if it is founded upon rational basis).
66. See, e.g., Young, 476 U.S. at 980-81 (stating that court cannot substitute its own construction of statute for reasonable agency interpretation (citing Chevron, 467 U.S. at 844);
DemocraticSenatorialCampaign Comm., 454 U.S. at 39 (noting that reviewing court may not interpret statute but must examine reasonableness of agency's interpretation (citing Zenith, 437
U.S. at 450; Train, 421 U.S. at 75)); Citizens to Preserve Overton Park, Inc., v. Volpe, 401 U.S.
402, 416 (1971) (holding that standard of review is narrow and courts may not substitute their
judgment for that of administrative agency); Loyola, 670 F.2d at 1226 (asserting that reviewing
court may not substitute its judgment for agency's judgment).
67. See, e.g., Chemical Mfrs. Ass'n v. Natural Resources Defense Council, Inc., 470 U.S.
116, 125 (1985) (holding that court need not find that agency's interpretation of statute is
only permissible interpretation, but rather agency's regulation must be "sufficiently rational"); Chevron, 467 U.S. at 843 n.l 1 (noting that court and agency do not have to adopt
same statutory interpretation); Democratic Senatorial Campaign Comm., 454 U.S. at 39 (stating
that agency's interpretation does not have to be only reasonable interpretation (citing Zenith,
437 U.S. at 450; Train, 421 U.S. at 75; Udall, 380 U.S. at 16; Aragon, 329 U.S. at 153)).
68. See supra notes 58-67 and accompanying text (describing proper inquiry for judicial
review of administrative agency's regulation).
69. See generally Kelly, An Overview of the Influx of Grey Market Goods Into the United States, 11
N.C.J. INT'L L. & CoM. REG. 231 (1986) (examining various theories of attack on gray market);
see also NEC Elecs. v. Cal. Circuit Abco, 810 F.2d 1506, 1510 (9th Cir.) (holding that parallel
importation does not constitute trademark infringement under Lanham Act), cert. denied, 108
S. Ct. 152 (1987); El Greco Leather Prods. Co. v. Shoe World, 806 F.2d 392, 396 (2d Cir.
1986) (stating that trademark owner may prevent importation of shoes labeled with trademark
without permission), cert. denied, 108 S. Ct. 71 (1987);Johnson &Johnson Prods., Inc. v. DAL
Int'l Trading Co., 798 F.2d 100, 101 (3d Cir. 1986) (claiming that gray market importation
constituted breach of contract); United States v. Eighty-Nine Bottles of "Eau de Joy", 797
F.2d 767, 770-71 (9th Cir. 1986) (allowing seizure of gray goods under section 526 of Tariff
Act where owners of foreign and domestic trademarks were unrelated); Sebastian Int'l, Inc. v.
Consumer Contact, Ltd., 664 F. Supp. 909, 910 (D.N.J. 1987) (barring gray market importation of hair care products under Copyright Act); Bell & Howell: Mamiya Co. v. Masel Supply
Co., 548 F. Supp. 1063, 1079 (E.D.N.Y. 1982) (granting injunctive relief to protect trademark
owner from harm caused by diverted goods), vacated, 719 F.2d 42 (2d Cir. 1983).
474
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tributors have brought numerous suits against gray market importers for trademark infringement, claiming that the diverted goods
damaged the goodwill of their trademarks. 70 Many trademark owners have also claimed that section 526 of the Tariff Act and section
42 of the Lanham Act grant them an unqualified right to bar unau71
thorized importation of their goods.
In Osawa & Co. v. B & H Photo,72 the exclusive distributor of
"Mamiya" trademarked camera equipment brought an action for injunctive relief against two discount camera dealers that sold gray
market Mamiya cameras. 73 The distributor claimed that it was entitled to an injunction under section 526 of the Tariff Act, section 42
of the Lanham Act, and state law principles of unfair competition
and trademark dilution.7 4 After examining the facts of the case, the
United States District Court for the Southern District of New York
75
granted the injunction to prevent irreparable harm to the plaintiff.
The court noted that the diverted goods were causing consuier
confusion and were damaging the plaintiff's business. 7 6 The court,
however, did not address the issue of the validity of the Customs
77
regulations implementing the Tariff Act.
Similarly, in Vivitar Corp. v. United States,78 a trademark owner
claimed that section 526 of the Tariff Act required the Customs Service to seize all trademarked goods that were imported without the
70. See, e.g., Original Appalachian Artworks, Inc. v. Granada Elecs., Inc., 816 F.2d 68, 7273 (2d Cir.) (holding that gray market goods infringed upon trademark where confusion as to
source of goods damaged reputation and goodwill of trademark owner), eert. denied, 108 S. Ct.
143 (1987); Premier Dental Prods. Co. v. Darby Dental Supply Co., 794 F.2d 850, 858-59 (3d
Cir.) (granting injunctive relief against parallel importer to prevent irreparable harm to authorized distributor), cert. denied, 479 U.S. 950 (1986); Monte Carlo Shirt, Inc. v. Daewoo Int'l
(America) Corp., 707 F.2d 1054, 1056 (9th Cir. 1983) (refusing to grant injunction for trademark infringement because plaintiff did not show consumer confusion between plaintiff's and
defendant's goods).
71. See infra notes 72-87 and accompanying text (discussing trademark owners' claims
under sections 526 and 42).
72. 589 F. Supp. 1163 (S.D.N.Y. 1984).
73. Osawa & Co. v. B & H Photo, 589 F. Supp. 1163, 1164-65 (S.D.N.Y. 1984). Because
B & H Photo refused to name the source of its gray market Mamiya cameras, the court
deemed the retailer to be the importer for purposes of the suit. Id. at 1166 n. 11.
74. Id. at 1165.
75. Id. at 1170.
76. Id. at 1168-70. The court noted that Osawa's sales had fallen drastically since B & H
Photo began to sell gray market Mamiya cameras. Id. at 1168. Consequently, Osawa was
forced to lay off a significant number of its repairmen, and suffered delays in its warranty
repair times. Id. Osawa had also performed warranty repairs and honored rebates on gray
market goods to avoid consumer resentment. Id. Moreover, some dealers erroneously believed that Osawa had granted preferential price treatment to their competitors and consequently, these dealers lost enthusiasm for selling Mamiya goods. Id.
77. Id. at 1177.
78. 593 F. Supp. 420 (Ct. Int'l Trade 1984), af'd on other grounds, 761 F.2d 1552 (Fed.
Cir. 1985), cert. denied, 474 U.S. 1055 (1986).
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K MART CORP.
V. CARTIER, INC.
475
trademark owner's consent. 79 After examining the statute's legislative history, the United States Court of International Trade determined that Congress enacted the section to reverse the result in
Katzel. 80 The court noted that an agency regulation is entitled to
substantial deference if the regulation is a reasonable interpretation
of the statute it enforces. 8 ' The court also stated that the regulation
in question was entitled to even greater deference because Congress
has implicitly accepted the Customs Service's interpretation of the
statute while amending section 526.82 The court concluded that the
regulations were a reasonable reflection of Congress' intent to pro83
tect American industry.
