Opinion ID: 161830
Heading Depth: 2
Heading Rank: 3

Heading: The Common Control Exception

Text: 23 We next consider whether, in spite of a valid transfer of the trademark from Vittoria Italy to VNA, a regulatory exception to the Act removes VNA from the scope of its gray market protections. The regulation in question, 19 C.F.R. § 133.23(d)(1), reads, in relevant part: 24 Gray market goods subject to the restrictions of this section shall be detained for 30 days from the date on which the goods are presented for Customs examination, to permit the importer to establish that any of the following exceptions ... are applicable: 25 (1) The trademark or trade name was applied under the authority of a ... trade name owner who is the same as the U.S. owner, a parent or subsidiary of the U.S. owner, or a party otherwise subject to common ownership or control with the U.S. owner (in an instance covered by § 133.2(d) and 133.12(d) of this part). 26 EAI does not allege that VNA is the same as Vittoria Italy, is a parent or subsidiary of Vittoria Italy, or that it is subject to common ownership with Vittoria Italy. Rather, EAI argues that the evidence is sufficient to show common control of the two companies or control of VNA by Vittoria Italy. 27 For the purpose of applying § 133.23(d)(1), common control is defined as effective control in policy and operations and is not necessarily synonymous with common ownership. 19 C.F.R. § 133.2(d)(2); see also United States v. Eighty-Three Rolex Watches, 992 F.2d 508, 516 (5th Cir.1993) (the ties that bind two entities with a profitable business relationship do not constitute the required effective control); United States v. Eighty Nine Bottles of Eau de Joy, 797 F.2d 767, 772 (9th Cir.1986) (suggesting that common control required common ownership, operations or management.). [A] close and profitable business relationship does not amount to common control. Eighty-Three Rolex Watches, 992 F.2d at 515. Rather, [t]he regulatory language makes clear that it contemplates the sort of control that a parent corporation would exercise over a subsidiary or that a common owner might exercise over both organizations. Eighty-Nine Bottles of Eau de Joy, 797 F.2d at 771. 28 In this case, EAI asserts genuine questions of material fact exist with respect to the following allegations: (1) VNA and Vittoria Italy work in concert to design, develop and distribute Vittoria products; (2) VNA and Vittoria Italy make joint decisions as to present and future product ranges; (3) Vittoria Italy sells Vittoria-branded products directly to original equipment manufacturers in the United States; (4) Vittoria Italy pays a significant percentage of VNA's advertising budget and exercises some measure of control over VNA's marketing of Vittoria products; (5) Vittoria Italy determines which product lines VNA is allowed to market in the United States; (6) Vittoria Italy reimburses VNA for nearly all of its liability for warranty claims on Vittoria products; (7) Vittoria Italy's catalog lists VNA as its U.S. distributor; and (8) the president and CEO of Vittoria Italy, Rudie Campagne (Campagne), makes decisions about employees of VNA as well as a sister company of VNA called XLM. Although these allegations show a close and profitable business relationship, they fall short of establishing common control as defined in 19 C.F.R. § 133.2(d). 29 For example, allegations of joint decision making and cooperative efforts to develop and market products for the United States at most give rise to an inference that a close business relationship exists between VNA and Vittoria Italy. Indeed, such cooperative planning is required by the 1992 Agreement. ( Aplt.App. at 39, ¶ 4.2.) Similarly, Vittoria Italy's reimbursing VNA for warranty liabilities does not give rise to an inference of control. While Vittoria Italy provides funding to support VNA's advertising, Vittoria Italy has no legal control over how those funds are spent. EAI's evidence that Vittoria Italy controls VNA's employment decisions apparently consists of a single e-mail from Campagne expressing his disapproval with VNA's management team and a strong request that it rehire a retired former officer of the company, which it did. Again, this is not evidence of control, but only evidence of VNA's understandable desire to preserve a good business relationship with Vittoria Italy. 30 VNA is referred to as the U.S. distributor for the Vittoria Group in the catalog. However, deposition testimony by VNA executives explains that the term Vittoria Group is a collective, descriptive term used to refer to several independent companies, each of which is somehow engaged in the production or sale of Vittoria products. In contrast, EAI has offered no evidence of any legal authority enabling Vittoria Italy or any other party to control VNA's actions. 31 EAI relies on a concurrence by Justice Brennan in K Mart Corp. v. Cartier, Inc., discussing the legislative history behind the Act and concluding that Congress did not intend to extend § 526's protections to affiliates of foreign manufacturers. 486 U.S. at 297, 108 S.Ct. 1811. Justice Brennan observed that Congress's intent was to protect only domestic interests, and that [t]he barriers that Congress erected.... are fragile barriers indeed if a foreign manufacturer might bypass them by the simple device of incorporating a shell domestic subsidiary and transferring to it a single asset — the United States trademark. Id. at 298, 108 S.Ct. 1811. 32 We believe EAI reads too much into Justice Brennan's concurrence by attempting to apply the descriptive word affiliate to this context. First, extending the common control exception to companies who merely work together under cooperative contractual arrangements would not advance the two policy considerations for § 526 that Justice Brennan identified in his concurrence. The first of these is that independent U.S. entities which acquire rights to trademarks have significantly greater investment-backed expectations at stake than subsidiaries or other affiliates of foreign manufacturers. 486 U.S. at 302, 108 S.Ct. 1811. However, close but independent business allies are also likely to have invested significant financial and human capital into their endeavors, as the record shows to be the case here. Second, Justice Brennan contrasted independent U.S. trademark holders with those covered by the common control exception because, in the latter case, the foreign manufacturer can protect its U.S. marketing efforts simply by restricting who can purchase the product and where those customers can subsequently export it. Id. The same cannot be said of U.S. trademark owners associated with foreign manufacturers only by virtue of a contract or other cooperative arrangement rather than by common control. While close business allies may hope to persuade their partners to adopt such controls, without more they are not able to force an unwilling foreign manufacturer to protect them from gray market importers. Such is the case here. 33 Finally, we find no evidence that VNA and Vittoria Italy have engaged in fraud or otherwise have attempted to subvert the limits Congress placed on § 526's protections. Although EAI alleges that VNA was created at the behest of Vittoria Italy, it points to no evidence that the agreement leading to the creation of VNA was anything but an arm's-length transaction between the Hibdon Tire Center and Vittoria Italy. Further, there is no evidence that Vittoria Italy has any legal authority to control VNA's actions, and no evidence of other connections between them such as interlocking officers or directors. 34 In sum, we hold that EAI has failed to demonstrate the existence of genuine questions of material fact sufficient to implicate the common control exception to the Act.