The Christmas shopping season of 1987 is well underway. The shelves of discount houses are stocked with a full range of products at bargain prices. But at this time next year, those shelves could be bare.
Could this be the last Christmas to find bargains on genuine trademarked merchandise?
The Supreme Court's decision in Coalition to Preserve the Integrity of American Trademarks (COPIAT) v. United States et. al., scheduled as early as this month, could mean the end of many types of discounted merchandise imported under current laws. Name-brand products ranging from Colgate toothpaste and Johnson & Johnson baby shampoo to top-of-the-line luxury items like Seiko and Cartier watches, Waterford crystal, Godiva chocolates and even Mercedes-Benz and Porsche automobiles, may be affected by the high court's decision.
Known as "gray market" goods, or "parallel imports," these are genuine trademarked foreign manufactured products that are imported without the consent of the U.S. trademark owner. The goods are typically purchased from a third party or the trademark owner's authorized distributor overseas and sold in competition with the trademark owner's authorized distributor in the United States .
Often, the authorized distributors are wholly owned subsidiaries of the foreign manufacturer, who refuse to sell to U.S. retailers that will not sell the product at the manufacturer's suggested retail price. Independent American importers can purchase genuine products overseas at prices so far below those set for the U.S. market that even after paying shipping costs and Customs duties, they can offer the same article for 20 to 40 percent less than the authorized distributor.
The high court's decision could stop what one report has estimated as a $7 billion business touching almost every industry. According to Toby Collado, executive director of COPIAT, as many as one of four watches purchased by consumers are gray market, depending on the watch brand. Brands currently in demand on the gray market include Seiko, Pulsar, Cartier, Citizen, Bulova, Piaget and Mavado. Gray-market sales of Gucci products also have increased dramatically in the past year.
In the Washington area, luxury products -- particularly perfumes and fragrances -- make up a high percentage of gray goods. One reason for this is that such goods generally have a high markup, thereby allowing for greater price maneuvering. Another reason is that local discounters cannot obtain them any other way but on the gray market.
"Authorized distributors are less likely to distribute their luxury products to anyone but the most exclusive store. They want to maintain that elitist image," explains Hank Hankla, a lawyer with a lobbying firm representing the American Consumer Trade Council, an association of importers and distributors, and also representing Cosmetic Centers, the discount health and beauty chain. Prestige cosmetics, perfumes, and fragrances obtained on the gray market make up a large part of Cosmetic Centers' sales.
"In stores like ours," says Hankla, "luxury perfumes such as Opium and L'Air de Temps are more likely to be obtained through the gray market than something like Max Factor, which can be purchased through normal channels of distribution."
Prestige cosmetics and perfumes, along with certain name-brand watches, also make up a large portion of K mart's parallel imports. And the savings to consumers are substantial -- 30 percent to 50 percent below suggested retail price. A Seiko watch retailing for $195 at an authorized dealer could cost a K mart shopper $100 to $120 and a Citizen brand watch with a suggested retail price of $110 could sell for as low as $50.
Other products, such as cameras, have nearly dropped out of the gray market. Single lens reflex cameras, the biggest category of parallel imports four or five years ago, have "basically dried up," says Hankla. "Today you just can't buy cameras cheaper overseas than you can here.
It is the availability of such bargain merchandise that is at stake in the COPIAT case. The Supreme Court will decide whether the Customs Service's regulations permitting the importation of gray-market goods are consistent with section 526 of the Tariff Act of 1930. Enacted in 1922, this provision prohibits the importation of any foreign manufactured goods bearing a U.S. trademark without the trademark owner's consent. Customs has interpreted the statute to allow the importation of trademarked merchandise if the domestic and foreign trademark owners are under common ownership or control, or if the goods have been trademarked abroad with the authorization of the trademark owner.
COPIAT members -- manufacturers and distributors of trademarked goods such as tires, crystal, perfumes, photographic equipment and electronics -- argue that this interpretation goes against the intent of Congress. They argue that the influx of gray-market goods leads to consumer confusion, damage to reputation, injury to business, lack of quality control in the marketplace, and allows gray marketeers to "free ride" on the reputation that trademark owners have built for their products.