One month after the circuit court decision in K Mart, the United
States Court of Appeals for the Second Circuit upheld Customs reg84
ulation section 133.21 as a valid interpretation of the Tariff Act.
Although the court believed that Congress enacted section 526 to
exclude trademarked goods whenever the trademark owner possessed domestic good will, it sustained the regulation in light of
Congress' acquiescence to the longstanding administrative policy. 8 5
The court noted that parallel importation would not irreparably
harm the trademark owners because they could sue the gray market
importers for damages.8 6 Finally, the court stated that section 42 of
the Lanham Act only applies to counterfeit trademarks and, there87
fore, does not bar importation of gray market goods.
E. The Economic Impact of the Gray Market
The gray market provides American consumers with a larger selection of goods at lower prices than authorized distributors pro79. Vivitar Corp. v. United States, 593 F. Supp. 420, 422 (Ct. Int'l Trade 1984), aff'd on
other grounds, 761 F.2d 1552 (Fed. Cir. 1985), cert. denied, 474 U.S. 1055 (1986).
80. Id. at 428. The court stated that Congress intended section 526 to protect any American trademark owner who had purchased his trademark rights from an independent foreign
company. Id. at 426-28 (citing 62 CONG. REC. 11,603-05 (1922)).
81. Id. at 433 (citing Zenith Radio Corp. v. United States, 437 U.S. 443, 450 (1978)).
82. Id. at 434 (stating that congressional failure to repeal or revise legislation in face of
administrative interpretation can be persuasive evidence of congressional intent (citing Zemel
v. Rusk, 381 U.S. 1, 11-12 (1965); Norwegian Nitrogen Prods. Co. v. United States, 288 U.S.
294, 313 (1933))).
83. Id. at 434-35.
84. Olympus Corp. v. United States, 792 F.2d 315, 320 (2d Cir. 1986).
85. Id. at 319-20. Although the court agreed that Congress enacted section 526 in response to Katzel, it did not believe that the provision only applied where an American citizen
purchased trademark rights from a foreigner. Id. at 319. The court stated that Congress
intended section 526 to protect American trademark owners' goodwill. Id. at 320. The court
conceded, however, that it would be impracticable for the Customs Service to determine when
a trademark owner possessed goodwill. Id.
86. Id.
87. Id. at 321.
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vide.88 In addition, the gray market benefits trademark owners in
two ways. First, trademark owners profit when parallel importers
purchase goods for resale because these importers must purchase
the goods from the trademark owner or its affiliates. 89 Second, the
increased competition in distribution benefits the manufacturer because more goods are sold at the lower price. 90 Moreover, parallel
imports benefit the United States economy because competition increases market efficiency. 91 The increased competition also 2 pro9
motes the United States Government's interest in free trade.
The gray market, however, is potentially harmful to consumers
and trademark owners. 93 First, gray market goods are not necessarily identical to authorized imports and may not meet United States
technical specifications or safety standards. 94 Second, gray market
goods are not eligible for manufacturers' warranty services and rebates. 95 Consumer dissatisfaction with gray market goods damages
the manufacturer's reputation, and not the unauthorized importer's
88. See Cohen, Grey Market Imports and the InternationalLocation of Manufacturing, I1 N.CJ.
INT'L L. & COM. REG. 171, 178-79 (1986) (arguing that prices of many goods would be artificially inflated without gray market); Boyer, supra note 2, at 89 (commenting that parallel importers charge lower prices than authorized distributors while providing larger selection of
goods).
89. See 19 C.F.R. § 133.21 (1988) (allowing gray market importation only when foreign
and domestic trademark owners are related).
90. See Steiner, RPM, DistributionRestraints, and the Growth of Discounting: The Importance of
Vertical Competition, 15 ANTrrrusT L. & ECON. REV. 73, 84-89 (1983) (arguing that manufacturers and retailers thrive on each other's efficiency).
91. See Samuelson, The Gains From InternationalTrade Once Again, in INTERNATIONAL TRADE:
SELECTED READINGS 131 (j. Bhagwati ed. 1982) (arguing that free international trade produces optimal world market efficiency); P. LINDERT & C. KINDLEBERGER, INTERNATIONAL EcoNOMICS 37-43 (7th ed. 1982) (explaining that United States benefits from free international
trade); see also W. CLINE, TRADE POLICY INTHE 1980's 10-12 (1983) (noting that "protectionism" is economically costly); Steiner, supra note 90, at 84-89 (claiming that distribution restraints produce market inefficiency).
92. See Sherman Act, 15 U.S.C. §§ 1-7 (1982) (preventing combinations in restraint of
trade); Clayton Act, 15 U.S.C. §§ 12-27 (1982) (making discrimination in price, services, or
facilities illegal). President Reagan has endorsed the gray market as consistent with United
States economic policy. See Letter from President Ronald Reagan to Paula Stern, Chainvoman, United States Int'l Trade Comm'n (Jan. 4, 1985) (disapproving International Trade
Commission's ban on gray market goods); Goodgame, supra note 1, at 76 (stating that Reagan
administration has encouraged parallel importation); see also Westerman, supra note 1, at 86
(noting that President Reagan approved of his aides importing gray market BMW
automobiles after trip to Europe for March, 1985 economic summit).
93. See Nolan-Haley, supra note 9, at 233-34, 250-51 (concluding that burdens of gray
market outweigh benefits).
94. Id. at 234; Brief for Respondents, supra note 7, at 7-8. For example, many gray market products are accompanied by instruction manuals written in foreign languages. Id. at 8; see
also Osawa & Co. v. B & H Photo, 589 F. Supp. 1163, 1169 (S.D.N.Y. 1984) (noting that many
gray market cameras come with instructions written in foreign languages).
95. Brief for Respondents, supra note 7, at 8; see also Osawa, 589 F. Supp. at 1169 (noting
that manufacturer may legally refuse to honor warranty and rebate claims on gray market
goods). Many parallel importers, however, provide their own warranty service. Boyer, supra
note 2, at 89.
1989]
K MART
CORP. V. CARTIER, INC.
477
reputation, because consumers are generally uninformed about the
96
gray market.
II.
,4.
K MART
Factual and ProceduralHistory
The gray market began to expand rapidly during the early
1980s. 9 7 This growth prompted United States trademark owners to
increase their efforts in trying to stop unauthorized importation of
their goods.9 8 Charles of the Ritz, for example, spent several million dollars tracking down the sources of gray market "Opium" perfume. 9 9 Trademark owners' attempts to prevent diversion,
however, are often ineffective because of the difficulty or impossibility of preventing sales in foreign countries to gray market
importers. 100
In 1984, forty manufacturers and distributors of trademarked
goods formed a trade association, the Coalition to Preserve the Integrity of American Trademarks (COPIAT), to combat the gray market. 10 ' Since its inception, COPIAT has lobbied extensively before
96. See Victor, supra note 12, at 791 (commenting that consumer may not understand
relationship between gray market importer and trademark owner).
