High Court OKs Some Imports on Gray Market

The Supreme Court, in a major victory for discount retailers, ruled Tuesday that cut-rate American outlets may bypass some trademark owners of foreign products and sell the imported goods here at lower prices.

In a 5-4 vote, the high court concluded that American trademark laws were intended to aid U.S. firms, not foreign firms marketing products in this country.

The decision preserves the estimated $6-billion-a-year “gray market” in the United States, in which discount retailers such as K mart Corp. buy cameras, watches, perfumes and electronic goods overseas and then sell them here at discount prices.

Many of those same products--such as Cartier watches, which are made by a Dutch corporation, Japanese-made Minolta cameras or German-made Mercedes Benz automobiles--are also sold here through American subsidiaries that own the U.S. trademarks. Generally, these trademark dealers sell at higher prices.

The subsidiaries, maintaining that they provide more service and better warranties on the products, had sought action from the federal courts to halt the discount competition. But the high court ruled that U.S. trademarks do not provide that protection for foreign firms and subsidiaries.

“This is a good decision for retailers and consumers,” said Robert Stevenson, a vice president of public affairs for K mart Corp. in Troy, Mich., a defendant in the lawsuit filed in 1984. “The U.S. shouldn’t be an island of high prices isolated from the rest of the world. If there is a significant difference between the price charged overseas and the price charged by a domestic distributor, it creates an opportunity to buy it there and bring it in independent of the established network.”

Deception Charged

But Rod DeArment, a Washington attorney for a coalition of American trademark owners, charged that the decision allows importers to deceive consumers.

“In the drugstore next to my office, you can find Johnson & Johnson shampoo that is made in Brazil and imported through the gray market. The consumer who picks it up may think it is the same, but it is a watery shampoo and it doesn’t have a safety seal on top,” he said.

The decision was written by new Justice Anthony M. Kennedy, acting as the tie-breaker between two factions of the court. The ruling generally upheld a long-standing Customs Service interpretation of the Tariff Act of 1930. In this measure, Congress banned the back-channel importing of merchandise that “bears a trademark owned by a citizen of, or by a corporation or association created or organized within the United States.”

Kennedy drew a distinction based on whether the firm with the U.S. trademark is an independent business or a subsidiary of a foreign firm. When an independent American firm buys the right to import a foreign-made product and registers a U.S. trademark, it holds the exclusive right to sell the product here, he said. The Customs Service can and does prohibit discount imports that compete with these American trademark owners.

No Protection

However, if the U.S. trademark is actually held “by the same person or business entity” that makes the product overseas, no protection is provided from gray market competition, Kennedy said.

The latter category covers many of the popular foreign goods sold in this country. Even though Mercedes Benz dealerships in the United States are owned by U.S. businesses, the cars they receive are imported and allocated by a U.S. subsidiary of the German corporation.

A gray market has flourished around the country for these automobiles and many other name-brand foreign products. Discount brokers and stores can buy the merchandise independently overseas and then offer it for sale in the United States for much less than authorized distributors do, unencumbered by high manufacturer-sponsored promotion costs.

DeArment contended that gray market importers unfairly “prey on” successful brands. Charles of the Ritz, a perfumer importer, spent millions of dollars to promote its Opium perfume in the United States, only to have its market undercut by discounters who bought the product wholesale in Europe, he said.

For buyers of gray market goods, there can be problems. Foreign corporations often will not honor warranties on products bought from discounters. In the auto market, purchasers sometimes find that gray market cars do not meet stringent U.S. standards in areas such as fuel emissions.

Boost for Discounters

Nonetheless, the high court decision provided a boost to discount retailers, which only last month had suffered a setback from the court. In the earlier ruling, the justices made it more difficult for a price-cutter to prove that a manufacturer had illegally conspired with a full-service retailer to shut a bargain outlet out of the market. That ruling, by Justice Antonin Scalia, limited the enforcement of federal antitrust laws.

Monday’s ruling arose when an appeals court in Washington declared two years ago that the liberal Customs Service regulations were unfair to American trademark holders. The case (K mart Corp. vs. Cartier Inc., 86-495) was first argued in October before an eight-member Supreme Court and evidently resulted in a 4-4 split. One faction, led by Scalia, sided with the trademark owners, who wanted to cut off gray market importers. A second faction, led by Justice William J. Brennan Jr., favored an open market in imports.

Law Called “Jingoist”

It was left to Kennedy, who joined the court in February, to settle the case, and on most points he sided with Brennan. In an accompanying opinion, Brennan said that the 1930 law had a “protectionist, almost jingoist, flavor” and was designed to aid only legitimate American firms. It was not designed to protect the foreign manufacturer that employed “the simple device of incorporating a shell domestic subsidiary,” he said.

In one instance, Kennedy sided with Scalia, agreeing that the U.S. firm that “authorizes an independent foreign manufacturer” to make a product overseas for it can be protected from gray market imports of those products by others.

In another action, the court ruled for the first time that a death sentence can be upheld in some cases where a “harmless” procedural error is made during the sentencing. Justice Sandra Day O’Connor, writing for a 5-3 majority, said that an appeals court must decide whether the error was harmless. The court ruled unanimously that the death sentence of a convicted murderer in Texas must be reconsidered because he was not given a chance to consult his lawyer before being interviewed by a psychiatrist (Satterwhite vs. Texas, 86-6284).

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