Opposition Brief — SKF USA INC. v. International Trade Commission

5

Federal Circuit also agreed with the Commission's finding

that there was no basis to exclude the SKF bearings sold by

Roller Bearing Company/Tyson Bearing Company

(“RBC/Tyson”) under license from SKF USA but without

SKF USA’s post-sale technical services, and that it was

disingenuous for SKF USA to contend that RBC/Tyson

provided equivalent post-sale services to those of SKF USA

in the face of SKF USA’s stated position that no Respondent

can provide equivalent services to those of SKF USA

because SKF USA's services are per se superior to any

services others could provide. Pet. App. 2la-22a, 79a.

Accordingly, the Federal Circuit affirmed the Commission's

findings that there were no material differences between the

SKF bearings sold by SKF USA and the SKF bearings sold

by Respondents and, thus, affirmed the determination that

there was no infringement. Pet. App. 21 a-22a, 95a-96a.

Notwithstanding its arguments about the standard

allegedly applied by the Federal Circuit and the Commission.

SKF USA did not lose this case because of one or two non-

conforming sales. Instead, non-conforming sales amounted

to 12.6% of SKF USA sales (Pet. App. 6a. 20a-21a).* or

hundreds of millions of dollars. That amount of non-

receiving services on those sales, that customers in several of the

“alternate channels of trade” are generally gray market resellers, and that

the purchasers and/or end users of these bearings would receive the

alleged SKF USA services. Sve, e.g., Pet. App. 83a-84a (describing

obstacles to receiving services).

‘ Contrary to the assertions throughout SKF USA’s Petition, the Federal

Circuit did not find that 97.4% of SKF USA’s bearings sales were

accompanied by SKF USA's post-sale technical and engineering services

and that only 2.6% were unaccompanied by the services, and these

statements certainly are contested by Respondents, notwithstanding SKF

USA’s statement (Pet. 9) that the 97.4% is “uncontested.” In any event,

2.6% 0 of $2.6 billion in bearings sales would still amount to almost $70

million in SKF USA sales of non-conforming product that was not

materially different from the gray market bearings sold by Respondents.

See also JA27S.

6

conforming sales by SKF USA significantly exceeded the

sales by respondents during the same five-year period. See

JA291 n.20; JA288, JA290; see also CX-2468.1C-

* The statement in the Petition (Pet. 17) that gray market sales of SKF

bearings are estimated to exceed $100 million annually is not supported

by the cited evidence, or otherwise. To the contrary, as the Commission

opinion makes clear, the cited evidence relates to Respondents” sales

over a five-year period and demonstrates that SKF*s sales of non-

conforming bearings Were several times greater than Respondents’ sales

of SKF bearings. See Pet. App. 85a n.20 (redacted public version) and

JA291 n. 20 (unredacted confidential version).

J

REASONS FOR DENYING THE PETITION

I. THERE IS NO CONFLICT AMONG THE

CIRCUITS REGARDING THE STANDARD

APPLIED IN GRAY MARKET CASES.

SKF USA errs in claiming that a conflict exists among

the circuits as to the standard used in gray market goods

cases. The Federal Circuit decision in this case did not

create any conflict among the circuit courts. Instead. the

decision below, as well as the other cases cited by SKF USA,

demonstrate that al-of the circuits properly focus on whether

there are “material differences” between the authorized

products and the gray market goods in determining whether

there is trademark infringement. See Societe Des Produits

Nestle, S.A. v. Casa Helvetia, Inc., 982 F.2d 633. 639-40 (1"

Cir. 1992); Original Appalachian Artworks, Inc. v. Granada

Electronics, Inc., 816 F.2d 68, 73 (2d Cir. 1987); /beria

Foods Corp. v. Romeo, 150 F.3d 298, 302-03 (3d Cir. 1998):

Martin's Herend Imports, Inc. v. Diamond & Gem Trading

USA, Co., 112 F.3d 1296, 1302 (5" Cir. 1997): American

Circuit Breaker Corp. v. Oregon Breakers, Inc., 406 F.3d

577, 585-86 (9" Cir. 2005): Davidoff & CIE, S.A. v. PLD

Int'l Corp., 263 F.3d 1297, 1302 (11" Cir. 2001).

A. This Case Raises No Conflict Regarding

Whether Material Differences Suffice.

SKF USA argues that a conflict exists among various

circuits as to whether “material differences suffice” to

establish trademark infringement in a gray market case.

Initially, given that the Federal Circuit found that there were

no material differences. the issue of whether a finding of

8

material differences would be sufficient to establish

. ‘ . . 6

infringement is not presented by this case.”

Moreover, SKF USA fails to mention, much_ less

demonstrate, how the Federal Circuit's decision below

conflicts with the decisions of other circuits on this issue.

Pet. 10-11. This failure can likely be attributed to the fact

that the Federal Circuit’s ruling is consistent with the

holdings of other circuits. Citing its previous holding in

Gamut Trading Co. v. International Trade Commission, 200

F.3d 775 (Fed. Cir. 1999), the Federal Circuit recognized

that the “fundamental inquiry in gray market goods cases [is]

‘whether there are differences between the foreign and

domestic products and if so whether the differences are

material.” Pet. App. Ila-12a. Thus, contrary to SKF

USA’s assertions, there is no question that all circuits,

including the Federal Circuit. focus on “material

differences.”

B. There Is No Conflict Regarding Whether

Inferior Quality Is Required.