In a recent Customs gray-market survey, numerous companies such as Jos. E. Seagrams & Sons, Godiva Chocolatier, Colgate Palmolive, Ford Motor, Minolta, Duracell and others, cited problems such as no factory-authorized warranties, no instructions, improperly labeled products and health and safety defects associated with gray-market goods.
"The overall problem is that gray goods are not made and designed for sale in this country," says COPIAT's Toby Collado. Some of the problems associated with the sale of gray-market goods in this country could be serious: Richardson-Vicks reported a case of several gray-market imports of Oil of Olay cosmetic products that were found to contain Red Dye No. 2, a color additive deemed by the Food and Drug Administration unsafe and thus not approved in the United States, but still allowed in Canada and the United Kingdom. The American Automobile Dealers Association reported that as many as 99 percent of gray-market cars do not fully comply with U.S. emission and/or safety standards. "The question is whether consumers truly get a savings under these circumstances," says Collado.
Those in favor of continued gray-market imports argue that the Customs regulations allowing parallel imports are consistent with the intent of Congress, as expressed in the legislative history of section 526 and by congressional inaction over years of Customs interpretation and practice.
They claim that, more importantly, parallel imports benefit the consumer by saving them billions of dollars a year through lower prices. And they provide greater availability of popular products to a wider range of consumers, many of whom may not live in the large cities or near retail centers where exclusive authorized distributors are typically located.
Gray goods are not counterfeits, proponents emphasize, but rather genuine products bearing legitimate trademarks. "We don't buy from back alleys. These are reputable and legitimate products," says A. Robert Stevenson, a K mart vice president.
If the Supreme Court finds present Customs regulations illegal, what then?
"K mart would survive", assures Stevenson, noting that gray-market imports make up less than 1 percent of K mart's total sales.
But even those discount stores with only a small percentage of gray goods may experience some heavy losses if importation restrictions are enacted. In some cases, the appeal of a particular discount article may be the very thing that attracts a consumer to a store. One may go to K mart or W. Bell for the purpose of buying a Seiko watch and stay to purchase $50 more in products that may not be gray market. Even if only 20 percent of a store's total inventory is gray market, it could account for far more than 20 percent of its business.
Those stores whose gray-market goods do account for only a small percentage of its total merchandise cannot afford to do without them: With profits of more than $26 billion, even a 1 percent drop in gray-market sales for K mart would mean a loss of $260 million.
Jay Freedman, whose law firm Freedman, Levy, Kroll and Simonds represents W. Bell, explains that some authorized distributors refuse to sell to discount houses, forcing discount stores like W. Bell to import thorough the gray market "just to have access to popular products." Without the gray market, some stores may have to drop more popular items from their inventory altogether.
Gene Rowan, an attorney with Patton, Boggs and Blow, which represents Revco drugstores, says that stopping the importation of gray-market goods will place extreme limitations on the "availability of certain products and accessibility of its present variety of products to large selections of the population."
Others say consumers will be hit right where it hurts the most -- in their pocketbooks -- and it may be a double-whammy as they encounter both the absence of bargain goods and the presence of higher prices for authorized articles. Some retailers now drop their prices for authorized merchandise to compete with gray-market goods. Without such competition, authorized dealers may raise their prices again.
COPIAT's Collado disagrees. "Inter-brand competition, i.e., Seiko versus Citizen brand watches, often results in just as much savings to consumers as intra-brand, i.e., authorized Seikos versus unauthorized Seikos."
He notes that even with the presence of gray-market goods, many of the so-called discount houses do not really offer prices that are lower than those offered by authorized retailers. And in many instances, such as in the case of a shampoo or toothpaste, both authorized and unauthorized versions of the product are sold out of the same bin.
Until the Supreme Court decision, however, holiday shoppers may want to purchase enough bargain goods to last a few Christmases, just in case. Karen Miller is a lawyer with the U.S. Customs Service.