97. See id. at 795-96 (noting that gray market grew during early 1980s); Brief for Respondents, supra note 7, at 3 (stating that gray market "bloomed" in early 1980s); see also Westerman, supra note 1, at 86 (estimating that gray market sales may be fastest rising part of trade
deficit).
98. See Victor, supra note 12, at 795-96 (arguing that growth of gray market forced trademark owners to combat unauthorized imports); Brief for Respondents, supra note 7, at 3 (stating that gray market's expansion prompted trademark owners to take actions against gray
market); see also Riley, supra note 11, at 20 (describing manufacturers' and authorized distributors' efforts to deter gray market importers).
99. See Westerman, supra note 1, at 87 (observing that Charles of the Ritz set up network
of private investigators in Europe and Asia).
100. Brief for Respondents, supra note 7, at 3; see also Westerman, supra note 1, at 86
(noting that trademark owners have failed to "make a dent" in influx of gray market goods).
Foreign retailers and distributors may inadvertently sell goods to parallel market importers.
See id. at 87 (explaining that seller does not always know identity of purchaser). Moreover, in
many countries, sellers cannot discriminate against gray market buyers. See Brief for Respondents, supra note 7, at 3 (arguing that it is often legally impossible to prevent sales to gray
market importers); Westerman, supra note 1, at 87 (stating that British Fair Trading Act allows
wholesalers to sell to any retailer, and retailers to buy from any wholesaler).
101. See Westerman, supra note 1, at 86 (discussing formation of COPIAT). Many of
COPIAT's members are the domestic sales and marketing affiliates of foreign manufacturers
of trademarked goods. Brief for Petitioner K Mart Corp., at ii, K Mart Corp. v. Cartier, Inc.,
108 S. Ct. 1811 (1988) (Nos. 86-495, 86-624, 86-625) [hereinafter Brief for Petitioner]. The
current 66 members of COPIAT are: AC&R Advertising, Inc.; Alfin Fragrances, Inc.; American Cyanamid Company/Jacqueline Cochran; American Watch Association; Auto-Time; Avon
Products, Inc.; Baccarat, Inc.; Brown & Company, Inc.; Calvin Klein Cosmetics Corp.; Cannon
U.S.A., Inc.; Cartier, Inc.; Charles of the Ritz Group, Ltd.; Citizen Watch Company of
America, Inc.; Colonia, Inc.; Compar, Inc.; Computer Retail Trade Association; Cosmair, Inc.;
Dennis Time Co.; Dial Corporation/Greyhound Corp.; Diodon, Inc.; Distilled Spirits Council
of the United States, Inc.; Duracell, Inc.; E. Leitz, Inc.; Electronic Industries Association/Consumer Electronics Group; Elizabeth Arden, Inc.; Estee Lauder, Inc.; Georgio, Inc.,
THE AMERICAN UNIVERSITY LAW REVIEW
[Vol. 38:463
Congress and the Treasury Department to reverse the Customs Service regulation that permits parallel importation.1 0 2 Thus far, the
10 3
Coalition has been unsuccessful in changing the current law.
In an attempt to expand its efforts beyond lobbying, COPIAT
brought suit against the United States Customs Service, alleging
that Customs regulation section 133.21 was inconsistent with the
Tariff and Lanham Acts.10 4 The plaintiffs claimed to suffer damages
from the importation and sale of gray market goods in the United
States. 10 5 COPIAT argued that the Tariff and Lanham Acts gave its
members an unqualified right to demand the exclusion of goods
that their subsidiaries or licensees manufactured, but third parties
imported without their authorization. 10 6 In addition, COPIAT contended that although the goods bore authentic trademarks, they
could not be imported without the domestic trademark owners' consent. 10 7 The Coalition, therefore, requested that the District Court
for the District of Columbia declare the regulation inconsistent with
the statutes and issue an injunction prohibiting enforcement of the
regulation.' 0 8 The district court rejected COPIAT's claims and upPerfume Division; G-K-G Inc.; G.M.I. Photographic Inc.; Halston Fragrances, Inc.; Joseph E.
Seagram & Sons, Inc.; Maier & Berkele; Mimco; Minolta Corporation; Moet-Hennessy U.S.
Corporation; National Association of Beverage Importers, Inc.; Nikon, Inc.; North American
Watch Corporation; NETCO; Omichron Corporation; P. Robertet, Inc.; Parfums Givenchy,
Inc.; Parfums Stem, Inc.; Parfums Worth Corp.; Pentax Corporation; PepsiCo; PFW, Division
of Hercules, Inc.; Photographic Manufacturers and Distributors Association, Inc.; Photographic Trade News; Polaris Optics; Procter & Gamble Company; Revlon, Inc.; RichardsonVicks Inc.; Schneider Corporation of America; Seiko Time Corporation/Hattori Corporation
of America; Sinar Bron, Inc.; Sony Corporation of America; Stanhill Enterprises, Inc.; Tessler
& Company, Inc.; Texchron, Inc.; The Wilkes Group, Inc.; Tokina Optical Corporation;
Victor Hasselblad, Inc.; Warner Cosmetics Incorporated; Weil Ceramics & Glass, Inc.; Whitbread North America, Inc. Brief for Respondents, supra note 7, at 10a-I Ia.
102. See Eisler, Gray-Market Mayhem: Its Makers vs. Importers in Lobbying Onslaught, IX Legal
Times, Nov. 17, 1986, at 1, col. 1 (noting COPIAT's efforts to change current law); see also
Gray Market Imports: Hearings on S. 2614 Before the Subcomm. on Int 'l Trade of the Senate Comm. on
Finance, 99th Cong., 2d Sess. 8-36 (1986) (statement of Robert H. Miller'for COPIAT) (testifying against bill which would codify Customs regulation section 133.21).
103. K Mart Corp. v. Cartier, Inc., 108 S. Ct. 1811, 1819 (1988).
104. Coalition to Preserve the Integrity of Am. Trademarks v. United States, 598 F. Supp.
844, 846 (D.D.C. 1984), rev'd, 790 F.2d 903 (D.C. Cir. 1986), aff'd sub nom. K Mart Corp. v.
Cartier, Inc., 108 S. Ct. 950 (jurisdiction only), aff'd in part and rev'd in part, 108 S. Ct. 1811
(1988) (merits).
The original complaint named the United States of America, the Secretary of the Treasury,
and the Commissioner of the Customs Service as defendants. Id. The district court allowed K
Mart Corporation and 47th Street Photo to enter the action as intervenor-defendants. Id.