Once again, SKF USA fails to mention how the decision

below is in conflict with the decision of another circuit on

this particular issue. Indeed, the cases cited by SKF USA in

support of an alleged “conflict” with respect to this issue are

all quality control cases -- cases in which the alleged

infringer failed to provide quality control measures (e.g.,

* Respondents note that even where material differences are found,

consumer confusion may be an issue that still needs to be decided. See,

e.g., Nestle, 982 F.2d at 641 (finding of material differences gives rise to

presumption of confusion, but presumption may be rebutted by evidence

to the contrary). To the extent that SKF USA is seeking to raise any

conflict about what must be proven and who has the burden to do so once

material differences are established. that issue is simply not presented by

this case. because the Federal Circuit found that there were no material

differences.

9

inspections of products) utilized by the trademark owner.

Quality control was not at issue before the Federal Circuit.

and whether “inferior quality is required” was not raised,

addressed or decided by that court. The Federal Circuit's

decision, thus, could not possibly conflict with other circuit

court decisions on this issue.

In any event, no conflict exists as to whether proof of

inferior quality is required. SKF USA contends that the

First, Second, Fourth and Fifth Circuits do not require proof

that the gray market goods are of inferior quality, and the

Third Circuit is somehow in conflict with respect to this

issue. Pet. 11-12. However, the language from the Third

Circuit case cited by SKF USA, /beria, neither indicates nor

suggests that proof of inferior quality is required.’

Moreover, only a few sentences before this cited passage. the

[beria court explicitly stated that “courts do not require

trademark owners to show that the actual quality of the

inspected goods is measurably higher than that of the

uninspected goods.” 150 F.3d at 304 (emphasis added).

Thus, SKF USA’‘s contention that there is some conflict in

the circuits on this point is clearly misplaced.

’ As one district court recognized: “[The plaintiff] is correct in asserting

that differences in quality control procedures may be material for

purposes of the Lanham Act regardless of whether the products

themselves are actually of a higher quality than the allegedly infringing

products . . . ‘the test is whether the quality control procedures

established by the trademark owner are /ikely fo result in differences

between the products such that consumer confusion regarding the

sponsorship of the products could injure the trademark owner's

goodwill” See RJ Reynolds Tobacco Co. vy. Premium Tobacco Stores,

Inc. S7 US.P.Q.2d (BNA) 1253, 1255 (N.D. Hl. 2000) (emphasis in

original) (citing /Acria, 150 F.3d at 304).

10

C. There Is No Conflict Regarding Whether Actual

Harm To Goodwill Is Required.

No conflict exists among the circuits as to whether a

trademark owner must establish actual harm to its goodwill

in a gray market goods case. Once again, the issue of

whether a trademark owner must establish actual harm to

goodwill was not addressed by the Federal Circuit in the

proceeding below; thus, the Federal Circuit's opinion could

not be in conflict with the holdings of other circuits on this

issue. Because no conflict was created on this issue, SKF

USA’s request for certiorari has no basis.

SKF USA mischaracterizes the Federal Circuit's decision

in arguing that it created a conflict among the circuits by

requiring that a trademark owner show that gray market sales

“further diminish” the value of the mark if it cannot establish

that “all or substantially all” of its goods are accompanied by

the characteristics it claims as material differences. Pet. 12.

Nowhere in its opinion did the Federal Circuit impose a

“further diminishment™ requirement on SKF USA.

The issue of “further diminishment™ arose when SKF

USA itself argued to the Commission that the Second Circuit

non-gray market quality control case of Warner-Lambert

Company v. Northside Development Corporation, 86 F.3d 3

(2d Cir. 1996), stood for the proposition that if a trademark

owner itself sells non-conforming products, it can. still

prevent an alleged infringer from selling similarly non-

conforming products, as long as the number of non-

conforming sales by the trademark owner is de minimis. See

Pet. App. 19a. The Commission rejected this argument.

holding that Warner-Lambert does not stand for such an

assertion. Pet. App. 93a. Indeed, there is no mention in the

Second Circuit's opinion in Warner-Lambert of the phrase

11

“de minimis.’ Rather. the Second Circuit held that even if

some non-conforming goods “survive” a mark holder's

quality control procedures and enter the marketplace, the sale

of additional nonconforming goods by another can further

devalue the trademark: however, to be entitled to relief, a

trademark holder who sells nonconforming goods must show

that the later sales measurably diminish the value of an

already partially devalued mark. Pet. App. 94a.

The Commission held that despite its attempts to rely on

Warner-Lamberi, the case was of no use to SKF USA

because SKF USA provided no evidence that sales of the

gray market bearings reduced the value of its trademarks

beyond the diminution resulting from its own non-

conforming sales. Pet. App. 95a. The Commission never

ruled that SKF USA was required to show that gray market

sales “further diminished” the value of its mark or even that

Warner-Lamberi was applicable in a non-quality control

case, but instead, simply ruled that SKF USA’s attempts to

rely on Warner-Lambert could not succeed because SKF

USA could not meet the test set forth in that case.

Likewise, the Federal Circuit never imposed a purported

“further diminishment” requirement on SKF USA. Nowhere

in its opinion did the Federal Circuit state that SKF USA

must show that the gray market sales “further diminish” the

value of its marks. Rather. the Federal Circuit explicitly held

that the Commission did not require proof of further

Jminishment, and correctly applied the material differences

standard. Pet. App. 19a. Accordingly, the Federal Circuit's

* Even if Warner-Lambert exempted de minimis sales of non-conforming

goods from consideration under the material differences test, an issue

which the case does not purport to address. SKF USA’s sales of non-

conforming bearings could not be considered de minimis. As stated

above, SKF has sold hundreds of millions of dollars worth of non-

conforming bearings in the United States.

decision below has not created any conflict with respect to

this issue.

