Opinion ID: 211680
Heading Depth: 2
Heading Rank: 1

Heading: Material Difference Standard

Text: 15 The first issue we address is whether the distinction between domestic goods and gray market goods must be physical in nature in order to satisfy the material difference test, an issue of first impression for this court. SKF USA is essentially in agreement with the Commission that differences between authorized goods and gray market goods need not be physical to be material. The intervenors, however, argue that material differences must be physically manifested in the product or its packaging. They assert that the material difference test compares products, not sellers or the services they offer, and that the difference must be shown to be integral to the product. 16 We agree with SKF USA and the Commission and hold that physical material differences are not required to establish trademark infringement involving gray market goods. That is because trademarked goods originating from the trademark owner may have nonphysical characteristics associated with them, including services, such that similar goods lacking those associated characteristics may be believed by consumers to have originated from the trademark owner and, lacking such traits, may mislead the consumer and damage the owner's goodwill. 17 Generally, gray market goods are defined as genuine goods that ... are of foreign manufacture, bearing a legally affixed foreign trademark that is the same mark as is registered in the United States; gray goods are legally acquired abroad and then imported without the consent of the United States trademark holder. Gamut, 200 F.3d at 778. The principle of gray market law is that the importation of a product that was produced by the owner of the United States trademark or with its consent, but not authorized for sale in the United States, may, in appropriate cases, infringe the United States trademark. Id. at 777. 18 In Gamut, a decision of this court involving gray market goods, the Kubota Corporation filed a complaint at the Commission, alleging that Gamut and other respondents violated § 337 of the 1930 Tariff Act by importing from Japan and reselling in the United States used tractors bearing the mark Kubota that had been properly affixed in Japan. Id. at 780. The ALJ in that case determined that the respondents infringed Kubota's trademark because twenty-four models of the Kubota tractors imported by Gamut differed materially from the corresponding tractors imported by Kubota. Specifically, the ALJ found that the respondents' imported Japanese tractors lacked English language warning labels and that Kubota-US dealers did not have English language operator or service manuals for those models. Id. The ALJ determined that those differences in labeling, service, and parts for the imported Kubota tractors were in part relevant to the finding of a material difference between the authorized tractors and the gray market, used tractors. Id. at 782. The ALJ concluded that the respondents had infringed Kubota's trademark and violated § 337. Id. Gamut and the other respondent companies appealed, and the full Commission affirmed. 19 We began our analysis in Gamut with the fundamental inquiry in gray market goods cases: whether there are differences between the foreign and domestic product and if so whether the differences are material. Id. at 779. We stated that [t]he courts have applied a low threshold of materiality, requiring no more than showing that consumers would be likely to consider the differences between the foreign and domestic products to be significant when purchasing the product, for such differences would suffice to erode the goodwill of the domestic source. Id. That inquiry involves a question of fact. 20 The rationale underlying that minimal requirement is that [a]ny higher threshold would endanger a manufacturer's investment in product goodwill and unduly subject consumers to potential confusion by severing the tie between a manufacturer's protected mark and its associated bundle of traits. Id. at 779-80 (quoting Societe Des Produits Nestle v. Casa Helvetia, Inc., 982 F.2d 633, 641 (1st Cir.1992) ( Nestle )). We explained that the consuming public, associating a trademark with goods having certain characteristics, would be likely to be confused or deceived by goods bearing the same mark but having materially different characteristics. Id. at 779. Thus, by distinguishing domestic goods from gray market goods that bear a material difference, thereby finding trademark infringement, we upheld the two fundamental policies of trademark law: to protect the consumer and to safeguard the goodwill of the producer. Id. at 782. Accordingly, because we held that [s]ubstantial evidence supports the Commission's finding that consumers would consider the differences between the used imported tractors and the authorized Kubota-US tractors to be important to their purchasing decision, and thus material, id., we affirmed the Commission's decision. 21 We here carry that reasoning a step further and make explicit what may have only been implicit in Gamut. We hence conclude that, consistent with the Gamut decision, material differences that preclude infringement by gray goods may be physical or nonphysical. 