Both intervenor-defendants sold diverted goods to consumers. Id.
105. Id. Cartier, Inc. and Charles of the Ritz Group, Ltd., both members of COPIAT,
joined in the action as individual parties. Coalition to Preserve the Integrity of Am. Trademarks v. United States, 790 F.2d 903, 904 (D.C. Cir. 1986), aff'd sub nom. K Mart Corp. v.
Cartier, Inc., 108 S. Ct. 950 (jurisdiction only), aff'd in part and rev'd in part, 108 S. Ct. 1811
(1988) (merits).
106. COPIAT, 598 F. Supp. at 846.
107. Id.
108. Id.
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MART CORP. V. CARTIER, INC.
479
held the Customs regulation as consistent with the Tariff and Lanham Acts. 109
B.
The Circuit Court Opinion
In a unanimous opinion, the United States Court of Appeals for
the District of Columbia Circuit held that Customs Service regulation section 133.21 violated the Tariff Act. 110 The court stated that
the language of the Tariff Act does not disclose any exceptions to
section 526 based on the relationship between the foreign and domestic trademark owners.'a ' Judge Silberman, writing for the court,
reasoned that an agency's interpretation is entitled to deference
112
only when congressional intent on the matter at issue is unclear.
After holding that jurisdiction was proper, the court examined the
purpose of section 526.113 Judge Silberman contended that the lan109. Id. at 853. The district court first considered the plaintiffs' claim under section 42 of
the Lanham Act. Id. at 847-48. The plaintiffs argued that despite the statute's plain language,
the Supreme Court held in Katzel that the predecessor to section 42 applied to genuine trademarked goods. Id. at 847 (citing A. Bourjois & Co. v. Katzel, 260 U.S. 689 (1923)). The
district court, however, distinguished the result in Katzel by noting that the Supreme Court
decided the case primarily on the equities involved therein. Id. at 848. The court further
noted that in Katzel, a foreign trademark owner defrauded a United States citizen by selling
him trademark rights, and later arranging to have a third party import the goods. Id. Accordingly, the district court dismissed COPIAT's claim under the Lanham Act for failing to state a
claim upon which relief could be granted because section 42 does not apply to gray market
goods. Id.
Next, the court considered whether the challenged Customs regulation was consistent with
section 526 of the Tariff Act of 1930. Id. at 848-52. Although the Coalition claimed that the
language of section 526 clearly barred all gray market importation, the court examined the
history of the statute and the regulation. Id. at 849-50. In discussing the validity of the regulations promulgated by the Customs Service, the court noted that the proper inquiry was
whether the agency's interpretation of the statute was sufficiently reasonable for the reviewing
court to accept. Id. at 851 (citing Federal Election Comm'n v. Democratic Senatorial Campaign Comm., 454 U.S. 27, 39 (1981)). Moreover, the district court argued that it was not
necessary for the agency's interpretation to be the only reasonable construction, or even the
construction the court would have reached. Id. (citing Democratic Senatorial Campaign Comm.,
454 U.S. at 39). Based on the history of the Tariff Act and a pattern of legislative acquiescence, the court found that the agency's regulation was a long-standing and consistent interpretation of section 526. Id. at 851-52. The court noted that Congress has recognized the
Customs regulation as a long-standing and consistent interpretation of section 526. Id. at 851
(citing H.R. REP. No. 621, 95th Cong., 1st Sess. 27 (1977)). The court further argued that
Congress implicitly accepted the Customs Service's interpretation of section 526 by failing to
amend the provision. Id. at 852 (citing Haig v. United States, 453 U.S. 280, 297-98 (1981)).
The court, finding no issue of material fact in dispute, therefore, granted summary judgment
for the defendants. Id. at 853.
110. See Coalition to Preserve the Integrity of Am. Trademarks v. United States, 703 F.2d
903, 917 (D.C. Cir. 1986), aff'd sub noma.K Mart Corp. v. Cartier, Inc., 108 S. Ct. 950 (jurisdiction only), aff'd in part and rev'd in part, 108 S. Ct. 1811 (1988) (merits). The court did not
examine section 42 of the Lanham Act because it found that the regulation violated the Tariff
Act. Id. at 907.
111. Id. at 907-08.
112. Id. at 908 (citing Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc.,
467 U.S. 837, 843 (1984)).
113. Id. at 907-13. Intervenor-defendant 47th Street Photo argued that the district court
480
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guage of section 526 clearly adopts the "territoriality" theory of
trademarks without qualification.
14
Under this view, a trademark is
valid only in the country where it was registered and, therefore, a
foreign trademark will infringe upon a domestic trademark.' 15 Accordingly, the court held the regulation invalid because it contradicted the plain language of section 526.116
The court also argued that the legislative history of section 526
demonstrated that Congress intended to prohibit all gray market
importation.'1 7 Judge Silberman noted that during the debate over
section 526, several Senators asked questions and expressed con-
cerns about the provision's applicability."
8
Judge Silberman con-
strued these comments to indicate that Congress intended the
amendment to apply to all gray market situations.1 9 The court also
contended that Congress' refusal to amend or repeal section 526
sustained its broad application.'
20
The court thus concluded that
lacked jurisdiction. Id. at 905 n. 1. 47th Street Photo referred to Vivitar Corp. v. United
States, 761 F.2d 1552 (Fed. Cir. 1985), cert. denied, 474 U.S. 1054 (1986), which held that 28
U.S.C. § 1581(i)(4) (1982) granted the Court of International Trade exclusive jurisdiction
over section 526 claims, with appellate jurisdiction in the Federal Circuit. Id. at 905. Judge
Silberman noted that section 526 claims were not mentioned in 28 U.S.C. § 1581 (1982), and
could not find any rationale for extending the Court of International Trade's exclusive jurisdiction. Id. at 907. The court, therefore, held that it had the authority to hear the case under
the grant of general federal question jurisdiction, 28 U.S.C. § 1331 (1982), and under 28
U.S.C. § 1338(a) (1982), which grants jurisdiction for claims relating to trademarks. Id. at
905. In a separate opinion, the Supreme Court upheld the circuit court's jurisdiction. K Mart
Corp. v. Cartier, Inc., 108 S. Ct. 950 (1988).
114. Coalition to Preserve the Integrity of Am. Trademarks v. United States, 709 F.2d
903, 910 (D.C. Cir. 1986), aff'd sub nom. K Mart Corp. v. Cartier, Inc., 108 S. Ct. 950 (jurisdiction), rev'd in part and aff'd in part, 108 S. Ct. 1811 (1988) (merits). Judge Silberman further
noted that by adopting the "territoriality" approach, Congress rejected the idea that simply
because a trademark is valid abroad, it is also valid in the United States. Id.