SKF USA also mischaracterizes the decisions of other

circuits in an effort to create a non-existent conflict. The

Fourth Circuit case it cites does not hold that actual loss is

required to state a Lanham Act claim, but simply holds that

in the absence of an actual loss, it is within the court's

discretion whether to award monetary damages. Shel/ Oil

Co. v. Commercial Petroleum, Inc., 928 F.2d 104, 108 (4"

Cir. 1991).’ Likewise. the Third Circuit case cited by SKF

USA is equally distinguishable. It concerns a quality control

case, similar to Warner-Lambert, discussed above, and

stands for the same proposition set forth in that case.

Specifically, in quality control cases, to establish the

existence of “material differences.” it must be shown that the

quality control procedures established by the trademark

owner are likely to result in differences between the products

such that consumer confusion regarding the sponsorship of

the products could injure the trademark owner’s goodwill.

Iberia, 150 F.3d at 304. The fact that this Third Circuit case

is consistent with the Second Circuit case of Warner-

Lambert, and even cites Warner-Lambert, refutes SKF

USA’s contention that there is some conflict between those

circuits.

D. There Is No Conflict Regarding Whether “All or

Substantially All” of the Goods Must Be

Materially Different.

Once again, SKF USA’s assertions regarding this

purported conflict are riddled with inaccuracies. First, as

explained above, while the Federal Circuit did apply an “all

' Moreover, given that damages are not available in Section 337

investigations, the Federal Circuit decision below could not possibly

create a conflict on damages issues.

ee

tyJ

or substantially all” requirement, it did not, as SKF USA

argues (Pet. 12-13), impose a “further diminishment’

criterion.” The Federal Circuit made quite clear that no such

“further diminishment™ requirement was ever applied in this

case.

Second, SKF USA _ mischaracterizes the “all or

substantially al.” requirement imposed by the Federal

Circuit. Specifically, SKF USA argues that this standard

requires that “all but one of the trademark owner's

authorized goods [] be materially different.” Pet. 13. It is

inexplicable how SKF USA could interpret the “all or

substantially all” requirement to mean “all but one.” as the

Federal Circuit explicitly stated that the “all or swhstantially

all” requirement “recognizes that something less than 100%

compliance will suffice and certainly permits a small amount

of nonconforming goods.” Pet. App. 18a-19a. (emphasis in

original). The Federal Circuit never states that “all but one”

of the trademark owner's goods must contain the material

difference. Instead. the opinion makes clear that the inquiry

of how many goods constitute “all or substantially all” is

highly fact specific. See id.

Third. SKF USA incorrectly argues that the imposition of

the “all or substantially all” requirement somehow creates a

conflict among the circuits because “[n]one of the other

circuits has established a quantification requirement for

noncontformity in gray market imports.” Pet. 13.

To the extent that there may be any conflict among the

circuits with respect to quantification, however, such conflict

has already been resolved in SKF USA’s favor. In Martin's

Herend, the plaintiff had itself imported certain products that

it later sought to prevent the defendant from importing. The

Fifth Circuit 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

14

same quality from the same product line.” 112 F.3d at 1304.

The Federal Circuit here. however, held that it would “not go

so far as Martin's Herend to hold that the sale of even one

authorized item lacking a material difference defeats

infringement.” and instead adopted the “all or substantially

all” standard, under which a “single sale of a nonconforming

item typically should not defeat a trademark owner's

protection.” Pet. App. 18a-19a. Not surprisingly, SKF USA

does not rely on, or even acknowledge, this apparent

difference between the Fifth Circuit and the Federal Circuit,

a difference that could only have benefited SKF USA and

provides no basis for review of the decision below.'°

Other than Warner-Lambert, which SKF USA once

again mischaracterizes,’' SKF USA points to no other circuit

‘’ Because SKF USA could not mect the more lenient test applied by the

Federal Circuit, it is obvious that SKF USA could not meet the more

stringent standard applied by Martin's Herend. Accordingly, to the

extent that there is any conflict between the Federal Circuit and the Fifth

Circuit, the resolution of the conflict could not change the outcome of

this case. This Court “reviews judgments, not statements in opinions,”

Black vy. Cutter Laboratories, 351 U.S. 292, 297 (1956), and does not

“decide questions that cannot affect the rights of litigants in the case

before them.” Lewis v. Continental Bank Corp., 494 U.S. 472, 477

(1990) (internal quotations omitted).

'' SKF USA seeks to portray Warner-Lambert as creating a conflict by

suggesting that the Second Circuit held that 4.4% non-conforming

product could be ignored under the material differences test. Pet. at 13.

There is no such holding in Warner-Lambert. Initially, Warner-Lambert

(which SKF USA has elsewhere argued is inapplicable) is not a gray

market case, did not apply the material differences test. and involves

quality control issues, not post-sale technical services. In any event. as

discussed above, Warner-Lambert did not exempt the 4.4% non-

conforming sales from consideration, but rather held that such sales did

not automatically bar plaintiff's claim and that plaintiff could still prevail

if it could show that defendant’s non-conforming sales diminished the

value of its trademark above and beyond the diminishment caused by

plaintiff's own non-conforming sales. It ts further clear that Warner-

Lambert was not holding that a 4.4% test would be applicable in all

15

as having addressed the issue of how much non-conforming

product will preclude a gray market trademark infringement

claim based on alleged material differences. The absence of.

other authority is perhaps not surprising. because most gray

market cases have involved physical differences. In such

cases, the authorized products typically have all contained

the claimed feature. so there has been no need to articulate or

apply a requirement such as the “all or substantially all”

requirement. ~ See, ¢.g., Nestle, supra."* By contrast, this

cases; rather, its willingness to consider an infringement claim

notwithstanding the 4.4% mon-conforming sales was based on the

particular facts and circumstainces of the case.

'* A recent exception to this observation is Bourdeau Bros., Inc. vy.