22 Our reasoning is as follows: first, although the differences in labeling, parts, and structural features of the tractors certainly were mostly physical in nature, importantly, the Gamut court used only the term material differences, and not physical differences, to characterize the precise test to be applied in the gray market goods context. Second, as the Commission in the instant case correctly pointed out, although some of the material differences in Gamut were indeed physical, we there relied on cases that held that nonphysical material differences are sufficient to avoid trademark infringement. For example, the Gamut decision relied on Nestle, a First Circuit case in which that court stated in a footnote, [w]e think the appropriate test should not be strictly limited to physical differences. Other sorts of differences — differences in, say, warranty protection or service commitments — may well render products non-identical in the relevant Lanham Act sense. 982 F.2d at 639 n. 7. Additionally, the Gamut court stated that [d]ifferences in labeling and other written materials have been deemed material, on the criteria of likelihood of consumer confusion and concerns for the effect of failed consumer expectations on the trademark holder's reputation and goodwill, favorably citing Osawa & Co. v. B & H Photo, 589 F.Supp. 1163 (S.D.N.Y.1984), and Fender Musical Instruments Corp. v. Unlimited Music Center, Inc., 35 USPQ2d 1053 (D.Conn.1995). Gamut, 200 F.3d at 781. In those cases, material differences were found based in part on differences in services and guarantees between authorized and gray market goods, as well as accompanying documents such as instruction manuals, nonphysical traits that were nevertheless determined to constitute a material difference to consumers. 23 We are thus satisfied that the Commission's conclusion that nonphysical traits may constitute material differences is consistent with our case law and promotes the sound, established policies underlying trademark protection. Accordingly, we hold that material differences need not be physical in order to establish trademark infringement in gray market cases. 24 SKF USA argues that the Commission misinterpreted Martin's Herend and wrongly required that all or substantially all of SKF USA's authorized bearings be accompanied by the post-sale technical and engineering support, the allegedly material difference that distinguished SKF USA's goods from the gray goods. It alleges that the Commission erroneously combined the material difference standard in confusion-as-to-source case law with the diminution of value standard in deteriorated product cases such as Warner-Lambert. That elevated standard, SKF USA argues, constituted reversible legal error. Instead, SKF USA asserts that the proper inquiry should have been simply whether the mark holder has established that a material difference exists between categories of products. It maintains that it has met that burden and that fully 97.4% of its sales — the undisputed 87.4% of authorized sales, plus sales by Chicago Rawhide to the vehicle service market — are supported by post-sale technical services, consisting of both on-site services and hotline support, while respondents did not provide any such post-sale support for any of their sales. Thus, SKF USA asserts, it has shown that a sufficient number of its goods are materially different from the gray goods. Citing Nitro Leisure Products, L.L.C. v. Acushnet Co., 341 F.3d 1356 (Fed.Cir.2003), SKF USA also argues that the Commission failed to account for channel-specific factors in SKF USA's sales. That is, it argues that consumers who purchase bearings in the alternate channels of distribution have different expectations of service from SKF USA than do consumers from traditional, authorized distributors, so the alternate channels should not be considered in the aggregate. Furthermore, SKF USA contends that the Commission's statement that certain of its goods were not predictably and consistently accompanied by the asserted material difference was in error. It argues that the Commission's findings relating to SKF USA's dealings in the surplus market and the vehicle service market were unsupported by the record. 25 The Commission responds that it properly required SKF USA to show that substantially all of its authorized bearings were accompanied by the characteristics claimed to be a material difference, citing Martin's Herend. Because not all of the SKF USA-authorized bearings were accompanied by the post-sale services, the Commission asserts that it was correct in holding that the gray market bearings were identical to SKF USA-authorized bearings and should not be found to infringe SKF USA's trademark. The Commission further argues that the alternate channels of distribution argument advanced by SKF USA is not relevant to a material difference analysis of trademark infringement. It asserts that the material difference standard focuses on the goods themselves, not their channels of distribution. The Commission contends that, because some portion of the SKF-marked bearings are not predictably and consistently supported by post-sale technical services, especially the bearings sold through the alternate channels, those services cannot be considered integral to the goods and cannot be relied upon to show a material difference between SKF USA's bearings and the respondents' bearings. It argues that SKF USA's argument that consumer expectations are different in the alternate channels of distribution lacks evidentiary support. 