115. See Note, Greying, supra note 39, at 545-46 (describing various theories of function of
trademarks). According to the "territoriality" theory, gray market goods bear invalid trademarks because they were not registered in the United States. Id. A second theory, the
"universality" or "trade identity" theory, only recognizes a trademark as an indication of a
product's origin. Id. at 545. Under this view, a trademark is valid worldwide. Id. at 546. A
third theory, the "exhaustion" theory, states that a trademark owner's rights are exhausted
when the trademark owner sells the goods. Id. Parallel importation violates a trademark
owner's rights only under the "territoriality" theory. Id. at 545-46.
116. See COPIAT, 709 F.2d at 908.
117. Id. at 910-13.
118. Id. at 910-12 (citing 62 CONG. REC. 11,603-05 (1922)).
119. Id. at 912.
120. Id. at 912-13. Section 526 was reenacted without substantive change in the TariffAct
of 1930, ch. 497, tit. IV, § 526, 46 Stat. 590, 741 (current version at 19 U.S.C. § 1526 (1982)).
Id. at 912. Since the reenactment, Congress has rejected at least three proposals to limit or
repeal section 526. See S. 3713, 90th Cong., 2d Sess., 114 CONG. REC. 19,446 (1968) (rejecting proposal to replace section 526 with Lanham Act); H.R. 7234, 86th Cong., 1st Sess.,
105 CONG. REC. 8,540 (1959) (attempting to repeal section 526); S. 2540, 83d Cong., 2d
Sess., 100 CONG. REC. 14,067 (1954) (proposing to limit section 526 protection to American
trademark owners unrelated to foreign manufacturers). But see Act of Oct. 3, 1978, Pub. L.
No. 95-410, tit. II, § 211(a), 92 Stat. 888, 903 (codified as amended at 19 U.S.C. § 1526(d)
(1982)) (excluding importation for personal use from section 526).
1989]
K
MART CORP. V. CARTIER, INC.
481
the Customs Service's interpretation of section 526 was
2
impermissible.1 1
Finally, the court reviewed the history of the Customs regulation, 12 2 and suggested that the regulation was entitled to less deference because it was not adopted contemporaneously with the
statute.123 Moreover, Judge Silberman argued that the Customs
Service's interpretation was not consistent because its rationale was
both poorly articulated and vacillating.' 2 4 The circuit court, therefore, remanded the case to the district court with instructions to issue a declaratory judgment stating that Customs regulation section
133.21 was unlawful. 125
C. The Supreme Court
In a 5-4 decision, the Supreme Court affirmed in part and reversed in part the circuit court, holding that the Customs Service's
authorized use exception violated the Tariff Act. 126 Noting that the
Customs regulation's subsections were severable, the Court upheld
the common control exception as consistent with section 526.127
The Court based its holding on a strict interpretation of the language of section 526.128
Justice Kennedy, writing for the majority, stated that an agency's
interpretation of a statute was entitled to deference unless the regulation conflicted with the statute's "clear and unambiguous" language. 12 9 The Court argued that the Customs Service's common
control exception was a reasonable interpretation of ambiguities in
the statutory language. 130 Justice Kennedy noted that the phrases
"owned by" and "merchandise of foreign manufacture" were broad
enough to include situations involving a foreign parent corporation,
or goods that a domestic corporation's foreign subsidiary manufac121. Coalition to Preserve the Integrity of Am. Trademarks v. United States, 709 F.2d
903, 912 (D.C. Cir. 1986), aff'd sub nom. K Mart Corp. v. Cartier, Inc., 108 S. Ct. 950 (jurisdiction), rev'd in part and aff'd in part, 108 S. Ct. 1811 (1988).
122. Id. at 914-17.
123. Id. at 916 (citing Zenith Radio Corp. v. United States, 437 U.S. 443, 450 (1978)).
124. Id. (citing Federal Election Comm'n v. Democratic Senatorial Campaign Comm., 454
U.S. 27, 37 (1981)).
125. Id. at 918. The court refused to grant injunctive relief. Id.
126. K Mart Corp. v. Cartier, Inc., 108 S. Ct. 1811 (1988). Justice Kennedy wrote this
portion of the opinion, with whom ChiefJustice Rehnquist andJustices Blackmun, O'Connor,
and Scaliajoined. Id. at 1814. Justices Kennedy and White agreed with the result of the case.
Id. In a separate opinion, Justice Brennan, with whom Justices Marshall and Stevens joined,
argued that both exceptions were consistent with section 526. Id.
127. Id. at 1819.
128. Id. at 1817-19.
129. Id. at 1817 (citing Board of Governors v. Dimension Fin. Corp., 474 U.S. 361, 368
(1986).
130. Id. at 1818.
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tures. 13 i The Court concluded, however, that the statutory language could not permit importation of goods that an independent
foreign manufacturer produces under license from an American
32
trademark owner.1
Justice Brennan, concurring in part and dissenting in part, argued
that both the common control exception and the authorized use exception were consistent with section 526.133 Justice Brennan stated
that he agreed that section 526 did not clearly apply to the situation
in which a foreign manufacturer registered its trademark in the
United States through a domestic subsidiary, because the trademark
is not clearly "owned by" a United States entity.' 3 4 Similarly, the
phrase "merchandise of foreign manufacture" could mean either
merchandise manufactured in a foreign country, or merchandise
which a foreigner manufactured. 13 5 Moreover, Justice Brennan argued that the Customs regulation was valid because Congress enacted section 526 to overrule Katzel, and since then, trademark law
and corporate structures have grown more complex.' 3 6 Accordingly, Justice Brennan would have upheld regulation section 133.21
37
as consistent with the Tariff Act.1
Justice Scalia agreed with the majority that the statute's language
controlled, but disagreed with the Court's interpretation of the language.' 3 8 First, Justice Scalia contended that if a foreign corporation registered its trademark through a domestic subsidiary, then a
United States corporation clearly owned the trademark.' 3 9 Second,
Justice Scalia stated that "merchandise of foreign manufacture"
clearly means goods manufactured abroad. 140 Justice Scalia, therefore, would have affirmed the circuit court's opinion and held that
4
the regulations violated section 526.1 1
III.
ANALYSIS
The Supreme Court incorrectly held that the authorized use exception of Customs regulation section 133.21 violates section 526 of
131. Id.
132. Id. at 1818-19.
133. Id. at 1819-31 (Brennan, J., concurring in part and dissenting in part).
134. Id. at 1821 (Brennan, J., concurring in part and dissenting in part).
135. Id. (Brennan, J., concurring in part and dissenting in part). Goods that a domestic
corporation produces in a foreign country would only be excluded if the domestic corporation
was viewed as a foreign entity. Id.
136. Id. at 1824-27 (Brennan, J., concurring in part and dissenting in part).
137. Id. at 1831 (Brennan, J., concurring in part and dissenting in part).
138. Id. (Scalia, J., concurring in part and dissenting in part).
139. Id. at 1831-32 (Scalia, J., concurring in part and dissenting in part).
140. Id. at 1833-36 (Scalia, J., concurring in part and dissenting in part).
141. Id. at 1836 (Scalia, J., concurring in part and dissenting in part).
K
19891
MART CORP. V. CARTIER, INC.