International Trade Commission, 444 F.3d 1317 (Fed. Cir. 2006), in

which the United States trademark owner, Deere & Co., alleged that

Bourdeau’s importation and sale in the United States of forage harvesters

that had been manufactured solely for sale in Europe violated Section

337 of the Tariff Act. The Commission found infringement based on

material physical differences between the forage harvestors sold by

Deere & Co. and the Europe:an forage harvestors sold by Bourdeau (i.¢.,

differences in safety features. differences in warning labels and safety

decals, differences in the hitch mechanism, differences in the operator's

manuals). The Federal Circuit agreed that such differences would be

material, but noted that Bourrdeau had argued to the ALJ and the court

that Deere itse/f sold Europeian forage harvesters in the United States. It

remanded the case to determine whether the material differences standard

was satisfied in light of such sales. If Deere could establish that the

number of nonconforming products sold in the United States was “so

small that substantially all mf Deere’s sales in the United States were of

North American forage harvesters, such that substantially all of the

authorized sales were of goods bearing the asserted material differences.”

Deere would prevai. in satisfying the “material differences” standard. /d

at 1327. .

’ Nestle’s chocolate differed from the gray market chocolate. which was

manufactured in Venezuela, with respect to the packaging, composition.

shape. price, and quality control. Nestle, 982 F.2d at 635. All of the

chocolate sold or offered for sale in the United States by Nestle differed

from the gray market chocollate in these respects: thus. the only question

to be answered was whether these differences were material, ie¢., whether

consumers would likely comsider these differences to be relevant when

16

case involves only non-physical differences, a circumstance

other circuits have not had occasion to address. See Pet.

App. 6a, 49a.

Physical features of a product will typically remain part

of a product when it reaches the ultimate consumer,

regardless of the number of times it is sold. By contrast,

when dealing with non-physical features, such as post-sale

services, trademark owners must take additional steps to

ensure that the non-physical features accompany the product

through all levels of sale and resale down to the ultimate

consumer. Only by doing so can the feature be considered

an integral part of the product and a basis for claiming that a

product without the post-sale services or other non-physical

feature is materially different. Accordingly, when dealing

with only non-physical differences, it is more likely that

some of the trademark owner’s goods may not be

accompanied by the non-physical characteristics that are

claimed to constitute material differences, particularly

where, as here, the trademark owner intentionally sells

product in some sales channels without accompanying

services. It was thus appropriate and hardly surprising that

the Federal Circuit needed to articulate a test addressing the

impact of non-conforming sales on the material differences

standard. The test that it articulated was appropriate and

consistent with the purposes of trademark law, as discussed

below. No other circuit, however, has addressed the

application of the material differences test to a case

involving only non-physical differences. Therefore. by

definition there can be no inter-circuit conflict at this point as

to how the test should apply in that context.

purchasing the chocolate. 982 F.2d at 638 (holding that “the record is

pellucid that Nestle never authorized the sale of Venezuelan-made

chocolates in Puerto Rico”).

17-

Il. THE FEDERAL CIRCUIT’S DECISION DOES

NOT UNDERMINE TRADEMARK OWNERS

AND THE PUBLIC’S PROTECTION AGAINST

GRAY MARKET INFRINGEMENT

SKF USA's attempt to appeal to purported public policy

concerns is high on rhetoric and low on substance. While

concerns regarding materially different gray market goods

may be valid, the Federal Circuit's opinion in this action has

done nothing to heighten or exacerbate such concerns.

A. The “All or Substantially All” Standard Does

Not Ignore Realities of Consumer Markets or

the Protection of Consumer Expectations.

SKF USA argues that the Federal Circuit's “all or

substantially all” standard is impossible for a trademark

owner to satisfy because “even the most conscientious and

scrupulous trademark owners . . . cannot prevent

nonconforming trademarked goods from ever entering the

stream of commerce.” Pet. 14. Once again, SKF USA

mischaracterizes the Federal Court’s decision.

This action does not involve a “conscientious and

scrupulous” trademark owner who implemented the most

“rigorous and demanding manufacturing. -distribution, and

service procedures.” ret, 14. Instead. SKF USA

intentionally chose to sell Aundreds of millions of dollars of

bearings that were not accompanied by its post-sale technical

support. This case is thus entirely distinct from the quality

control cases relied on by SKF USA, which acknowledge the

practical reality that, despite the lapses one must realistically

expect under even the most rigorous quality controls, a

trademark owner nonetheless has the right to protect the

quality controls it consistently implements with respect to all

or substantially all of its products. Not only do the cases

cited by SKF USA not involve the purposeful nonconformity

18

involved here. they do not support the notion that a

trademark owner can establish the existence of material

differences based on procedures it has chosen not to apply.

See Pet. 15 (citing Philip Morris, Inc. vy. Allen Distributors,

Inc., 48 F. Supp. 2d 844, 848 (S.D. Ind. 1999); RJ. Reynolds

Tobacco Co. 57 U.S.P.Q.2d at 1255; El Greco Leather

Prods. Co. v. Shoe World. Inc., 806 F.2d 392, 395 (2d Cir.

1986)). In effect. SKF USA has chosen to sell two products

— one with services and one without — yet wishes to be free at

the same time to claim that others are selling a materially

different product when they import and sell the second

product.

SKF USA argues that the Federal Circuit’s “all or

substantially all” standard is impracticable in the context of

non-physical differences where the nonconforming nature of

the sales is intentional. Pet. 15. For example, SKF USA

argues that a manufacturer of a guitar may offer extensive

warranties to nearly all of its customers, but agree not to

offer such warranties to rock musicians who use guitars in a

destructive manner. Pet. 15. What SKF USA fails to

acknowledge 1s that the material difference standard entails a

comparison of authorized products to unauthorized products

— regardless of the channels of trade through which those

products may have traveled on their way to the ultimate

consumer. See Pet. App. 22a. 63a (rejecting SKF USA’s

channels of distribution argument); Gamut, 200 F.3d at 779.

