Ruling favors grey marketeers

Retailers can continue to sell name- brand goods bought on the international grey market to compete with “authorized” dealers. And if the manufacturer won’t guarantee the grey-market product, consumers can take legal action, the Supreme Court of Canada says.

Because of uneven pricing policies by multinational manufacturers, North American retailers, using a strong U.S. dollar, can buy directly – or through a grey marketeer – from overstocked overseas dealers and undercut the licenced domestic dealers and distributors.

The collapse of prices of Seiko quartz watches in Canada and the United States during the past several years is a result of grey-market buying by retailers such as Consumers Distributing Co. Ltd., the Woolco stores of F. W. Woolworth Co. Ltd., both of Toronto, and K mart Canada Ltd. of Brampton, Ont.

A Supreme Court decision in a drawn-out battle between Consumers and Seiko Time Canada Ltd. of Toronto, fits with one made by U.S. President Ronald Reagan after a similar U.S. case. It involved Toronto grey marketeer Continent-Wide Enterprises Ltd. and Duracell Inc., a U.S. unit of Dart and Kraft Inc. of Northbrook, Ill.

President Reagan rendered ineffectual the U.S. International Trade Commission’s ban on grey-market importing of Duracell batteries made by its Belgian subsidiary. Duracell has filed an appeal to reinstate the ITC ban.

Similarly, Seiko Canada, the authorized distributor of 250 quartz models, failed to stop Consumers from selling Seiko watches.

Although an authorized dealer, Seiko Canada is not a registered user of Seiko’s trademark rights. And even if it was, the Supreme Court said, “the distribution of a trademarked product lawfully acquired is not, by itself,” prohibited under Canadian trademark or common law.

Seiko Canada is an indirect marketing subsidiary of Japan’s K. Hattori and Co. Ltd. The Supreme Court noted that Hattori itself, owner of the trademark, did not try to stop the retailer. “Hattori launched these watches into world commerce with a warranty attached in its own name,” the Supreme Court said in overturning lower court decisions.

Consumers did not appeal a permanent order that made it post notices saying its watches are not covered by “international guaranty” through Seiko Canada. “Hattori is thereby freed from the obligation to perform, at least through Canadian facilities, its guaranty to repair during the warranty period,” the Supreme Court said.

Because Hattori and not Seiko Canada issued the guarantee, “Canadian purchasers should be left with their chances of forcing Hattori to perform this obligation.” The squabble started in 1978 when Consumers began importing 11 watch models from an unrevealed authorized overseas dealer. Seiko Canada service centres refused to accept Hattori’s guarantee for these watches and Seiko Canada sued Consumers in January, 1979, to stop it from selling the watches.

In April, 1980, the Supreme Court of Ontario said that public confusion “is likely” even after the notices were posted. Consumers Distributing was ordered to stop selling Seiko watches in Canada and pay $5,000 damages to Seiko Canada.

Consumers Distributing appealed – but only the order keeping it from advertising and selling Seikowatches.

Ontario’s Court of Appeal accepted the judge’s reasoning that Seiko’s authorized “product” included the instruction booklet, point-of-sales service, the guarantee and the after- sales services.

But the Supreme Court of Canada found no public confusion or deception after the notices were posted. It said “startling legal consequences would ensue” and “monopoly situations would exist” if such an extended package were limited to only authorized distributors.

Free competition “would be battered” because the extended package would recognize the right of one individual to control an identical product sold by another, even though the product is legitimately acquired. “Such a principle is foreign to our law,” the court said.

Some major U.S. grey marketeers, including Seiko importer Progress Trading Co. of New York, provide their own warranties. Chicago-based retailer Montgomery Ward and Co. switched to grey-market Seikos after 10 years of buying from authorized distributors. Its national merchandise manager for jewelry said he preferred the service, assortment and value offered by the grey marketeers.

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