483
the Tariff Act. 14 2 First, the Court's conclusion that section 526
clearly prohibits the authorized use exception places too much emphasis on the statutory language in light of the context in which
Congress enacted the section.' 43 Second, even if the language of
section 526 was determinative, the Court should have upheld the
regulation as a reasonable interpretation of the Tariff Act. 144 Third,
the gray market promotes United States economic policies and
1 45
should be allowed to continue.
A.
Section 526 Should be Narrowly Construed
The Supreme Court erroneously concluded that section 526 of
the Tariff Act bars gray market imports of goods manufactured
under license. The Court erred by examining the language of section 526 out of its legislative and historical context.14 6 The Court's
strict reliance on the letter of the law caused it to stray from congressional intent at the time of passage of section 526.147
The manner in which section 526 was drafted demonstrates that
Congress intended the section only to apply to the Katzel situation.' 4 8 Section 526 was a hastily drafted, unrelated amendment to
the Tariff Act. 14 9 The supposedly broad language of the provision
was the product of rushed drafting rather than a conscious intent to
142. See Olympus Corp. v. United States, 792 F.2d 315, 320 (2d Cir. 1986) (upholding
Customs regulation); Coalition to Preserve the Integrity of Am. Trademarks v. United States,
598 F. Supp. 844, 851 (D.D.C. 1984) (holding Customs regulation consistent with Tariff Act),
rev'd, 790 F.2d 903 (D.C. Cir. 1986), aff'd sub nom. K Mart Corp. v. Cartier, Inc., 108 S. Ct. 950
(jurisdiction), aff'd in part and rev'd in part, 108 S. Ct. 1811 (1988) (merits); Vivitar Corp. v.
United States, 593 F. Supp. 420, 434-35 (Ct. Int'l Trade 1984) (finding section 133.21 of
Customs regulations to be reasonable interpretation of TariffAct), aff'd, 761 F.2d 1552 (Fed.
Cir. 1985), cert. denied, 474 U.S. 1055 (1986).
143. See supra notes 35-51 and accompanying text (discussing legislative history of section
526).
144. See supra notes 63-68 and accompanying text (outlining proper test for agency
actions).
145. See supra notes 88-92 and accompanying text (examining economic ramifications of
gray market); see also Parfums Stern, Inc. v. United States, 575 F. Supp. 416, 421 (S.D. Fla.
1983) (stating that to prevent distribution of equal-quality goods at lower prices would hurt
public); Boyer, supra note 2, at 89 (noting that American consumers have long been recipients
of benefits of gray market); Note, Greying, supra note 5, at 335 (stating that without gray market, many goods would not be available to most American consumers). For a thorough discussion of the economic benefits accompanying the gray market, see id. at 333-36.
146. See United States v. Dotterweich, 320 U.S. 277, 280 (1943) (stating that courts must
view statutory language in light of legislative and historical context (citing McDermott v. Wisconsin, 228 U.S. 115, 128 (1913); Hipolite Egg Co. v. United States, 220 U.S. 45, 57 (1911))).
147. See United Steelworkers v. Weber, 443 U.S. 193, 201 (1979) (arguing that what is
within letter of law may not be within its spirit (quoting Church of the Holy Trinity v. United
States, 43 U.S. 457, 459 (1892))).
148. See Gorelick & Little, supra note 39, at 215 (arguing that section 526 was hastily added to Tariff Act to reverse circuit court's decision in Katzeo.
149. Id.
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bar all gray market importation. 150 The Senators relied on the representations the provision's sponsors made that it was designed to
protect United States citizens who purchased trademark rights from
foreigners.' 5 '
Congress thus enacted section 526 solely to protect United States
citizens who purchased trademark rights from foreign trademark
owners. 15 2 Congress was concerned that the Katzel decision would
encourage foreign trademark owners to compete with the American
owners of those same trademarks.'- 5 Congress, therefore, drafted
54
section 526 to overrule Katzel.1
During the debate on the amendment, several Senators expressed
concerns about the statute's application. 155 The circuit court construed these comments as indicative of Congress' intent that the
amendment cover all gray market situations. 1 5 6 This contention is
weak, however, because the Senators' concerns were not adequately
answered, thus proving that Congress was uncertain about the stat1 57
ute's applications.
The legislative history of section 526 supports a narrow interpretation of the provision. During the brief debate, Senator Moses objected to the provision because it was intended to overrule Katzel,
150. Federal Brief, supra note 59, at 23.
151. Id. at 24.
152. See Gorelick & Little, supra note 39, at 214-15 (noting Senators' references to prevention of fraud (citing 62 CONG. REC. 11,602-05 (1922))); Federal Brief, supra note 59, at 16
(stating that Congress intended section 526 to apply only where foreign trademark owner
sold its rights to American citizen (citing 62 CONG. REC. 11,603 (1922))). Many American
citizens had recently purchased foreign trademarks that the Alien Property Custodian had
seized from German nationals during World War I. Gorelick & Little, supra note 39, at 214-15
(citing 62 CONG. REc. 11,604-05 (1922)). The Senators enacted section 526 to protect American businessmen from German competition. Id. at 215 (citing 62 CONG. REC. 11,604 (1922)).
153. See 62 CONG. REC. 11,603 (1922) (noting congressional concern to protect American
trademark owners from unfair competition from foreign trademark holders). Senator Sutherland of West Virginia stated:
I believe that the Senate is in favor of protecting the property rights of American
citizens who have purchased trade-marks [sic] from foreigners, and when these foreigners deliberately violate the property rights of those to whom they have sold these
trade-marks [sic] by shipping over to this country goods under those identical trademarks [sic].
Id. (statement of Sen. Sutherland).
154. See Gorelick & Little, supra note 39, at 210-15 (arguing that Congress intended section 526 to apply only in Katzel situation); Federal Brief, supra note 59, at 18 (asserting that
only purpose of section 526 was to protect Americans who purchase trademark rights from
foreigners).
155. 62 CONG. REC. 11,602-05 (1922).
156. See Coalition to Preserve the Integrity of Am. Trademarks v. United States, 790 F.2d
903, 910-12 (D.C. Cir. 1986), aff'd sub noma.K Mart Corp. v. Cartier, Inc., 108 S. Ct. 950
(jurisdiction), aff'd in part and rev'd in part, 108 S. Ct. 1811 (1988) (merits); Note,supra note 39,
at 91-92 (asserting that Senate debates clearly indicate iriention not to limit section 526 to
facts of Katzel).
157. See Gorelick & Little, supra note 39, at 214-16 (noting that debate indicated that Senators were confused about application of section 526 (citing 62 CONG. REC. 11,602-05 (1922))).