Nothing in gray market precedent supports the exemption of

certain channels of trade or certain classes of consumers

from the material differences inquiry where a trademark

owner purposefully chooses not to offer services."

'* Moreover, the underpinning of SKF USA’s argument that it could treat

different sales channels differently was its claim = that consumers

purchasing in different channels had different expectations as to what, if

any, post-sale technical services they would receive. As the Federal

19

SKF USA‘*s argument that the Commission should have

ignored its non-conforming product sold in certain sales

channels in the United States is disingenuous in fight of the

relief it seeks under Section 337. SKF USA has asked for a

general exclusion order that would block a// unauthorized

imports of SKF bearings. without regard to whether such

bearings would be resold in channels in which consumers

allegedly did not expect the claimed post-sale services that

SKF USA asserted were a material difference. There is no

authority to support this proposition, much less a conflict

among the circuits.

SKF USA also argues that the Federal Circuit's “all or

substantially all” standard conflicts with “fundamental tenets

of the trademark law directed to protecting the expectations

of average consumers.” Pet. 16. Contrary to SKF USA's

contention, the “all or substantially all” requirement is

consistent with the protection of consumer expectations. In

enacting the Lanham Act to protect consumers, lawmakers

recognized that “|e]very product is composed of a bundle of

characteristics . . . Consumers who purchase a_ particular

product expect to receive the same special characteristics

every time.” See Davidoff, 263 F.3d at 1301 (internal

citations omitted). Thus. “when a product identical to a

domestic product is imported into the United States under the

same mark, no violation of the Lanham Trade-Mark Act

vecurs . . . In such a situation, consumers get exactly the

bundle of characteristics that they associate with the

mark....° See Nestle, 982 F.2d at 641 (emphasis in

original). If less than “substantially all” of a trademark

owner's products are sold without being accompanied by a

certain characteristic, which, in this case. constituted sales

Circuit and the Commission noted in the proceedings below, however,

SKF USA failed to establish that purchasers of SKE bearings in the

“alternate channels of trade” had any such different expectations. Pet.

App. 21a. 80a, 86a-88a.

20

totaling hundreds of millions of dollars, the trademark owner

cannot argue that this characteristic is included in the

“bundle” that consumers expect to receive every time.

B. The “All or Substantially All” Standard Does

Not Undermine The Remedy Against Gray

Market Imports, But Rather Ensures That Such

a Remedy Is Appropriate.

SKF USA argues that the importation of gray market

goods demands a unique legal solution, namely, in rem

actions under Section 337, and contends that the Federal

Circuit's decision endangers the exclusion remedies

available under Section 337. Pet. 18-19. Respondents agree

that in rem actions and remedies under Section 337(d)(2) of

the Tariff Act of 1930, 19 U.S.C. §1337(d)(2) are unique, in

that they allow trademark owners to prevent importation by

all others of entire classes of genuine products. These

remedies are not appropriate, however, when the subject

products are identical to products sold by the trademark

owner itself.

Indeed, as noted above, SKF USA here sought a general

exclusion order under Section 337 against a// imports of

unauthorized SKF bearings, regardless of whether those

bearings were to be sold in channels where SKF USA itself

did not offer post-sale technical support. Thus, SKF USA

sought to exclude bearings identical to hundreds of millions

of dollars of bearings SKF USA itself has sold in the United

States. Before a party is permitted to obtain the extreme

relief under Section 337 of excluding imports of all

unauthorized goods, it should be required to prove that the

gray market goods are materially different from “all or

substantially all” of the authorized goods sold by the

trademark owner. To allow otherwise would be to disregard

consumer expectations in favor of providing trademark

owners with an exclusive distributorship. Accordingly, SKI

21

USA’s contention that the Federal Circuit’s decision

somehow endangers exclusion remedies under Section 337 is

simply incorrect. To the contrary, it ensures that these

remedies comport with the goals of the Lanham Act.

CONCLUSION

The Petition fora writ of certiorari should be denied.

Respectfully submitted.

/s/ Steuart LH. Thomsen

Patricia B. Cunningham — Steuart H. Thomsen

SUTHERLAND ASBILL & Counsel of Record

BRENNAN LLP SUTHERLAND ASBILL &

999 Peachtree St., NE BRENNAN LIP

Atlanta, GA 30309 1275 Pennsylvania Ave., N.W.

(404) 853-8000 Washington, D.C. 20004-2415

(202) 383-0100

Counsel for Respondent Bearings Limited

Lyle B. Vander Schaaf

BRYAN CAVE LLP

700 Thirteenth Street, N.W.

Suite 700

Washington, D.C. 20545

(202) 508-6191

Counsel for Respondent McGuire Bearing Company

May 26, 2006

/ FILED

: JUN 1~ 2006

}

eee cert,

No. 05-1236 | § eu coues oe

IN THE

Supreme Court of the United States

SKF USA Inc.,

Petitioner,

v.

INTERNATIONAL TRADE COMMISSION, BEARINGS LIMITED,

and McGuire BEARING CoMPANY,

Respondents.

On PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FEDERAL CIRCUIT

REPLY BRIEF

BENNETT EVAN COOPER HERBERT C. SHELLEY

STEPTOE & JOHNSON LLP Counsel of Record

Collier Center ALICE A. KIPEL

201 East Washington Street STEPTOE & JOHNSON LLP

Suite 1600 1330 Connecticut Ave., N.W.