26 First, we agree with the Commission that a plaintiff in a gray market trademark infringement case must establish that all or substantially all of its sales are accompanied by the asserted material difference in order to show that its goods are materially different. If less than all or substantially all of a trademark owner's products possess the material difference, then the trademark owner has placed into the stream of commerce a substantial quantity of goods that are or may be the same or similar to those of the importer, and then there is no material difference. Indeed, if it cannot be said that substantially all of a trademark owner's goods are accompanied by the asserted characteristic, then it may properly be concluded that, in effect, there exists no material difference between the trademark owner's goods and the allegedly infringing goods. We have reasoned before that the consuming public, associating a trademark with goods having certain characteristics, would be likely to be confused or deceived by goods bearing the same mark but having materially different characteristics. Gamut, 200 F.3d at 779. Conversely, then, a trademark owner's argument that consumers would be confused by gray goods lacking an asserted material difference from the authorized goods is inconsistent with the owner's own sale of marked goods also lacking that material difference from its own authorized goods. To permit recovery by a trademark owner when less than substantially all of its goods bear the material difference from the gray goods thus would allow the owner itself to contribute to the confusion by consumers that it accuses gray market importers of creating. 27 Martin's Herend, a decision of a sister circuit, supports that requirement, and we find its reasoning persuasive. In that case, a United States trademark owner alleged that a defendant company importing or selling similarly-marked fine porcelain goods infringed its mark. The defendant argued that the trademark owner itself had sold some of the same porcelain pieces and that there was no material difference between the defendant's product and the trademark owner's product. But the Fifth Circuit held that the defendant was properly held liable for trademark infringement for selling pieces not offered by the trademark owner because those pieces were materially different from the pieces the owner was selling. 112 F.3d at 1302. However, the Fifth Circuit also held that [a]s long as plaintiffs have ever approved a piece for importation and sale in this country, [the defendant] is free to sell any individual piece of the same quality from the same product line. Id. at 1304. The court reasoned that [t]he Lanham Act protects the trademark [but] it does not protect the exclusive distributorship agreement per se.  Id. In effect, the Fifth Circuit segregated the trademark owner's porcelain items into product lines that were materially different from the defendant's imports and those that were not. 28 The Commission argues that in Martin's Herend, the sale of even one authorized porcelain piece would have resulted in the denial of relief with respect to all porcelain pieces of the same quality from the same product line. In the present case, the Commission asserts, the requirement that all or substantially all of a plaintiff's goods be accompanied by the alleged material difference in order to seek relief under trademark infringement is entirely consistent with the Fifth Circuit's reasoning. In Martin's Herend as well as in the present case, the sale by the trademark owner of marked goods that lack the alleged material difference weakens the owner's argument that similar sales by others would damage its mark. Indeed, such a sale may result in the conclusion that the characteristic is not integral to the goods and cannot be the proper basis for the material difference standard. 29 We reject SKF USA's attempts to distinguish Martin's Herend by arguing that that case involved physical differences, was based on specific product lines, and did not involve complex channels of distribution. SKF USA argues that no cases have required a trademark owner to establish that all of its products are accompanied by the material differences in order to prevail. However, we do not read the Commission's determination to set forth such a strict rule, and we do not go so far as Martin's Herend to hold that the sale of even one authorized item lacking a material difference defeats infringement. Instead, the all or substantially all  benchmark recognizes that something less than 100% compliance will suffice and certainly permits a small amount of nonconforming goods. A single sale of a nonconforming item typically should not defeat a trademark owner's protection. Accordingly, we agree with the Commission that the test of all or substantially all is a fair interpretation of the material difference standard, and we expressly adopt the Commission's holding that a trademark owner must show that all or substantially all of its authorized goods are accompanied by each of the claimed material differences to satisfy that standard. 30 We also disagree with SKF USA that the Commission wrongly applied Warner-Lambert to require further diminishment of its mark's value. In that case, the Second Circuit held that for a trademark holder [t]o be entitled to relief against a later seller of non-conforming goods, such a trademark holder must show that the later sales measurably diminish the value of an already partially devalued mark. Warner-Lambert, 86 F.3d at 7. SKF USA argued before the Commission that Warner-Lambert stood for the proposition that a trademark owner's non-adherence to its policies or practices does not defeat a claim of infringement if those non-conforming sales are insignificant. Final Determination, slip op. at 50. In essence, it argued that its nonconforming sales should be ignored because they were in de minimis amounts. We do not construe the Commission's statements regarding that case as a misapplication of the further diminishment test, and we instead determine that the Commission properly applied the material difference standard.