1989]
K MART CORP. V CARTIER, INC.
485
158
which was scheduled to be heard before the Supreme Court.
Senator Sutherland, one of the primary supporters of section 526,
defended the narrow interpretation theory by stating that the drafters of section 526 designed the provision to protect the property
rights of American citizens who purchased trademarks from foreigners.159 Moreover, Senator McCumber, another major proponent of
the amendment, noted that the provision would apply only if a foreigner sold a trademark to a United States citizen. 160 Accordingly,
the Customs regulation is consistent with the Tariff Act.
B.
The Customs Regulation is a Reasonable Interpretation
of the Tariff Act
The Supreme Court erred in holding the authorized use exception invalid in K Mart, even if the statute's language is determinative. First, the language of section 526 clearly shows that Congress
enacted it to protect United States trademark owners.' 6 ' The Customs Service designed its regulations to prevent foreign corporations that merely register their trademarks in the United States from
utilizing the statute's protections.1 62 Second, the statute cannot expressly prohibit the authorized use exception as the Court suggests,
not an acceptable practice at the
because trademark licensing was
63
time the statute was enacted.
The Customs Service is empowered to issue regulations to enforce the Tariff Act. 164 In order for a reviewing court to overturn
such a regulation, it must find that the agency interpretation was not
a sufficiently reasonable one.165 The regulation, however, need not
158. 62 CONG. REc. 11,603 (1922) (statement of Sen. Moses).
159. See id. (statement of Sen. Sutherland insisting that only purpose of section 526 was to
prevent palpable fraud).
160. See id. at 11,605 (statement of Sen. McCumber asserting that owner of trademark
must be domiciled in, and trademark must be registered in, United States).
161. See supra notes 35-48 and accompanying text (discussing enactment of section 526).
162. See K Mart Corp. v. Cartier, Inc., 108 S. Ct. 1811, 1820 (1988) (Brennan, J., concurring in part and dissenting in part) (asserting that foreign manufacturers importing to United
States cannot claim section 526 to protect them from third party competition).
163. See id. at 1828 (Brennan, J., concurring in part and dissenting in part) (stating that
when section 526 was before Congress, only reason for trademark was to identify product's
origin, and that under this view, licensing was philosophically impossible). Justice Brennan
argued that postenactment developments can create situations where enforcement of the literal language of a statute would not be appropriate. Id. at 1830 (Brennan, J., concurring in
part and dissenting in part). Brennan noted, for example, that a nineteenth century statute
outlawing theft of ovens would still apply to microwave ovens, while a statute which allowed
government inspectors to examine ovens for "propensity to spew flames" might not. Id.
164. See 19 U.S.C. § 1624 (1982) (granting Treasury Department power to enforce Tariff
Act); see also Zenith Radio Corp. v. United States, 437 U.S. 443, 450 (1978) (holding that
Customs Service may reasonably interpret Tariff Act).
165. See supra notes 64-65 and accompanying text (stating that reviewing court must uphold regulations that are reasonable interpretations of statutes they enforce).
486
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be the only reasonable interpretation of the Act.' 6 6 Moreover, the
agency's interpretation need not be the same as the reviewing
court's interpretation. 6 7 Considering the provision's vague legislative history, the Customs Service regulation is a reasonable interpretation of section 526.168
Since 1936, the Customs Service has consistently interpreted section 526 to allow parallel importation.' 69 During this time, Congress has acquiesced to the Customs Service regulation by declining
to amend the statute.' 70 The regulation, therefore, should be upheld as consistent with section 526 of the Tariff Act.
C. The Customs Regulation Promotes United States Economic Policies
Gray market importation should be allowed to continue because it
benefits the United States economy.17 American consumers benefit
from the gray market through lower prices and a larger selection of
goods. 172 In addition, parallel importation conforms with United
States public policy.' 73 The gray market promotes the United States
Government's antitrust and free trade policies.174 For similar rea166. See supra notes 66-68 and accompanying text (examining reasonableness test for
regulation).
167. See supra note 68 and accompanying text (explaining that agency and court do not
have to agree on interpretation of statute).
168. See supra notes 39-44 and accompanying text (describing confusion surrounding application of section 526).
169. Coalition to Preserve the Integrity of Am. Trademarks v. United States, 598 F. Supp.
844, 849 (D.D.C. 1984), rev'd, 790 F.2d 903 (D.C. Cir. 1986), aff'd sub non. K Mart Corp. v.
Cartier, Inc. 108 S. Ct. 950 (jurisdiction), aff'd in part and rev'd in part, 108 S. Ct. 1811 (1988)
(merits). The circuit court cited Zenith Radio Corp. v. United States to suggest that the Customs
regulation was not entitled to deference because it was adopted after the Tariff Act. See
COPIAT, 790 F.2d at 916 (stating that because Customs regulation was not adopted contemporaneously with statute, it was not thorough, nor consistent enough to warrant acceptance
by court (citing Zenith, 437 U.S. at 450)). The Supreme Court in Zenith, however, stated that
an agency interpretation is entitled to "peculiar weight" when it is adopted contemporaneously with a statute. Zenith, 437 U.S. at 450 (quoting Norwegian Nitrogen Prod. v. United
States, 288 U.S. 294, 315 (1933)). The Court did not intend to say that a non-contemporaneous interpretation is entitled to little deference. Judge Silberman also argued that Customs'
interpretation was inconsistent because its reasoning was "poorly articulated and vacillating."
COPIAT, 790 F.2d at 916. This contention ignores the Customs' consistent application of the
statute. See COPIAT, 589 F. Supp. at 849 (recognizing that Customs has consistently interpreted section 526 since 1936).
170. See COPIAT, 598 F. Supp. at 849 (recognizing that section 526 had been in effect
from 1936 until 1972).
171. See supra notes 88-96 and accompanying text (examining economic impact of gray
market).
172. See Boyer, supra note 2, at 89 (noting that gray market importers charge lower prices
than authorized distributors and provide larger selection of goods).
173. See Brief for Petitioner, supra note 101, at 39-40 (stating that Court should not strain
to construe statute in manner so against antitrust laws and public policy).
174. See id. at 40 (citing United States v. National Ass'n of Sec. Dealers, Inc., 422 U.S. 694,
719-20 (1975) (holding that immunity from antitrust laws can be justified only by clear showing of repugnancy between regulatory system and antitrust laws)).
1989]
K
MART CORP. V. CARTIER, INC.
487
sons, Japan and the European Community Commission allow paral175
lel importation as a fair trade practice.
Trademark owners are not without recourse against gray market
importers. 76 If a parallel importer damages a trademark's good177
will, the owner can obtain injunctive, as well as monetary, relief.
Additionally, trademark owners profit from parallel importation be78
cause importers must buy the goods from the manufacturer.1
Moreover, the United States is under no obligation to shield foreign
trademark owners who merely register their trademarks in the
United States from gray market competition. 79 The Customs regulation, therefore, should be upheld as a reasonable interpretation of
the Tariff Act.