Phoenix, AZ 85004-2382 Washington, D.C. 20036

(602) 257-5200 (202) 429-8146

Counsel for Petitioner

i

RULE 29.6 STATEMENT ~

No change has occurred with regard to the disclosure

statement made on page ii of Petitioner’s Petition For A Writ

of Certiorari.

ii

TABLE OF CONTENTS

Page

TARA AAT ERO btininicsscniceieicanticinabigibaae ili

SUE rea Mek TRS ec shsid cchhndniaieavuisavisaeesbinsce asaaninbanoneasiioe ]

I. THE FEDERAL CIRCUIT’S STANDARD

CREATES A PRONOUNCED CONFLICT WITH

OTHER CIRCUITS’ APPROACHES... 2

A. The “All or Substantially All”

Requirement Alone Justifies this Court’s

ATI LCR TA ETE HIER EF 2

B. Other Aspects of the Federal Circuit’s

Standard Broaden the Conflict. ....................... 6

Il. THIS CASE PRESENTS THE APPROPRIATE

VEHICLE TO RESOLVE THE CONFLICT......... 8

CA FIG BAe ION sinvnicscsscnicdsneqaitbvipnetinnn kanes coiueeb tenet sae ABMaEES 10

ill

TABLE OF AUTHORITIES

Page

CASES

Bourdeau Bros., Inc. v. International Trade

Commission, 444 F.3d 1317 (Fed. Cir. Mar.

PR EE Cisishb iia ncdackehinc alin hineui akadniibiaasins 1,10

El Greco Leather Prod. Co. v. Shoe World, Inc., 806

dl ee a Ae OEE chee tcistin ssi dacceanisnudansadansacalots 6

Iberia Foods Corp. v. Romeo, 150 F.3d 298 (3d Cir.

PINs. ink sctisivesDinisdacddieamnidicssicesbecoakoauicinnue toes 4,5, 6

Martin's Herend Imports, Inc., v. Diamond & Gem

Trading USA, Co., 112 F.3d 1296 (Sth Cir.

WTB akinécsihnccetsaesgaeiiasicds aks niaca eatin reeks 6,9

Monsanto Co. v. Haskel Trading, Inc., 13 F. Supp. 2d

Re CELEBS: © FED <cacianciinicsinaisinistccisisteinasianianens a4

Philip Morris, Inc. v. Allen Distributors, Inc., 48 F.

ue. 26 BAG C52), Wak, TSI) sisvicsiivssccasccsssiasvesvesccrsens 5

R.J. Reynolds Tobacco Co. v. Premium Tobacco

Stores Inc., 57 U.S.P.Q.2d (BNA) 1253 (N.D.

ile: MI isso uae aigiolagiocey sola epee oaakaeapieas eeaae 5

Shell Oil Co. v. Commercial Petroleum, Inc., 928 F.2d

PE Ge, FED csshcsivnn teicciscectimcsninicss ue easeeens G7

SKF USA Inc. v. International Trade Commission,

GES FOE TST CP Ey De Sevcsestintitdciccesscdcoe l

Societe Des Produits Nestle, S.A. v. Casa Helvetia,

Inc., 982 F.2d 633 (1st Cir. 1992) ..................... 7&7

iV

Warner-Lambert Co. v. Northside Development

Cee, BS EG 3 CAG AE, FIO) asiiccecivrcitccone 3, 6

STATUTES

PP LOOT viiicntussiniadintchedcaatal wlan andinaaen 8

LEGISLATIVE MATERIAL

H.R. Rep. No. 100-40, 100th Cong., Ist Sess. 156

CAG, TEE B escent atiisaesbbesnsatedtaruancasasasecioeinies 8

Omnibus Trade and Competitiveness Act of 1988,

Pub. L. No. 100-418, 102 Stat. 1107 ................ esses 8

MISCELLANEOUS

J. Thomas McCarthy, McCarthy on Trademarks and

Unfair Competition (4th ed. 2005) .......ceesesseeseenees 9

Jerome Gilson, 7rademark Protection and Practice

FUE 00 ed irecikccatda sui tcvaccdcatoantenduolacausacinneen 10

INTRODUCTION

The briefs of the Government and Bearings Limited et al. in

opposition confirm the need for review by this Couart. In fact,

the briefs highlight the considerable differences that exist

among the circuits as to the appropriate legal standard for

finding trademark infringement by gray market goods.

But what the Government does not even mention, and

Bearings Limited mentions only in a footnote, is Bourdeau

Bros., Inc. v. International Trade Commission, 444 F.3d 1317

(Fed. Cir. Mar. 20, 2006), the first gray market decision

issued by the Federal Circuit since its 2005 opinion in SKF

USA Inc. v. International Trade Commission, 423 F.3d 1307

(Fed. Cir. 2005). Bourdeau cites to SKF USA no fewer than

seventeen times, and vacates and remands the International

Trade Commission’s finding of gray market infringement in

favor of the trademark owner -- The John Deere Company --

by applying the Federal Circuit’s new material difference

standard stemming from SKF USA. The decision validates

Petitioner’s concern that, in the absence of review by this

Court, the practical effect of the Federal Circuit’s newly

articulated standard is to bar trademark owners from

obtaining relief against the growing onslaught of infringing

gray market imports through the most effective remedy -- a

Section 337 action. Because the Federal Circuit has exclusive

jurisdiction of such actions, there is no time or opportunity for

further “‘ventilation” of the issue, in the context in which it is

most likely to arise. Govt. Br. at 8-9.

