Hey, These Japanese Mushrooms Aren’t Organic: The Ninth Circuit Addresses the Material Difference Standard in Relation to Produce as Parallel Imports

by Foley Hoag LLP - Trademark, Copyright & Unfair Competition
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MushroomsThe Ninth Circuit recently issued a decision upholding the lower court’s finding at summary judgment that a U.S. importer of branded, gray market mushrooms infringed upon the rights of the U.S. trademark owner.  Gray-market goods, also known as parallel imports, are branded goods legitimately produced and sold abroad that are imported into the United States without the consent of the U.S. brand owner.  For a more in-depth discussion of the ramifications of and reasons for parallel imports, see this blog’s previous article here.

Material Differences: The Key to Infringement

According to the Ninth Circuit, goods manufactured abroad with the consent of the trademark owner are not “genuine” within the meaning of the U.S. trademark laws if they are materially different than their authorized domestic counterparts.  Such “material differences” can cause confusion and potentially harm consumers in the U.S. because consumers are not receiving goods with the qualities and features that they expect.  Courts have found a number of differences present in parallel imports to be material to U.S. consumers, including packaging in a language other than English, labels with information in metric units rather than U.S. standard, and different product formulation, to name a few.  According to the Ninth Circuit in its Hokto Kinoko Co. v. Concord Farms, Inc. decision of December 2013, “Because the likelihood of confusion increases as the differences between products become more subtle, the threshold for determining a material difference is low.”  Indeed, as the court further explains, there need only be one material difference between a domestic product and a foreign product for a parallel import to infringe.

The Material Differences Between Mushrooms Produced in the Unites States and Japan

In this case, plaintiff Hokto USA, a wholly owned subsidiary of co-plaintiff Hokuto Japan, is a U.S. producer of organic mushrooms.  Hokto USA’s mushrooms are grown in a state of the art, computer-controlled facility using a sterilized culture as the growing medium.  Hokuto Japan, on the other hand, produces the same sort of mushrooms, but its products are not organic and are grown in a mixture of manure and compost.  Both companies use the above-depicted mushroom logos in connection with their respective goods, but Hokto USA sells its products in the U.S. market with English language packaging and its Hokuto Japan’s products are sold in Japan with Japanese labeling.

The defendant Concord Farms entered the picture by selling the mushrooms produced by Hokuto Japan in the United States.  Concord Farms’ mushrooms were not acquired directly from the Japanese producer but, rather, from an independent distributor further down the supply chain.  Ultimately, the Concord Farms-supplied, non-organic mushrooms with the Japanese labels found their way into the exact same supermarket display as the organic, English-label mushrooms produced by Hokto USA.  All of the packages bore the same trademarks.  Shortly after Hokto USA became aware of this, suit was filed.

The trial court granted the plaintiffs’ motion for summary judgment of trademark infringement.  The judge rejected Concord Farms’ claim that the mushrooms it sold were genuine, despite evidence that, for a time, Hokto USA itself sold mushrooms produced by Hokuto Japan.  The court noted that, despite having previously sourced branded mushrooms from Japan, Hokto USA arranged for its imported mushrooms to be custom-grown in a certified organic manner and affixed additional English labels to the imports that it received in Japanese packaging.  Concord Farms, on the other hand, only sold non-organic mushrooms in exclusively Japanese packaging.  The trial court found these differences to be material and likely to cause consumer confusion.  The Ninth Circuit affirmed in full.

Food for Thought   

The Ninth Circuit’s decision does not stray from the path set by previous cases regarding parallel imports and the material difference standard.  However, there are two points of specific interest to note.  First, brand owners can be assured that not only “manufactured” products such as electronics, pharmaceuticals, or processed foods can be protected against infringement arising from parallel imports, but that fresh products such as produce merit protection, too.  Second, although the court did not reach this conclusion, the opinion seems to suggest that a U.S. brand owner that engages in its own “authorized” parallel importing to fill a gap in production (as Hokto USA did in this case) could imperil its rights.  Had the temporarily-sourced, Japanese mushrooms procured by Hokto USA not been organic and if Hokto USA had not taken care to affix new, English labels, might the appeals court have reached a different conclusion?  This is definitely something for brand owners to keep in mind.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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