June 2010
ITC Misapplied “All or Substantially All” Test
| Judges: Michel, Newman (concurring in the remand and dissenting−in−part), Lourie (author) |
| [Appealed from ITC] |
In Deere & Co. v. International Trade Commission, No. 09−1016 (Fed. Cir. May 26, 2010), the Federal Circuit vacated the ITC’s determination that the sales of European−version John Deere forage harvesters in the United States by Intervenors Bourdeau Brothers, Inc., OK Enterprises, and Sunova Implement Co. (collectively “Bourdeau”) did not violate § 337 of the Tariff Act of 1930 as amended, 19 U.S.C. § 1337. The Court remanded to the ITC to determine whether 96.6 to 96.9%—the ratio of North American−version harvesters sold by Deere & Co. (“Deere”) in the United States divided by the sum of the North American−version harvesters and the European−version harvesters sold by Deere in the United States—is “substantially all” under the “all or substantially all” test, thereby entitling Deere to an exclusion order.
Deere manufactures self−propelled forage harvesters for sale in Europe, and it manufactures different self−propelled forage harvesters for sale in the United States. All of Deere’s harvesters are sold under certain Deere trademarks. New and used Deere harvesters are sold through various distribution channels, including official Deere dealers and independent dealers. Independent dealers sell Deere products without any oversight from Deere. Deere has official and independent dealers in both the United States and Europe. Bourdeau is an independent dealer in the United States.
The ITC instituted an investigation based on a complaint in which Deere alleged violations of 19 U.S.C. § 1337(a)(1)(C), which prohibits the importation of products that were “produced by the owner of the United States trademark or with its consent, but not authorized for sale in the United States,” often called “gray market goods.” Specifically, Deere contended that Bourdeau and other independent and official Deere dealers based in both the United States and Europe had infringed Deere’s trademarks by unlawfully importing and selling Deere’s European−version harvesters in the United States.
At the conclusion of that investigation, the ITC issued a general exclusion order prohibiting importation of European−version harvesters manufactured by or under the authority of Deere bearing Deere’s trademarks. In a previous appeal, the Federal Circuit vacated−in−part and remanded, finding that Deere was required to show that all or substantially all of the Deere harvesters being sold in the United States that were authorized by Deere were North American−version harvesters, as opposed to European−version harvesters.
On remand from the previous appeal, the ALJ found that Deere did not authorize the sales of the European−version harvesters in the United States and that the number of sales that Bourdeau alleged were authorized was, in any event, so small that “substantially all” of Deere’s authorized U.S. sales were of North American−version harvesters. The ITC reversed the ALJ, finding substantial evidence that Deere’s U.S. and European dealers had apparent authority to sell European−version harvesters. The ITC reasoned that because trademark law focuses on the potential for third−party confusion in the marketplace, apparent authority is sufficient to constitute “authority.” The ITC also found that not “all or substantially all” of the authorized harvesters sold in the United States were North American−version harvesters.
On appeal, the Federal Circuit held that substantial evidence supported the ITC’s determination that the sales of European−version harvesters in the United States by official Deere dealers were authorized, but that the ITC had misapplied the “all or substantially all” test set forth in SKF USA, Inc. v. International Trade Commission, 423 F.3d 1307 (Fed. Cir. 2005).
In support of the first holding, the Court determined that the ITC correctly held that “apparent authority” constitutes authority for purposes of this case. Apparent authority arises from a buyer’s reasonable belief, based on the acts and omissions of a seller (here Deere), that sales were authorized. The Court approved of the ITC’s reasoning, which looked to one of the policies underlying trademark law—avoiding third−party confusion in the marketplace.
“[T]he ‘all or substantially all’ calculation requires dividing the number of authorized European−version harvesters sold in the United States, the numerator, by the total number of authorized harvesters sold in the United States, the denominator.” Slip op. at 15−16.
The Court then determined that substantial evidence supported the ITC’s finding that Deere’s official dealers, including its official European dealers, had apparent authority to sell Deere European−version harvesters in the United States. As evidence, the Court highlighted Deere’s promotion of a Web site that allowed dealers to advertise European−version harvesters for sale in the United States by official Deere dealers. Further, the Court noted that Deere’s credit arm financed the purchases of European−version harvesters in the United States by official dealers.
The Court also determined that the ITC did not err in including sales by Deere’s official European dealers in the United States in its calculation, reasoning that authorized sales by European dealers of European−version harvesters introduced into the United States must be included in the total “authorized sales” because, absent such authorization, they would constitute “importation into the United States . . . of articles that infringe” a U.S. trademark in violation of 19 U.S.C. § 1337(a)(1)(C).
In further support of the first holding, the Court determined that, contrary to Deere’s argument, Deere did in fact have an opportunity to introduce evidence regarding authorization of its official European dealer sales. The Court found that the ITC permissibly requested additional briefing on the authorization issue. Juxtaposed with that point, the Court noted that the ITC properly found that Deere’s claim that European trademark law precluded Deere from stopping importation had not been sufficiently developed for the ITC to draw any conclusion.
In its second holding, the Court determined that the ITC misapplied the “all or substantially all” test, which prevents recovery by a trademark owner if less than “substantially all” of its goods bear the material difference from the gray goods and deters the owner from contributing to the consumer confusion that it accuses gray market importers of creating. The Court recited its instructions on remand in the previous appeal and determined that those instructions asked whether “substantially all of the authorized sales,” i.e., the sum of authorized North American−version and authorized European−version harvester sales, were of North American−version harvesters. Thus, the Court reasoned that the denominator should have been the total authorized sales, not the total European−version harvester sales, in the United States. Based on the factual findings by the ITC, the Court concluded that a total of 96.6 to 96.9% of the authorized harvesters sold in the United States were of the North American version. The Court remanded to the ITC to determine whether this percentage represents “substantially all.” The Court noted the ITC’s indication that the high prices and low volumes of Deere’s harvester sales may lead to a conclusion that even a small number of European−version harvesters could generate substantial confusion. In contrast, the Court also noted the ALJ’s finding on remand, using a reasonable numerator and denominator, that the percentage of authorized sales in the United States that were of North American−version harvesters was large enough to meet the “all or substantially all” test. Giving further guidance on this point, the Court explained that a single sale of a nonconforming item typically should not defeat a trademark owner’s protection, and then noted a previous Federal Circuit case finding 95.6% was considered “substantially all.”
In a separate opinion, Judge Newman concurred in the remand but dissented from the Court’s holding that the sales of European−version harvesters in the United States by official Deere dealers were authorized. Judge Newman stated that the majority decision improperly requires the trademark owner to prove that it tried and was unable to impose restrictions on its independent official dealers both in the United States and overseas, despite the fact that § 337 does not require the holder of a valid U.S. trademark to exhaust all other possible remedies or controls before seeking exclusion under the Tariff Act.
In arguing that “apparent authority” should not be sufficient to find sales “authorized,” Judge Newman cited A. Bourjois & Co. v. Katzel, 260 U.S. 689, 692 (1923), for the proposition that the holder of a U.S. trademark has the right to exclude authentic foreign goods bearing an authentic foreign mark, even when there is no consumer confusion as to the origin of the goods.