Having ignored the impact of the SKF USA legal standard

in Bourdeau, the Government, like Bearings Limited,

concentrates on its argument as to why there is no conflict

among the circuits regarding the criteria for gray market

infringement. The Government’s arguments inconsistently

mischaracterize the opinion below and attempt to narrow the

issue in a manner that takes it out of context. The Government

focuses its “all or substantially all” argument to address

2

whether a single lapse by a trademark owner deprives the

owner of protection. It then states that only one circuit besides

the Federal Circuit, the Fifth Circuit, has addressed this issue

and that there is no reviewable conflict between the two, or

among the other circuits that have not addressed it. Bearings

Limited presents a rambling discussion of case law attempting

to show absolute consistency among all circuits.

The Government’s manipulation of the issue and Bearings

Limited’s discussion belie the fact that the concept of “all or

substantially all” has arisen in different manners among the

circuits. There is a conflict among the circuits on the

standards for determining gray market trademark

infringement. Moreover, contrary to both Respondents’

arguments, the Federal Circuit has created the strictest

standard for proving infringement, not only by adopting the

single-sale “all or substantially all” position, but also by

superimposing a requirement to prove further diminishment

of the trademark’s value as an additional obstacle to relief.

The Federal Circuit’s new and exceedingly stringent hybrid

standard undermines the core principles of gray market

trademark law and necessarily creates a direct conflict that

cuts deeply across the precedent of each of its sister circuits

that has established a material difference test.

I. THE FEDERAL CIRCUIT’S STANDARD

CREATES A PRONOUNCED CONFLICT

WITH OTHER CIRCUITS’ APPROACHES.

A. The “All or Substantially All” Requirement

Alone Justifies this Court’s Review.

Consistent with the theme of downplaying the extent of

circuit conflict, the Respondents fail to appreciate even the

precise scope of the direct conflict that they concede.

Specifically, the Government claims that “only one other

circuit has addressed the question at issue here”—namely, the

“all or substantially all” requirement of the first prong of the

Federal Circuit’s standard. Govt. Br. at 5, 8; BL Br. at 14.

3

The Government states that there may be a conflict between

how the two circuits apply the standard, but it need not be

resolved now. However, in addition to the Fifth Circuit, the

First, Second, and Third Circuits each have specifically

opined on the issue. None has adopted anything approaching

the strict quantitative standard imposed by the Federal Circuit

in this case. Instead, they have applied more flexible

standards that focus on likelihood of consumer confusion in

the particular circumstances, which is the ultimate benchmark

of Lanham Act jurisprudence. An “all or substantially all”

quantitative standard does not allow for circumstances in

which a trademark owner may distribute nonconforming

goods in a manner that it has reasonably determined will not

confuse customers.

For example, in Warner-Lambert Co. v. Northside

Development Corp., 86 F.3d 3 (2d Cir. 1996), the Second

Circuit addressed the extent to which the trademark owner’s

authorized goods could be nonconforming, and it held that the

trademark owner was entitled to injunctive relief even though

the trademark owner was responsible for 4.4% of product in

the marketplace being nonconforming. Warner-Lambert, as

Respondents correctly note, was a product degradation case

(stale cough drops). However, they misleadingly contend that

the case is “not a gray market case.” Govt. Br. at 12; BL Br.

at 14 n. 11. The product degradation line of cases is a subset

of gray market case law that is analyzed under all of the same

standards, but that requires trademark owners to establish, in

addition to a material difference, that “the unauthorized

products [are] inferior” or “diminish the value of their mark.”

Monsanto Co. v. Haskel Trading, Inc., 13 F. Supp. 2d 349,

356-57 & n.5 (E.D.N.Y. 1998). The failure to appreciate this

nuance is presumably the reason Respondents discount the

“further diminishment” prong of the material difference

standard articulated by the Federal Circuit in SKF USA.

Moreover, as noted in the petition, Warner-Lambert is the

only case found where a numerical percentage of

4

nonconforming product was Stated. The 4.4% of

nonconforming goods did not deprive the trademark owner of

protection there and SKF USA’s 2.6%, discussed in more

detail in the petition, fairs wel! in comparison. '

The Third Circuit, in Jberia Foods Corp. v. Romeo, 150

F.3d 298 (3d Cir. 1998), has also opined on the issue, noting

that “the [appropriate] test is whether the quality control

procedures established by the trademark owner [the material

difference at issue], are likely to result in differences between

the products such that consumer confusion regarding the

sponsorship of the product could injure the trademark owner’s

goodwill.” /d. at 304. While the Third Circuit’s language is

not quite as developed as the decisions of other circuits, its

import is clear: “all or substantially all” is not the standard.

Rather, what is required in that circuit is that enough of the

trademark owner's products conform to create a material

difference vis-a-vis the imported gray market products and

generate a likelihood of confusion.” The Government’s

assertion that /beria Foods does not address the “all or

substantially all” issue (Govt. Br. at 9) depends on its narrow

' Bearings Limited devotes a substantial portion of its brief attempting to

portray SKF USA’s petition as raising factual issues. The portrayal is

both misleading and inaccurate. The Government’s brief settles the “‘fact-

bound question” — 2.6% of SKF USA’s sales were found not to have been

accompanied by post-sale technical services. Govt. Br. at 7. Bearings

Limited, however, quarrels with the use of percentages, preferring to state

repeatedly that SKF USA has put “hundreds of millions of dollars” of

non-materially different bearings on the market. BL Br. at 2, 4, 11 n. 8

and 20. Percentages are the only way to put matters in context; a large

actual dollar amount in one industry may be insignificant in another.

Using 2.6%, a number with which SKF USA disagrees, results in less than

$14 million per year, an insignificant amount compared to annual SKF

USA sales of over $525 million and estimated annual gray market bearing

sales of over $100 million.

? In this context, the 97.4% of SKF USA’s sales found to be materially

different would likely meet the Third Circuit's standard for finding a

likelihood of confusion.

5

view of the “issue”; the Third Circuit chose a conflicting

standard in lieu of “all or substantially all.”

