Grey Market

Grey market goods (also called parallel imports) are genuine products — made by or with the authorization of the intellectual property owner — that are purchased in one country and imported into another country for resale, without an additional authorization from the IP owner in the destination country. GREY MARKET vs. COUNTERFEITS: grey market goods are GENUINE — they are the real product, made by or authorized by the brand owner; counterfeits are fake; the grey market issue is about PARALLEL DISTRIBUTION CHANNELS, not fake products; WHY GREY MARKETS ARISE: patent/copyright/trademark owners often charge different prices in different countries (regional pricing); a US drug priced at $100 and sold in Canada at $40 creates incentive for parallel importers to buy in Canada and resell in the US at $70 (below US list price); the price differential drives the grey market; PATENT GREY MARKET: after a patented product is sold, patent exhaustion doctrine determines whether the patent owner can control resale and importation; TRADEMARK GREY MARKET: separate doctrine — Lever Bros. Co. v. United States (D.C. Cir. 1993); grey market goods may legally use the trademark in the destination country under some conditions but not others; TARIFF ACT: 19 U.S.C. § 1526 bans importation of trademarked goods manufactured abroad; § 337 ITC proceedings can block imports that infringe US patents.

Impression Products, Inc. v. Lexmark International, Inc., 581 U.S. 249 (2017) is the leading Supreme Court case on patent exhaustion and the grey market: FACTS: Lexmark sold printer toner cartridges both domestically and internationally; for domestic sales, some cartridges were sold under 'Return Program' contracts restricting reuse/resale; internationally sold cartridges were acquired by Impression and imported for reuse and resale; Lexmark sued for patent infringement; TWO HOLDINGS: (1) DOMESTIC SINGLE-USE RESTRICTIONS: Lexmark could not use patent law to enforce the 'Return Program' single-use restrictions against downstream purchasers (Impression) who were not parties to the original contract; an authorized sale exhausts patent rights even if the sale was subject to use restrictions — patent owners must use CONTRACT law against the original purchaser, not patent law against downstream buyers; (2) INTERNATIONAL EXHAUSTION: an authorized sale abroad (by the patent owner or with its authorization) also exhausts US patent rights — even if the product is then imported into the US; the Court unanimously rejected Lexmark's argument that foreign sales should not exhaust US patent rights; IMPACT: after Impression, US patent owners CANNOT use US patents to block reimportation of goods they or their authorized licensees sold abroad; this eliminated the 'restricted foreign sale' strategy for preventing grey market imports; COMPARE KIRTSAENG (copyright): Kirtsaeng v. John Wiley & Sons (S.Ct. 2013) reached the same result for copyright — international authorized sale exhausts US copyright importation right.

After Impression Products, patent owners have LIMITED tools to control grey market goods under patent law — but non-patent mechanisms remain: PATENT LAW — VERY LIMITED AFTER IMPRESSION: the authorized sale (domestic or international) exhausts the patent; the patent owner cannot use patent infringement claims to control downstream resale or importation of the same article; CONTRACTUAL RESTRICTIONS: (a) against the DIRECT purchaser: the patent owner can contractually restrict the direct buyer (authorized distributor, OEM) from reselling into unauthorized territories; violation = breach of contract, not patent infringement; (b) the contract does NOT bind downstream third-party purchasers who are not parties to the contract; (c) ITC Section 337 does NOT apply to goods sold abroad by the US patent owner — the goods must be unauthorized imports; TRADEMARK RESTRICTIONS: if the US trademark rights are separate from foreign trademark rights, trademark law may provide parallel import protection where patent law does not — Lever Bros.; however, if the goods are materially identical (same quality, labeling) and the trademark owner is the same entity as the foreign seller, grey market restrictions are harder to maintain; COPYRIGHT: works with a first-sale doctrine (Kirtsaeng) cannot be blocked by copyright; but DRM, shrinkwrap licenses, or region coding may add contractual restrictions; AUTHORIZED LICENSEE RESTRICTIONS: if goods are sold by an AUTHORIZED LICENSEE (not the patent owner), the licensee can include territorial restrictions in its sublicense agreements — but after Impression, even those authorized licensee sales may exhaust the patent; STRATEGIES: regional entity structures (separate legal entities owning different territorial patents); price control via distribution agreements; ITC § 337 for unauthorized infringing imports (not authorized grey market goods).

The International Trade Commission (ITC) can block importation of goods that infringe US patents — but its jurisdiction over grey market goods is more limited: ITC JURISDICTION: 19 U.S.C. § 337 bars importation of articles that infringe US patents (among other IP); ITC issues exclusion orders (blocking importation at the border) and cease-and-desist orders (blocking domestic sale of already-imported goods); GREY MARKET LIMITATION: goods AUTHORIZED by the US patent owner and sold abroad are NOT 'infringing' articles under § 337 — they were authorized; the patent was exhausted by the authorized foreign sale after Impression Products; ITC CANNOT BLOCK authorized grey market goods that the US patent owner (or its affiliate/licensee with appropriate authority) sold abroad; UNAUTHORIZED IMPORTS: § 337 fully applies to unauthorized imports — competing manufacturers who copy the product without authorization and import into the US; CONTRACTUAL RESTRICTION + § 337: the ITC has historically taken a different approach than district courts on contractual restrictions; pre-Impression, ITC sometimes enforced contractual restrictions on foreign sales as if they prevented exhaustion; post-Impression, this mechanism is more limited; TARIFF ACT § 1526 (TRADEMARK): for trademark grey market goods (separate from patent), § 1526 CBP regulations may provide exclusion of goods that are NOT the same as authorized domestic goods (different quality, labeling, warranty, safety certifications); PRACTICAL STRATEGY: for pharmaceuticals, electronics, and branded goods sold internationally, the most effective grey market control remains contractual (exclusive distribution agreements) + trademark registration in each territory + monitoring importers.

The pharmaceutical industry is among the most affected by patent exhaustion and grey market issues: DRUG PRICE DIFFERENTIALS: pharmaceutical companies charge dramatically different prices internationally (based on GDP, negotiated national health system prices, regulatory price controls); US drug prices are often 3–10x higher than in Canada, EU, or developing markets; this creates the largest grey market incentive; BIOLOGIC DRUGS AND BIOSIMILARS: the BPCIA (Biologics Price Competition and Innovation Act) governs biosimilar interchangeability; grey market biologics pose additional safety concerns (cold chain, counterfeit risk) that create regulatory barriers beyond patent exhaustion; IMPORTATION BAN — 21 U.S.C. § 331(a): the FDA prohibits personal importation of prescription drugs not approved in the US — even if approved abroad; this FDA regulatory ban operates independently of patent exhaustion; grey market drug importation into the US faces both patent (limited after Impression) AND FDA regulatory challenges; PARALLEL IMPORTS IN THE EU: the EU has an internal market exhaustion doctrine — once goods are sold in ANY EU member state by the IP owner or with consent, the IP rights are exhausted throughout the EU; this means a drug priced low in Spain can be reimported into Germany; EU exhaustion does NOT extend to imports from outside the EU; PATENT TERM EXTENSIONS: Hatch-Waxman § 156 PTE and EU SPCs create additional patent exclusivity beyond the base patent term; grey market goods may enter after PTE expires in the originating country but while PTE is still in force in the destination country — creating an exhaustion window where the drug is patented in the US but not in the seller's country.