Client Alert

Federal Circuit Decision Serves as Warning for Trademark Owners Who Fail to Control Their Distributors

9/27/2005

The Federal Circuit’s recent decision in SKF USA, Inc. v. International Trade Commission, 2005 U.S. App. LEXIS 19750 (Fed. Cir. September 14, 2005), illustrates the dangers that lurk for trademark owners who fail to control their distributors adequately.

SKF is a manufacturer of ball-bearings located in the United States.  It produces and sells ball-bearings bearing its SKF mark both in the United States and abroad.  Certain of the SKF-marked ball-bearings sold abroad make their way into the United States, where they are resold without SKF’s authorization.  SKF objected to the unauthorized domestic sale of its foreign manufactured ball-bearings, and filed a complaint at the International Trade Commission against a number of the companies involved in such sales.

Generally speaking, the sale of "gray market goods" such as the foreign manufactured SKF ball-bearings is not illegal.  However, where goods sold by a trademark owner abroad are "materially different" from goods sold domestically, the importation into the United States and resale of such foreign goods may constitute trademark infringement.  The rationale for this rule is simple:  No consumer confusion results from the domestic sale of genuine foreign products that are identical to the U.S. products sold under the trademark at issue.   On the other hand, where the trademark owner’s foreign products and U.S. products differ, U.S. consumers are not getting the same thing when they purchase the foreign products, and therefore may be mislead.   

In light of the above rules concerning gray-market goods, SKF could only prevent the unauthorized importation and resale of its foreign ball-bearings if it could show that such ball-bearings were materially different from its U.S.-manufactured products.  It sought to do this not by pointing to any material physical differences (there were none), but rather by arguing that the unauthorized ball-bearings were sold without the technical support that SKF offered to customers who bought its products through authorized distributors.  SKF argued that U.S. customers might be misled into purchasing the gray market ball-bearings, incorrectly believing that the purchase would include technical support.

The Federal Circuit accepted SKF’s argument in principle—if SKF and all of its authorized U.S. distributors in fact provide technical support to customers, and such technical support is not provided with the gray market ball bearings, then the gray market goods and the authorized goods are, indeed, materially different.  Unfortunately for SKF, however, the court found that 12.6% of its U.S. ball bearings were sold directly to entities that did not provide post-sale technical support.  Accordingly, due to SKF’s inconsistent provision of technical support (directly or through its authorized distributors), the evidence did not support SKF’s claim that the authorized U.S. ball bearings and the unauthorized gray market ball bearings were materially different.

The SKF case, therefore, illustrates the importance to trademark owners of establishing and maintaining clear standards that authorized distributors must follow in connection with the sale of such trademark owners’ products.  As SKF found out, failure to maintain consistent standards can undermine any effort to prevent the unauthorized importation and sale of gray market goods.

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