Indeed, as discussed in the petition, district courts in other

circuits that have been presented with the issue of whether the

“all or substantially all” standard is appropriate have looked

to the Third Circuit’s Jberia Foods decision for guidance. In

Philip Morris, Inc. v. Allen Distributors, Inc., 48 F. Supp. 2d

844, 853 (S.D. Ind. 1999), for example, the court, citing

Iberia Foods, held that the plaintiffs and the defendants’

products differed materially, despite the plaintiffs failure to

show either that “all or substantially all” of its products

conformed or that there was further diminishment. Similarly,

in R.J. Reynolds Tobacco Co. v. Premium Tobacco Stores

Inc., 57 U.S.P.Q.2d (BNA) 1253 (N.D. Ill. 2000), the court,

citing /beria Foods among other decisions, held that the

plaintiff “need not show that its procedures succeed in

preventing virtually all stale products from reaching the

consumer. Accordingly, the import of the Third Circuit’s

decision has been widely understood.

Finally, the First Circuit, commenting on the “materiality

threshold” in gray market cases, has noted “that the threshold

of materiality is always quite low.” Societe Des Produits

Nestle, S.A. v. Casa Helvetia, Inc., 982 F.2d 633, 641 (1st Cir.

1992). Consistent with the underlying principles of the

Lanham Act, the court reasoned 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.” /d.

Accordingly, even if the conflict were limited to the first

prong of the Federal Circuit’s newly articulated standard as

argued by the Government, “all or substantially all” defined

to be no more than a single sale, which clearly it is not, the

breadth of the conflict is much greater than the Government

or Bearings Limited concedes.

6

B. Other Aspects of the Federal Circuit’s

Standard Broaden the Conflict.

By upholding the Commission’s application of Warner-

Lambert, the Federal Circuit added a second prong to its

standard that requires the trademark owner to prove that

“later sales measurably diminish the value of” or “further

devalue[]” its mark. Pet. App. 7a, 19a (quoting Warner-

Lambert, 86 F.3d at 7). Yet the Government states “the court

below did not hold that a plaintiff must show that there has

been a diminishment in the value of the mark.” Govt. Br. at

10-11; BL Br. at 10. This.misstatement of the standard

created in SKF USA cannot be used to support the argument

that there is no circuit conflict. In practice, the second prong

of the new standard necessarily translates into a requirement

that the trademark owner establish that the infringing products

are of an inferior quality and that they result in harm to the

trademark owner’s mark. Neither the Government nor

Bearings Limited suggests any way in which a plaintiff could

show further diminishment from gray market infringement

without proof of inferior quality.

Even viewed apart from the “all or substantially all” prong,

the “further diminishment” prong directly conflicts with the

majority of material difference standards articulated by other

circuits. The First, Second, Fourth, and Fifth Circuits have

each held that proof that the gray market goods are inferior in

quality is not necessary to prove infringement.’ Indeed, “the

assertion that plaintiffs must prove that defendants’

unauthorized products [are] inferior...would turn the Lanham

> See Nestle, 982 F.2d at 640 (“A showing that the alleged infringing

product suffers in quality is not necessary to prove a Lanham Trade-Mark

Act violation.”); El Greco Leather Prod. Co. v. Shoe World, Inc., 806 F.2d

392, 395 (2d Cir. 1986) (“the actual quality of the goods is irrelevant’’);

Iberia Foods, 150 F.3d at 304 (citing El Greco); Shell Oil Co. v.

Commercial Petroleum, Inc., 928 F.2d 104, 107 (4th Cir. 1991) (same);

Martin’s Herend Imports, Inc., v. Diamond & Gem Trading USA, Co., 112

F.3d 1296, 1302 (Sth Cir. 1997) (agreeing with Nestle’s approach). -

7

Act on its head.” Monsanto, 13 F. Supp. 2d at 356-57

(quotation omitted). Moreover, the First Circuit recognized in

Nestle that “(t]he Lanham Act contains no...proof-of-injury

requirement. By its very nature, trademark infringement

results in irreparable harm because the attendant loss of

profits, goodwill, and reputation cannot be satisfactorily

quantified....Hence, irreparable harm flows from an unlawful

trademark infringement as a matter of law.” 982 F.2d at 640

(citation omitted).

In a similar light, Respondents offer an unsupportable

reading of the Fourth Circuit’s opinion in Shell Oil Co. v.

Commercial Petroleum, Inc., 928 F.2d 104 (4th Cir. 1991).

The Government claims that the Fourth Circuit “held only

that district courts have discretion to refuse to award damages

in the absence of actual loss,” and that Petitioner quoted “the

court’s description of the litigant’s argument” rather than the

court’s holding. Govt. Br. at 11 & n.1. To the contrary, the

Fourth Circuit cited the district court’s holding that, despite

the infringement, “the evidence does not show any damages

suffered by Shell and none will be assessed,” and held that

“we do not believe that [the district court] misinterpreted the

requirements for awarding damages.” 928 F.2d at 108

(emphasis added). The Fourth Circuit’s discussion of the

district court’s discretionary equitable power to award

damages without proof of actual loss did not concern injury to

the trademark owner’s good will, but instead restitution of the

“infringer’s profits.” /d. Accordingly, the court effectively

concluded, as recognized by the plaintiff and quoted by

Petitioner, “that a finding of actual loss[] is a prerequisite to

an award of damages.” Jd. Damages, of course, are not

relevant in a Section 337 action, and do not go to the issue of

infringement.

Indeed, the Federal Circuit’s second prong effectively

undoes Congress’s explicit elimination of a requirement that

the complainant prove injury or harm. Such a requirement

existed in gray market Section 337 cases before the enactment