Distributing Imported Trademarked Products

by Marc Ullman and Charles Knull

What if your company found a brand-name product overseas that you thought would be a good bet for the U.S. market and you cut a deal with the manufacturer to become the exclusive licensee of the trademark in the United States as well as the exclusive distributor of the product in the United States?

What if you invested time, energy and a whole lot of money to develop the market for the product?

What if after three or four years, you found a bunch of other companies bringing in the same branded products as "gray market goods" and piggybacking on your marketing efforts and cutting into your gross?

What are your legal options?

For one thing, you may have a big problem with the actual priorities of your manufacturer. It may love the fact that you have developed a new market in the United States, but it may also love the fact that the more product it can sell in the United States, the better it is; and, when it comes to sales, perhaps it turns a blind eye to sales that it might know will be diverted. A manufacturer that is concerned about its exclusive distributors will take steps, such as noting batch numbers and making its middlemen promise not to sell to gray marketers, which can be very effective in squelching those sales. So you may want to have a heart-to-heart conversation with your supplier.

Generally, U.S. law supports an exclusive licensee's right to prevent such gray market goods from being sold by others only if there is a difference in quality of those goods from the ones that the licensee sells. So one way to prevent gray market entry is to create a U.S.-specific version of the product. This can be done through packaging changes or a small difference in the actual product. As long as this product is the one sold to you and not otherwise made available by your licensor so that it leaks into the marketplace, you as exclusive licensee will be able to take legal action against gray market sales in the United States of the "foreign" version.

If your manufacturer will not go along, you will face the outcome that the exclusive licensee faced in Zip International v. Trilini, in which Ullman, Shapiro & Ullman just represented the victorious gray marketer that had purchased product from the overseas manufacturer that more or less sold its own distributor out. (Click here to read the court decision.)

In the Zip case in the U.S. District Court of the Eastern District of New York, Ullman, Shapiro & Ullman LLP represented an importer (Trilini) of Russian sunflower seeds that are popular with the U.S. community of Russian immigrants. Zip International, the plaintiff, had an exclusive U.S. license with the Russian maker of the seeds and sued Trilini for trademark infringement and unfair competition.

Zip lost because it could not prove Trilini's imports were anything but identical to the product Zip was importing. Clearly, Zip's problem is with its manufacturer, which appears not to be taking the steps to prevent gray market sales noted above. The court commented on the weak agreement Zip presented as its evidence of an exclusive license, noting that the agreement did not even have the basic requirement that Zip maintain the quality of its products it was importing.

Ullman, Shapiro & Ullman provides its clients (both manufacturers and distributors) with agreements and legal advice that is designed to create enforceable exclusive license agreements so that its client's investments in marketing and promotion mean profit and success. Both the licensor and the licensee will benefit from a proper exclusive arrangement.

Marc Ullman is a partner and Charles Knull is trademark counsel at the New York-based law firm Ullman, Shapiro & Ullman LLC ( USUlaw.com ).