IV.
RECOMMENDATIONS
Although parallel importation is proper under the Tariff and Lanham Acts, Congress must enact legislation to protect both the trademark owners and consumers. Consumers are often unaware that
they are purchasing a gray market good that the manufacturer's warranty does not cover.18 0 If the trademark owner later refuses to repair the item, his reputation will suffer because the consumer does
not understand the relationship between the manufacturer and the
gray market importer, and expects the manufacturer's warranty to
8
cover the product.' '
Recently, California and New York passed statutes which require
gray market importers to disclose specified differences between the
gray and authorized goods, and state that their goods are not ac175. Id. at 44 (stating that European Community Commission declared that failure to
honor warranty guarantees on gray market goods may result in prosecution). The Japanese
Fair Trade Commission has announced that obstruction of parallel importation is an unfair
business practice. Id.
176. See Olympus Corp. v. United States, 792 F.2d 315, 320 (2d Cir. 1986) (noting that
trademark owners can sue parallel importers for damage to goodwill of trademark).
177. See Osawa & Co. v. B & H Photo, 589 F. Supp. 1163, 1170 (S.D.N.Y. 1984) (barring
gray market importation of trademarked camera equipment to prevent irreparable harm to
trademark owner).
178. Parallel importation is permitted only when the foreign and domestic trademark
owners are related. 19 C.F.R. § 133.21 (c)(1) (1988). The trademark owners, therefore, benefit when parallel importers purchase their goods for resale. In an authorized use situation, the
trademark owner benefited when it licensed the trademark.
179. See supra note 101 (stating that many of COPIAT's members are domestic marketing
and sales affiliates of foreign trademark owners).
180. Boyer, supra note 2, at 89.
181. Osawa, 589 F. Supp. at 1167. Alternatively, it is very expensive to honor warranties
on gray market goods. See id. at 1167-68 (asserting that legitimate dealers not only bear expense of warranting their own products, but also of those products sold by gray market
dealers).
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companied by the manufacturers' warranties. 8 2 This disclosure requirement remedies problems of consumer confusion and damage
to the trademark holder's goodwill because it disassociates the gray
goods from the domestic trademark owner.' 8 3 In addition, the law
informs consumers if the gray good is not identical to the authorized
good.
Congress should enact similar legislation to protect United States
consumers and trademark holders. Specifically, the law should require gray market retailers to clearly inform consumers that a parallel importer, and not the authorized distributor, imported the goods
and, therefore, that the product is not eligible for the manufacturer's warranty and other services. The retailer should also be required to disclose any and all differences of which he is aware
between the diverted and authorized products, such as instructions
written in a foreign language. The seller should display this information on a conspicuous sign and on a label affixed to the product.
182. CAL. CIVIL CODE § 1797.81 (West 1988); N.Y. GENERAL BUSINESS LAW § 218aa (McKinney 1988). The California law provides in pertinent part:
(a) Every retail seller who offers grey market goods for sale shall post a conspicuous sign at the product's point of display and affix to the product or its package a
conspicuous ticket, label, or tag disclosing any or all of the following, whichever is
applicable:
(1) The item is not covered by a manufacturer's express written warranty valid in
the United States (however, any implied warranty provided by law still exists).
(2) The item is not compatible with United States electrical currents.
(3) The item is not compatible with United States broadcast frequencies.
(4) Replacement parts are not available through the manufacturer's United
States distributors.
(5) Compatible accessories are not available through the manufacturer's United
States distributors.
(6) The item is not accompanied by instructions in English.
(7) The item is not eligible for a manufacturer's rebate.
(8) Any other incompatibility or nonconformity with relevant domestic standards
known to the seller.
CAL. CIVIL CODE § 1797.81 (West 1988).
Similarly the New York statute provides in pertinent part:
2. Every retail dealer who knowingly offers for sale grey market merchandise shall
conspicuously post, in the following manner, the information required by subdivision three of this section:
a. On a sign attached to the item itself; or
b. On a sign affixed to each cash register or point of sale at which such goods are
offered for sale; or
c. On a sign so situated as to be clearly visible to the buyer from the register.
3. Every retail dealer who offers for sale grey market merchandise shall disclose, as
applicable, that either some of the products or a specific product are not:
a. accompanied by the manufacturer's warranty valid in the United States; or
b. accompanied by instructions in English; or
c. eligible for a rebate offered by the manufacturer.
N.Y. GENERAL BusINEss LAw § 218aa (McKinney 1988).
183. Trademark owners can also prevent gray market importers from reaping the benefits
of their trademarks' reputation by marketing their products under different names in the
United States than the names used abroad. Gorelick & Little, supra note 39, at 214.
1989]
K MART
CORP. V. CARTIER, INC.
489
This notification requirement will help minimize confusion and
84
other negative aspects of the gray market.'
CONCLUSION
In K Mart Corp. v. Cartier,Inc.,18
5
the Supreme Court erroneously
broadened the application of section 526 to bar gray market importation of goods manufactured under license from a United States
trademark owner. Congress passed section 526 of the Tariff Act to
shield American trademark owners from unfair competition from
foreign trademark owners. The Customs Service, under a grant of
congressional authority, promulgated a regulation which is a reasonable interpretation of the Tariff Act. In striking down the authorized use exception of Customs Service regulation section
133.21, the Supreme Court interpreted a provision of the Tariff Act
that Congress designed to protect United States trademark holders,
to enforce trademark owners' monopolies. This decision unnecessarily harms American consumers because the resulting decreased
competition will allow trademark owners to charge artificially inflated prices. The United States Government is under no obligation
to protect foreign manufacturers, which merely register their trademarks in the United States, from parallel imports. Congress should,
however, require gray market retailers to disclose the status of their
goods in order to protect United States consumers and trademark
owners.
184. Gray market goods also raise the issue of tort liability. Specifically, the issue is
whether a manufacturer should be responsible in tort for defects in goods it did not intend to
sell in the United States. In general, products liability attaches to all sellers of a product,
including the manufacturer of a component part of the product. PROSSER & KEETON, THE
LAW OF TORTS § 100 (5th ed. 1984). A tortfeasor, however, will usually not be liable to unforeseeable plaintiffs. Id. § 43. Accordingly, trademark owners would argue that they should
not be liable for diverted goods because they could not have foreseen that the product would
be sold in the United States. Plaintiffs could argue, however, that the trademark owners
should have foreseen parallel importation in light of the prevalence of the gray market. In
addition, consumers would argue that they should be able to sue the trademark owner in case
the gray market importer is insolvent, or is outside thejurisdiction of the United States courts.
Cf. id. § 100 (stating that retailers are subject to products liability because manufacturer may
be out of business or cannot be reached).
185. 108 S. Ct. 1811 (1988).